BYDDY - NIO: Abu Dhabi Steps In Deliveries About To Soar

2023-06-23 07:30:00 ET

Summary

• NIO Inc. is raising around $740 million in cash through a placement of 85 million new shares to Abu Dhabi-linked CYVN Holdings.
• The deal will boost NIO's cash balance, which should help fund its growth spending and extend its cash runway to around three years.
• NIO is expected to experience substantial growth in the second half of the year with an improved product lineup, although profitability is not yet in sight.

Article Thesis

Chinese electric vehicle pure-play NIO Inc. ( NIO ) is getting an investment from Abu Dhabi-linked CYVN Holdings. This provides cash that can be used to fund the ongoing ramp-up of NIO's operations. With volumes expected to grow massively during the second half of the current year, NIO will get back to compelling sales growth -- but profitability is still not in sight.

What Happened?

NIO Inc. announced that it will raise around $740 million in cash via a placement of 85 million new shares. These shares will be sold to CYVN Holdings, which is an investment vehicle that is primarily owned by the Abu Dhabi government, Abu Dhabi being a member of the United Arab Emirates.

Cash Balance Gets Boosted

This deal naturally has several implications for NIO and its shareholder base. First, the deal will boost NIO's cash balance. $740 million is a sizeable amount of cash for a company the size of NIO and should help fund its growth spending for a while.

In the above image, we see NIO's cash position and its short-term investments, which are pretty close to being cash, at the end of the most recent quarter. In total, NIO had $4.7 billion of cash-like liquidity. A $740 million increase to that number represents around 15% of the total.

At the same time, it is also important to look at NIO's cash burn. The company is not profitable yet, and it is investing heavily in order to increase its production capacity in order to eventually achieve sufficient scale that would allow it to be profitable. The fact that NIO is unprofitable for now is not surprising -- most EV players, especially those that don't have the size of Tesla ( TSLA ) or BYD ( OTCPK:BYDDY ), are unprofitable.

According to Seeking Alpha's data, which is available here , NIO burned through $560 million of cash over the last year, before accounting for capital expenditures. When we add the $1.01 billion in capital expenditures over the last year, the free cash flow number stood at around -$1.7 billion. In other words, NIO is burning through a little less than $2 billion of cash per year, using the company's data over the last year. The current cash position would thus be sufficient for around 2.5 years' worth of cash burn, before accounting for the recent share placement with CYVN Holdings. This deal alone adds around five months' worth of cash burn to NIO's balance sheet -- in total, following this deal, NIO's cash position should be sufficient to fund its cash burn for the next three years or so.

Of course, the cash burn rate will not stay unchanged forever. Factors such as margin headwinds, due to an ongoing price war in China's EV market, could increase the cash burn rate in the near term. Ramping up its production and starting up new factories could also add to the cash burn rate in the foreseeable future. On the other hand, as NIO becomes larger, its business should become more profitable, and the cash burn per vehicle should decline meaningfully. Eventually, NIO will have to become profitable in order to self-fund its ongoing growth, but there is no need to hit profitability and positive cash flows in the very near term -- although, of course, hitting profitability sooner is preferable.

In the recent past, NIO investors had been worrying about the company's cash burn and balance sheet. And while the financing environment has become tougher for not-yet-profitable growth companies such as NIO, it does not look like the company will run out of cash anytime soon. NIO still has billions of cash on its balance sheet, and the recent deal with CYVN shows that deep-pocketed players are willing to invest in NIO -- which is a good thing. Saudi Arabia's sovereign wealth fund has been investing billions of dollars in Lucid Group, Inc. ( LCID ), seeing investments in this EV player as a good way to become less dependent on oil and gas revenues. It is possible that Abu Dhabi has a similar line of thinking when it comes to its investment in NIO, and if that is the case, NIO could likely place additional shares in the future, should the company require additional funds.

Of course, while additional funds for NIO are positive, this comes at a cost: Dilution. When NIO issues new shares to add cash to its balance sheet, the portion of shares being owned by existing shareholders declines. In this case, 85 million new shares were issued, which is equal to around 5% of NIO's current share count, as we can see in the following chart:

While 5% dilution isn't drastic, it nevertheless is meaningful. But that is something that has to be expected when investing in a growth company that isn't profitable yet. Most of these companies have a rising share count. Even Tesla, which is the highest-value EV company and which has become quite profitable by now, continues to dilute its shareholders via the issuance of shares to employees and management.

NIO: Substantial Growth Expected

NIO is mostly active in China, which is the world's most important EV market. In recent quarters, China has been struggling a bit, however, due to weaker-than-expected economic growth and due to lingering effects of the massive lockdowns in the country, which lasted way longer than in other countries. While the market environment wasn't easy for NIO, the company also suffered from some company-specific issues during the last couple of months, such as consumers not being very into its sedans, and high prices for most of NIO's line-up. Sales volumes thus weren't especially attractive during the first five months of the current year, considering that the EV industry experiences major growth tailwinds in general.

NIO's sales totaled 44,000 during the first five months of the year, which was up by 16% compared to the previous year's period. While a mid-teens growth rate would be nice for most companies, a higher growth rate is expected from EV companies, thus this was not especially compelling. That being said, the company guides for substantially higher deliveries growth during the second half of the year.

Several factors will contribute to this, including changes in its model line-up that should make NIO more competitive. It will release the ET5 Touring, which will, according to management, be an important addition to the ET5 sedan, and NIO also recently launched the all-new ES6. The new ES6, which is an SUV, has received a high amount of orders so far. Electrek reports that NIO received around 30,000 pre-orders in just three days or around 10,000 per day. Of course, the pre-order pace will not remain this high, as orders are likely substantially front-loaded. Also, not every pre-order will result in a sale. Still, this data suggests that the demand for NIO's new vehicle is high and that many Chinese consumers are willing to pay the above-average prices that NIO demands.

NIO's management guided for around 10,000 deliveries in June, which would be substantially above the pace seen during the first five months of the year. Even better, NIO also claims that it will average around 20,000 vehicle sales per month during the second half of the year. In total, that would make for around 175,000 vehicle sales this year, with around two-thirds of that in the second half of the year. If NIO hits that target, it would exit the year with a sales pace of around a quarter million vehicles per year -- which would make it one of the largest EV companies in the world. Of course, it is not guaranteed that NIO will hit this target, as its execution has been underwhelming at times.

Still, even if NIO were to just sell 15,000 vehicles per month in H2, that would represent a huge improvement versus the first half. By improving scale, margins should improve over time as well.

Final Thoughts

NIO's shares have not performed well over the last year at all -- which holds true for many EV companies. Execution has been mediocre at times, but the recent deal with Abu Dhabi's government provides access to additional funds and should help the company in ramping up its business.

With an improved product lineup, the second half will likely be much stronger than the first half, although the company will most likely continue to lose money in the coming quarters.

With a 2023 price-to-sales multiple of 1.6 and a 2024 price-to-sales multiple of just 1.1, NIO is far from expensive for an EV company. NIO is not a low-risk stock, due to not being profitable for now, due to uncertainties about margins in the industry in the future, and due to China-centered macro risks. Still, with a pretty low valuation and substantial expected growth, it could be interesting for those looking for an EV investment.

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