馃攳
馃槺馃敶 NIO Stock Dilution Explained! Why NIO Stock is Crashing? - YouTube
Channel: 馃嚚馃嚦 East West Investment Opportunities - D艑NGXii
[0]
Oh, my God, NIO is tanking -10%. We've
got dilution incoming! What the hell!!!
[4]
So now that we've talked what dilution
means and also how you can rate it as
[9]
an investor.
[10]
I also want to prepare you for the frank
news that I do think NIO will have to
[15]
raise actually more capital
that way, 2 million US dollars.
[19]
And this also may mean that if
in case that the stock price
[23]
is rallying on that news,
[26]
NIO ($NIO 钄氭潵) may actually in the future
also consider once again of raising
[30]
more,
[30]
you asked dollars in cash
because remember NIO still has to
[35]
pay for the tranches,
[37]
although they are smaller trenches
into the NIO China entity when
[42]
the new investments coming in
or so from the new investors.
[45]
So this is part of the deal. This is
how it's going to be. And of course,
[49]
NIO will also need some more
working capital in US dollars in the
[54]
new ADR that we are invested in.
[57]
This is not a additional
offering. However,
[60]
I also want to prepare you
for a little bit of bad news,
[63]
because I do think there is more
dilution to be expected from NIO.
[67]
I have mentioned it in my
evaluation videos previously.
[71]
I mentioned also that I don't
think it's necessarily a bad thing.
[75]
So something you need to take in the
consideration of investing in NIO that you
[79]
will be at some point
diluted as a shareholder,
[83]
similar things happened to Tesla.
[84]
I think this is just how growth companies
are working and you need to consider
[89]
it with your valuation and
your price targets. So, well,
[92]
I think the viewers of my videos should
be warned about what has happened
[97]
today and well, let's
dive into it anyways.
[100]
What does it mean with the dilution
today and also why the stock is tanking,
[105]
but ultimately, what does it mean
for you as a NIO shareholder?
[109]
So as of yesterday evening after
the closing of the markets,
[112]
NIO announced a new,
[114]
additional offering of shares of 75
million to be exact and pricing it
[119]
at $20,44 USD. So pretty
high pricing here.
[123]
Pretty good actually. And now
what does it mean, actually?
[128]
So coming back to my dilution Excel sheet,
[130]
which I actually used in my video last
time when I made a video exactly at the
[134]
same topic about NIO dilution,
[136]
and that was actually with the
first Pre-Hefei funding cash raise
[141]
when actually NIO,
[143]
raised some our cash in order to
actually pay their parts into the Hefei,
[148]
into the new entity, the new China,
[150]
NIO China entity part of the deal.
[153]
And back then we diluted
by roughly 9% shareholders
[158]
raising actually 428 million
US dollars at the share
[163]
price off back then $5,95 with a
[167]
72 million additional shares.
[170]
And as just outlined in the introduction
video this is just partly how growth
[175]
companies work, offering new shares,
[177]
diluting existing shareholders in order
to raise capital and cash for funding
[181]
growth. So back then, and
actually at my valuation videos,
[185]
which I also link once again I
mentioned that I expect NIO to
[189]
further dilute shareholders. Actually,
if you look into my funding document,
[193]
you will see that I consider
that NIO is raising a total of
[197]
2 billion US dollars until they
become profitable and they don't need
[202]
to raise any money anymore and
raising it at an average of 10
[207]
US dollars, a share.
[208]
So today's raise is actually significantly
higher here and they are raising
[213]
1.5 billion by that.
And as you can see here,
[217]
we're now at 1055 million
outstanding shares now
[222]
offering 75 million new shares.
[224]
So that is roughly a dilution
of 7% and at the share price of
[229]
$20,44 cents that give them 1.5 billion us
[234]
dollars in a cash raise and puts it to
[236]
1,130 million shares
outstanding shares for NIO.
[242]
So this is totally in line
with what I was expecting in my
[247]
valuation video about NIO actually.
[250]
There is still some more room
for more additional dilution,
[253]
but now let's talk about it,
why NIO is actually doing that.
[257]
And what does it mean for you as
a shareholder? And to do that,
[261]
I prepared a little visual presentation
of what I think is happening here.
[265]
So this is Li Bin on the left hand side,
[268]
he's the CEO and founder of NIO
and in the middle, you see NIO,
[273]
the ADR.
[274]
So the American listed company
that you as NIO gang has invested
[278]
as shareholders buying the shares
of the NIO ADR that is US listed
[284]
and, well a couple of months ago before
we got the Hefei government deal.
[289]
That company well had only 150 million
[294]
US dollars cash left in the bank
that was at the end of Q4 of
[298]
2019.
