NIO: Beijing Gives The Green Light

Summary

• 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.

Drew Angerer/Getty Images News

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.

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.

Comments

[thesuperchief]

Article says Beijing gives the green light. For now, until when? its like being in the "Squid Game" like playing red light-green light?

[astrog8teman]

Recommended reading. Becoming China's B-tch. It came out in 2012 and pretty much shows how they increasingly own us. Every month that goes by with an unwieldy balance of payments makes us beholden to the aims of the CCP. Whether it is buying product or their stocks, don't be fooled., We are fueling their progress which will only be used against us or our friends.

[tmdoherty]

@astrog8teman Not true. We are hardly "beholden to the aims of the CCP."

The facts tell a far different story. First of all, statistics on China's growing GDP are highly misleading, because they don't take into account production costs, security costs, and social welfare costs. Each of these must be subtracted from GDP, since they are drains (that is, unavoidable expenses) on the economy. When you compare China and the US for GDP adjusted for these costs, it is very clear that the US is far ahead of China, and the gap is increasing, not decreasing.

Also, social welfare costs are about to go ballistic in China, and this will have a big effect on published GDP. Currently, there are approximately 8 working age Chinese available to contribute to pension payments of Chinese retirees, but over the next 3 decades, this 8:1 ratio will drastically decrease to 2:1. This massive expansion of the retired population in China, coupled with the contraction of working-age adults, is by far the largest such trend in the history of the world. Worse, these working-age adults will not be replenished any time soon, since China's population growth is expected to go negative in a few years, and this trend will continue for the rest of the century.

In point of fact, China's economy is currently an economy predicated on "export processing," where goods made from parts that originate elsewhere are merely assembled in China. But for every dollar spent by Americans on goods ostensibly "Made in China," 55 cents goes to the US who produces the components for these items. Stated another way, 55% of goods labeled "Made in China" actually originates in the US.

The other major driving force for China's economy is massive building, but this cannot be sustained. Consider that money-losing SOEs have borrowed massive amounts of money to build build build in pretty much uncontrolled fashion, but that these building increasingly are never occupied, and many are never sold either. A full 20% of residential real estate in China lies unoccupied, and China continues to build immense Ghost Cities that are just that: essentially, empty ghost towns.

The immense borrowing used to build such unneeded and wasteful infrastructure have weighed heavily on the Chinese economy, which is now far more indebted than the US (China's estimated debt is north of 300% of GDP, compared with the US debt of about 120% of GDP, much of that contributed by the Trump administration). This massive debt has accelerated faster than any other country in the history of the world. This is why the Chinese government is cracking down on wasteful, indebted Chinese real estate developers, e.g. Evergrande. But the problem is much bigger than just Evergrande. To deal with this problem, the Chinese government has ordered Chinese banks to not report bad loans (much less mark-to-market), rewrite their loan portfolios, and do anything they can--legal or not--to cushion the blow to the economy. Then there's the issue of Shadow Banking, which has become rampant now, and amounts to at least $5 trillion in additional debt. Writing off these bad loans in total is estimated to cost up to $10 trillion.

So to say that the CCP is our masters, and when they say jump, we can only say "How high?" is simply disingenuous.

[Rushi_P]

@tmdoherty very good counterpoint.
“But for every dollar spent by Americans on goods ostensibly "Made in China," 55 cents goes to the US who produces the components for these items. Stated another way, 55% of goods labeled "Made in China" actually originates in the US.”
Is there a reference for the above? It is kind of comforting if true but want to know the reference

[tmdoherty]

@Rushi_P Yeah. Michael Bentley cites Hale G and Hobijn B, "The US Content of 'Made in China'", 2011, FRBSF Economic Letter, Federal Reserve Bank of San Francisco in his book, "Unrivaled". There are others.

[Bobbie B]

How can anyone trust the numbers coming out of a Chinese company that does not comply with FASB? The CCP is bound and determined to have the world kneel at its feet, Nothing is off the table.

[Conman11793]

Your investment in a company, or decision to invest, should not be rationalized by the size of that investment vs the size of your overall portfolio. Seems to be what you’re doing 🤷🏼‍♂️

[mrflorida55]

@Conman11793 IHow is that...the risk level you are willing to accept is always based on the % of capital deployed in a stock and thus % of portfolio..

[chemical_lab]

No American should ever invest in a Chinese company.

[Conman11793]

@chemical_lab agreed, I stopped 15 years ago after Petrochina was found to be cooking the books…Thats was it for me, never again

[Niarb Namtih]

@Conman11793 Enron, Tyco, Worldcom, Lehman, Healthsouth, AIG, Madoff, and Freddie Mac probably turned you off to all US too right?

[jjoserr]

@chemical_lab we live in a free country !

[sanberdoo]

"Chinese legal system is not as developed in comparison to legal systems of Western countries." Apparently the author is unfamiliar with the parable of Lucy Van Pelt, Charlie Brown and the football.

