Oh, my God, NIO is tanking -10%. We've
got dilution incoming! What the hell!!!
So now that we've talked what dilution
means and also how you can rate it as
an investor.
I also want to prepare you for the frank
news that I do think NIO will have to
raise actually more capital
that way, 2 million US dollars.
And this also may mean that if
in case that the stock price
is rallying on that news,
NIO ($NIO 蔚来) may actually in the future
also consider once again of raising
more,
you asked dollars in cash
because remember NIO still has to
pay for the tranches,
although they are smaller trenches
into the NIO China entity when
the new investments coming in
or so from the new investors.
So this is part of the deal. This is
how it's going to be. And of course,
NIO will also need some more
working capital in US dollars in the
new ADR that we are invested in.
This is not a additional
offering. However,
I also want to prepare you
for a little bit of bad news,
because I do think there is more
dilution to be expected from NIO.
I have mentioned it in my
evaluation videos previously.
I mentioned also that I don't
think it's necessarily a bad thing.
So something you need to take in the
consideration of investing in NIO that you
will be at some point
diluted as a shareholder,
similar things happened to Tesla.
I think this is just how growth companies
are working and you need to consider
it with your valuation and
your price targets. So, well,
I think the viewers of my videos should
be warned about what has happened
today and well, let's
dive into it anyways.
What does it mean with the dilution
today and also why the stock is tanking,
but ultimately, what does it mean
for you as a NIO shareholder?
So as of yesterday evening after
the closing of the markets,
NIO announced a new,
additional offering of shares of 75
million to be exact and pricing it
at $20,44 USD. So pretty
high pricing here.
Pretty good actually. And now
what does it mean, actually?
So coming back to my dilution Excel sheet,
which I actually used in my video last
time when I made a video exactly at the
same topic about NIO dilution,
and that was actually with the
first Pre-Hefei funding cash raise
when actually NIO,
raised some our cash in order to
actually pay their parts into the Hefei,
into the new entity, the new China,
NIO China entity part of the deal.
And back then we diluted
by roughly 9% shareholders
raising actually 428 million
US dollars at the share
price off back then $5,95 with a
72 million additional shares.
And as just outlined in the introduction
video this is just partly how growth
companies work, offering new shares,
diluting existing shareholders in order
to raise capital and cash for funding
growth. So back then, and
actually at my valuation videos,
which I also link once again I
mentioned that I expect NIO to
further dilute shareholders. Actually,
if you look into my funding document,
you will see that I consider
that NIO is raising a total of
2 billion US dollars until they
become profitable and they don't need
to raise any money anymore and
raising it at an average of 10
US dollars, a share.
So today's raise is actually significantly
higher here and they are raising
1.5 billion by that.
And as you can see here,
we're now at 1055 million
outstanding shares now
offering 75 million new shares.
So that is roughly a dilution
of 7% and at the share price of
$20,44 cents that give them 1.5 billion us
dollars in a cash raise and puts it to
1,130 million shares
outstanding shares for NIO.
So this is totally in line
with what I was expecting in my
valuation video about NIO actually.
There is still some more room
for more additional dilution,
but now let's talk about it,
why NIO is actually doing that.
And what does it mean for you as
a shareholder? And to do that,
I prepared a little visual presentation
of what I think is happening here.
So this is Li Bin on the left hand side,
he's the CEO and founder of NIO
and in the middle, you see NIO,
the ADR.
So the American listed company
that you as NIO gang has invested
as shareholders buying the shares
of the NIO ADR that is US listed
and, well a couple of months ago before
we got the Hefei government deal.
That company well had only 150 million
US dollars cash left in the bank
that was at the end of Q4 of
2019.
And Li Bin as a founder of this company
is roughly owning 13% of this company
and back then at that time,
he was actually giving 100 million
us dollars off his personal
wealth in cash into this company.
Additionally raising more convertible
bonds in order to keep NIO
ADR at float.
Otherwise NIO was at the
verge of bankruptcy back then.
So really a bad situation.
We were actually in the situation that
NIO could have gone out of business at
any point in time,
back then the shares were trading
below three US dollars a share look at
where we are now. So why are we
here? And this is what happened next.
This is actually what the, Hefei
government deal did do to NIO.
And basically NIO founded a new
company that is called NIO China,
which is a Chinese entity and NIO ADR.
so the US listed enterprise is actually
the holding company of this new company.
And it has 75% roughly
ownership in this new Chinese
entity.
And in order to do that well they
need more partners here and new
investors and the investor in this case
has been the Hefei local government,
which was getting less than 25%
ownership in this new company,
therefore giving this new
company 7 billion renminbi (RMB)
in cash injection. And this is
renminbi, so Chinese currency.
This is important to know because
this is the Chinese entity.
This cannot hold US dollars.
This entity is fully funded
by Chinese money here.
And yeah in order to do this deal,
NIO had to transfer both their
assets of the company from the new
ADR plus 600 million in US dollars in cash
to this new entity.
