Nio Inc., a Shanghai-based electric-car maker, has filed for an initial public offering, hoping to raise money for an expansion that includes launching a smaller electric SUV to broaden its customer base.
Nio earlier in August filed to offer about $1.8 billion worth of American depositary shares. According to an amended filing Tuesday, the company set the terms of its IPO, seeking to sell 160 million shares between $6.25 and $8.25 per American depositary share to raise up to $1.52 billion, if an option to sell more shares is exercised.
If Nio succeeds in raising that sum, it would mark the fourth largest U.S. IPO this year, behind Axa Equitable Holdings’ EQH, -0.44% $3.16 billion, PagSeguro Digital’s PAGS, +1.83% $2.6 billion, and iQIYI Inc.’s IQ, -0.36% $2.4 billion.
The company expects to list its ADS on the New York Stock Exchange under the ticker symbol NIO, and Morgan Stanley, Goldman Sachs and J.P. Morgan are among the underwriters.
Entities affiliated with Chinese technology conglomerate Tencent Holdings Ltd. 0700, -1.26% have a 15% stake in Nio, and those affiliated with investment powerhouse Hillhouse Capital another 7.5%, according to the company’s prospectus. Founder and Chief Executive Bin Li holds a 17% stake.
The company will compete with Tesla Inc. TSLA, -2.20% in the luxury electric-car market, and mentioned the potential U.S. rival 13 times in its prospectus.
Here are five things to know about Nio ahead of its IPO:
Its name means ‘blue sky coming’
Nio’s Chinese name, Weilai, translates as “blue sky coming.” Li founded the company in 2014, then named NextCar Inc. It changed its name to Nio three years later.
Nio first introduced a “super car,” the EP9, in 2016. It launched its first volume-produced car, the ES8, in December 2017, with deliveries starting in June of this year.
The ES8 is a 7-seater all-aluminum body electric SUV that the company boasts is cheaper in China than Tesla’s Model X.
“Currently we believe no premium BEV is available to Chinese consumers at competitive pricing and the ES8 is expected to face limited competition initially from premium BEVs,” NIO said in the prospectus.
As of the end of July, Nio had delivered 481 ES8s and had unfulfilled reservations for more than 17,000 ES8s with deposits, according to the prospectus.
Nio plans to launch its second vehicle, the ES6, by the end of 2018, and start deliveries in the first half of next year. The ES6 is a 5-seater, “high-performance premium electric SUV, set at a lower price point than the ES8 to target a broader customer base,” NIO said in the filing.
Nio had a fairly standard warning about the ES6 in the filing, saying it “may not successfully develop the ES6. Our vehicles may not meet customer expectations and our future models, including the ES6, may not be commercially viable.”
No revenue until this year
Nio has more in common with Tesla than ambition: it also has lost massive amounts of money and burned through piles of cash — part of the reason it plans to go public.
“We have negative cash flows from operation, have only recently started to generate revenues and have not been profitable, all of which may continue in the future,” it warned.
Nio began showing revenue this year, reporting $6.7 million in vehicle sales and $7 million in total revenue for the first six months of 2018, when net losses topped $502 million. The company reported a net loss of $758.8 million for all of 2017.
Through June, Nio had burned through $549 million in cash to operate, compared with $691 million for all of 2017. Capital expenditures hit $163 million in the first six months of this year, compared with $168 million for all of last year.
The company estimates that its capital expenditures for the next three years will reach about $1.8 billion. That includes money for improvements and installation of equipment at a plant in Shanghai, as well as for research and development and the expansion of its sales and service network. It expects to incur about $600 million of that in the 12 months starting July 2018.
Nio’s total borrowings, as of June, reached $189.9 million, mainly bank loans and a loan from its investors, said the prospectus.
‘Limited experience’ in making cars
There is no dearth of risks listed in Nio’s prospectus, and such risks are familiar to anyone who has spent any time reading about Tesla: “Our ability to develop and manufacture a car of sufficient quality and appeal to customers on schedule and on a large scale is unproven and still evolving,” it said of risks relating to business.
Nio admits it has “limited experience” so far in high-volume manufacturing of electric vehicles.
“We cannot assure you that we will be able to develop efficient, automated, cost-efficient manufacturing capability and processes, and reliable sources of component supply that will enable us to meet the quality, price, engineering, design and production standards, as well as the production volumes required to successfully mass market the ES8 and future vehicles,” it said.
Then there are the suppliers. The ES8 uses more than 1,700 purchased parts which Nio buys from more than 160 suppliers. Many of those are single-source suppliers for these components, and the company is expecting that this will be similar for the ES6 and any other future vehicle it may produce.
“The supply chain exposes us to multiple potential sources of delivery failure or component shortages,” says the prospectus.
The company is also highly dependent on government incentives and policies that are favorable for electric vehicles.
Its business could be affected by trade wars
Nio said its business could be “adversely affected” by trade tariffs or other trade barriers, including U.S. tariffs imposed in March on steel and aluminum and additional tariffs targeting Chinese goods.
Nio does not export any products to the U.S. and it is not yet clear what impact these tariffs could have. It intends to sell its cars only in China at least in the near future, but tariffs could potentially impact raw-material prices, it said.
Unusual—and risky—corporate structure
Like many Chinese companies with listings outside of China, Nio is a variable-interest entity, or VIE, a structure created in the 1990s as a workaround for Chinese companies that are not allowed to have direct foreign ownership.
Under the VIE structure, the Chinese company creates two entities, one in China that holds the permits and licenses needed to do business there and the other an offshore entity, in this case in the Cayman Islands, in which foreign investors can buy shares. The Chinese entity, which is usually owned by top executives, pays fees and royalties to the offshore company in contractual arrangements.
The biggest example of a VIE is Alibaba Group Holding Ltd., in which the Chinese entity is wholly owned by its founder and chairman, Jack Ma.
The risk with this setup is that foreign investors don’t actually own stock in the company, and local management or even the Chinese government could decide or force a split with the listed company, leaving U.S. investors high and dry.
“It is uncertain whether any new PRC laws or regulations relating to variable interest entity structures will be adopted or if adopted, what they would provide,” the company warns in its prospectus.
As an “emerging growth” company, Nio has to follow fewer reporting and other requirements.
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