This Company Can Now Fund Its Expansion
Chinese EV carmaker, NIO Inc. (NYSE: NIO) is up after news announcing the launch of a $650 million five-year convertible bond which the company will use to fund expansion.
NIO Inc. designs, manufactures, and sells electric vehicles in the People’s Republic of China, the United States, Germany, and the United Kingdom. The company is also involved in the manufacture of e-powertrain, battery packs, and components; and racing management, technology development, and sales and after sales management activities.
“The Shanghai-based carmaker’s move to raise capital via an equity-linked bond, only four months after it listed in New York, mirrors that of China’s Netflix-like video platform iQiyi, which sold a $750 million convertible bond in November after going public last year, highlighting the growing appeal of convertibles for high-growth companies in need of cash.
Convertible bonds are a cheaper funding avenue due to their lower coupons in exchange for giving the bondholder the option of converting the debt into company shares at a set price in future. The equity link gives investors fixed returns and the prospect of profiting from a rise in the issuer’s share price.
The startup could raise as much as $750 million if a greenshoe, or over-allotment option, was exercised.
A greenshoe is defined by Investopedia as “a clause contained in the underwriting agreement of an initial public offering (IPO) that allows underwriters to buy up to an additional 15% of company shares at the offering price.
Investment banks and underwriters that take part in the greenshoe process have the ability to exercise this option if public demand exceeds expectations and the stock trades above the offering price.”
Louis Hsieh, NIO’s chief financial officer, told investors on a call that part of the reason for selling a convertible bond was to make up the difference between what the company raised in its IPO and what it had originally sought to raise.
NIO raised $1 billion in its U.S. IPO but it had earlier aimed for $1.8-$2 billion, Hsieh said.
Asked about the timing, Hsieh said the convertible bond market was receptive to a deal and he did not want to wait until March or April and risk a possible worsening in U.S.-China trade tensions.
China is the world’s largest and fastest-growing market for new-energy vehicles (NEVs), a category comprising electric battery cars and plug-in electric hybrids, but competition is fierce as Beijing looks to rein in subsidies that led to a huge array of EV contenders entering the market.
NIO’s revenue and deliveries of its electric SUV soared in the third quarter of last year.
It plans to use the proceeds of the convertible bond for research and development, development of manufacturing facilities and sales and marketing.”
NIO should be considered a buy if this price move continues. Look for an entry at $7.98 with a price target of at least $9.36 based on the pattern in the chart.