I previously wrote about NIO Inc (NIO) in April questioning both its unjustifiably high valuation at the time and its long term viability as a going concern due to their subscale operations and eye-popping cash burn. Given that the company has since reported two very disappointing quarters showing weak sales and massive cash burn, the focus of this article is now on its near term viability and it does not look good. Despite the stock's ~70% decline since my original article, the conclusion I've come to now is that they will not make it to year end without a large capital infusion, something that has thus far proved elusive for them to obtain.
NIO's Recent Results
More detail on the past few quarters will follow, but, if you're a visual person such as myself, here's an overview of NIO's total shipments since inception by vehicle model:
Note that at the beginning of 2019, NIO told analysts they would do 35K-40K deliveries in CY19. It appears they won't even do half that range due to the unbelievably tepid launch of their new ES6 model (discussed further below).
I should also note that part of what hurt what was expected to be a robust ramp of ES6 was a recall of a approximately 5000 ES8 due to battery fire risk (and actual explosions). This likely hurt the NIO brand substantially as the recall amounted to over 1/4 of all ES8 delivered by that time when the recall was announced in June 2019.
Q119: NIO delivered 3,989 vehicles, a sequential decline of 50% from Q418. Reported total revenue fell from $500M to $243M sequentially. Operational cash burn in the quarter was $600M+, excluding the cost of very expensive hedging transactions the company entered into when they issued $750M of convertible bonds in early February 2019. This was only the company's third full quarter of delivering vehicles, so a drop in deliveries that is this large is alarming, as is the cash burn.
Q219: After delaying reporting results until roughly 1 month later than normal, NIO finally reported on September 24 that they delivered 3,553 vehicles, a further sequential decline of 11% from their already weak Q1 results. Reported total revenue fell further from $243M to $220M sequentially. Although the company does not release a quarterly cash flow statement, one can see from the balance sheet that their Q219 cash burn was approximately RMB 3.1B (approximately $440M). Making matters worse, Q219 was the first quarter in which they started shipping their second vehicle model, the smaller, less expensive ES6; they began delivering the ES6 in June 2019. Excluding the ES6 deliveries, deliveries of their initial model ES8 fell 21% sequentially from Q1, after the 50% sequential drop from Q418 noted above.
Q319: Given the company reported Q2 results less than a week before the end of Q319, one would think they have good visibility here. Their guidance for Q3 was for 4,200 - 4,400 deliveries in Q1, a modest increase from Q2. They just announced that they actually delivered 4,799 in Q319 just two weeks later. So they "sandbagged" more than a little here to engineer this delivery "beat" obviously. The most notable items from the Q3 deliveries release were 1) ES6, their lower-priced variant that just started shipping in June '19 already showed a modest monthly decline in September versus August, after only it's fourth month on the market! It begs the question of whether the ES6, like the predecessor ES8 will also have a very brief period of popularity before fading.
To summarize, the ES8 (the larger EV SUV launched in 1H18) saw its biggest sales month in December 2018 at 3,318 deliveries. It averaged only 201/mo in Q319, three quarters later, a dramatic 94% drop in unit volumes from the peak. This could be fine if the ES6 was picking up the slack...but it simply isn't.
The ES6 was first delivered in June 2019. As discussed, it is a somewhat smaller and cheaper electric luxury SUV that NIO rolled out as its second model. The lack of a material ramp up in sales here is troubling. The peak ES6 month thus far (August 2019) showed only 1,797 ES6 deliveries, just over half of what the more expensive ES8 achieved months earlier in late 2018. For reference the base price of the ES8 is RMB448K, while the ES6 base price is RMB398K, so without added options the slightly smaller 5-seater ES6 is about 11% cheaper than the 7-seater ES8.
In the largest EV market in the world, the demand for NIO's high-priced electric SUVs is proving to be surprisingly thin.
Lastly, delivering an extra 400-500 cars in Q319 at negative GMs is more likely to hurt than help cash flows and liquidity unless the company has fully gone into conserve cash/liquidate inventory (and anything that moves) mode.
