Nio (NASDAQ:NIO), the Chinese electric vehicle manufacturer, finally got the cash injection it needed to survive. But this has already been mostly discounted in NIO stock. It gained more than 160% in the just-ended second quarter.
On June 29, the company announced that it had received 4.8 billion RMB (about $678 million) from strategic partners who now own 24.115% of a joint venture into which Nio has contributed its assets.
In addition, the EV maker expects to get more money. For example, 200 million RMB will be invested before Sept. 30. Nio also expects to receive another 2 billion RMB by March 31, 2021. Therefore, its strategic partners are putting in 7 billion RMB in total, for that JV stake.
Nio Stock Valuation Now
Incredibly, Nio stock now has an $8 billion stock market valuation at the June 29 closing price of $7.23 per share. But here is a valuation anomaly that investors might be ignoring.
If you take the 7 billion RMB and divide it by 24.115%, you get an implied valuation for the joint venture with Nio, named Nio Anhui, of 29 billion RMB. That is equal to $4.1 billion.
It also implies that the asset contribution into Nio Anhio from Nio is worth 22 billion RMB, or just $3.1 billion. But Nio stock now has a market value of $8 billion. This is almost twice the valuation implied by the joint venture deal with the strategic partners.
Actually, this is not exactly precise since Nio just raised another $428 million in equity through an ADR offering. In other words, the implied value of the strategic partnership Nio Anhui is $4.1 billion but the pre-ADR offering of Nio is worth $7.57 billion. Therefore the implied contribution from Nio is just $3.467 billion. That is a long way from $8 billion in market value.
In other words, either Nio stock is really worth more than 50% less than its present value. Or, the value of the partnership and the addition of the cash makes the company worth twice what the strategic partners were willing to value Nio.
Of course, there is the third possibility. Maybe the strategic investors knew their valuation of $4 billion was too low. In other words, they knew they got a bargain valuation.
Plans for the Money
Nio had a net loss of $239 million in Q1 2020 on revenue of $193.8 million. At this rate, assuming this represents the burn rate, Nio could last another four quarters or so. That is because its liquidity is comprised of $988 million from the strategic partners and $428 million from the ADR equity offering, or $1.42 billion.
It is highly likely the actual burn rate is much more than this. Nio does not produce cash flow statements on a quarterly basis. So we can’t see, for example, how much it spends on capex and net changes in working capital. I suspect that adds in another 30-40% on top of the net income losses.
So that probably reduces the company’s ability to last with its present liquidity to only three more quarters. Keep in mind as well that Nio plans on delivering 9,500 to 10,000 EVs. This is more than 147% higher than Q1. So I think that probably doubles the cash burn estimate from last quarter or $420 million per quarter.
In other words, Nio is going to need to get profitable fairly soon, probably within the next few quarters. That way, it won’t have to raise more capital or potentially go out of business. In other words, the company can probably last only three more quarters if it is burning $420 million per quarter.
What to do With Nio Stock
I suspect that given the huge rise in Nio stock in the past quarter, it may be a bit overvalued. This is also borne out by my analysis of the valuation of the Nio Anhio.
Therefore, I would wait to see what the Q2 report shows for the number of cars that Nio delivers. In addition, I think it is worth waiting to see what Nio says about the outlook for Q3.
I suspect there will be another opportunity for investors to buy into Nio at a cheaper price.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here.
