Breakingviews - Nio’s $1.4 bln lifeline may pave a smoother road

Chinese electric vehicle start-up Nio Inc. vehicles are on display in front of the New York Stock Exchange (NYSE) to celebrate the company’s initial public offering (IPO) in New York, U.S., September 12, 2018. REUTERS/Brendan McDermid

HONG KONG (Reuters Breakingviews) - China’s Tesla might finally clear some roadblocks. Nio has tapped everyone from founder William Li to China’s Tencent for funding since its debut in late 2018. But the U.S.-listed company remains cash-strapped. Now it says it is close to securing $1.4 billion from the municipal government of Hefei in Anhui. Similar past agreements have failed to materialise but this one, with official ties, is a more promising potential pillar of support.

Investors will have a sense of déjà vu. In May, the company said it had snagged a similar amount from Beijing E-Town, a state-backed group. Shares rallied, but the money is yet to arrive. There was another flurry of excitement earlier this year when Chinese media reported a further $1 billion on the way from Guangzhou Automobile – but it turns out that the final sum may be under $150 million.

The latest announcement has more substance, partly because it builds on an existing relationship with Anhui’s homegrown automaker JAC. The state-owned group is already Nio’s manufacturing partner, and it is in their interests for the young company to prosper. The deal would see the group establish its Nio China headquarters in the region, and a press release describing a signing ceremony attended by local officials and JAC’s chairman provide some extra credibility.

Shares rose 13% on the disclosure but there is scant detail on how the funding will be structured. A sum of $1.4 billion is equivalent to about one third of Nio’s current market cap. Bernstein’s analysts expect that the Hefei government could take a significant share of entity Nio China, giving existing owners less share of future revenues and cash flow.

Although the headline sum is enough to wipe out the listed company’s net debt, which stood at just over $1 billion at the end of the third quarter, Nio will still need to grapple with weak demand. And leverage may continue to grow: total borrowings increased more than 440% in the year to September 2019. The company earlier had net cash.

A fundraising deal may pave a smoother road but existing shareholders will pay for the support.


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