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NIO Is Running Out of Time

NIO Inc. (NYSE:NIO) is in desperate need of cash. The struggling Chinese luxury electric vehicle company has been on the ropes since reporting its second-quarter earnings in September.

While the company's equity continues to show some hope of a turnaround, the prospect appears increasingly farfetched.


Emergency financing through personal leverage

On Sept. 24, analysts at Sanford C. Bernstein determined that "NIO's liquidity is now measured in weeks." As we remarked in a Sept. 29 research note, the company has just two options:


"With precious little cash left in the bank and gross margins expected to remain negative in the second half of the year, NIO must either raise funds or close up shop."



This remains the case today. The problem now is that no one seems interested in helping NIO out.

A $200 million emergency lifeline was extended in early September thanks to CEO Bin Li and major outside shareholder Tencent Holdings Ltd. (HKSE:00700). However, this was only a stop-gap measure. Indeed, without the initial infusion of this lifeline, NIO may have been out of cash by the start of the third quarter. Li was only able to stump up his part of the lifeline financing, $110 million, by borrowing against his holdings in other companies.

Unfortunately for NIO, private investors have not been particularly excited about handing cash over to a company on the brink of insolvency and no clear path to financial sustainability.

No bailout from China Inc.

With private investors unlikely to stump up the cash NIO needs just to keep the lights on, much of the attention has shifted toward hopes that the Chinese government, euphemistically known as China Inc., might offer a bailout. Bernstein discussed the possibility in its Sep. 29 research update:


"Will NIO get a bailout deal? NIO's share price has declined sharply since Q2 reporting, but still implies market cap of US$1.8bn. Meanwhile its convertible bond trades at 33 cents and implies default. We think the best explanation for this apparent contradiction is faith among equity investors that China Inc. will come to NIO's rescue. In our view, the best argument in favour of a NIO bailout is that failure would represent an embarrassing setback for China EV ambitions. It could also prove very damaging for the fundraising plans of various other Chinese EV start-ups. But we anticipate that NIO's high cash burn could put off would-be suitors."



Alas, this hope appears to have largely faded from sight. According to Chinese media reports over the past two weeks, it appears that local governments are unwilling to take the big risk of extending a public lifeline. That could prove fatal.

Finance chief jumps ship

Another nail was driven into NIO's financial coffin this week. On Oct. 28, the company announced the resignation of its chief financial officer, Louis T. Hsieh. According to the press release, Hsieh's departure is due to "personal reasons," offering no further explanation. However, this explanation is likely not the full truth. Given the sheer magnitude of NIO's financial difficulties, it is more likely that Hsieh is exiting due to his inability to right the financial ship.

Hsieh had been the point man for NIO's latest fundraising efforts. His loss indicates that his efforts have come up short. While the company may hope to find a better fundraiser as a replacement, it does not have much time. Moreover, anytime a top fundraiser leaves a company, it makes potential investors squeamish. NIO is is an extremely precarious financial position, one that many feel is likely only to get worse.

Losing its finance chief amid a mounting cash crisis is bad news for a company desperately trying to convince outside investors to inject additional capital. Hsieh's exit may well make what was already an exceptionally difficult task nigh impossible.

Turnaround plan has no substance

With cash in short supply and little sign of serious financing options on the table, one might think NIO would be working day and night to curb its cash burn. Strangely enough, however, the company's proposed turnaround plan appears to require a lot more investment. On Oct. 16, the company announced the launch of 24 NIO Space locations that it hopes will accelerate demand:


"We have recently launched our NIO Space concept across 24 cities, including Shanghai, Beijing and Guangzhou. Unlike NIO House, NIO Spaces are communal settings where consumers can interact with the vehicles on display and discover more about the NIO lifestyle."



According to the company, the answer to its woes comes with an increase in overhead, rather than a decrease. That is a very strange stance to take. It also seems highly unlikely to succeed.

Disclosure: Author is short NIO.

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This article first appeared on GuruFocus.