Tuesday, December 01, 2020 8:54:55 AM
It is not a secret that in the last a few months, NIO's short interest increased a lot. Most traders will be wondering why a growth stock like NIO receives that amount of attention from short sellers. I do believe that Citron's comment on the stock explains the current amount of short interest. However, that's not all. I carefully studied the company's estimates and financials. In my opinion, the risks noted by Citron are no more than market rumours.
Total Amount Of Assets, Cash And Total Market Capitalization
In the last annual report, NIO reported cash in hand of $2.8 billion and total assets of $5 billion. The current amount of property, plant and equipment is equal to $0.75 billion. These assets are quite small as compared to the total market capitalization of $65-$71 billion. Most analysts may claim that the company expects to report a significant amount of sales and cash flow in the future. That's correct. However, nobody seems to understand that NIO will need to raise capital. The company will soon need additional cash to finance its new factories. Remember, if NIO has to sell additional shares, the share count will increase, which will lead to stock dilution. As a result, I would expect the share price to decrease.
The Market Expects A Lot From NIO
At the end of the year, NIO expects to produce 48k-50k. The company sells most of its cars at $50k-$60k. It means that the company will be making close to $2.6 billion in sales by the end of the year. With a market capitalization of $65-$71 billion, the market is expecting the company to deliver many more cars in the future. We are talking about a Market Cap/Sales ratio of more than 25x, which is extremely high. I admire the confidence given by market analysts. However, there are many things that may go wrong. If you really want to buy shares at the current price, first read the following risks disclosed by the company:
We have limited experience to date in high volume manufacturing of our electric vehicles. We cannot assure you that we will be able to develop efficient, automated, cost-efficient manufacturing capability and processes, and reliable sources of component supply that will enable us to meet the quality, price, engineering, design and production standards, as well as the production volumes required to successfully mass market the ES8, the ES6, the EC6 and future vehicles.
Chinese Accounting: Kandi (KNDI) and Luckin Coffee Inc. (LKNCY)
Many companies from China were accused of fraud from 2014 to 2016. As a result, many investors are currently reluctant to buy shares of the companies from China. That's not all. Very recently, other companies like KNDI or LKNCY were accused by short sellers. Their share price suffered massive declines:
Kandi: How This China-Based NASDAQ-Listed Company Used Fake Sales, EV Hype to Nab $160 Million From U.S. Investors Source: Hindenburg Research
Muddy Waters published an anonymous short report on Luckin Coffee, leading to major sell-off on the stock. Source: SA
NIO is more serious than KNDI and LKNCY. However, if investors start to be afraid of the accounting standards in China, NIO’s share price may decline too. It is sad that a few companies have destroyed the reputation of China.
If You Are A Shareholder Of NIO, The Government Of China Is Your Partner.
There is another clear risk about NIO that shareholders need to know. The Government of China finances the company's operations. There are clear risks when you have to deal with politicians and governments. Most investors would be afraid of China not financing NIO's operations any more. As a result, I would expect the share price to decline. But, that's not all. According to documents provided by NIO, if the state of China incurs in operating losses, the company will have to pay some money. I don't think most NIO shareholders know this:
We have entered into an arrangement with Jianghuai Automobile Group Co., Ltd., or JAC, for manufacturing the ES8 for five years starting from 2018.
JAC is a major state-owned automobile manufacturer in China and it constructed such Hefei manufacturing plant for the production of the ES8 (with a modified production line for the ES6) and potentially other future vehicles with us. Pursuant to our arrangement with JAC with respect to the ES8, ES6 and EC6, we pay JAC for each vehicle produced on a per-vehicle basis monthly for the first three years.
In addition, for the first 36 months after the start of production, which commenced on April 10, 2018, to the extent the Hefei manufacturing plant incurs any operating losses, we have agreed to compensate JAC for such operating losses.
My Take
I still remember the time when we could buy NIO’s shares at $17. NIO represented a fantastic opportunity for investors in the United States. Right now, the share price is at more than $45, and many short sellers are targeting both NIO and other stocks from China. In my opinion, there are clear risks for shareholders. Notice that the amount of cash and assets appear to be very small as compared to the total market capitalization. In addition, the state of China is actually your partner if you are a NIO’s shareholder. Most investors will not be interested to be engaged in businesses with governments like China. To sum up, I like the business model of NIO, but I also see a significant number of risks. Be careful!
