Many investors remain reluctant to invest in China, fearing the government will put its thumb on the scale.
Those fears have come true for Nio (NYSE:NIO), to the enormous relief of its shareholders.
Even while fighting the coronavirus from China, the city of Hefei, which is about 235 miles from the center of the outbreak in Wuhan, is focused on bailing out Nio.
Hefei, which is the center of the country’s auto industry, is putting $1.4 billion into Nio. In exchange, Nio is putting a new headquarters there and will integrate into the local supply chain.
No Financial Sense
The deal makes no financial sense. Nio had previously laid off workers, closed its racing team and abandoned plans to build its own factory. Sales of its ES6 sedan had slowed with the country’s economy.
Back in the United States, the shares found a bid at over $4. They opened March 2 at $4.15, a market capitalization of $4.4 billion. That’s for a company with estimated 2019 sales of $6.6 billion. The company is expected to report revenue of $412 million when it reports its fourth quarter.
From an investment standpoint, Nio makes no sense. Nio isn’t Tesla (NASDAQ:TSLA), and it never was. There’s no reason for it to be worth a premium over its sales. Debt has been growing, it has been burning cash, and workers have not been getting paid on time. The company’s own financial statements for the third quarter said it lacked the cash to go on for another year.
But Nio has powerful friends. Tencent Holdings (OTCMKTS:TCEHY), with its $490 billion market cap, is a major backer. So is Temasek Holdings, an investment vehicle of the Singapore government. Both were likely instrumental in getting Hefei to back Nio. The Chinese government’s help can’t be discounted either.
In an honest market, Nio stock would have collapsed in February, after the company reported fewer than 1,600 sales in January, down from a year earlier. Sales for February, during the worst of the outbreak, should be even worse.
Yet even while the company was late on payroll and desperately short of cash in February, shares barely budged. On the day of the Hefei announcement they were trading right about where they had been at the start of the month.
The deal may still collapse. If it doesn’t, many American investors can now say the Chinese game is rigged. Hillhouse Capital, an early American backer of Nio, sold out its position during the fourth quarter. As recently as April Hillhouse had been Nio’s third-largest investor, with a 6.2% stake. It had taken $100 million of its Series A funding in 2015, and another $600 million in 2017, ahead of the 2018 IPO, where it opened at $8 per share.
Nio fell hard while Hillhouse was buying in the second quarter, hitting a low of $1.51 per share in October. It recovered as Hillhouse was selling, ending December at $4.02. The story should be a cautionary one for other American investors.
The Bottom Line on Nio Stock
You can’t trust Nio.
The company may get back into production, but it’s not the same company.
The old Nio was an iconoclastic, proudly capitalist enterprise, led by a man who claimed to be “China’s Elon Musk,” William Li. The new Nio is government backed, solidly within the mainstream of its electric car revolution.
Rather than seeing this as a government bailout, think of the Hefei deal, should it close, as General Motors (NYSE:GM) absorbing the upstart. Get out while you can.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.