And then this new entity
in total has 11.2 billion
renminbi in cash coming from
both the Hefei government,
as well as the NIO ADR and this
company, as I mentioned before,
it's already owned by the
ADR and this means owned by
Li Bin and US and
international shareholders.
So now why did the first raise happen?
You see that NIO just had 150
million us dollars cash in the banks,
and they have 600 million us dollars in
cash that they need to transfer to this
new entity. So not enough money
to actually make this transition.
And as outlined in my previous video,
this has to be done in different
steps in different tranches.
So let's go back to the Excel sheet,
this tranch one to tranch five,
and we are already and NIO
possibly paid already two tranches
into this new company.
So with around 182 million
US dollars each and
the next tranche would be in September.
So this is why I always
said in my previous video,
that it's quite likely that NIO
will actually raise more capital
because this entity here needs more
capital in order to actually fulfill those
tranches into NIO China. Plus in
addition, they need working capital,
which means they need US dollars to pay
for instance, for the German entity,
for the UK entity and for
a US entity where they have
employees and they are paid in
euros and US dollars and so on.
And also if NIO wants to go global,
they need you as dollars in
funding and not RMB cash,
which can be used for paying
the operations in China
for paying the production
for paying the expansions locally
for paying marketing in China.
But it's not well used for paying in
US dollars because it's really hard to
transfer cash from RMB into US dollars.
This is true how the situation is.
So this is exactly why the first
catchphrase happened with the
430 million US dollars.
Roughly knew I had enough US dollars in
the bank to make the first payments of
the first tranches and to spend a
little money on working capital there.
And with this first illusion already Li
Bin as a shareholder was diluted minus
9%. And we as NIO shareholders were
also diluted by minus 9%. However,
what happened afterwards is that
the new prospects of NIO have been
largely recognized by the markets.
And we had this recent run up of
the share price because a NIO is
recovering it's on the
verge of profitability.
The market demand has picked up and most
of the analysts are recognizing that
and the bank analysts are
now having higher share price
targets for the company.
So the stock price is
keeping increasing there.
So now this is the interesting bit
about the second raise today that
actually, you know, first of all,
you need to, so first of all,
you need to think about Li Bin, he's
an entrepreneur, he's an individual,
he's a billionaire.
He wants to own as much as
possible off this company,
of NIO ADR.
So he is actually in the same boat
with us because he is largely a NIO ADR
shareholder.
And most of his personal wealth
actually depends on what is happening
to this entity here. And as mentioned
before, during the bad times,
he put more of his personal
money into that company.
And with this second raise,
I think partly one of the reasons
why he is doing this is that he wants
some part back of his company.
He wants to increase the
ownership in NIO China,
and actually decreasing the ownership
of the minority stakeholder.
And that's exactly what's been written
in the press release about this offering
the company plans to use this net proceeds
from ADS offering mainly to increase
the share capital off and a
company's ownership in NIO China to
repurchase the equity, interests, held,
and certain minority
shareholders of China.
So you need to think from
Li Bin's perspective,
he wants back his
ownership in this company,
and he is buying back
the shares of NIO China,
which was clear from
the beginning. Actually,
if you read the details
that NIO as the US listed
company has this option of
buying back to company. Now,
the timing of that is interesting
because now the stock price has run up.
However, NIO is not still profitable yet.
So what does it mean actually with
now increasing the ownership in this
company? That means if we get
future revenues, future profits,
actually, instead of only previously
getting 75% of those profits,
because you have to split them
with the Heifei local government,
which was providing
here the cash injection.
Now possibly maybe up to 95% of
those profits belong to Li Bin
and the NIO Gang. Well,
I don't know if it's going to be 95%
because NIO is not outlining how much
ownership they are buying back
into in NIO China. However,
we can see it as a views of actually
looking into the future and seeing that
well, this company is probably going to
print billions in profits in the future.
So I want a larger stake of this,
and I only gave you some ownership during
this bad times because I actually had
to, because otherwise I would have never
had a chance to get to those profits.
So, this is probably the
thinking behind of Li Bin,
why he is doing the cash raise here.
And because he is now sitting in the same
boat with us you can see that this is
not necessarily a bad thing,
although we are now getting
more dilution minus 7%. So,
so of course the showers are tanking
and our shares are now worth less in the
company. Temporary, however, as I
outlined before this should have in,
like, let's say five years time,
this should have possible implications
on both the valuation on NIO.
And at the same time, our stakes in
this company as early investors now,
then there's also other reasons
why the cash raise has been done,
which is investing in
research and development,
as well as in autonomous driving
technologies and global market
development. So this is exactly
what I have been saying before.
They need the US dollars in order to
pay for their working capital in the
overseas entities.
The research and development is possibly
mostly done in Germany in Munich
office. Then autonomous development
is actually happening in
California in the San Jose entity.
And then they're talking here
about global market development.
And we recently heard the news that NIO
wants to go global in the second half of
2021.
