Nio (NIO 8.60%) is one of the largely followed Chinese electric vehicle names. So investors didn't hesitate to react when the company announced it has filed to sell more of its American depositary shares in an at-the-market offering. The stock dropped 5.5% Wednesday morning, and it remains at that level as of 10 a.m. EDT.
Nio said it is looking to raise up to $2 billion from an at-the-market equity offering program. Now that, in itself, isn't surprising or necessarily negative news. In fact, raising capital in the equity markets is standard practice for public companies that are still in early growth stages. And Nio certainly qualifies as one. But the company said it had $7.5 billion of cash and cash equivalents, restricted cash and short-term investments on its balance sheet as of June 30. So the initial reaction to the announcement seems to come with two likely scenarios -- neither of which is positive for current shareholders.
Nio said it plans to use the money "to further strengthen its balance sheet, as well as for general corporate purposes." The company is introducing new models and plans to double its production capacity with a new plant under construction. So there is certainly a need for capital.
But with $7.5 billion already on the balance sheet, investors are likely wondering why another $2 billion would be needed. But even if the company is just being ultra-conservative and planning further into the future, there is another thought to explain the timing. Current shareholders who will experience dilution likely are selling today either due to fear of unknown capital needs, or the reasoning that management may feel the share price is at an unsustainably high level.