Hefei is bottom fishing again

The second season of the story of NIO's collaboration with Hefei State-owned Assets has begun.

On September 29th, NIO announced the signing of a strategic investment agreement with Hefei Jiaoyun New Energy Automobile Investment Fund Partnership Enterprise (Limited Partnership), Anhui Province High-Tech Industry Investment Co., Ltd., and Guotou Zhaoshang Investment Management Co., Ltd., three strategic investors, to subscribe for new shares of NIO China with RMB 3.3 billion in cash.

Hefei, Anhui, and Guotou jointly invested in NIO, a storyline that had already occurred four years ago. In 2020, these three investors invested 7 billion yuan to rescue NIO, which was in a dire situation. Since then, the story of Hefei State-owned Assets and NIO has become a well-known tale. Currently, they still hold 7.6% of NIO China's shares.

Now, NIO is once again facing challenges. With the intensifying competition in the new energy vehicle sector, NIO's market value has halved in the past year, and its stock price has fallen back to the level of 2020. At this critical moment, will Hefei State-owned Assets once again come to the rescue and continue the legend?

Valued at 46.6 billion, Hefei this time gets a 50% discount on shares?

From the information currently disclosed, Hefei has received a very favorable valuation this time.

NIO's announcement did not disclose the valuation details of this transaction, only stating that after the transaction is completed, NIO will hold 88.3% of NIO China's shares. Currently, NIO holds 92.1% of NIO China's shares, and in this round of capital increase, it will continue to invest another 10 billion yuan in NIO China. Assuming that the valuations of all parties in this round of capital increase are the same, based on this information, it is not difficult to calculate that NIO China's pre-investment valuation is 46.6 billion yuan, and the post-investment valuation is 59.9 billion yuan.

As of the close on September 27th, NIO's market value in the US stock market was 13.6 billion USD, and in the Hong Kong stock market, it was 100 billion HKD. Obviously, the valuation of NIO China's financing this time is significantly lower than NIO's market value, with a discount of approximately 50%.

Of course, it is important to note that NIO China is not NIO's entire asset. In 2020, NIO established a subsidiary, NIO China, to introduce Hefei State-owned Assets, injecting core businesses and related assets including vehicle R&D, supply chain and manufacturing, sales and services, and energy services. However, NIO still has some business segments that are not under NIO China, such as the crucial autonomous driving sector. Therefore, it is difficult to determine what proportion NIO China should account for in NIO's total market value.

Looking from a different perspective, considering the strategic value of this round of state-owned asset investment, perhaps it is not necessary to scrutinize the valuation so closely.

Hefei State-owned Assets is most praised for its courage to help in times of need. When they invested in NIO in 2020, they played the role of a white knight. At the end of 2019, NIO's financial report revealed that the cash and cash equivalents were only 863 million yuan, hanging by a thread, and Hefei State-owned Assets provided a real lifesaving fund.

The current situation is not as dire. The recently disclosed semi-annual report showed that as of the end of June 2024, NIO's cash and cash equivalents amounted to 24.652 billion yuan, a far cry from four years ago. In fact, compared to NIO's losses, 3.3 billion yuan in cash is not a large amount In the first half of 2024, NIO recorded a net loss of 10.384 billion yuan. This means that 3.3 billion yuan is only enough for NIO to sustain losses for one and a half months.

More important than the funds themselves may be the support expressed by Hefei State-owned Assets through its second heavy investment in NIO.

NIO is currently at a critical "turning point". On one hand, NIO is still experiencing substantial losses, with over 20 billion yuan in losses in 2023 and a similar amount expected in 2024, with no possibility of short-term profitability. On the other hand, NIO is gradually moving away from the "lagging behind" doubts of the past few years and reclaiming its own position.

Since 2024, NIO's sales data has been quite impressive, with monthly sales continuously exceeding 20,000 units. The financial report shows that NIO's revenue in the second quarter of 2024 reached 17.45 billion yuan, a year-on-year increase of 98.9%, ranking first in the "NIO-Li" interruption layer in terms of growth rate. Furthermore, NIO's gross profit margin for complete vehicles also increased by 6 percentage points year-on-year in the second quarter, reaching 12.2%.

After the release of the semi-annual report, several top investment banks have raised NIO's ratings. JP Morgan has upgraded NIO's ADR rating from "Neutral" to "Buy" and raised the target stock price from $5.3 to $8. Deutsche Bank has also raised the target price of NIO's Hong Kong stocks from 65.5 Hong Kong dollars to 72 Hong Kong dollars.

Could it be that Hefei State-owned Assets is once again making a precise bottom fishing move?

Already Achieved Fivefold Returns

The last time Hefei State-owned Assets bottom-fished NIO, they handed in a perfect answer sheet.

Just recently, NIO's Chairman Li Bin revealed in a live broadcast with Yu Minhong that NIO has only done one RMB financing in its history, which was the investment by Hefei, Anhui, and Guotou in NIO, but quickly returned five times to them. This is the first time Li Bin has talked about the investment return NIO brought to Hefei State-owned Assets.

Let's take a look and see if Li Bin is bragging.

