Embattled Chinese electric vehicle company Nio (NYSE:NIO) lives to fight another day. The company recently managed to raise some money, avoiding a near-term cash shortage. However, NIO stock hasn’t rallied on the news.
And the company’s finances remain perilous. That could change, as it has suggested that a bigger investment is in the works. But there are still lingering concerns there.
I’ve covered Nio’s funding issues on several occasions. That’s because, until Nio solves its cash crunch, it’s always just a quarter or two away from disaster. In February, there were questions of whether the company would even be able to meet payroll and a small interest payment.
Funding Secured … Kind Of
On Thursday Nio announced a move to bring in nearly a quarter of a billion dollars. This cash infusion comes via a convertible note offering.
The deal will raise $235 million for Nio via bonds that pay 0% interest. Sounds good, right? The catch is that they can be converted into NIO stock at $3.50 per share, which is a meaningful discount to where the stock traded prior to the offering.
Additionally, the bonds mature in just one year, as they will come due March 5, 2021. You can probably see the problem here. If NIO stock goes up, then the bondholders get to turn their position into cheap stock, diluting shareholders significantly.
And if NIO stock goes down, the bondholders won’t convert. Instead, they’ll demand $235 million in hard cash, adding another major near-term liability to a company that is already desperately short of funds.
Keeping the Dream Alive
This bond offering gets the company a stopgap funding measure, but only for a year. And it comes at considerable cost to shareholders, putting them even farther down the food chain within the company’s capital structure.
And all this fundraising hasn’t solved the main problem — keeping the company liquid. Even after all of this, Nio still only has enough cash to last a few months, given the company’s normal burn rate of around $250 million per quarter.
That burn rate, you should keep in mind, was based on Nio selling thousands of vehicles a month. Now sales have dropped sharply with the coronavirus from China and the slowdown in its home economy. This will slow down revenues even more.
Starbucks (NASDAQ:SBUX), for example, just announced that its sales in China dropped a stunning 78% year-over-year this February. If even coffee sales have stopped virtually outright, it’s hard to imagine that Nio will be able to move many vehicles in the near future either.
Bigger Solution Coming?
In late February, Nio announced that it had reached “a framework” with the city of Hefei to relocate its operations there. As an enticement for doing so, Hefei would invest 10 billion Yuan ($1.4 billion) into Nio.
This, unlike the smaller recent fundraising efforts, would actually give Nio cash to last through the end of 2021 and have time to try to ramp up its business. Alas, that framework may not come to fruition. Nothing is finalized. Nio says it will provide more details in coming months.
Also, you may remember that Nio announced a deal with E-Town Capital last year to much fanfare. Yet the company was apparently unable to close the deal even many months later.
Interestingly, Citibank’s analyst dropped their price target from $6.80 to $4.30 on March 3, along with cutting the stock from a “buy” to a “neutral” rating.
This is remarkable in that the analyst had stayed bullish even when Nio stock dropped into the $ range and appeared to be out of funds. Yet now, the situation has deteriorated to the point that the stock is no longer worth buying, according to Citi.
Their analyst said that the company’s arrangement with the city of Hefei will force it to invest in a new headquarters building. For a company that is drastically unprofitable and short of cash, new buildings and relocation costs are an unneeded distraction at this point in time.
Bernstein’s Robin Zhu shared similar skepticism. Zhu wrote that while the funding would be a relief, “We remain dubious over the company’s fundamental outlook, and remain concerned about Tesla (NASDAQ:TSLA) competition.”
My Verdict on Nio Stock
While the company has managed to keep the lights on for now, investors should keep a close eye on Nio’s finances. Unless — and until — that deal with Hefei comes through, Nio is still just a few months away from running out of money.
And we have no idea what, if any, terms Nio will reach with Hefei. What sort of dilution or other clauses will be in there in return for the cash? How much will it cost Nio to relocate its operations to a new city? And more broadly, when will the economy pick up again in China?
Nio was already burning way too much cash and struggling to show that it had a viable business back in 2019. With car sales slowing to a trickle, Nio’s earnings results will look even uglier over the next quarter or two. As such, Nio is a clear avoid at this time.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, Ian Bezek held no positions in any of the aforementioned securities.