NIO: Growth Is Set To Accelerate

Summary

• NIO’s delivery growth in July accelerated over the previous month.
• Because of this strong start to Q3, I am updating my FY 2021 delivery estimate.
• As the semiconductor supply shortage eases, NIO’s delivery growth should further accelerate.
• Based on valuation and estimated sales growth, NIO is a buy.

SimonSkafar/iStock via Getty Images

NIO (NYSE:NIO) saw impressive delivery growth in July which indicates stronger than expected growth for the second half of the year… which should also see a normalization in production as the chip supply shortage eases. NIO is not cheap, but impressive delivery and sales growth justify a high sales multiplier factor.

NIO's delivery growth may accelerate toward the end of the year

For the month of July, NIO reported 124.5% Y/Y delivery growth. The Chinese EV maker delivered 7,931 vehicles last month, the majority of which were NIO's five-seater smart electric SUV, the ES6. NIO delivered 3,669 ES6s (46% of total deliveries), 2,560 EC6s vehicles (32% of deliveries), which is NIO's five-seater electric coupe sport utility vehicle, and 1,702 ES8s (21% of deliveries), which is NIO's six or seven-seater smart electric SUV. NIO's ES6 is the best-selling EV SUV in the Chinese maker's product line-up and it has the highest delivery volume. If we break down the growth rate by model, then the ES6 saw 41% Y/Y delivery growth and the ES8 saw 84% Y/Y growth. In July 2020, NIO delivered just 3,533 ES8s and ES6s, and deliveries of the EC6 coupe SUV commenced only in September 2020. NIO's 124.5% Y/Y growth rate reported for July, although impressive on its own, may underestimate NIO's total delivery growth for the second half of the year as production returns to normal and EC6 sales start to make a larger impact.

NIO's ES6 and the EC6 deliveries saw a small delivery dip in July, which may be attributable to the chip supply shortage rather than slowing demand. However, the drop in deliveries for these two models was countered by an increase in ES8 deliveries. The net effect was that NIO delivered 152 fewer vehicles in July than it delivered in June. I expect ES6 and EC6 models to resume growth throughout Q3'21, and NIO, like other car brands, should benefit from an improving flow of semiconductors in the second half of the year.

	2021					2020
	July	June	May	April	Y/Y Growth	July	June	May	April
ES6	3,669	3,755	3,017	3,163	40.6%	2,610	2,476	2,685	2,907
EC6	2,560	2,830	2,282	2,416	-	-	-	-	-
ES8	1,702	1,498	1,412	1,523	84.4%	923	1,264	751	248
Total	7,931	8,083	6,711	7,102	124.5%	3,533	3,740	3,436	3,155

Click to enlarge

(Source: Author)

Despite supply problems with semiconductors, NIO's growth accelerated in July. NIO's July delivery growth rate of 124.5% exceeded delivery growth in June, a month that saw 116.1% growth over last year. In July 2020, NIO's Y/Y delivery growth rate was 322.1% because the delivery volume was much lower in FY 2019, making for a very favorable Y/Y comparison.

NIO's EV rivals, XPeng (XPEV) and Li Auto (LI), did better. XPeng delivered 8,040 vehicles in July 2021, showing 228% Y/Y growth. Delivery growth was driven by XPeng's P7s, the Company's sports smart sedan, of which the Chinese EV maker sold 6,054 models. XPeng also sold 1,986 G3s, its compact SUV, which competes against NIO's range of sport utility vehicles. Li Auto also delivered record results with 8,589 Li ONEs delivered in July 2021. The delivery numbers showed 251.3% Y/Y growth. The Li ONE is Li Auto's six-seater electric SUV and it competes for buyers against NIO's ES8. It was the first time for Li Auto to cross the milestone of 8,000 monthly deliveries.

Based on the delivery reports, XPeng and Li Auto have stronger delivery growth rates and each EV maker sold more vehicles than NIO in July. NIO lagged its rivals in July deliveries, but its SUV-centric line-up of products nevertheless saw impressive growth. Because of an expected return to normal production in the second half of the year, I expect NIO's growth to continue to accelerate in the remaining five months of the year. Ford (F) said last week that it sees an improving semiconductor supply situation although chips will continue to be in short supply at least until the end of the year. I expect similar comments from NIO next week when earnings are due at which point management may give a new production/delivery guidance.

NIO lowered its Q1'21 production forecast because of the semiconductor shortage to 19,500 models, which indicated 1,000 fewer vehicles to be delivered than called for in its earlier guidance of 20,000-20,500 vehicles. NIO ultimately ended up delivering 20,060 in Q1'21. NIO's Q2 saw deliveries of 21,896, so the Chinese EV maker did better in deliveries than its guidance suggested. Because of this, I expect that production can ramp up significantly in Q3 and Q4 as the chip supply shortage becomes less of a production choke point for NIO. I estimate that NIO will edge closer to the 100,000-delivery milestone this year with growth being driven predominantly by the EC6 and ES8. For Q3'21, I expect NIO to average more than 8,000 monthly deliveries, with the average of monthly deliveries growing to a little bit above 10,000 in Q4'21. Compared to my previous guidance, the FY 2021 delivery estimate reflects an additional 1,840 vehicles to be sold in the second half of 2021. So far, NIO delivered 49,887 models in 2021 (including July deliveries) which is equivalent to 50.4% of my full year delivery estimate.

	Q4'21	Q3'21	Q2'21	Q1'21	Total
ES6	15,500	12,500	9,935	8,088	46,023
EC6	9,300	8,000	7,528	7,456	32,284
ES8	6,200	5,440	4,433	4,516	20,589
Total	31,000	25,940	21,896	20,060	98,896

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(Source: Author Projections)

NIO's sales are expected to grow rapidly

NIO is expected to have sales of $8.9B next year, twice as much as XPeng… which has the same P-S ratio as NIO. Li Auto has the cheapest sales growth as FY 2022 revenues are valued with a 5.2 sales multiplier factor. Looking at estimated 5-year revenue growth, Li Auto is expected to grow sales the fastest, in part because of its smaller size. However, NIO will still have a very impressive revenue growth of 310% until 2025 (based on next year's sales). Because of NIO's BaaS revenue opportunity (which is better than XPeng's battery lease model), I would choose NIO over the other two Chinese EV makers... despite the lower total sales growth rate.

	Market Cap	FY 2022 Est. Revenues	P-S Ratio	Expected Sales Growth FY 2021 - FY 2025
NIO	$71.66 billion	$8.91 billion	8.0	+ 310%
XPeng	$34.75 billion	$4.29 billion	8.1	+ 408%
Li Auto	$27.98 billion	$5.40 billion	5.2	+ 471%

Click to enlarge

(Source: Author)

Risks with NIO

The chip supply shortage will be the factor that decides how quickly NIO can return to full production and how quickly deliveries will grow. The EV maker will likely give an update next week when it opens its books for the second quarter. The status update will likely include a modified production guidance for the rest of the year which should be positive if management expects the semiconductor situation to improve, which is what I would expect. What would change my opinion on NIO, and perhaps NIO's valuation, is a slowdown in delivery growth rates which I don't consider in my full year delivery estimate. Slower delivery and revenue growth are the two biggest risks for NIO and the stock.

Final thoughts

I expect NIO to return to a monthly production of at least 10,000 vehicles by Q4'21 as the chip supply situation eases in the next five months… that at least was the takeaway from Ford's Q2'21 earnings and NIO should similarly experience a better flow of semiconductors. This would clear a major production choke point, giving NIO room to ramp up production in 2021 and accelerate its growth.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of NIO, F either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.