Chinese EV maker NIO announced Wednesday the completion of the offering of 101,775,000 American depositary shares, each representing one Class A ordinary share, which included the exercise in full by the underwriters of their option to purchase up to an additional 13,275,000 ADSs, at a price of US$17.00 per ADS.
NIO said it plans to use the net proceeds from the ADS offering mainly to increase the share capital of and its ownership in NIO China, to repurchase equity interests held by certain minority shareholders of NIO China, and for research and development in autonomous driving technologies, global market development and general corporate purposes.
This is another round of stock issuance by NIO after it raised $477 million in a stock offering in June this year.
Just two months later, why is NIO ramping up its funding again?
Pressure from gambling agreements
As of June this year, NIO (including NIO China) has raised more than 23 billion RMB.
This includes $435 million in convertible bond financing, a RMB 7 billion capital injection from strategic investors from Hefei State Capital, a RMB 10.4 billion credit facility from six banks including the Anhui branch of China Construction Bank, and the RMB 477 million that NIO received in June when it issued 72 million additional shares at a price of US$5.95 per share.
Hefei State-owned Assets Supervision and Administration Commission's contribution to NIO China accounts for a significant percentage of the total.However, it's worth noting that the capital injection, while relieving NIO's cash crunch and ushering in a strategic endorsement from the state, also puts potential pressure on NIO.
According to an earlier media report on NIO's gambling agreement with a strategic investor from Hefei State Capital, NIO China is required to meet set targets after receiving the entire investment from the strategic investor in Phase 1.
These targets include the need for NIO to inject assets into NIO China within one year of the first full investment and deliver more than 20,000 vehicles for two consecutive years.Otherwise, NIO needs to buy back its shares from strategic investors.
In other words, the equity financing between NIO and the Hefei government is effectively a performance bet.
For NIO, although the gross margin has turned significantly positive in the second quarter, the net profit is still in the red, which is still a long way from profitability, and this undoubtedly adds to the uncertainty as to whether NIO China will be able to honor its bets one by one.
Therefore, it is not surprising that only two months after its last stock issue, NIO is once again increasing its stock issue and using the proceeds to buy back NIO China's share capital.
On the one hand, NIO will increase its shareholding in NIO China by buying back part of its stake, which may further reduce the risk to the state's assets.
On the other hand, analysts believe that the sooner NIO invests in NIO China within a limited period of time, the better, as it will help boost the government's confidence and thus gain more policy and financial support in the future.
Cash flow still needed for future operations
At the end of the IPO round, NIO's cash reserves will be at an all-time high of more than 20 billion RMB, after deducting the 325 million RMB used to buy back NIO China shares.
For NIO, the ample funds on the books will give the company security in its R&D operations for quite some time.
However, this does not mean that NIO will be able to rest easy, as NIO's accumulated net loss from 2017 to June 30, 2020 amounted to RMB 28,815.4 million.
NIO's deliveries exceeded 10,000 units for the first time in the second quarter and are expected to continue at that level in the third quarter.
However, from a profitability point of view, it is still difficult for NIO to rely on selling cars to achieve profitability in the short term.Hence, for now, NIO still needs a lot of cash support in terms of R&D and operations.
Its prospectus shows that from 2020, NIO has also made significant upfront investments in R&D, service network and sales and marketing to grow and expand its business rapidly.
By the end of June this year, NIO had opened 127 stores in China, including 22 NIO Centers and 105 NIO Spaces. 64 new stores were opened in the first half of the year, and 28 new NIO Spaces in the second quarter.
In addition, NIO's new business model, the bettery swap model, is now in operation.
In the NIO battery rental service BaaS launch held on August 20 this year, NIO founder William Li Bin has said, as of that day, NIO has deployed 143 exchange station in more than 60 cities across the country, to achieve more than 800,000 power exchange service.
Next year, NIO will further expand the number of switching stations.That is to say, along with NIO's sales gradually climb, the operating costs of the switching station will continue to increase, all of which require a large amount of financial support.
Therefore, the issuance of additional shares at a time when NIO's stock price is high is a good opportunity for NIO to raise capital.