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.
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.
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