- Beijing signals to the world that investing in NIO and its peers is not as risky as before.
- In addition, solid deliveries in Q4 give reasons to be optimistic about NIO’s future.
- As a result, I’m long NIO for the short term and looking only for a rebound, as it’s still hard to justify a long-term position in the company.
The latest political developments in Beijing suggest that Chinese automakers, which listed shares of their variable interest entities on foreign exchanges, will be able to continue operating their businesses as usual without worrying too much about further oversight from the state in the foreseeable future. As a result, stocks like NIO (NYSE:NIO), which have been in the decline for the whole of 2021, have decent chances of rebounding in the short term. For that reason, I recently purchased some shares of NIO and plan to hold them for a short amount of time, hoping to unwind the position on the possible appreciation of the price in the following months, as I continue to believe that most Chinese equities are still uninvestable under their current corporate structure for the long run. In addition, NIO shares represent a small fraction of my overall portfolio of investments, so in case of further depreciation of the company's stock, I won't suffer major losses.
Reasons For Optimism
Back in September, I was saying that it's hard to justify a long position in NIO due to the uncertainty regarding the status of its shares on the US exchanges. Then in November, I highlighted how NIO is underperforming against its competitors and how it struggles to reach the same growth rate of deliveries in comparison to its domestic peers. At the end of both of those articles, I concluded that NIO might not be the best stock to own and was right, as shares of the company have depreciated since that time, while the overall market has grown. However, it seems that the sentiment is slowly changing and it might be time to turn over the table and purchase some of NIO's shares, while they're still trading at their 1-year lows.
Source: My rating history on Seeking Alpha
In recent weeks, several things occurred, which made me decide to become bullish on NIO in the short term. First of all, the Chinese regulator clarified that there's no plan at this stage to ban the use of the VIE structure, which companies such as NIO use to access foreign capital markets, for the existing businesses that are already listed overseas. Secondly and even more importantly, China has finally scrapped limits on foreign investments in its auto sector, giving the green light for foreign investors to participate in the growth of the country's auto industry and minimizing the risks of owning stocks such as NIO for non-Chinese nationals. This is not the case with Alibaba (BABA), in which non-Chinese nationals still can't invest directly due to the company's strategic importance to the state. That's why it's important to differentiate both Alibaba and NIO even though they're operating mostly in China, and that's why I continue to be more bearish on the former despite the commentary from the Chinese regulator regarding the VIE issue.
In addition, the latest developments within NIO also leave room for optimism. Just a couple of days ago, the company has announced its Q4 delivery numbers, which were much better in comparison to the weak delivery numbers of Q3. Despite delivering only 3,667 vehicles this October, NIO managed to quickly retool its factories and delivered a total of 25,034 vehicles in Q4, making over 10,000 deliveries in November and December. Going forward, it's now safe to assume that investors should expect a greater increase in monthly and quarterly deliveries, as NIO seems to be finally successfully dealing with the ongoing chip shortage crisis and is about to launch two new flagship electric sedans under the names ET7 and ET5 later this year.
Considering all of this, I believe that NIO is a buy in the short term, as the latest developments should help to change the overall negative sentiment that surrounds its stock and help its shares to rebound in the foreseeable future. On top of that, due to the massive depreciation of its shares in 2021, NIO now trades at a forward P/S ratio of 9x, which is below the forward P/S ratio of its competitors such as XPeng (XPEV) and Tesla (TSLA), which trade at 14x and 21x their forward sales, respectively. Since the Chinese EV market is expected to grow at a CAGR of 31% in the following years, NIO will likely be able to increase in value and trade at similar multiples to that of its peers going forward.
Major Risks Are Still Out There
Despite all of those developments, I still stick to my opinion that it's risky to hold NIO shares for the long-term, as two major risks could materialize in the future and make an investment in such a company worthless.
First of all, even though the Chinese regulator said that it has no plans to ban overseas listing through the use of the VIE structure, it doesn't mean that it won't change its mind in the future. As I've already mentioned in my latest article on Alibaba, due to the fact that the Chinese legal system is not as developed in comparison to legal systems of Western countries, various Chinese regulatory agencies could change the interpretation of the law at their own discretion, leaving many investors with uncertainty about the state of their investments. That's why nothing has stopped China from forcing DiDi (DIDI) to delist from the US exchanges, and the same fate could await other Chinese-based companies as well. Even NIO itself stated in its F-1 filing back in 2018 that there's a risk that the Chinese regulator at any moment could say that its contractual agreements with its variable interest entity are illegal:
If the PRC government deems that our contractual arrangements with our variable interest entities do not comply with PRC regulatory restrictions on foreign investment in the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.
In addition, there's also a risk that the United States government will get involved as well since NIO is constantly being added to PCAOB's list of companies, where authorities deny access to conduct inspections. This means that there's no guarantee that the numbers inside the financial statements of NIO's VIE, which are being reported to the public are correct since they're not audited properly. If this continues to be the case and PCAOB won't be able to get full access to NIO's books, then there's a risk that the company's stock will be delisted from the U.S exchanges in the following years due to its failure to comply with the Holding Foreign Companies Accountable Act, which was passed a year ago. That's why owning shares of NIO's VIE for the long-term is not a great idea as well.
The Bottom Line
While the shift in Beijing's stance on VIEs and investments in its auto industry might be temporary, it still gives an opportunity for NIO's stock to appreciate in the short term. In addition, the aggressive growth of deliveries in the last two months and the upcoming releases of new electric sedans are giving reasons to be optimistic about NIO's future. That's why I believe that at the current levels NIO's stock could be considered a solid rebound play, as it has everything going for it to appreciate in the short term. As for the long-term, I still believe that there are better opportunities out there with fewer risks involved.
This article was written by
Bohdan Kucheriavyi is a Ukraine-based proprietary trader working at a prop firm. He has been successfully investing personally and professionally since 2015. He combines his knowledge of international relations with his passion for global markets to identify good investments based on momentum and special situations with a specific focus on tech companies.
Bohdan leads the investing group Blacksquare Capital. Features of the group include: an all-weather portfolio, event-driven investment ideas, trade alerts, geopolitical event roundups, a weekly newsletter with updates on all current and watchlist holdings, quarterly market reports, community chat, valuation models - all aimed at helping investors develop an approach to overcome periods of economic and political uncertainty. Learn More.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of NIO, TSLA 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.
Bohdan Kucheriavyi is not financial/investment advisor, broker, or dealer. He's solely sharing his personal experience and opinion; therefore, all strategies, tips, suggestions, and recommendations shared are solely for informational purposes. There are risks associated with investing in securities. Investing in stocks, bonds, options, exchange traded funds, mutual funds, and money market funds involve risk of loss. Loss of principal is possible. Some high risk investments may use leverage, which will accentuate gains & losses. Foreign investing involves special risks, including a greater volatility and political, economic and currency risks and differences in accounting methods. A security’s or a firm’s past investment performance is not a guarantee or predictor of future investment performance.
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