[bullbearnme]

@sanberdoo bullshit IS has same problem to control fraud. What happen to a Lehman brothers?

[tmdoherty]

@bullbearnme It is NOT "the same problem" at all. Just because you can name one US company that went down in flames 13 years ago does NOT mean that China is only doing the same thing that the US is doing.

This is just not true, not by a country mile. I am SO tired of people excusing China by citing bad things that have happened in the US. This "whataboutism" must stop. It is just pure #FakeNews disinformation.

[bullbearnme]

@tmdoherty it is not just one company, there are ton of fraud cars in US. Name it from Roosevelt era market manipulation, fraud companies, American listed company cheating investors, checkout how many lawsuit raise by investor on American companies. It went unanswered. I have lost money by investing in fraud American companies. They will close up the cases and you just donated your money to a so call democratic country that control the media publication.

[Arjun206]

No sh*t Einstein that NIO was set to under perform.. it’s loss making and is way overvalued!

The one data point on opening of stocks to invest in auto sector means nothing. BABA is still a better bill case given it’s fundamentals if it delists you buy the shares on the HK Exchnage. Poor rationale in my opinion to be bearish

[thesuperchief]

Chinese aircraft carriers are a great and growing investment. all you have to do is buy China stocks, its handing them the money on a silver platter. CCP takes percentages of the investment money for that purpose.

[Glina]

@thesuperchief Great. The US aircraft carriers wont have to traverse the South China Sea alone then

[bullbearnme]

@thesuperchief you might want to count how many war victim and countries destroyed by US by using US tax payer money.

[bullbearnme]

@thesuperchief so shall we keep buying in Wallstreet to sponsor companies paying taxes to US gov to do research on military and then send missile and troop to other countries by wagging war and caused million of war victims. You can see how many casualties and country destroyed. All main stream media is well controlled.

[Cranios]

The headline should remind us all that since Beijing has to "give the green light" for a private business to prosper, then the business is still just as risky as it was before. Once it's no longer advantageous to the CCP, they will give the red light again.
The CCP doesn't give a hoot about being fair, especially to foreign investors.

[Investor since ‘73]

@Cranios They are partners in those businesses.

[tmdoherty]

@Cranios True. Laowai exist to be used by Chinese. That is their designated role in life.

[anthonymaw]

As a proud person of great Chinese ancestry, I agree with the author that Chinese stocks are "uninvestable" on the simple reason that the *COMMUNIST* regime is fundamentally anti-CAPITALISM. While China has adopted capitalist market economy for the past 4 decades and done well, the fundamental ideology in China is NOT to pump the wealth of the rich, unlike the United States where making rich people richer is the consistent underlying modus operandi.

[tmdoherty]

@anthonymaw I would say that the CCP is not really anti-capitalist per se. It's just that they: 1) tend to deeply mistrust foreigners and any foreign influence on China and Chinese; 2) insist on stacking the deck in their favor; 3) are inherently opaque, and not open to any form of criticism from anywhere, any time; and 4) have a vested interest in maintaining systemic crony-corruption that they can and do quietly benefit from economically--ironically, at the expense of the common people.

I also think you greatly exaggerate when you imply that the US has a vested interest in making rich people richer. Quite the contrary. I guess you've never listened to Bernie Sanders or any of the other major preachers against the (real or imagined) "evils" of the rich?

The Democratic party is acutely aware of the imbalance in income in the US. But then again, that's certainly no different than China, which has its own ever-growing (and accelerating, in comparison to the US) wealth inequality gap. In China, the top 10% own a proportion of the country's wealth that is about equivalent to that owned by the top 10% in the US now, according to the USC-Annenberg School of Business. Democrats rail constantly about taxing the rich, and they do that whenever they get in power, to the cheers of millions. They are also anti-wealth in other meaningful ways, including in regulatory matters, reflecting a mistrust of the rich that has been well-grounded in history. In fact, the Democratic party in general are severely criticized for pursuing "communist" or "socialist" policies (ironically, in sharp distinction with China, which occasionally mouths socialist words only).

[anthonymaw]

The CCP doesn't care about investor wealth. They have torpedoed China tech stocks as part of their crackdown on the rising influence of the tech sector. The CCP watched with revile, disgust and FEAR at how tech and social media in particularly helped cause the 1/6/21 US Capitol Insurrection (congratulations USA!) and have no hesitation of cracking down on Chinese tech and Chinese tech billionaires even if it destroys the wealth of shareholders. It's already been suggested that the muzzling of US politicians and candidates on Facebook and Twitter is the US tech sector effectively influencing US politics. Hence to keep the discussion on topic I would not personally invest in China stocks since the CCP "knows what's best" for China and acts accordingly without regard about investor's wealth. If you're American stay out of Facebook and Twitter stock - Trump will get his revenge on them when he gets to be President again.... ;-)

[bullbearnme]

@anthonymaw the same thing happened in US too. It is call Anti-Trust on big corporation. Read here www.investopedia.com/...

