Hamartia Antidote
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I guess seekingAlpha and zero-hedge are tired of posting Tesla gloom and doom...
https://seekingalpha.com/article/4251562-nio-will-end-tears
Summary
*NIO is a cash-incinerating machine par excellence.
*The stock is incredibly liquid and borrow is readily available at 2%, so this is actionable for most investors.
*I am not saying this is another China fraud, but the conditions clearly exist for it to be a fraudulent enterprise, defrauding offshore investors to the benefit of Chinese entrepreneurs.
Forget where the stock has come from and the fact that it is already down 50% from the highs. NIO (NIO, listed on the NYSE), the recently-listed Chinese BEV name, is a hype-driven, cash-incinerating JOBS-act IPO that may qualify as the best poster child for ZIRP's distortionary capital allocation effect when the history books get written years from now (great blog here on this topic by the way). In the meantime, it's a great short because it has no moat, de minimis brand, competes in the world's most crowded EV market, has a structurally high-cost model that is a big competitive disadvantage longer-term, has disclosed weaknesses in internal controls along with black-box cost accounting and a number of other oddities, and will suffer badly from just announced cuts to Chinese EV subsidies.
However, you can throw that all out if you like and just focus on the main thing: NIO is a cash-incinerating machine par excellence: since founding barely 4yrs ago, they have run up $5bn in accumulated deficits, are currently burning around $500m PER QUARTER, and have no clear path to profitability in the near term. The scale of the cash burn is such that they had to rush out a convert offering to raise $700mm, just 3mos after the IPO raised $1bn… relying on the artificially-inflated stock price during the pre-lockup period. This prompted numerous lawsuits (the bonds have since cratered with the stock), but the upshot is now, no matter what, they need to come back to market for another $1bn in 6mos (or sooner), such is the scale of their cash burn (I judge they've already burnt most of the convert cash they raised).
So, to my mind, you have multiple ways to win with this short. If China blows up, this gets crushed and/or disappears (luxury auto highly sensitive to the macro economy). As or when they run out of cash, there is a real chance there will be a 'run' on the company, perhaps by its suppliers (working capital is already massively negative), the Chinese banks (who are already significant lenders) or as the market realizes the US-listed paper is worthless. Or they simply need to come back to market in 6mos and raise another $1bn at whatever price the market is willing to bear (hint - it's not a $5bn EV for a company burning $2bn cash a year). The convert window is now closed (given what happened recently, the extant bonds now trade at 9% yield) so that option is gone. It is hard to say what downside is in this market; I think the shares are worthless but a realistic target this year is still closer to 1x revenue I feel, so >60% downside from here.
https://seekingalpha.com/article/4251562-nio-will-end-tears
Summary
*NIO is a cash-incinerating machine par excellence.
*The stock is incredibly liquid and borrow is readily available at 2%, so this is actionable for most investors.
*I am not saying this is another China fraud, but the conditions clearly exist for it to be a fraudulent enterprise, defrauding offshore investors to the benefit of Chinese entrepreneurs.
Forget where the stock has come from and the fact that it is already down 50% from the highs. NIO (NIO, listed on the NYSE), the recently-listed Chinese BEV name, is a hype-driven, cash-incinerating JOBS-act IPO that may qualify as the best poster child for ZIRP's distortionary capital allocation effect when the history books get written years from now (great blog here on this topic by the way). In the meantime, it's a great short because it has no moat, de minimis brand, competes in the world's most crowded EV market, has a structurally high-cost model that is a big competitive disadvantage longer-term, has disclosed weaknesses in internal controls along with black-box cost accounting and a number of other oddities, and will suffer badly from just announced cuts to Chinese EV subsidies.
However, you can throw that all out if you like and just focus on the main thing: NIO is a cash-incinerating machine par excellence: since founding barely 4yrs ago, they have run up $5bn in accumulated deficits, are currently burning around $500m PER QUARTER, and have no clear path to profitability in the near term. The scale of the cash burn is such that they had to rush out a convert offering to raise $700mm, just 3mos after the IPO raised $1bn… relying on the artificially-inflated stock price during the pre-lockup period. This prompted numerous lawsuits (the bonds have since cratered with the stock), but the upshot is now, no matter what, they need to come back to market for another $1bn in 6mos (or sooner), such is the scale of their cash burn (I judge they've already burnt most of the convert cash they raised).
So, to my mind, you have multiple ways to win with this short. If China blows up, this gets crushed and/or disappears (luxury auto highly sensitive to the macro economy). As or when they run out of cash, there is a real chance there will be a 'run' on the company, perhaps by its suppliers (working capital is already massively negative), the Chinese banks (who are already significant lenders) or as the market realizes the US-listed paper is worthless. Or they simply need to come back to market in 6mos and raise another $1bn at whatever price the market is willing to bear (hint - it's not a $5bn EV for a company burning $2bn cash a year). The convert window is now closed (given what happened recently, the extant bonds now trade at 9% yield) so that option is gone. It is hard to say what downside is in this market; I think the shares are worthless but a realistic target this year is still closer to 1x revenue I feel, so >60% downside from here.
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