NIO: Any Price Is Too High A Price To Pay

Summary

• 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.

Andy Feng/iStock Editorial via Getty Images

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.

Data by YCharts

My Conclusion

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.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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.

Comments

[DaveD72]

Nio is not being delisted----see current link just posted:

www.youtube.com/...

[funbuddy]

so dumb

[SAalwayslies]

On The Pulse, entering a short position soon? 72 hours almost up you douche

[Convoluted]

The last time I attended a CPA review course (about 25 years ago), one of the speakers delivered a presentation on ‘international accounting/auditing standards.’ Apparently, all these years later, China is not on board.

As best I understand, they have a security concern not shared by other nations. It seems beyond any rational argument that the quid pro quo for access to capital markets is basic financial reporting.

It also seems that the benefit of transparent financial reporting would drive the price of Chinese equities much higher. Further, future capital raises would be welcome. It would seem a much better future to ditch the VIE shenanigans and truly engage with the rest of the planet.

And everyone lived happily forever.

[CJH Research]

@Convoluted "China has taken steps in a bid to end the impasse. A top official at the China Securities Regulatory Commission said last month the regulator is "working very hard" to resolve the audit oversight issues with US counterparts." -Bloomberg

Neither side wants wholesale delisting. That's banking revenue on 2T of funds that will move to HK or Europe. Didi violated data security law even before listing. Market is overreacting to a non-news.

Also, Evergrande announced they are going to default on the next payment. The more informed security firms expect China to start rescuing the property market after the bubble has deflated enough. Evergrande default may be just enough to end the crisis.

[TomFinvestor]

Interesting to see that all three China company stocks, NIO, XPEV, and LI, dropped after reporting November car sales on Thursday.

[Jion]

There is no delisting risk. And if it is, then it means than China favors any delisting attempt. In that case, they will help JOBS to finalize its go private procedure, as the company has signed a definitive agreement to be sold 45% higher than todays price. But, as I said, JOBS will be delisted, but no one will force other Chinese companies to follow, except the U.S. media which devaluate them constantly. Forget for a moment the so well known stocks like NIO or BABA and check smaller ones, like QH. They trade at ridiculous low prices.If they continue to have such valuation, then their insiders will offer a good premium like they did in JOBS, and they will leave U.S. markets.

[GeneGrossman.com]

If On the Pulse is really a financial researcher and avid investor with a keen eye for innovation and disruption as well as growth like Seeking Alpha says if is, then how come it doesn't own any stock in any Chinese company, because there are a lot of big ones there whose biggest customers are in this country, and closing down their stocks to U.S. investors would hurt China quite a bit too... so it looks to me like On the Pulse is a little disappointed in not getting positions in some of those Chinese companies, and offering us some sour grapes.

[jmdc33]

Funny to see how most Americans are obsessed by communism, and still stucked in a cold war mentality...
It used to be against Russia, Cuba now it's China.....
May I recommend you behave like a good Patriot and stop buying ANYTHING made in China.
Go around your kitchen, living room and throw out everything made by this horrible country
Start with throwing away your Iphone.....

[JohnnyXY]

@jmdc33 this made me laugh--a lot :-D Yes, it's so true--most products in everyday use in the US are made in China or at least have some components made in China.

[JustMyke]

@JohnnyXY

Anybody else reading this from an iPhone?

[SAalwayslies]

@jmdc33 "Ya wanna say i'm chinese son then here's a remindah, check your tims (timberlands) they probably say made in China" Jin the Mc

[Gusler]

For how long are we playing the same tune of fud and scare tactics about delistings and try to short stocks?

[Reading is never enough]

@Gusler so true.
But sadly many believe this crap.

[zorbs99]

Take home from this article is any high school child can write an article. And this person wrote a previous article that says he dumped his life savings in LCID with zero sale. Cant make this stuff up..This is the quality of writers left.... just like our media reporters...zero quality left

[Tangster775]

@zorbs99 my thought exactly. I might have to consider canceling my premium membership if this is what SeekingAlpha promotes. And you are right, he literally wrote he invested half of his fund into LCID on Nov 13th. I can almost forgive him if he invested that much when it was still CCIV, but on Nov 13th, when the valuation is is already bigger than NIO LOL

[limitlist]

@Tangster775 It actually makes me want to keep my premium. I like the fact they allow it because it just exposes the truth more. Comments are brutally honest.

[Tangster775]

@limitlist lol thats one way to look at it. But when I first joined this a few weeks ago, all comments had to be approved, not sure if its just this article or that rule has been abolished.

[ThePaleTzu]

There's more than the ADR delisting risk. If(when) China invades Taiwan, there will be a mass exodus from ALL Chinese stocks. People haven't realized that China is not their friend, and doesn't play by the same rules that guide a civil society. We are at the beginning stage of a turmoil that will perpetuate itself indefinitely.

[Tangster775]

@ThePaleTzu omg another freaking moron. Name one country that China actually and formally invaded throughout history! The only country continues to occupy and invade other countries is the US. There are thousands of Taiwanese working and living in China, no one would start a war; only The US and their crony lackey kept spreading fear through the media while they can't even fix their own problems.

[tigerinmotion]

@ThePaleTzu Anybody believe the China Taiwan invasion devasting bs is the one lack of independant brain. If China wanna take Taiwan , it wont speak it out everyday everywhere, Any high level military action will be confidential. Plus, China's East and South East coast city group might be over half of the whole mainland Gdp and population, So if China want a war, he must calculate how much loss he can scarifice.

[Soldalma]

@Tangster775 Vietnam and India are two countries that China invaded. I am old enough to remember reading about the war between China and Vietnam in the news. The invasion of India is very recent. Try to learn a bit of history before babbling nonsense.

[user34645805]

Hey, he COULD be right. Maybe everything he said MIGHT happen. This article is so generic, you could replace the name Nio with any other and it would read the same. It's like a bad YouTube commercial.

[M2B+ Financial & Strategic Advisory]

There are many companies not listed running at OTC, NIO, BABA, and Others. The real value of those companies never should be denied... The Fearfull realised by the most investors become greedy to buy MORE!!

[Ed338]

In this market environment it seems companies get penalized for doing well.
NIO has reached the point were it is more similar to BYD and less like Rivian. One is a great company, the other is a speculative play. One has a lagging stock, the other rockets up on just air.
I'm okay with this. But NIO seems like winner long term.

[Ed338]

Funny thing is NIO has given me 1000% return. More than what it is possible with any other of the EV stocks (except tesla). And I still agree it is undervalued at this point.
NIO is the way to go now. More revenues, more R&D, more cash on hand, better partnerships, and bigger expansion plans than their Chinese peers. And with the coming of the ET7, ET5, and other mass market vehicles, well... the blue sky is within reach.

[Jay Peng]

U know of nothing man, it's laughable

[profhalf]

Speculative article based on no data and facts and mere conjecture has no direct relevance to NIO. Very disappointing.

[Siegfried 55]

This is not an objective opinion.

[Daljit Singh]

This is an opinion piece written without any facts. It lacks a deep understanding of international politics, intergovernmental relations in China, and the macroeconomic policies in China.

[Jtnguyen32]

Are you a shorter?