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Chinese Electric Vehicle Maker NIO Files IPO

Retail investors interested in the electric vehicle market can be forgiven for thinking that Tesla (NASDAQ:TSLA) is the only company in the world that produces cars that run on electricity. The 24-7 Elon Musk show tends to drown out news about any other player in the industry. Musk’s latest stunt related to taking the company private is a bit ironic given the recent announcement that Shanghai-based NIO is planning to IPO on the New York Stock Exchange, targeting a raise of $1.8 billion.

nio-ipo: NIO company logo. click to company websiteFounded in 2014 under its former name NextCar Inc., NIO quickly raised $2.1 billion across four rounds, with backers including Chinese tech giants Tencent and Baidu, as well as prestigious U.S. investment firms like Sequoia Capital. We first came across the company a little more than a year ago in our list of interesting electric car startups. The allusion to Tesla is more than superficial. Its founder William Li has been called the “Elon Musk of China.”  He first made a name for himself with Bitauto (NYSE:BITA), a provider of web content for the auto industry. In its filing with the Securities Exchange Commission (SEC), NIO mentions Tesla by name more than a dozen times. Rumors that we just made up say Li has Musk’s cherry red roadster tattooed on his left butt cheek.

nio-ipo: The China BEV SUV Market Landscape

This seems to be a pattern for China and its companies: They really, really idolize but really, really want to crush their U.S. counterparts. We’ve seen that competitive spirit in Chinese AI chipmakers, which are gunning for top-dog Nvidia (NASDAQ:NVDA). Now NIO hopes to race ahead of Tesla in what is becoming an increasingly crowded electric vehicle market in China. Currently valued at about $5 billion according to data firm CB Insights, NIO’s name translates to “Blue Sky Coming,” which actually makes a whole lot more sense than its convoluted corporate structure:

nio-ipo: NIO's corporate structure

Credit: NIO

We’ll leave it for future SEC investigations to figure all of that out. For now, let’s focus on what NIO brings to the table for prospective investors.

First NIO Electric Vehicle Ready to Roll

Not much yet, as it turns out. The company’s first concept EV was the sporty, electric model EP9, which claimed the title of fastest self-driving car in the world last year, reaching a speed of about 160 mph without a human behind the steering wheel. Its first commercial product for the masses is the ES8, an all-electric, seven-seater SUV that can accelerate from zero to about 60 mph in 4.4 seconds. It has a range of about 300 miles on a single charge. The ES8 does feature Level 2 Autonomy, which is in the same category of artificial intelligence-powered navigation as Tesla’s Autopilot, meaning the vehicle can steer, accelerate and brake in certain circumstances. Just don’t take your hands off the wheel or stream Netflix.

nio-ipo: NIO's ES8

ES8. Credit: NIO

The retail price for the ES8 is $65,000 but it is currently only available in China. Customers can shave about $14,500 off the base price by opting in for what the company calls a “battery payment option,” which involves making installment payment of about $185 per month for 78 months. Only those with good social credit scores need apply. A smaller five-seater SUV, the ES6, is expected to launch later this year at a lower price point.

Electric SUV Reservations Top 17,000

Torn from a page out of Tesla’s playbook, NIO takes pre-orders with deposits for its high-tech EVs. It just started making deliveries on more than 17,000 reservations, though it hasn’t gotten very far in the first two months, delivering less than 500 ES8s. The company requires an initial deposit of about $725, which is refundable until a production contract is inked. At that time, customers must pony up an additional $5,800 non-refundable deposit. About 5,000 clients have committed to the ES8 with non-refundable deposits, as of the end of July. NIO estimates it will take up to nine months to fulfill all 17,000-plus reservations, with an eventual goal to fulfill orders within 21 to 28 days. Let’s hope they don’t take a page out of Tesla’s manufacturing playbook for the Model 3.

