NIO Is Not Investing Enough In Marketing
With the recent stock dilution generated by NIO, I believe that we need to explain what’s going on. Recently, NIO decided to sell shares because other EV manufacturers sold the shares. I don’t think the company needs new financing. That’s not all. The company has no plan to invest the new dollars in marketing. Instead, it will use the proceeds to finance its research and development activities. I don’t see why the company does not invest in marketing. Shareholders expecting massive sales in the near future will not be happy. Without marketing efforts, sales never increase.
The Sale Of Equity At $39 Per Share
In December 2020, the company announced the sale of $2.7 billion in equity. Many other electric vehicle manufacturers like Tesla (TSLA), Xpev (XPEV), or Li Auto (LI) announced similar transactions. I believe that NIO did not really need the money. But, it of course looks like a good time to sell shares. It is easy for the management to explain a sale of equity when everybody else in the industry is selling shares.
Taking into account the sale of equity, I believe that retail investors need to understand what may happen next. Most analysts out there don’t talk about NIO’s dilution risk. Learn the following concept. NIO may become a profitable EV seller. However, if the company sells too many shares, you will never see an increase in the share price. To sum up, shareholders may not make a penny if NIO continues to issue shares.
Let’s understand the total amount of shares outstanding. In 2018 and 2019, the share count was below 1 billion shares. The company has not really issued new shares. Instead, when the management needed money to increase production, it signed deals with the Government of China.
Under the Hefei Investment Agreement, the Hefei Strategic Investors agreed to invest an aggregate of RMB7 billion in cash into NIO China. We agreed to inject our core businesses and assets in China, including vehicle research and development, supply chain, sales and services and NIO Power, or together as the Asset Consideration, into NIO China. The Asset Consideration is valued at RMB17.77 billion, as calculated based on 85% of the market value of our company (calculated based on our average ADS trading price over the thirty public trading days preceding April 21, 2020). Further, we agreed to invest RMB4.26 billion in cash into NIO China. Pursuant to the Hefei Shareholders Agreement, upon the completion of the investments, we will hold 75.885% of controlling equity interests in NIO China, and the Hefei Strategic Investors will collectively hold the remaining 24.115%. Source: Prospectus
In 2020, things started to change. With many retail investors buying shares of the company, NIO decided to sell shares at an extremely fast pace. In 2020, the share count went from less than 1 billion to more than 1.4 billion, which represents an increase of more than 40%. Clearly, there is some demand for the shares because the share price did not decline. With that, I wonder when investors will understand the massive creation of equity.
In addition, our future capital needs and other business reasons could require us to issue additional equity or debt securities or obtain a credit facility. The sale of additional equity or equity-linked securities could dilute our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations or our ability to pay dividends to our shareholders. Source: Prospectus
The Use Of Proceeds: More Research And Development
The company expects to use 60% of the money raised for research and development. It is quite frustrating. The company commenced its operations in 2014. It has used a significant amount of dollars in R&D. It has not sold a significant amount of cars. Its 2020 sales will be less than $2 billion. I don’t really understand why it doesn’t commence to make massive expenses in marketing. Research and development is always interesting. However, at some point, shareholders and investors want to make money. I see that the management does not seem very interested in generating dollars for investors.
(i) Approximately 60% for research and development of new products and next generations of autonomous driving technologies; (ii)approximately 30% for sales and service network expansion and market penetration; and (iii) the remaining 10% for general corporate purposes.
Conclusion
First of all, I don’t really understand why NIO sells equity. The company received a significant amount of money from the Government of China. It did not need that massive amount of cash. Besides, I dislike the fact that NIO expects to use the money for research and development. Shareholders will soon understand that the company does not really want to sell cars. It only wants to do research and development. I would ask the management to explain why the marketing expenditure is that low. Without marketing expenditures, the company will never report a decent amount of revenue. To sum up, many things need to change inside NIO.
Disclosure: We don’t hold NIO Shares