[299]
And Li Bin as a founder of this company
is roughly owning 13% of this company
[304]
and back then at that time,
[306]
he was actually giving 100 million
us dollars off his personal
[311]
wealth in cash into this company.
[314]
Additionally raising more convertible
bonds in order to keep NIO
[318]
ADR at float.
[321]
Otherwise NIO was at the
verge of bankruptcy back then.
[325]
So really a bad situation.
[327]
We were actually in the situation that
NIO could have gone out of business at
[332]
any point in time,
[333]
back then the shares were trading
below three US dollars a share look at
[338]
where we are now. So why are we
here? And this is what happened next.
[342]
This is actually what the, Hefei
government deal did do to NIO.
[347]
And basically NIO founded a new
company that is called NIO China,
[350]
which is a Chinese entity and NIO ADR.
[355]
so the US listed enterprise is actually
the holding company of this new company.
[359]
And it has 75% roughly
ownership in this new Chinese
[364]
entity.
[365]
And in order to do that well they
need more partners here and new
[370]
investors and the investor in this case
has been the Hefei local government,
[374]
which was getting less than 25%
ownership in this new company,
[379]
therefore giving this new
company 7 billion renminbi (RMB)
[384]
in cash injection. And this is
renminbi, so Chinese currency.
[388]
This is important to know because
this is the Chinese entity.
[391]
This cannot hold US dollars.
[394]
This entity is fully funded
by Chinese money here.
[397]
And yeah in order to do this deal,
[401]
NIO had to transfer both their
assets of the company from the new
[406]
ADR plus 600 million in US dollars in cash
[411]
to this new entity.
[412]
And then this new entity
in total has 11.2 billion
[417]
renminbi in cash coming from
both the Hefei government,
[421]
as well as the NIO ADR and this
company, as I mentioned before,
[425]
it's already owned by the
ADR and this means owned by
[429]
Li Bin and US and
international shareholders.
[434]
So now why did the first raise happen?
[436]
You see that NIO just had 150
million us dollars cash in the banks,
[441]
and they have 600 million us dollars in
cash that they need to transfer to this
[445]
new entity. So not enough money
to actually make this transition.
[450]
And as outlined in my previous video,
[452]
this has to be done in different
steps in different tranches.
[456]
So let's go back to the Excel sheet,
this tranch one to tranch five,
[462]
and we are already and NIO
possibly paid already two tranches
[466]
into this new company.
[468]
So with around 182 million
US dollars each and
[472]
the next tranche would be in September.
[476]
So this is why I always
said in my previous video,
[479]
that it's quite likely that NIO
will actually raise more capital
[484]
because this entity here needs more
capital in order to actually fulfill those
[488]
tranches into NIO China. Plus in
addition, they need working capital,
[492]
which means they need US dollars to pay
for instance, for the German entity,
[497]
for the UK entity and for
a US entity where they have
[501]
employees and they are paid in
euros and US dollars and so on.
[506]
And also if NIO wants to go global,
[508]
they need you as dollars in
funding and not RMB cash,
[512]
which can be used for paying
the operations in China
for paying the production
[516]
for paying the expansions locally
for paying marketing in China.
[520]
But it's not well used for paying in
US dollars because it's really hard to
[525]
transfer cash from RMB into US dollars.
This is true how the situation is.
[530]
So this is exactly why the first
catchphrase happened with the
[533]
430 million US dollars.
[535]
Roughly knew I had enough US dollars in
the bank to make the first payments of
[539]
the first tranches and to spend a
little money on working capital there.
[544]
And with this first illusion already Li
Bin as a shareholder was diluted minus
[548]
9%. And we as NIO shareholders were
also diluted by minus 9%. However,
[553]
what happened afterwards is that
the new prospects of NIO have been
[558]
largely recognized by the markets.
[560]
And we had this recent run up of
the share price because a NIO is
[565]
recovering it's on the
verge of profitability.
[569]
The market demand has picked up and most
of the analysts are recognizing that
[573]
and the bank analysts are
now having higher share price
targets for the company.
[577]
So the stock price is
keeping increasing there.
[580]
So now this is the interesting bit
about the second raise today that
[585]
actually, you know, first of all,
you need to, so first of all,
[588]
you need to think about Li Bin, he's
an entrepreneur, he's an individual,
[592]
he's a billionaire.
[593]
He wants to own as much as
possible off this company,
[597]
of NIO ADR.
[598]
So he is actually in the same boat
with us because he is largely a NIO ADR
[603]
shareholder.
[604]
And most of his personal wealth
actually depends on what is happening
[609]
to this entity here. And as mentioned
before, during the bad times,
[613]
he put more of his personal
money into that company.
