Why The Rumored NIO And GAC Deal Is Bad News

Jan. 15, 2020 11:41 AM ETNIO Inc. (NIO), GNZUF83 Comments9 Likes

Summary

  • There are Chinese articles circling that point to a financing deal between GAC Motor and NIO.
  • There is no official corroboration of these rumors.
  • If the rumors are true, it is unlikely to be great news for shareholders.
  • Looking for a helping hand in the market? Members of Special Situation Report get exclusive ideas and guidance to navigate any climate. Get started today »

Earlier this month, I publicly released a note on the Chinese electric vehicle company NIO (NYSE:NIO), which is effectively out of funding. Today, the company is up strongly (13.3%) in the pre-market on unofficial rumors on the popular Sina that another automotive company is going to provide funding. The original article is Chinese, but I'd caution that 1) there is no official corroboration of this from the companies involved 2) the article is speculation but not definitive news 3) the news doesn't seem to make a lot of sense.

A strong spike-up today could open up a great opportunity to initiate a short position or buy put options on the stock crashing by May when its annual report is due.

No official confirmation

The headline says that Feng Xingya, President and Director of Guangzhou Automobile Group (OTCPK:GNZUF) or GAC Group, is raising money to save Bin Li. Bin Li is the founder and CEO of NIO.

There is no official account of this from either NIO or GAC Group. I have contacted both companies but not heard back from them yet.

Speculation

I have only an English translation at my disposal to reference in this article but went over the content with a native Chinese speaker who confirmed that the article does not say any financing is definitive.

The article cites multiple persons familiar with the matter as sources but specifically talks about an intention to invest, and not a signed deal:

Yuguan Auto Market understands that GAC Group plans to invest in Weilai Automobile. At present, GAC Group is raising funds for investment in Weilai Automobile.

According to people familiar with the matter, the amount of this funding is about $ 1 billion.

The news makes little sense

The rumor makes little sense to me, except at egregious terms because NIO is on the ropes. As I've described in funding-not-yet-secured:

Every party considering an investment knows Nio is against the ropes. Think about it. If you could put a billion dollars in here, why would you assume all the risk and leave upside for the current shareholders? If you don't put it in, shareholders are toast. You have all the leverage.

There is a chance this company won't end up in Chapter 11, but I don't see it getting financing at a rate representative of a $4 billion valuation. In other words, current long-term shareholders are going to lose either way. In my opinion, this is a terrific short from here if you are able to withstand substantial short-term volatility (yesterday it was up ~90% at some point).

Any investment will come at a price. That price will be paid by current shareholders and, possibly, other stakeholders.

This is business 101. Maybe GAC Group will leave a few scraps as a matter of goodwill, but more than that doesn't make sense. Especially, if this article is right about other information it surfaces. Earlier, NIO and GAC apparently failed to meet on conditions (which indicates GAC Group is no pushover):

"As the new car manufacturer's head car company, Weilai will not find investors, it is just a matter of negotiation conditions," said a person familiar with the matter. Earlier, it was reported that Yizhuang would invest in Weilai Automobile, but afterwards, the source said that the key factor was that the parties' demands could not be reached.

If it is true that NIO first contacted Great Wall Motors:

Yuguan Automobile learned that before Guangzhou Automobile, Weilai had contacted the Great Wall. Although Great Wall has a good sales volume in 2019, with 1.06 million units, a year-on-year increase of 0.69%, it has become one of the few auto companies to grow in 2019. However, the main force of its sales is still Haval, whether from the perspective of brand promotion or new, the development of the energy market is complementary to the existing business. For Great Wall, investing in Weilai is equivalent to improving its business system. However, facing the situation of Weilai's loss and the shortage of cash flow, people familiar with the matter revealed that Wei Jianjun proposed to control Weilai Automobile.

Apparently, that did not work out because Great Wall demanded control. I presume control means, at a minimum, a controlling stake.

It even casually mentions Geely (OTCPK:GELYF) and FAW as (potential) investors:

Yuguan Automobile learned that Geely and FAW are also potential investors in Weilai Automobile. However, equivalent to the relationship between GAC and Weilai, Geely and FAW will be more rational waiting for opportunities.

But, translated, it looks like they are waiting for more rational opportunities. Which makes a lot of sense to me, given the supposed financial state of NIO. As the company completely runs out of funds, they can still swoop in to buy everything for a nickel-and-a-dime.

Other bad news

Although the stock is apparently surging on this article, it contains a lot of bad news if it is even reliable, other choice quotes from a simple English Google translate include:

Yuguan Auto believes that although Li Bin is a master of the capital market, he is not professional enough in the operation of automobile companies. Weilai may wish to add another heavyweight executive who understands the automobile industry under Li Bin to assist Li Bin in trading.

and about how bad the cash flow situation is:

Under the high cost pressure, Weilai Automobile, which has a tight cash flow, can only make up for the shortage of cash flow by controlling the amount of purchases.

For example, there are 2,000 orders, but the cash flow is only enough to maintain the production scale of 1,000 units, so only 1000 units can be produced and delivered.

Conclusion

Although the stock is up strong pre-market, I expect this to reverse during the day as investors; A) digest the news and realize it is not all that positive B) if it is confirmed inclusive of terms, I expect those to be very negative for NIO C) if it the rumors are denied and NIO is still without funding.

Check out the Special Situation Investing report if you are interested in uncorrelated returns. We look at special situations like spin-offs, share repurchases, rights offerings, M&A events and opportunistic short ideas.

This article was written by

Bram de Haas profile picture
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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: reserve the right to trade the stock long/short because of its volatility.

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