Interestingly, I found this story today about NIO on the front page of Sina Finance (think Yahoo Finance in China, use google translate if needed). Beyond generally conveying how negative sentiment in China has gotten towards NIO, it noted a wide variety of incentive programs that NIO was offering to car buyers in August and September to drive volume. NIO sure had to jump through a lot of hoops to put up a merely ok delivery "beat." After all, it would have been fairly embarrassing had they went through all that effort and still missed, right? Good for them. What did these incentives cost NIO on the bottom line though?
Given's NIO's extremely limited disclosure requirements (a 20-F filed annually), it's tough to get an exact handle on where their liquidity situation currently stands. After burning ~$440M in cash in Q219, NIO showed a Q219 ending balance sheet with only $503M of Cash+ST Investments+Restricted Cash. A superficial glance at this balance sheet should make any analyst cringe.
So, a quarter later, are they are already out of cash as of today?
My most thoughtful answer is: Maybe.
To start, let's look at NIO's overall cash & debt situation over the last few quarters:
|(RMB, in MMs)||Q418||Q119||Q219|
|Cash + ST Investments + ST Restricted Cash||8,346||7,537||3,456|
|Implied Quarterly Cash Burn||2,366||6,822||3,115|
Given NIO's limited disclosures, I believe the single most telling fact regarding their liquidity situation can be seen on the Total Debt line above. Despite burning well over $400M in Q219, NIO paid down ~RMB1B of debt during Q2. This is strange.
As can be seen, over the last 3 quarters, NIO has burned RMB 12.3B (or ~$1.7B at today's RMB/USD rate of 7.15). So they've averaged over $500M per quarter of cash burn, yet at 6/30 (over a quarter ago now) we know they only had RMB3,456M ($503M) in cash. Simple math would say that they should have roughly burned through all that cash by now slightly over a quarter later. This would obviously be the most dire but possibly the most realistic scenario for where they're currently at. So, why would a company burning ~$500M per quarter want to show a balance sheet with only ~$500M of cash on it? Logic dictates that they'd want to draw down credit lines to fluff up the cash balance at quarter end. Instead they paid down debt. The most rational explanation I can think of for this is that their lenders made them do it. This would imply they have just the Q219 ending cash balance and outstanding debt and no further available borrowing capacity.
For those that want to quote the RMB7B of borrowing capacity as of 4/2/19 from the 20-F, I'd also direct them to this passage:
As of December 31, 2018, we obtained short-term borrowings from ten banks of RMB1,870,000 in aggregate collateralized by bank deposit of RMB1,375,000 classified as short-term investment provided by one of our wholly-owned subsidiaries. The annual interest rate of these borrowings is approximately 4.35% to 5.22%.
Unless this was a one-off occurrence (with ten different banks?), we can assume that the true net borrowing availability would be the gross credit availability less the required cash collateral (in this case 74% of the overall credit line). Needless to say, this would also essentially wipe out any availability under credit lines that they claimed in their 20-F (which is now over 6 months old).
They disclosed the RMB1.375B in required cash collateral because they had fully drawn that facility as of 12/31/18. For the remainder of the quoted RMB7.095B in available credit facilities, they did not disclose (nor had to) collateral requirements because those facilities were undrawn at 12/31/18. If we made the assumption that the required cash collateral was the same for the remainder of the RMB7.095B of credit lines, we would arrive at a "true" availability of those credit facilities as ~RMB1.9B, inclusive of the net RMB495M net drawn on the disclosed facility above. So that would leave their effective excess borrowing capacity under RMB1.5B (<$200M) as of 4/2/19. Assuming that figure stayed unchanged from the end of Q119 to the end of Q219, they'd have their $503M Cash+ST Inv+ Restricted plus ~$200M in borrowing capacity. From their Q219 balance sheet, we can see that the convertible note is ~RMB5.4B of their gross debt balance, leaving ~RMB2.9B of non-convert borrowings. This level of borrowing would seem to exceed by over RMB1B+ our rudimentary attempt at calculated true available borrowings. It was not a worthless exercise though, because it says our simple cash analysis above is more favorable to the company.
Certain obvious questions come to mind, none of which the company has disclosed/discussed:
- What is the current available borrowing capacity at the end of Q219, if any, or at the end of the now completed Q319? If there is availability, what are the collateral requirements?