[616]
And with this second raise,
[619]
I think partly one of the reasons
why he is doing this is that he wants
[623]
some part back of his company.
[626]
He wants to increase the
ownership in NIO China,
[630]
and actually decreasing the ownership
of the minority stakeholder.
[634]
And that's exactly what's been written
in the press release about this offering
[638]
the company plans to use this net proceeds
from ADS offering mainly to increase
[642]
the share capital off and a
company's ownership in NIO China to
[647]
repurchase the equity, interests, held,
[649]
and certain minority
shareholders of China.
[652]
So you need to think from
Li Bin's perspective,
[654]
he wants back his
ownership in this company,
[658]
and he is buying back
the shares of NIO China,
[661]
which was clear from
the beginning. Actually,
[663]
if you read the details
that NIO as the US listed
[667]
company has this option of
buying back to company. Now,
[671]
the timing of that is interesting
because now the stock price has run up.
[676]
However, NIO is not still profitable yet.
[679]
So what does it mean actually with
now increasing the ownership in this
[684]
company? That means if we get
future revenues, future profits,
[689]
actually, instead of only previously
getting 75% of those profits,
[694]
because you have to split them
with the Heifei local government,
[697]
which was providing
here the cash injection.
[700]
Now possibly maybe up to 95% of
those profits belong to Li Bin
[705]
and the NIO Gang. Well,
[707]
I don't know if it's going to be 95%
because NIO is not outlining how much
[712]
ownership they are buying back
into in NIO China. However,
[716]
we can see it as a views of actually
looking into the future and seeing that
[721]
well, this company is probably going to
print billions in profits in the future.
[726]
So I want a larger stake of this,
[728]
and I only gave you some ownership during
this bad times because I actually had
[733]
to, because otherwise I would have never
had a chance to get to those profits.
[737]
So, this is probably the
thinking behind of Li Bin,
[740]
why he is doing the cash raise here.
[742]
And because he is now sitting in the same
boat with us you can see that this is
[747]
not necessarily a bad thing,
[748]
although we are now getting
more dilution minus 7%. So,
[753]
so of course the showers are tanking
and our shares are now worth less in the
[757]
company. Temporary, however, as I
outlined before this should have in,
[762]
like, let's say five years time,
[764]
this should have possible implications
on both the valuation on NIO.
[768]
And at the same time, our stakes in
this company as early investors now,
[772]
then there's also other reasons
why the cash raise has been done,
[775]
which is investing in
research and development,
[778]
as well as in autonomous driving
technologies and global market
[782]
development. So this is exactly
what I have been saying before.
[785]
They need the US dollars in order to
pay for their working capital in the
[790]
overseas entities.
[792]
The research and development is possibly
mostly done in Germany in Munich
[796]
office. Then autonomous development
is actually happening in
[801]
California in the San Jose entity.
[804]
And then they're talking here
about global market development.
[807]
And we recently heard the news that NIO
wants to go global in the second half of
[812]
2021.
[813]
So this is the preparation of
getting to wallet filled with US
[818]
dollars in order to spend it overseas.
And now the only question is like,
[822]
how much of the money are they going to
keep in U S dollars in order to spend it
[825]
on the global expansion
and also on funding,
[827]
the working capital and how much of the
US Dollaery they are actually spending
[831]
in buying back the NIO China entity
here in order to increase the
[836]
possible reaps and benefits of
profitability in a future for current
[841]
shareholders.
[842]
So if you look at the big picture
just a couple of months ago the NIO
[847]
ADR was almost bankrupt. We were at
a 3 billion US dollars valuation,
[851]
and now we are roughly trading at a
19 billion US dollars valuation with
[856]
the NIO ADR that has roughly a
300 million US dollars in cash,
[860]
or maybe they keep another 500 million
us dollars in cash from the current
[864]
raise,
[864]
and possibly they spent up to 1 billion
US dollars in buying back the assets
[869]
from NIO, China entity here. I don't
know how big the split is going to be.
[874]
Possibly they can even
buy back everything.
[876]
I don't think they're going to do that
because actually they also want those
[880]
partners.
[881]
They want a local government to be
partner in that entity because all of the
[884]
things that are happening in NIO
China are quite interesting as well.
[888]
So they can now fund all of the
operations with the CNY cash funds.
[892]
They can now fund all the Battery as a
Service (BaaS) with the bank loans of the
[897]
Chinese banks and stuff like that.
[898]
This wouldn't have been possible without
the local government to be really clear
[903]
on that. However I mean like, the
short sellers and the NIO Bears,
[907]
they will spin that into bad news about
the dilution of diluting shareholders
[912]
equities. When the Chinese government
went in, they said like, Oh,
[916]
well this is bad news because now we have
the Chinese government in this company
[920]
and nobody wants to government in
this company and stuff like that.