So this is the preparation of
getting to wallet filled with US
dollars in order to spend it overseas.
And now the only question is like,
how much of the money are they going to
keep in U S dollars in order to spend it
on the global expansion
and also on funding,
the working capital and how much of the
US Dollaery they are actually spending
in buying back the NIO China entity
here in order to increase the
possible reaps and benefits of
profitability in a future for current
shareholders.
So if you look at the big picture
just a couple of months ago the NIO
ADR was almost bankrupt. We were at
a 3 billion US dollars valuation,
and now we are roughly trading at a
19 billion US dollars valuation with
the NIO ADR that has roughly a
300 million US dollars in cash,
or maybe they keep another 500 million
us dollars in cash from the current
raise,
and possibly they spent up to 1 billion
US dollars in buying back the assets
from NIO, China entity here. I don't
know how big the split is going to be.
Possibly they can even
buy back everything.
I don't think they're going to do that
because actually they also want those
partners.
They want a local government to be
partner in that entity because all of the
things that are happening in NIO
China are quite interesting as well.
So they can now fund all of the
operations with the CNY cash funds.
They can now fund all the Battery as a
Service (BaaS) with the bank loans of the
Chinese banks and stuff like that.
This wouldn't have been possible without
the local government to be really clear
on that. However I mean like, the
short sellers and the NIO Bears,
they will spin that into bad news about
the dilution of diluting shareholders
equities. When the Chinese government
went in, they said like, Oh,
well this is bad news because now we have
the Chinese government in this company
and nobody wants to government in
this company and stuff like that.
However I'm just having a more
pragmatic view on that and just
aligning my thoughts with
how Li Bin thinking about it.
And you can clearly see that, yes,
there are clearly benefits of having the
Chinese local government being a part
of NIO China here at the same
time Li Bin he's an entrepreneur.
He doesn't want to depend on
the government to be clear.
And he's telling you this by actually
now starting to buy out the Chinese
government from the entity.
And I was actually thinking that this
could actually happen at a later stage,
to be honest, when NIO gets profitable,
that they may actually even do an IPO at a
Chinese star markets, sort
of Chinese stock exchange,
which actually has higher
listing barriers, for instance,
they need to be profitable at that point
in time and therefore then they might
actually going to buy back
some aspects of the companies,
but now actually with this raise,
with this big raise right now,
that may actually be a better timing
even for current shareholders because
well, if they're going to do it in a
couple of years those assets will be more
expensive to buy them back.
And so now that could actually be kind
of a bargain for Li Bin as well as
us for shareholders. Now,
I don't want to paint this entirely
into positive news. Of course,
dilution, isn't the best thing to have.
Of course I would rather not like
to be diluted as a shareholder,
but as I mentioned in my previous
videos, this is to be expected.
This is the deal that you getting.
If you're buying into a growth company
into a startup that hasn't reached
profitability yet, this
is just how it works.
This is how it worked for Tesla as well,
but to pay also some respect to
the bear thesis here you know,
with all this juggling around
of the assets and risk to that
I'm not saying that this
is entirely risk-free.
So for instance now that
we actually having the NIO
entity as a holding, having
to buy back the assets,
which they previously owned
is of course not ideal,
but this has just to do with the
situation that NiO was almost bankrupt.
So there is no other way around it
if this one and have happened NIO
wouldn't be existing today.
So all those negative effects of
dilution and so on are just having
to do with the fact that actually
a NIO isn't as profitable,
as fast as they possibly wanted
it to be in the beginning.
And if you are investing in a
startup in a young company like that,
then you just need to pay attention to
those kind of risks. And another reason,
of course, like always before if
you invest into a Chinese company,
you need to be aware that you are
just investing into this NIO ADR,
which is essentially a holding company
in the Cayman islands. Well, yeah,
they have an ownership in the NIO China
entity, but in a worst case scenario,
what could that mean? What could happen?
Do you really have the legal means to
sue somebody in China, if they kind of,
you know, doing some
bad stuff with your ADR?
This is possibly one of
the biggest risks in,
in investing in Chinese
companies in general.
But you just need to know that this
is also why Chinese stocks are usually
trading at a discount in
comparison to the Western peers.
So I'm willing to take that risk.
I know exactly what it means.
You should be aware of that too. So
not everything is positive about that,
however, in general yeah,
as you can see here,
I'm not really worried
about this current dilution.
I'm actually much more excited about
that it's now another 1.5 billion us
dollars in cash tremendously increasing
actually the quality of the balance
sheet of NIO right now,
and putting them in a much better position
and actually funding the growth for
the next couple of months to come.
So I think actually that the,
the pullback in the share price will
be short lived because there will be so
much more news coming out.
With the growth of NIO that, well,
it will possibly make back this.
Decline in the share price pretty
soon. So, yeah, these are my views.
This is not investment advice.
This is just what I am
personally thinking about it.
And I hope you enjoyed
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