Getting Charged Over the ES8

NIO customers who someday actually get their ES8 will eventually have a bevy of charging options. It offers a Power Home system for those who want the ability to charge up at home. Power Swap stations located in major cities will switch out batteries in minutes. A Power Mobile charging service involves trucks juicing EVs in about 10 minutes, a charge good enough for about 60 miles. Another forthcoming service called Power Express is expected to provide users with 24-hour on-demand charging services including car pick-up and drop-off. All of the services, including access to China’s more-than-200,000 public charging stations, are part of a fixed monthly subscription fee.

No Profit in Sight

Time to talk numbers that count, and there’s not much to count yet. The company’s first revenues only started rolling beginning in June, amounting to about $7 million, or what Musk finds lost between his couch cushions amid Mars bars wrappers. On the flip side, NIO’s net losses rang up to a half-billion dollars in the first six months of 2018. There’s no end in sight for the financial bloodbath: The company expects capital expenditures for the next three years, which includes completion of its own manufacturing facility in Shanghai by the end of 2020, along with additional R&D and expansion of its sales and service networks, to ring up at $1.8 billion.

NIO's financials

As you can see above, it’s not cheap to run a cutting-edge EV company, even in China. R&D alone accounted for $220 million for the first half of 2018. NIO currently has a five-year contract with Jianghuai Automobile Group Co. (JAC Motors), a Chinese state-owned vehicle manufacturer, to build the ES8. NIO not only pays JAC for each vehicle produced but also covers any operating losses and other fees at the manufacturing plant, which amounted to about $15 million in the first half of the year.

Market Dynamics

NIO operates and competes in the world’s leading market for both producing and buying electric vehicles, which comes with its own pros and pitfalls. The most up-to-date and reliable numbers we could find on the EV market come from McKinsey and Company for 2016. That’s when Chinese manufacturers produced 43 percent of the 873,000 EVs built worldwide, well before NIO’s ES8 even entered the conversation. Also in 2016, China overtook the U.S. market in the total number of EVs on the road, with 650,000 cumulative EV sales. The graphic below charts China’s relative dominance, though northern European countries like Norway lead in terms of total EV market penetration where one in four cars sold there are electric vehicles.

Global Market and Industry Electric Vehicle Index report by McKinsey & Co.

Credit: McKinsey & Co.

One caveat (which is true in most countries) is that the Chinese central government (as well as local ones) provides some pretty nice subsidies in order to reduce fuel consumption and improve the country’s notoriously bad air, not to mention boost the homegrown industry. But some of those are going away. In particular, subsidies in 2019 and 2020 will drop by 20 percent compared to 2017 levels. In addition, earlier this year, China announced it would lower tariffs (except for one particular country with the acronym USA) to 15 percent on passenger vehicle imports. Another sign of China opening its market: It just lifted the restriction on allowing foreign-owned electric vehicle manufacturers to open wholly-owned facilities in China without needing a domestic joint-venture partner. That means Tesla could park itself in Shanghai in a repeat of the Opium Wars. Except, you know, without addicting millions of Chinese to a dangerous drug. We’ll keep those sorts of economic opportunities here in the United States.

Conclusions

If you haven’t picked up on it yet, we’re not exactly bullish on an NIO IPO. It looks like the company hopes to raise enough capital to cover its growth over the next three years, but we wonder what the plan is after that. Arch-rival Tesla still hasn’t turned a profit after 15 years, about half of which it has been a public company, and it’s unclear if it will ever happen, especially if Musk keeps dropping LSD and tweeting his company into lawsuits.

In the long term, it’s hard to imagine either company competing against the big automakers, which are investing billions of their own into alternative energy vehicles and self-driving cars. In fact, Tesla doesn’t even sell the most EVs today. That honor goes to the Renault-Nissan Alliance, a partnership that could reportedly turn into a mega-merger within a couple of years. An investment in one of those companies now could be interesting down the road, though you’ll need to open an account with Zacks Trade, because both are traded on foreign stock exchanges.

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