Shares of Chinese electric-vehicle maker NIO (NYSE:NIO) were trading lower on Friday after the company said that it will issue 75 million new shares to raise about $1.5 billion.
As of 11:30 a.m. EDT, NIO's American depositary shares were down about 3% from Thursday's closing price.
NIO said that it will offer 75 million new American depositary shares next week, but while its plans for the proceeds are arguably bullish, they're a little complicated.
The company's shares were down on Friday morning because of auto investors' concerns about dilution. Those concerns are legitimate, but after a deeper dive into NIO's regulatory filings, I see what the company has in mind. As I explained in an article earlier today, it looks like a good thing for shareholders with a longer-term mindset.
Here's the story. As longer-term NIO investors know, the company was nearly out of cash -- perilously so -- early in 2020. That changed in late April, when it announced that economic-development authorities in China's Anhui province had agreed to invest nearly $1 billion in exchange for NIO's agreement to move its operation to Anhui's capital, Hefei, and to nurture a smart-vehicle business ecosystem there.
That was great news for the company, obviously, and the stock has done very well since then. But there was a catch: Simply put, NIO had to give up a stake in its China business -- about 24% -- in return for the cash.
Under the agreements it signed with those government investors, NIO has the right to buy some of that 24% back under certain circumstances. It's now taking advantage of its stock's huge run-up (about 380% since the beginning of June) to raise cash in order to buy back about half of the stake it gave up a few months ago.
As I write this, NIO's secondary offering is expected to price on Friday night, meaning that those shares will be in circulation next week. I won't be surprised if the stock faces some more turbulence in the near term as those shares enter the market. But I think this is ultimately good news for NIO and its longer-term investors.