Disclosure: We Don't Hold NIO, TSLA, KNDI or LKNCY shares
Stock Market Revolution
Recent NIO News
- Samsung Surpasses Apple in Q1 Smartphone Market; Salesforce in Talks to Acquire Informatica, and More News • IH Market News • 04/15/2024 11:06:48 AM
- NIO Inc. Files Its 2023 Annual Report on Form 20-F • GlobeNewswire Inc. • 04/09/2024 10:11:21 AM
- NIO Inc. Provides March and First Quarter 2024 Delivery Update • GlobeNewswire Inc. • 04/01/2024 09:30:26 AM
- NIO Inc. Prudently Adjusts First Quarter 2024 Delivery Outlook • GlobeNewswire Inc. • 03/27/2024 09:30:20 AM
- Fisker’s Shares Take a Hit Amid Speculation of Bankruptcy, Altria Divests from AB InBev to Fund Stock Repurchase Initiative • IH Market News • 03/14/2024 11:39:32 AM
- Form 6-K - Report of foreign issuer [Rules 13a-16 and 15d-16] • Edgar (US Regulatory) • 03/05/2024 12:39:45 PM
- U.S. Futures Dip, Crude Oil Fluctuates • IH Market News • 03/05/2024 11:05:54 AM
- NIO Inc. Reports Unaudited Fourth Quarter and Full Year 2023 Financial Results • GlobeNewswire Inc. • 03/05/2024 10:00:21 AM
- Form 6-K - Report of foreign issuer [Rules 13a-16 and 15d-16] • Edgar (US Regulatory) • 03/01/2024 11:06:42 AM
- NIO Inc. Provides February 2024 Delivery Update • GlobeNewswire Inc. • 03/01/2024 09:30:55 AM
- Form SC 13D/A - General statement of acquisition of beneficial ownership: [Amend] • Edgar (US Regulatory) • 02/28/2024 03:48:47 PM
- Form 6-K - Report of foreign issuer [Rules 13a-16 and 15d-16] • Edgar (US Regulatory) • 02/26/2024 02:23:07 PM
- NIO Entered Into Technology License Agreement with Forseven Limited • GlobeNewswire Inc. • 02/26/2024 10:00:59 AM
- Form 6-K - Report of foreign issuer [Rules 13a-16 and 15d-16] • Edgar (US Regulatory) • 02/22/2024 12:12:45 PM
- NIO Inc. to Report Unaudited Fourth Quarter and Full Year 2023 Financial Results on Tuesday, March 5, 2024 • GlobeNewswire Inc. • 02/22/2024 09:30:53 AM
- Form 6-K - Report of foreign issuer [Rules 13a-16 and 15d-16] • Edgar (US Regulatory) • 02/07/2024 11:20:43 AM
- Form 6-K - Report of foreign issuer [Rules 13a-16 and 15d-16] • Edgar (US Regulatory) • 02/07/2024 11:02:27 AM
- NIO Inc. Announces Board Change • GlobeNewswire Inc. • 02/07/2024 09:30:51 AM
- Form SC 13G/A - Statement of acquisition of beneficial ownership by individuals: [Amend] • Edgar (US Regulatory) • 02/02/2024 11:05:49 AM
- Form SC TO-I/A - Tender offer statement by Issuer: [Amend] • Edgar (US Regulatory) • 02/01/2024 02:21:51 PM
- Form 6-K - Report of foreign issuer [Rules 13a-16 and 15d-16] • Edgar (US Regulatory) • 02/01/2024 11:03:07 AM
- NIO Inc. Announces Completion of the Repurchase Right Offer for Its 0.00% Convertible Senior Notes due 2026 • GlobeNewswire Inc. • 02/01/2024 09:51:17 AM
- NIO Inc. Provides January 2024 Delivery Update • GlobeNewswire Inc. • 02/01/2024 09:39:04 AM
- Tesla Price Cuts Send European, Chinese Auto Stocks Lower • Dow Jones News • 01/17/2024 12:51:00 PM
- Form SC TO-I - Tender offer statement by Issuer • Edgar (US Regulatory) • 01/03/2024 02:20:49 PM
Bantec Reports an Over 50 Percent Increase in Sales and Profits in Q1 2024 from Q1 2023 • BANT • Apr 25, 2024 10:00 AM
Cannabix's Breath Logix Alcohol Device Delivers Positive Impact to Private Monitoring Agency in Montana, USA • BLO • Apr 25, 2024 8:52 AM
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