- When it comes to detecting NIO's ADR risks, investors are terribly uneducated.
- NIO's ADR could be severely impacted if the CCP begins to urge Chinese companies to drop their abroad stock listings.
- In 3Q21, NIO's electric-vehicle deliveries increased, but the risk is not worth the potential benefit.
Investors in NIO Inc. (NYSE:NIO), a high-flying electric car business, face a major risk of ADR delisting NIO. According to reports, the Chinese Communist Party is pressuring Chinese enterprises to leave foreign exchanges and discourages them from registering ADR shares on foreign exchanges. A delisting would be a major setback for electric-vehicle investors in the United States.
NIO's ADR Risk Has Just Skyrocketed
So far, electric-vehicle companies in China have remained under the radar and have not been subjected to regulation by the CPP, China's ruling party. Whatever the CCP wants from Chinese firms, it usually gets. Its authority is rarely questioned, and the CCP is not afraid to use the government's long arm to impose its vision for the future on Chinese companies. Unlike Alibaba (BABA), JD.com (JD), or DiDi Global (DIDI), NIO and its peers in the electric-vehicle industry have escaped greater scrutiny and regulation. However, Chinese electric-vehicle manufacturers may find themselves in hot water with the Chinese Communist Party.
The CCP is approaching companies that have ADR shares listed on foreign stock exchanges, and NIO is one of them. As I explained in ADR Delisting Risk Could Spark An Alibaba Exodus, the CCP is said to put more pressure on Chinese companies that are deemed to be too patriotic. DiDi Global, a ride-sharing service with massive operations in China, was in trouble with the CCP this year for national security reasons. Only a week after DiDi Global listed its ADR shares in the United States, Chinese authorities ordered DiDi's app to be removed from the Chinese App Store. The official reason given was that DiDi had violated data laws. DiDi's data collection practices were deemed illegal by China's Cyberspace Administration.
Recently, Bloomberg reported that the same agency, the Cyberspace Administration of China, had asked management to take steps to delist the company's ADR shares in the United States. This may not have been DiDi's first choice, but companies in China rarely have any choice but to comply when the CCP calls and demands something.
The Chinese Communist Party, which has never been a fan of foreign disclosure rules, could easily ramp up its campaign and pressure all Chinese companies to delist their ADR shares, with disastrous consequences for investors who believed in the long-term potential of, in our case, electric-vehicle maker NIO. The risk of delisting has risen significantly in recent days, and coercing Chinese companies to give up their overseas listings is exactly what you would expect from the CCP.
The move on DiDi is a bad omen for other companies with ADR shares. NIO is just one of many companies that could be affected by the CCP's long-term goal of making foreign stock listings of Chinese companies illegal. In the event of a delisting announcement, NIO's ADR shares are likely to drop significantly as investors try to liquidate their holdings. The key point to grasp here is that Chinese companies themselves request that their ADR shares be delisted and trading be halted in order to appease the CCP. This is not a result of enforcement actions taken by US regulators.
Any Price Is Too High To Pay
I try to keep investing as simple as possible. It's very simple. If I can't be certain that I own a portion of the company I'm buying, or if I can't be certain that I'll be able to trade and liquidate my position if necessary, why bother buying a company like NIO in the first place? What's going on, if the CCP can effectively take the market away from me?
The recent events in China are both alarming and vexing. The ADR risk is a significant risk that raises fundamental questions, such as how certain are you as an investor in an electric-vehicle company that you actually own a stake in?
Unfortunately, there is no certainty in the answer. The CCP could arrive at any time of the week and declare that the time for Chinese companies to use ADR is over. What happens next?
I frequently read about NIO's rapid growth in China's brisk electric-vehicle market, and NIO does grow quickly. According to the most recent delivery figures, 10,878 electric vehicles will be delivered in November 2021. After NIO managed to crank out only 3,667 vehicles in October, which was a huge disappointment at the time, the delivery number is likely to have resulted in more than a few investors breathing sighs of relief. NIO, on the other hand, has a reason for the October production drop: it is preparing its manufacturing plants for new models that will go on sale next year. NIO's quarterly deliveries have increased dramatically in 2021, with the company delivering roughly twice as many electric vehicles in 3Q21 as it did in 3Q20.
Source: CnEVPost Website
However, the significant increase in delivery numbers does not compensate for the fact that investors are unsure whether NIO's ADR shares will be available for trading next year. Or, for that matter, next month.
NIO's ADR shares are currently trading at a 12x sales multiple. If investors could be sure they owned what they think they own, the multiple might be justified. However, given the risks discussed here, I would not be comfortable paying even half of this sales multiple if NIO increased 3Q21 deliveries at twice the current rate.
I could never be at ease with an investment in which I don't know whether the CCP will pull the rug out from under me or not. NIO's ADR risk is very real, especially after what happened to DiDi, and it should worry you because it gets right to the heart of the most fundamental investment question: Can you be sure you actually own and trade what you think you own? In the case of NIO and other Chinese companies with ADRs listed in the United States, the answer is no. That is why any price for NIO is too high to pay.
This article was written by
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