- What is the minimum cash level needed to run your business (which is forecast to do ~$1B in revenue in CY19)? $100M? $200M?
- Given a modest sequential increase in deliveries in Q3, along with a dramatic mix shift to the lower-priced ES6 variant, what does that imply for Gross Margins and Q3 cash burn?
Unless management has great answers to the above, our best approximation is that NIO is approximately out of liquidity as of right around now (give or take a few weeks if they can sell off some inventory at discounts etc). Needless to say, a company that may or may not currently be solvent and is not expected to produce profits by analysts in the next five (5) years is not a sustainable situation and it calls for a serious restructuring at a minimum.
Show Me The Money
The company is clearly not oblivious to the math above, thus they have twice now announced (but not closed) financing deals since the end of May 2019:
- In their Q119 earnings announcement in late May they announced a financing from a state-backed investment firm (E-Town) for "up to RMB10B":
Source: Q119 earnings
Four months later in late September, they made the following comment regarding this supposed financing on their Q219 earnings call:
This is a very fast-moving and fluid situation with many advisers helping to navigate this period of time, and it has not been easy to find a path that is best for everyone.
They made zero mention of E-Town in the Q2 press release or earnings call. Even in their own words, this was never more than a "framework agreement" and now there is no mention of E-Town, who was supposed to be providing the financing!
- In early September, they announced a new $200M convertible note financing coming equally from Tencent (OTCPK:TCEHY), an existing NIO shareholder, and NIO CEO Bin Li. On September 24, when they reported Q219 results, they gave the following update:
Consummation of the placement of the Notes is subject to satisfaction of customary closing conditions and is expected to close before the end of September.
Now, over a week into October, the company still has not announced anything regarding this convert deal closing. But they did show their press reporting still functions by reporting the highly manicured delivery "beat."
Needless to say, NIO seems good at announcing financings, which they sorely need, but has not shown they can actually close these financings. Meanwhile, with each day that goes by...they are a day closer to insolvency.
Source: "Jerry Maguire"
While I just spent a lot of time focusing on the announced, yet not closed, funding deals (clearly a red flag), NIO's biggest problem probably is not, say, closing the delayed $200M convert financing, or other promised capital raises. It appears as though, no matter how much cash gets put in, this company is structurally unprofitable and cash-burning. At almost twice their Q319 delivery number and delivering only their higher ASP model ES8, they produced a whopping 0% GM in Q418! (their best ever quarter!). I fundamentally question why anyone, be it the NIO CEO, Tencent, E-Town, or anyone else would put any further money into this cash pit unless they received incredibly favorable terms (which would likely include wiping out US NIO ADR holders completely).
Is the bond market wrong?
Lastly, it's worth noting that NIO's one tradeable bond issue, the $750M face value converts issued in February 2019 last traded at 25c on the dollar! If bond investors think they're going to lose ~75% of their principal, why do equity investors (given the current NIO equity market cap is ~$1.8B) think they'll get anything? There's a clear disconnect here. If one were bullish on NIO (for whatever reason), the bonds that offer over 4x upside in <5 years would seem far more attractive, given their seniority to the equity. Bond investors are clearly saying NIO equity is worthless.
Without new financing, I believe NIO currently has mere weeks of solvency left, and possibly only a few days. If they can close the $200M convertible note financing, which is already delayed with no explanation, that will only buy them another 1-2 months. The situation for NIO equity appears to be terminal, it's just a question of how many days or weeks they have left at this point. I think the equity is a zero before long.
Risks (to a NIO short)
- $1B+ in financing from E-town for NIO China comes through (and is NOT structured so as to wipe out US ADR holders).
- China decides in a slowing domestic economy, to re-up EV incentives that they've been cutting since the end of CY18. This would be a major reversal to say the least and seems unlikely.
- An SOE bails NIO out to save jobs, grow a high profile homegrown EV maker, etc. Again, I'd ask the question, why would it be in BeiJing's interest to throw any bone to US ADR holders, particularly in the current geopolitical climate?
- Borrow is relatively tight with rates quoted in the 30%s.
Disclosure: I am/we are short NIO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Thanks to Seeking Alpha contributor Jeremy Raper and twitter user @JCOviedo6, and others for their work and assistance.