IPOs: EV Maker Nio Sputters Out of the Gate With Weak Pricing
Bottom line: Nio’s shares are likely to debut flat to down slightly in a lackluster New York trading debut, capping an IPO process pockmarked by investor skepticism.
Wall Street investors will get a taste of a new flavor of Chinese company very soon, when homegrown electric vehicle maker Nio makes its trading debut on Wednesday. But based on all the signals so far, this offering for a company that some have likened to China’s answer to Tesla (Nasdaq: TSLA) could be a major flop. That would be somewhat appropriate given all of the real Tesla’s current woes, which point to the difficulties of building up a major new car maker from scratch.
Nio’s road to New York has been pockmarked with negative signposts pretty much all of the way. The latest of those has media reporting the company has priced its IPO American depositary shares (ADSs) at the very bottom of their range, at a price of $6.25 apiece, raising a total of $1 billion. (English article) That compares with an initial target of up to $1.8 billion, and I’ve heard that even that figure was trimmed back from initial hopes of more like $2 billion. (English article)
This particular development continues a trend that has seen investors give a chilly reception to money-losing Chinese companies in the last couple of months. Two money-losing drugmakers that listed in Hong Kong, Asceltis (HKEx: 1672) and BeiGene (HKEx: 6160; Nasdaq: BGNE), both now trade below their IPO prices. Another money-loser, e-commerce company Pinduoduo (Nasdaq: PDD) initially charged out of the gate with a 40 percent gain, but has since then fallen back to close to its IPO price.
All that said, let’s return to Nio and discuss the prospects for this neophyte and the challenges it will face. The company lost 5 billion yuan last year, or around $700 million, which was double its loss from the previous year. That’s not all that unusual for this kind of startup, and especially in an expensive area like electric car development.
But other reports are also pointing out that Nio is behind schedule in its ambitious plans to become one of the nation’s leading EV makers. Again, this isn’t that unexpected but isn’t extremely encouraging. Perhaps one of the most worrisome signs, and one that’s really not new, is China’s fickle attitude towards new energy car makers in general.
Changing Policies
On the one hand, Beijing wants to encourage the development of such clean energy cars in a bid to create cutting-edge technologies that can someday be exported and also to clean up the country’s air. But on the other hand, it is also discovering that the generous subsidies it gives to Nio and many other EV wannabes often end up getting wasted, and result in the development of second-rate models using old and immature technology.
The result is that China is constantly tweaking its new energy vehicle incentive programs, since such government support is still quite critical to the success of most companies. It does appear that Nio’s vehicles probably still qualify for Chinese subsidies, at least for now, or we probably would have heard otherwise. But there’s certainly no guarantee that Beijing won’t decide a year or two from now that Nio’s cars aren’t cutting-edge enough and slash them from the list.
Subsidies aside, there are also all kinds of other complex issues behind such cutting-edge manufacturing. Nio currently does all of its actual manufacturing through a third-party partner, but wants to eventually build its own plant. That would cost quite a pretty penny for such a small company, whose own market value will only be $6.4 billion based on the final IPO pricing.
Looking to other examples, Tesla, as I’ve already pointed out, is considered one of the industry’s best, and even they are running into trouble these days. The leader in China, BYD (HKEx: 1211; Shenzhen: 002594), is backed by billionaire investor Warren Buffett, and is also having difficulty. At the end of the day I don’t think anyone doubts that EVs are the wave of the future and will someday be quite lucrative for someone who finds the right formula for success. As to whether Nio will be among that group, I would probably put the chances at relatively low.
