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Note: I've already covered NIO Inc. (NIO), so investors should see this as an update to my previous article on the business.
Last year, NIO Inc., the Chinese star of electric vehicles, was under pressure since the company presented very disappointing prospects for the first half of 2019 in the publication of its results for the fourth quarter of 2018:
We anticipate a larger than expected sequential decrease in shipments in the first quarter of 2019, in part due to accelerated deliveries at the end of last year in anticipation of the reduction in EV subsidies in China in 2019, as well as than seasonal slowdowns of January 1st.st and Chinese New Year holidays. We also expect deliveries in the second quarter of 2019 to reflect a lingering weakness in the expectation of the results of the 2019 Electric Vehicle Subsidy Policy in China and improved macroeconomic conditions.
And while NIO actually managed to surpass the peak of its Q1 delivery forecast by about 5 percent, management's guidance for the second quarter was again well below expectations:
For the second quarter, we expect an even more challenging sales environment and anticipate a decline in global demand and shipments, as competition continues to accelerate and China's auto market remains moderate.
NIO now forecasts a sequential decline in vehicle deliveries of 20 to 30% despite the outlook integrating planned deliveries of "several hundred of ES6 in June 2019", the company's second SUV model in the Chinese market. Assuming a moderate 400 deliveries of ES6 in the second quarter, the quarterly decline of the ES8 could easily eclipse 35%, a devastating figure for a car in production for just 12 months.
Photo: NIO ES-6 SUV coming soon – Source: MotorMobiles.de
But what really caught my eye is the company's impressive number of cash losses for the quarter. At first glance, cash and cash equivalents appeared to be down just under $ 100 million to $ 1.1 billion in one quarter, but short and long-term borrowings increased by more than $ 900 million in the first quarter, with most of the increase due to the successful issuance of convertible senior notes totaling $ 750 million.
After being interviewed by the analysts during the teleconference, management said "1more than 4 billion RMB"(or above $ 600 million) but, judging by balance sheet movements, cash consumption would actually have been closer to a billion dollars." Difference from number of executives can be partially explained by the fact that the company uses close to $ 300 million of the convertible bond product for call options and the conclusion of other derivative transactions in order to limit potential dilution and to face a convertible arbitrage.
Worse, at least according to the transcript, management expects second-quarter cash to be spent. "to be a bit highIf this actually means more than the first quarter, NIO will have to raise significant capital in the fourth quarter at the latest, despite current expectations of a significant improvement in cash consumption in the second half of the year.
That being said, the company has unveiled a new framework agreement with Beijing E-Town International Investment and Development Co. ("E-Town Capital"), a state-owned investment company:
Under this agreement, the company will establish an entity, NIO China, in the Economic and Technological Development Zone of Beijing and will bring certain activities and assets to NIO China, while E-Town Capital will initially aim to invest up to ### 39 billion to RMB 10 billion through its affiliated entities. or jointly with third parties of NIO China in exchange for a minority stake in NIO China. In addition, E-Town Capital is expected to assist NIO China in creating or finding third-party partners for the construction of a new next-generation platform (NP2) 2.0 vehicle manufacturing facility. The parties are continuing their efforts to reach a definitive and binding definitive agreement for this investment.
During the teleconference, analysts were desperately looking for more color in the announcement, but management provided only very limited information, except that the new entity of NIO China would be consolidated in the financial statements of the company. society and that "the team is now working with E-Town on the details of these final agreements, and there will be many details to refine. "
Although I doubt that this transaction will be completed at any given time, it will probably take a few quarters for a final agreement to be signed. Meanwhile, NIO will have to obtain new capital commitments from creditors and / or investors to avoid running out of cash later this year.
Investors should also not bet on the new NIO ES6, because this slightly smaller and cheaper SUV has already begun to cannibalize the orders of the large ES8, as admitted by management during the call. The company reported "more than 12,000 pre-orders ES6 (…) among which more than 5,000 have been added during the five and a half weeks since the Shanghai Auto Show " but at the same time, refused to confirm the previous forecast for unit shipments of more than 20,000 ES6 full year.
In addition, it is difficult to share the optimism of management for the second half of the year. While the growth of ES6 shipments will undoubtedly contribute to positive revenue, the current analysts consensus estimates, a business turnover of $ 2.2 billion for the first time. Exercise 19, seem quite out of reach.
The recent substantial reduction in China's electric vehicle subsidies will continue to dampen the company's demand for sport utility vehicles, and ongoing trade war problems with the United States will have an additional impact on China's economy and consumer confidence. customers.
Final result:
NIO has apparently begun to intensify its activities at the worst possible time, as the country is facing an ongoing trade war with the United States, the demand for vehicles in China is declining and EV subsidies have been sharply reduced in recent times. . Planned deliveries are far removed from previous forecasts, so NIO has a huge cash shortage that, without obtaining new capital commitments, will likely result in depleted funds before the end of the year.
And if the planned investment of RMB 10 billion in E-Town Capital in the new entity NIO China is certainly good news, it is unlikely that the proposed cash contribution will be put upstream of the new joint venture with NIO Inc.
In short:
NIO Inc. must raise a significant amount of new capital before the end of 2019, otherwise the company will be bankrupt. With international equity and bond markets seemingly closed for the company at this stage, NIO will likely need short-term government support to move to 2020.
Given the still tense valuation, the substantial decline in growth forecasts and concerns about the viability of the company beyond this year, I urge investors to stay on the sidelines or sell existing positions. Even a short sale still looks attractive but, certainly, the basics of easy money has already been won over the past two months.
Disclosure: I / we have / we have no position in the actions mentioned, and we do not intend to initiate a position within the next 72 hours. I have written this article myself and it expresses my own opinions. I do not receive compensation for this (other than Seeking Alpha). I do not have any business relationship with a company whose shares are mentioned in this article.
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