[924]
However I'm just having a more
pragmatic view on that and just
[929]
aligning my thoughts with
how Li Bin thinking about it.
[932]
And you can clearly see that, yes,
[935]
there are clearly benefits of having the
Chinese local government being a part
[939]
of NIO China here at the same
time Li Bin he's an entrepreneur.
[943]
He doesn't want to depend on
the government to be clear.
[946]
And he's telling you this by actually
now starting to buy out the Chinese
[950]
government from the entity.
[952]
And I was actually thinking that this
could actually happen at a later stage,
[956]
to be honest, when NIO gets profitable,
[958]
that they may actually even do an IPO at a
[963]
Chinese star markets, sort
of Chinese stock exchange,
[966]
which actually has higher
listing barriers, for instance,
[970]
they need to be profitable at that point
in time and therefore then they might
[974]
actually going to buy back
some aspects of the companies,
[977]
but now actually with this raise,
with this big raise right now,
[981]
that may actually be a better timing
even for current shareholders because
[986]
well, if they're going to do it in a
couple of years those assets will be more
[990]
expensive to buy them back.
[992]
And so now that could actually be kind
of a bargain for Li Bin as well as
[997]
us for shareholders. Now,
[998]
I don't want to paint this entirely
into positive news. Of course,
[1003]
dilution, isn't the best thing to have.
[1005]
Of course I would rather not like
to be diluted as a shareholder,
[1009]
but as I mentioned in my previous
videos, this is to be expected.
[1014]
This is the deal that you getting.
[1016]
If you're buying into a growth company
into a startup that hasn't reached
[1020]
profitability yet, this
is just how it works.
[1022]
This is how it worked for Tesla as well,
[1024]
but to pay also some respect to
the bear thesis here you know,
[1028]
with all this juggling around
of the assets and risk to that
[1033]
I'm not saying that this
is entirely risk-free.
[1036]
So for instance now that
we actually having the NIO
[1040]
entity as a holding, having
to buy back the assets,
[1044]
which they previously owned
is of course not ideal,
[1049]
but this has just to do with the
situation that NiO was almost bankrupt.
[1053]
So there is no other way around it
if this one and have happened NIO
[1058]
wouldn't be existing today.
[1060]
So all those negative effects of
dilution and so on are just having
[1065]
to do with the fact that actually
a NIO isn't as profitable,
[1069]
as fast as they possibly wanted
it to be in the beginning.
[1072]
And if you are investing in a
startup in a young company like that,
[1077]
then you just need to pay attention to
those kind of risks. And another reason,
[1081]
of course, like always before if
you invest into a Chinese company,
[1085]
you need to be aware that you are
just investing into this NIO ADR,
[1089]
which is essentially a holding company
in the Cayman islands. Well, yeah,
[1094]
they have an ownership in the NIO China
entity, but in a worst case scenario,
[1098]
what could that mean? What could happen?
[1100]
Do you really have the legal means to
sue somebody in China, if they kind of,
[1105]
you know, doing some
bad stuff with your ADR?
[1109]
This is possibly one of
the biggest risks in,
[1112]
in investing in Chinese
companies in general.
[1116]
But you just need to know that this
is also why Chinese stocks are usually
[1120]
trading at a discount in
comparison to the Western peers.
[1125]
So I'm willing to take that risk.
I know exactly what it means.
[1128]
You should be aware of that too. So
not everything is positive about that,
[1132]
however, in general yeah,
as you can see here,
[1135]
I'm not really worried
about this current dilution.
[1137]
I'm actually much more excited about
that it's now another 1.5 billion us
[1142]
dollars in cash tremendously increasing
actually the quality of the balance
[1146]
sheet of NIO right now,
[1148]
and putting them in a much better position
and actually funding the growth for
[1152]
the next couple of months to come.
So I think actually that the,
[1156]
the pullback in the share price will
be short lived because there will be so
[1161]
much more news coming out.
[1163]
With the growth of NIO that, well,
it will possibly make back this.
[1168]
Decline in the share price pretty
soon. So, yeah, these are my views.
[1172]
This is not investment advice.
[1173]
This is just what I am
personally thinking about it.
[1176]
And I hope you enjoyed
this information. If so,
[1179]
please subscribe to the child
because currently I'm pumping.
[1182]
A video every other day.
So maybe if you don't.
[1185]
Get a notification hit that
notification button so that you,
[1188]
whenever I post a new video,
[1190]
you would definitely get it into your
start page here at YouTube. And yeah.
[1194]
Thank you guys for watching
and see you in the next one.
Most Recent Videos:
You can go back to the homepage right here: Homepage