Arrangement with Hefei government gives a cash boost but ‘may put the company under more pressure in case of prolonged sales weakness’

Published: March 2, 2020 at 12:07 p.m. ET, By Emily Bary

Shares of Chinese electric-car maker Nio Inc. are falling in Monday trading after a Citi analyst expressed concerns about the company’s “underwhelming” performance as of late, as well as a new arrangement with the government of Hefei.

Nio NIO announced last week that it had struck a preliminary agreement with the government of Hefei in China, under which the government will provide funding and resources for Nio and Nio will grow its operations and expand its relationship with partners in the province.

Nio’s shares are off 2.5% in Monday’s session.

“While the deal will ease [near-term] cash flow pressure on Nio, the collaboration will require Nio to spend a portion of the cash injection on the headquarters move, which may put the company under more pressure in case of prolonged sales weakness,” Citi analyst Jeff Chung wrote while downgrading Nio’s U.S.-listed shares to neutral from buy. He also lowered his price target to $4.30 from $6.80.

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Chung also worries that ongoing economic pressures “will likely dampen purchases,” especially since Nio has been establishing itself as an “emerging luxury brand.”

He expects continued weakness for Nio’s ES6 and ES8 lines, though he is “cautiously optimistic” about a new-energy-vehicle stimulus this year. He also thinks that the company’s EC6 electric coupe SUV will contribute to sales beginning in the second half of this year, helping to offset some of the weakness of the other two models.

Nio shares have gained 5.2% over the past month, as the company’s U.S. counterpart Tesla Inc. TSLA has seen its stock climb 9.2%. The S&P 500 SPX has shed 6.7% in that span.

Source: www.marketwatch.com