To The Moon

Yesterday, NIO announced a massive $1 billion financing, and its Hong Kong stock price dropped by 4.45%, which is considered a normal reaction. However, what was unexpected is that NIO's US stock plummeted by 17.07% last night, with trading volume increasing tenfold. It can be described as a high-volume crash!

Why did investors react so dramatically?

In yesterday's article titled " Li was reduced, NIO raise more, what happened to new energy vehicle companies?" I included a chart of the major new energy vehicle companies' debt-to-equity ratios, with NIO currently at 79%, significantly higher than its competitors:

NIO's financial situation is indeed tight, given the various areas where it needs funds, such as its second brand, battery swapping stations, and its smartphone venture. From an expense ratio perspective, NIO has the highest sales and administrative expense ratio as well as research and development expense ratio among mainstream new energy vehicle companies.

For example, in the second quarter of this year, NIO's sales and administrative expense ratio was 32.6%, significantly higher than Tesla's 4.8% and XPeng's 8.1%:

As another example, NIO's research and development expense ratio was 38.1% in the second quarter, significantly higher than Tesla's 3.8%, Li's 8.5%, and Xpeng's 27%:

The automotive industry exhibits significant economies of scale, meaning that when car sales volume increases, the corresponding expense ratios tend to decrease significantly. Therefore, comparing NIO to Tesla at the current stage may not be appropriate.

In 2022, NIO reported annual revenue of $7.3 billion, which is comparable to Tesla's $7 billion in revenue in 2016. During that year, Tesla had a sales and administrative expense ratio of 20.5% and a research and development expense ratio of 11.9%. NIO's expense ratios continue to be significantly higher.

In terms of expense rate control, the best among Nio, Xpeng and Li is Li. Nio was once better than Xpeng, but now it is the worst.

Sluggish expense ratio control has led to massive net losses for NIO, with a staggering loss of 6.1 billion RMB in the second quarter of this year, far exceeding Xpeng's 2.8 billion RMB loss. Therefore, NIO is in urgent need of financing to bolster its financial position.

If car sales return to high growth, NIO's cash flow wouldn't be as tight. However, based on the third-quarter sales guidance and the sales data released by Li Auto from September 1st to 17th, NIO's September sales may be around 17,000 units, a significant drop compared to the roughly 20,000 units in July and August.

NIO has provided a reason for this, citing insufficient sales personnel and channel development. However, investors find it challenging to accept this excuse, which has led to a continuous decline in the stock price after the release of the second-quarter report.

Now, with NIO's announcement of significant financing, investors are paying even more attention to its cash flow situation. If the subsequent car sales data does not recover as expected, the pressure of tight cash flow could have a greater impact on the stock price.

Apart from sluggish sales, another significant source of cash flow pressure for NIO is the construction of its battery swapping stations. According to the management's plan, they aim to build 1,000 swapping stations by 2023.

According to data compiled by CnEVPost, NIO, Aulton New Energy, and Botan Technology have the highest number of battery swapping stations in China. Among these, NIO primarily targets ordinary consumers, while the latter two mainly serve the taxi market.

NIO has been rapidly expanding its battery swapping station network, but there are relatively few followers in this strategy. Is this strategy a stroke of genius on NIO's part, or is it a case of going it alone? Similar to NIO's foray into the smartphone market, there are currently few automotive companies following suit.

Lastly, to answer the question posed in this article – whether NIO's 17% drop due to financing is a justified sell-off or not. In my personal opinion, if NIO's sales can recover in the future, this significant drop presents an excellent entry opportunity. After all, the current price-to-sales ratio valuation is much lower than that of Li and XPeng:

However, NIO has brought too much disappointment to investors, and whether it can return to its peak is surrounded by too many uncertainties. It's hard to definitively say if it has been unjustly sold off. Investors might consider waiting for a rebound in high-frequency sales data or entering the market after the release of new vehicle models with the potential to be blockbusters. $NIO Inc.(NIO)$ $Li Auto(LI)$ $XPeng Inc.(XPEV)$