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.
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.
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.
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.