Going back to early 2020, NIO was facing a life-threatening crisis, with Li Bin describing the company as already in the ICU at that time. NIO, with huge losses, urgently needed financing to survive. Before Hefei State-owned Assets intervened, Li Bin had failed to secure cooperation in 18 cities across the country.

In April 2020, NIO signed a final investment agreement with Hefei Construction Investment Holding (Group) Co., Ltd., Guotou Merchants Investment Management Co., Ltd., and Anhui Provincial High-tech Industry Investment Co., Ltd., with the three strategic investors collectively investing 7 billion yuan in cash in NIO China. As soon as the news came out, while many admired Hefei State-owned Assets for daring to "catch the falling knife bare-handed," there were also some voices of misunderstanding and doubt.

Unexpectedly, as soon as the investment agreement was signed and before the money was transferred, NIO's stock price began to soar, tripling in just two months. Seeing favorable market conditions, NIO successfully raised $2.2 billion in funds through two new stock issuances in June and August 2020. Subsequently, NIO immediately initiated the repurchase of shares from Hefei State-owned Assets By sorting out NIO's related announcements, we can see that in August 2020, NIO repurchased for the first time at the original price when the Hefei state-owned assets entered the stock, repurchasing 8.6% of the shares, costing RMB 2.5 billion; in February 2021, NIO repurchased for the second time, with an amount of RMB 5.5 billion. At this time, NIO China's valuation rose to RMB 166.4 billion, 5.7 times the valuation at the time of investment; in September 2021, NIO repurchased for the third time, with an amount of USD 2.5 billion, and NIO China's valuation continued to grow to RMB 176.3 billion.

After three repurchases, the three state-owned shareholders collectively received a return of RMB 10.5 billion, netting RMB 3.5 billion after deducting the RMB 7 billion cost. Moreover, they still hold nearly 8% of NIO China's shares.

It can be seen that Li Bin's statement of "five times return" is indeed not an exaggeration. In the second and third repurchases, Hefei state-owned assets did indeed achieve returns of over 5 times, with an investment period of only one year.

Looking back now, in the NIO battle, the timing of Hefei state-owned assets' investment and exit can be considered perfect. When investing, NIO's stock price was only around $2, at the lowest point after its listing on the US stock market. When exiting, it was at the peak of the 2021 new energy bubble, with NIO's market value surpassing USD 100 billion at one point. No wonder Hefei has since gained the title of the "most powerful venture capital city".

It is not difficult to see that when Hefei invested in NIO China for the second time, what they actually used was just the profit from the first investment, and the overall situation was not affected regardless of the outcome.

The Highlight of the "Hefei Model"

Here we have not yet considered the boost to the local industrial chain in Hefei after introducing NIO.

The reason why the "Hefei Model" is highly praised is not only due to the enviable investment returns. In February 2021, Hefei city signed a framework agreement with NIO, promising in the agreement that the capital gains from investing in NIO China will be used to support the development of NIO and the intelligent electric vehicle industry cluster in Hefei. It can be seen that obtaining investment returns has never been Hefei's ultimate goal, and this increase in holding NIO China also reflects Hefei's commitment.

In June this year, NIO's third factory started construction in the Hefei Xinqiao Intelligent Electric Vehicle Industrial Park, with a reported total investment of RMB 11 billion and an annual production capacity of 600,000 vehicles. With this, NIO has established three factories in Hefei, with a total capacity exceeding 1.2 million vehicles, surpassing Tesla's Shanghai factory.

More importantly, using the introduction of NIO as a starting point, Hefei is building an entire electric vehicle industry chain. According to the cooperation agreement between Hefei and NIO in 2021, the two parties will jointly build the Hefei Xinqiao Intelligent Electric Vehicle Industrial Park to create a "world-class intelligent electric vehicle industry cluster with a complete industrial chain".

According to media reports, the number of supporting companies in Hefei introduced in batteries, motors, electronic controls, automotive electronics, and other industries has exceeded 100, making it one of the core gathering places for China's new energy vehicle industry. Another piece of data is that in 2021, NIO's partners in Anhui numbered only about 60, but by 2024, this number will increase to about 120, reflecting the rapid improvement of Anhui's new energy vehicle industry chain From a macro perspective, in the past few years, Hefei and Anhui's position in the Chinese automotive industry has rapidly risen. Data shows that in 2023, the revenue of Anhui's automobile manufacturing industry's scale enterprises reached nearly 550 billion yuan, with the total industry chain revenue reaching 1.15 trillion yuan. The automobile production volume ranks second in the country, while the production volume of new energy vehicles ranks fourth. From January to August 2024, the total automobile production in Anhui province was 2.1161 million vehicles, a year-on-year increase of 44.84%, continuing to rank second nationwide. The production volume of new energy vehicles increased by 81.59% year-on-year to 937,400 vehicles, also rising to second place nationwide. At this point, Anhui's automobile and new energy vehicle production volumes respectively account for 11.33% and 13.38% of the country's total.

At this point, Hefei's investment in NIO can be regarded as a model of government-guided industrial upgrading and technological development