What happened

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.

So what

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. 

A NIO electric SUV at one of the company's battery-swap stations.

Image source: NIO.

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. 

Now what

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.