NIO: Maintaining At Neutral, Fair Q4 And Some To Like In 2022
Summary
- NIO's November deliveries reached a record of 10,878 units, pushing just above September's high as the manufacturer regained momentum.
- Q4 is expected to see ~23,500 to 25,500 units delivered, representing flat q/q growth in a relatively lackluster end to FY21.
- FY22 is expected to see multiple catalysts arise, such as three new models, five new countries entered, and more production capacity.
- However, these moves open the door for more competitive pressure and execution risk, but revenue and delivery growth could see some upside.
Andy Feng/iStock Editorial via Getty Images
NIO (NYSE:NIO) wrapped up November on a decent note, reaching a new record high for deliveries as the manufacturer bounced back off of a very weak October. Q3 results were solid, and management highlighted an upbeat take for FY22, with multiple catalysts expected. Even so, with fierce competition in key markets and a weak Q4 projection relative to peers, NIO is maintained at neutral as market volatility and pandemic fears heighten.
November Deliveries
Graphic from NIO
NIO's November deliveries reached a new record, at 10,878 units, representing +105.6% y/y and +196.6% m/m growth. In comparison, though, deliveries for the month were up just +2.3%, 250 units, from September's high. NIO did not point to any underlying factors, such as production shifts or impacts from supply chain issues (although it remains very challenging) - the manufacturer cited the beginning of deliveries for vehicles equipped with a 75kWh battery pack, and its order book improving in Norway. As it stands, NIO looks to still be ramping up production levels of that 75kWh pack (for which a manufacturing restructuring heavily dented deliveries in Oct.), as it works to regain momentum in a seasonal strong period.
On a per vehicle basis, NIO witnessed a record month for the EC6, reaching just shy of 3,500 units, +278.1% m/m and +2.7% from September, reflecting strong demand for the model. The ES8 had a similarly strong month, jumping to 2,683 units, +1,131% m/m after a very sharp drop in October and +35.6% higher than September's levels. NIO's main vehicle, the ES6, failed to reach a new record, climbing to just over 4,700 units, about -10.4% below September.
Data from NIO
For the YTD period, NIO has delivered 80,940 units. Vehicle trends are reflecting strong demand gearing up into the winter months, but the manufacturer is unlikely to reach the 100,000 delivery mark for the year following October's weakness. NIO is still pointing to robust demand and a strong order book limited by some supply imbalances, such as that within users opting to wait for the 75kWh battery when it is not widely available. Balancing of supply and demand in the early part of next year sets NIO up for a strong trajectory of growth enabled by substantial capacity/production increases. However, the manufacturer is projected to deliver 92,000 to 94,000 units for 2021, +110% to +115% y/y, putting it shy of projected delivery numbers from rival XPeng (XPEV) of 98,000 to 100,000 units.
Q3 Commentary
Q3 results published mid-month reflected that marginal q/q growth in deliveries, +11.6%. Even with some higher ASPs, weakness from financing/subsidizing dented vehicle sales growth rates relative to vehicle unit growth by 240 bp, to +9.2%.
Gross profit continued to grow, reaching nearly RMB2.0 billion, US$309 million, as NIO continues to see economies of scale as deliveries increase. Margins, however, remained fairly flat q/q, with vehicle margin being hurt by those subsidizing effects as regulatory credit sales offset those losses to allow slight gross margin expansion. On the other hand, increased investments to push ahead with the R&D pipeline - vehicle innovation, expansion and more models - sent NIO's operating losses and net losses deeper in the red, with the manufacturer seeing those losses widen by a couple hundred million renminbi.
NIO's balance sheet remains strong, with the manufacturer having more than enough cash to fuel such spending and development to progress its vehicle lineup and fuel expansion plans. A recently-wrapped up share offering raised nearly US$2 billion, RMB12.7 billion, providing even more of a cushion.
Management provided an upbeat outlook moving forward, even as the company has returned to normal production and lost some ground to XPeng over the past few months.
- Capacity expansion: JAC's manufacturing restructuring and upgrades pave the way for the plant to boost its annual capacity, while commencement of operations at NeoPark is expected in Q3 2022. With double shifts, NIO expects maximum annual capacity to be 600,000 units, although it is unlikely that the manufacturer will meet that level without severely hurting its bottom line. As such, NIO is likely to increase capacity gradually up to 15,000-20,000 units through Q2 2022, and up to 25,000 units to 30,000 potentially by the end of 2022, taking annual production run rates to the 300,000 unit range.
