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Why NIO Stock is trading lower today


What happened

Shares of Chinese electric vehicle maker NIO (NYSE: NIO) were down on Friday after the company said it would issue 75 million new shares to raise around $ 1.5 billion.

As of 11:30 a.m. EDT, US shares of NIO’s custodian were down about 3% from Thursday’s closing price.

So what

NIO has said it will offer 75 million new U.S. depositary shares next week, but while its plans for the product are arguably upbeat, they’re a bit complicated.

Shares of the company were down Friday morning amid concerns from auto investors about dilution. These concerns are legitimate, but after a closer look at NIO’s regulatory filings, I see what the company has in mind. As I explained in an article earlier today, this sounds like a good thing for shareholders with a long-term mindset.

An NIO electric SUV at one of the company's battery exchange stations.

Image source: NIO.

Here is the story. As long-term NIO investors know, the company was almost cash-strapped – dangerously so – at the start of 2020. That changed in late April, when she announced that economic development authorities in China’s province of Anhui had agreed to invest nearly a billion dollars. in exchange for NIO’s agreement to move its operations to Anhui’s capital, Hefei, and to maintain a business ecosystem of intelligent vehicles there.

This was obviously great news for the company, and the title made very good since. But there was a catch: Simply put, NIO had to give up a stake in its China business – around 24% – in exchange for the money.

Under the agreements it has signed with these government investors, NIO has the right to repurchase a portion of this 24% in certain circumstances. It is now taking advantage of the enormous acceleration of its action (around 380% since the beginning of June) to raise liquidity in order to buy back around half of the stake it abandoned a few months ago.

Now what

As of this writing, NIO’s secondary offering is expected to be priced Friday night, meaning these shares will be in circulation next week. I won’t be surprised if the stock faces further near-term turmoil as these stocks enter the market. But I think that’s ultimately good news for NIO and its long-term investors.

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