NIO Inc. 2018 Form 20-F Summary
Business context and reporting period
NIO Inc. is a Cayman Islands holding company focused on designing, developing, jointly manufacturing and selling premium smart electric vehicles in China, together with charging, battery-swapping and vehicle-service offerings. The filing covers the fiscal year ended December 31, 2018, rather than a standalone fourth quarter. Financial statements are prepared under U.S. GAAP and reported primarily in RMB; U.S. dollar amounts use RMB6.8755 per US$1.
NIO began delivering its first volume-produced vehicle, the seven-seat ES8, on June 28, 2018. It delivered 11,348 seven-seat ES8 vehicles by year-end and launched the ES6 in December 2018, with deliveries expected to begin in June 2019.
Financial performance and liquidity
| Metric | 2018 RMB | 2018 US$ | 2017 RMB |
|---|---|---|---|
| Total revenue | 4,951.2 million | 720.1 million | None |
| Vehicle sales | 4,852.5 million | 705.8 million | None |
| Other sales | 98.7 million | 14.4 million | None |
| Gross loss | (255.9) million | (37.2) million | None |
| Gross margin | Approximately (5.2%) | Approximately (5.2%) | Not meaningful |
| Operating loss | (9,595.6) million | (1,395.6) million | (4,953.6) million |
| Net loss | (9,639.0) million | (1,401.9) million | (5,021.2) million |
| Net loss attributable to ordinary shareholders | (23,327.9) million | (3,392.9) million | (7,561.7) million |
| Basic and diluted loss per share | RMB(70.23) | US$(10.21) | RMB(346.84) |
| Operating cash flow | (7,911.8) million | (1,150.7) million | (4,574.7) million |
| Capital expenditures | 2,644.0 million | 384.5 million | 1,113.9 million |
Research and development expense increased 53.6% to RMB3,997.9 million, while selling, general and administrative expense increased 127.2% to RMB5,341.8 million. Share-based compensation totaled RMB679.5 million. The operating loss included RMB222.9 million paid or payable to JAC for manufacturing and processing fees and compensation for Hefei plant operating losses.
At December 31, 2018, cash and cash equivalents were RMB3,133.8 million, restricted cash was RMB90.5 million, and short-term investments were RMB5,154.7 million. Total cash, cash equivalents and restricted cash were RMB3,224.4 million. Working capital was RMB3,576.2 million.
Total borrowings were RMB3,236.9 million, comprising short-term borrowings, current and long-term bank loans, and loans from investors. Total liabilities were RMB10,692.2 million, compared with total assets of RMB18,842.6 million. Shareholders’ equity was RMB6,821.1 million, following the IPO and conversion of preferred shares.
Financing cash flow of RMB11,603.1 million primarily reflected RMB7,531.0 million of IPO proceeds, RMB1,265.9 million of redeemable non-controlling interest financing and RMB2,668.5 million of borrowings. Management stated that available cash, investments, banking facilities and expected receipts were sufficient for the next 12 months, while the financial statements were prepared on a going-concern basis dependent on continued financing and execution of the business plan.
Material changes versus the prior comparable period
- Revenue began in June 2018; 2017 had no revenue. The filing therefore does not provide a meaningful year-over-year revenue comparison.
- Gross loss was RMB255.9 million because vehicle and other sales costs exceeded revenue during the initial production ramp.
- Net loss increased 91.9% from RMB5,021.2 million to RMB9,639.0 million, and operating cash burn increased 72.9% from RMB4,574.7 million to RMB7,911.8 million.
- R&D and SG&A expanded substantially as NIO increased engineering, sales, marketing, service-network and NIO House investments.
- Preferred shares converted into 821.4 million ordinary shares upon the IPO. The conversion eliminated RMB19,657.8 million of preferred-share mezzanine equity, while IPO proceeds materially increased paid-in capital and equity.
- Property, plant and equipment increased to RMB4,853.2 million from RMB1,911.0 million, and inventory increased to RMB1,465.2 million from RMB89.5 million as volume production began.
Guidance, outlook, commentary and risks
- NIO expected to begin ES6 deliveries in June 2019 and six-seat ES8 deliveries in March 2019. It targeted launching approximately one new model annually in the near term.
- Management estimated approximately US$1.7 billion of capital expenditures over the following three years, including approximately US$600 million during the twelve months beginning January 2019.
- The company planned to activate most NIO Pilot features by the second quarter of 2019 and roll out additional advanced driver-assistance features by year-end 2019.
- The filing identifies continued negative operating cash flow, lack of profitability, substantial capital requirements, production ramp risk, dependence on JAC and suppliers, single-source component exposure, warranty uncertainty, battery and vehicle-safety risks, competition, and dependence on Chinese subsidies and favorable EV policies.
- China’s March 2019 subsidy policy reduced national subsidies and eliminated local subsidies, materially reducing the subsidy applicable to the ES8 compared with 2018.
- NIO agreed to cease construction of its planned Jiading manufacturing facility in March 2019 and planned to rely on collaborative manufacturing while expanding Nanjing facilities.
- After year-end, NIO issued US$750 million aggregate principal amount of 4.50% convertible senior notes due 2024. The notes may require repurchase in 2022 or upon a fundamental change and may dilute shareholders upon conversion.
- The company disclosed a material weakness in internal control over financial reporting related to insufficient U.S. GAAP and SEC-reporting expertise. Disclosure controls were assessed as ineffective as of December 31, 2018.
- Four putative securities class actions were filed in March 2019. The filing states that the matters were preliminary and that potential losses could not be estimated.
- NIO uses contractual arrangements and variable-interest entities for certain China operations. Changes in PRC laws or enforcement could affect control, consolidation and access to economic benefits.
Investor verification priorities
- Verify ES8 and ES6 delivery volumes, cancellation rates, pricing, subsidy exposure and vehicle-level gross margin during the production ramp.
- Reconcile cash, short-term investments, restricted cash, borrowing capacity and operating cash burn against planned capital expenditures and expected financing needs.
- Review the terms, conversion mechanics, repurchase provisions and potential dilution from the 2024 convertible notes and related capped-call transactions.
- Assess remediation of the material weakness and whether subsequent filings report effective internal controls without additional material weaknesses or restatements.
- Evaluate JAC manufacturing-loss obligations, supplier concentration, warranty reserves, recalls and other vehicle-quality contingencies.
- Monitor changes to Chinese EV subsidies, tax incentives, manufacturing approvals, charging regulations and the legal status of the VIE structure.
- Review developments and potential financial exposure from the shareholder class-action lawsuits and related-party transactions.