- New models: aside from the ET7, which has yet to launch, NIO is expecting to unveil two new vehicles during 1H 2022 with deliveries beginning in 2H, bringing the lineup total to six. The other two yet-to-be-announced models will be produced at NeoPark, so scaling in the latter half of the year will take some time, and delivery volumes could be limited. More models are expected in 2023; the mass-market brand still has few details. While more and more models and a mass-market appealing vehicle can definitely serve to boost deliveries and demand, NIO is opening itself up to more competitive pressures, which it is struggling slightly against at the moment.
- Strong demand: NIO saw new orders reach an all-time high in October, but supply chain volatility and imbalances still have not allowed the manufacturer to reach a balanced order book. Strong demand in Norway is likely a contributing factor in the surge of ES8 deliveries, the only model present in the country at the moment. Ramping up of the new battery pack availability can help the manufacturer meet strong demand for such equipped vehicles.
- International expansion: Norway was NIO's first step into Europe, but the manufacturer is planning to be more aggressive and is targeting five additional countries for expansion. While exact confirmed details have yet to be announced, Germany, Denmark and the Netherlands are three of the rumored nations, which opens the door for millions of target customers as well as heightened competition from Tesla (TSLA), Volkswagen (OTCPK:VWAGY), and Mercedes (OTCPK:DDAIF).
2022 Outlook
As NIO heads into the final four weeks of Q4 and 2021, the outlook for the company ultimately will be more important than the next few weeks. Q4 guidance of 23,500 to 25,500 units was at the high-end, but still relatively in-line with a prior projection following October's results, leaving less room for major upside surprises.
Shares have remained flat for most of the year (and down 24% since warning about valuation), since the end of Q1, aside from some swings to the low $30s and low $50s. With nothing major expected in the last few weeks, and a fair projection for deliveries, 2022's catalysts are factors to watch to drive shares out of range-bound territory.
For 2022, NIO has more to prove, in that it can successfully rapidly scale deliveries to match capacity expansion targets and that it can handle a multi-faceted approach. The company is working off of annual run rates of 120,000 to 150,000 units currently, but wants to increase that fourfold in just twelve months - this raises doubts that either NIO will overspend to do so, and hurt the bottom line with widening operating losses, or that those projections are too lofty and NIO fails to meet that high bar. Another consecutive year of ~100% growth in deliveries puts NIO in the 180,000 unit range, a fair benchmark projection to start the year. At that level, it's still just a fraction of stated target capacity, leaving more room for growth, or for disappointment.
On the other hand, NIO is doing a lot - while it might not seem like it, the company is handling dozens of different projects, increasing execution risk. The manufacturer faces three new models in main region China, new entry in six different European countries, not counting multiple models there, expansion of service networks, charging infrastructures, factory expansion, and planning a launch of a mass-market brand. That's a lot to handle, difficult to achieve simultaneously and very costly as well. As mentioned before, operating and net losses widened during Q3, and with investments and spend still ramping up for these new projects/developments, NIO likely won't see profitability in 2022, pushing that timeline back another year.
And all of that geographical and model expansion to other price segments opens up the doors for increased competitive pressures. While NIO has found some success in the luxury market, entering into mass-market and other lower-priced segments increases competition with BYD (OTCPK:BYDDY) and Geely (OTCPK:GELYF) among others such as SAIC-GM-Wuling. In addition, moves from manufacturers such as XPeng in its own model lineup expansion to higher price segments enhances competitive pressures.
Looking forward to 2022, an early projection of US$10.8 billion in revenues on 180,000 units delivered looks fair. This assumes annual ASP remains nearly flat to 2021, and limited impacts from supply chain volatility, lockdowns, or other effects that could hinder production or deliveries stemming from the pandemic. As such, valuing the shares at a modest ~8x EV/sales multiple paves the way for ~35% upside to $52 in a base case scenario; a higher multiple near ~10x, about in line with current, could see ~68% upside to $65 in a bull case. However, given the execution risk from all of the moving parts NIO is dealing with, as well as competitive pressure, projected lack of profitability, and some persistence of year-long multiple contraction, NIO is maintained at neutral.
This article was written by
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Comments (6)
This are rumors for shorters to make money.
And a buying opportunity from me.
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Nio is in formoula E .
Nio is loved in Europe.
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Don’t fall in their trap..enjoy the way up.
