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China's Tesla wannabe seeks investors to pay for potential
Bloomberg | 2018/9/6

Investor excitement for China¡¯s electric-vehicle business gets a reality check next week.

Nio Inc. will become the first major electric-vehicle maker to have a U.S. initial public offering since Tesla Inc. in 2010, and its stock is set to start trading Sept. 12. The company, backed by Tencent Holdings, seeks a valuation of $6.4 billion to $8.5 billion -- even though it¡¯s delivered fewer than 2,000 vehicles ever.

Shanghai-based Nio wants to grab the pole position in the race to be China¡¯s homegrown answer to Tesla, competing with dozens of domestic automakers to capitalize on rising demand in the world¡¯s largest market. Yet that battle also attracts the same type of intense scrutiny that Elon Musk¡¯s company faces, as many of the fledgling companies need to convince investors they have the manufacturing capacity to deliver on their promises.

¡°The bull case for Nio is that it has the potential to be China¡¯s EV champion,¡± said Robin Zhu, an analyst at Sanford C. Bernstein & Co. in Hong Kong. ¡°The bear case is that the business burns cash at an alarming rate and hasn¡¯t demonstrated transformative demand levels.¡±

Tesla¡¯s still-diminutive presence in China -- fewer than 12,000 of its vehicles were registered this year through July, according to LMC Automotive -- creates an opening for local startups. The Chinese government¡¯s quest to lead the world in EVs has created favorable policies and lured investors -- at least five local electric-car makers attracted $1 billion or more in backing with minimal production.

In addition, there are several established electric-car makers in China with years of experience in manufacturing. Those companies -- including BYD Co. and Beijing Electric Vehicle Co., which is preparing for an IPO in China -- typically focus on cheaper, less flashy vehicles that don¡¯t directly compete with the likes of Tesla.

Nio represents a different breed, targeting wealthier buyers through a focus on connectivity and performance. After breaking speed records with its EP9 race car, Nio is ramping up production of the ES8 SUV, its first commercial product, at a partner¡¯s plant in the eastern city of Hefei.

Nio founder William Li pledged to deliver 10,000 vehicles to customers by year¡¯s end. One skeptic, He Xiaopeng, the chairman of rival Xpeng Motors Technology, said in a social-media posting in July that¡¯s a goal no Chinese EV startup, including his own, can reach.

One early Nio backer, JD.com Inc. billionaire founder Liu Qiangdong, took 10 seconds to decide to invest, said Liu¡¯s wife, Zhang Zetian. Liu made the decision immediately after Nio¡¯s founder made a presentation at Liu¡¯s home, Zhang said at an event in December.

¡°He is so creative,¡± Liu said in a January interview with Bloomberg. ¡°I am sure he will get a very successful IPO and make a perfect car for consumers.¡±

Like many peers, Nio hasn¡¯t secured an EV manufacturing license from regulators, so it tapped Anhui Jianghuai Automobile Group to build its cars. That allowed Nio to start manufacturing while working to build a facility in Shanghai, but it also means many production-related hurdles are beyond its control. Anhui Jianghuai works with other carmakers and also has its own ambitions.

¡°Carmaking requires years of accumulation of technology as well as big r&d spending, and good supply-chain management is a key competitive strength, too,¡± said Li Bo, an analyst at Windsor Capital Management Co. in Shanghai, who said his firm won¡¯t be interested in the IPO. ¡°Nio has no experience in large-scale production, so its capacity and supply won¡¯t be able to keep up even if sales volumes rise.¡±

A Nio representative declined to comment. In its prospectus, Nio said it expects to receive a manufacturing license in 2-3 years, and that it plans to use about a quarter of its IPO proceeds, potentially $277 million, to help develop production facilities and supply chain.

Nio has accumulated $1.6 billion in losses since the start of 2016, according to the prospectus. The company started generating revenue in the first half of this year, bringing in $7 million. Nio needs to sell about 100,000 vehicles a year to break even, Bernstein¡¯s Zhu estimated, based on the financials disclosed by Nio.

¡°Tesla represents a cautionary tale for what could go wrong at Nio,¡± Zhu said in an Aug. 20 research note.

If China¡¯s EV demand increases as the government projects, Nio¡¯s path to profitability will become easier. The country, Nio¡¯s primary market, targets 7 million new-energy vehicles sold by 2025. By 2040, more than half of all new-car sales and a third of the planet¡¯s automobile fleet -- equal to 559 million vehicles -- will be electric, according to a global outlook published by Bloomberg New Energy Finance in May.

Such projections triggered hefty valuations for EV makers. Even at the bottom end of its range, NIO would be more valuable than established rival Anhui Zotye Automobile Co., which makes conventional gasoline-powered cars but also sold 20,204 EVs last year.

Xpeng -- which hasn¡¯t delivered a single vehicle, doesn¡¯t own a factory and hasn¡¯t obtained a production license -- said a recent fundraising round valued it at 25 billion yuan ($3.7 billion).

¡°The biggest challenge is production,¡± said Toliver Ma, an analyst at Guotai Junan Securities Co. in Hong Kong. ¡°Investors may speculate on Nio shares in the short term after its listing, but that enthusiasm will eventually cool down as they become more rational and as the company releases more transparent data.¡±


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