Is Anyone Willing to Bail Out Chinese Electric-Car Maker NIO?

A deal to provide Chinese electric-car maker NIO (NIO 0.03%) with urgently needed cash to build a factory has fallen through because of "heavy risks," according to a new report from China's National Business Daily.

NIO's efforts to raise cash accelerated after it reported in September that it had burned over $600 million in the second quarter, leading analysts to speculate that the company could go broke within weeks.

Is the end approaching for NIO? Here's what we know.

Early sales of NIO's new ES6 have been decent, but the income from those sales won't come close to covering the company's costs. Image source: NIO.

NIO is running out of cash -- and options

Here are the key points of the story to date.

• NIO delayed its second-quarter earnings report from early August to Sept. 24.
• On Sept. 5, NIO said that it would raise $200 million by the end of September via the sale of convertible notes -- half to CEO Willian Bin Li and half to an affiliate of key investor Tencent Holdings (TCEHY +0.01%).
• NIO released its second-quarter earnings report on Sept. 24, and it was a doozy. Among other things, the company disclosed that it had burned about $620 million in cash in the second quarter, leaving it with just $503.4 million as of June 30. The company also canceled its quarterly conference call -- only to un-cancel it the following day.
• During the call on Sept. 25, CFO Louis Hsieh said that the company had made "significant positive progress" toward securing additional funding, but it was too early to disclose details.
• On Sept. 30, Bernstein analyst Robin Zhu cut his price target for NIO to just $0.90, saying that even with the potential $200 million raise, the company likely had only weeks of cash remaining.
• On Oct. 8, NIO said that its third-quarter sales had come in ahead of the guidance it issued on Sept. 23. Shares jumped after days of losses, but the rebound was short-lived.
• On Oct. 15, National Business Daily reported that NIO was close to a deal with the government of Wuxing district, in China's east-coast Zhejiang province, in which the Wuxing government would invest between $707 million and $1.4 billion in NIO, some of which the company would use to build a factory in the district.
• On Oct. 16, National Business Daily, citing a source within the Information Office of the Wuxing district government, reported that the government had walked away from the deal because of "heavy risks."
• As of Oct. 16, NIO has not said anything to suggest that the $200 million convertible-note sale has closed.

Long story short, NIO appears to have had (at least) two financing deals fall through since its earnings report on Sept. 23.

NIO data by YCharts.

What it means for investors

Auto investors know that a restructuring automaker can be an appealing investment, as long as the underlying business is in reasonably good shape.

We need to be very clear that NIO does not fall into that category. NIO is nowhere near having the sales it needs to be self-funding, and its excessive spending in the second quarter has put it in a very deep financial hole.

Simply put, the company needs to raise a lot of cash quickly to continue operations. Given that (at least) two deals appear to have fallen through in recent days, investors need to confront the possibility that the company may not be able to get financing without a restructuring that would wipe out the equity -- and it's possible that it won't be able to get financing at all. Trade carefully.