By the way , there are 56 ethnics in China. Are you from Hong Kong?

[Jion]

Answer from another Chinese stock's IR (Hong Kong based CLPS Inc, ticker: CLPS):

"We believe that our recent stock price performance is generally due to market behavior, including SEC‘s recent finalized and amended “Holding Foreign Companies Accountable Act” in Dec. 2nd, wherein Chinese companies listed in the U.S. markets may face delisting in the next 2-3 years if PCAOB won’t inspect these companies’ audits. Majority or all of U.S.-listed Chinese companies’ stock price have been impacted by this policy. However, we are continuously and closely working with our U.S. lawyer and independent auditor to ensure that we comply with PCAOB’s regulation, as well as in parallel with Chinese regulation. We are optimistic that more and better disclosures will be promulgated that could benefit the listed companies, regulators and shareholders."As you see, they care mostly about PCAOB and at a horizon of 2 to 3 years, and not China's regulators anymore.

[John_III_XVI]

@Jion I dare them to say that out loud in China where the comrades can hear them. Uh Huh!

[bullbearnme]

@John_III_XVI at least they won’t drop bomb or missile anytime into any countries and cause civilian casualties but keep down the press that make everyone forget the shit that happens. The world media is control by the largest economy in the world

[Jion]

@John_III_XVI the whole situation reminds me of the cold war. Most believe that the communists spy everyone, then you say they don't already know? This is about finance, so some have mixed different things...In a few months, the tide will change so the media. Then the U.S. listed Chinese stocks will go back to their normal discount to the U.S. stocks, and those who invest/trade will follow the money. But the contrarians are ALREADY watching and picking...

[prudent 576]

American RIVN or TSLA please.

[bullbearnme]

@prudent 576 monopoly to kill competitor? This is not a healthy way or shall we say an act of bully to suppress other from growing their own business and industry without competition. This is shame.

[eduso]

"solid deliveries in Q4"? I stopped reading here. You must be joking. Check other Chinese EV-makers. With one, deliveries went up over 5 times since last year, not 2 times as with NIO.
LI, BYD, XPEV, BIDU etc.

[JohnnyXY]

@eduso because their production capacities have not been saturated yet. NIO will more then double production capacity this year. Besides, Xpeng and Byd have to sell 2x cars as Nio to make the same money.

[tmdoherty]

@eduso I agree. 80,000 vehicles delivered in 2021 is no accomplishment, AND no great improvement year/year, especially for a company that is hyper-valued ($50 billion market cap vs $83 billion market cap for VWAGY). Volkswagen plans to deliver 1 million electric vehicles this year.

[eric_2021]

@tmdoherty But VW will fall far short...as they did this year.

[MaxZanetti]

I like NIO but I would never trust Beijing. Trust em as far as you can throw em I say!!

[bullbearnme]

@MaxZanetti every countries has it own problem. The same problem happened in US when they pass a law. So business is still business.

[Amos Tuck]

Titans of Carmaking Are Plotting the Overthrow of Elon Musk

www.bloomberg.com/...

"In the other corner are giants of scale: Volkswagen AG and Toyota Motor Corp. The world’s two biggest automakers — each sold roughly 10 or 11 cars for every one Elon Musk did last year — realize the age of the battery-powered vehicle is here and are gaming out how to stay on top. Within five days of one another last month, these masters of mass production laid out plans to splurge $170 billion over the coming years to preserve their claim on an industry they’ve dominated for decades."

[Reluctant Investor]

If the photo above is a NIO car I’m not a buyer of the car or the stock.

[luffyman]

@Reluctant Investor It's a concept car, NIO Eve. Concept cars are sometimes made to look unconventional and sometimes ridiculous compared to production models on purpose.

[marcmotors1]

@Reluctant Investor If you would visit the Nio website, you would know.It's a prototype.
The cars are very beautiful.Top product.

[Cosmic Dust]

It is a matter of fact that all companies in Communist China are controlled by the Chinese Communist Party. Doing business there is directly or indirectly supporting the Communist Regime, who committed genicide against its own ethnic minorities, destroyed Democrarcy in Hong Kong, and threatened Democratic Taiwan. And more and more evidences suggest that the the CCP regime intentionally allowed the COVID virus to spread to the world to make themselves look better.

Money or soul? It is your choice to make after all.

[LongGone21]

@Cosmic Dust Ha ha. China is so terrible that, just last week, the darling of US investors and government, Tesla, opened up shop in Xinjiang province...

[Hopeful17]

@Cosmic Dust China has loads, Millions upon Millions, of good people. Whatever you think of their Commie Government, you have to admit that they have taken Hundreds of Millions of poverty living citizens and moved them out of that class. Hundreds of Millions in the past two or three decades. That is quite an accomplishment. Of course we helped them by sending Millions of our manufacturing jobs over to China.

We have loads of people across our grand country living in poverty and do not even have a plan to get them out of that despicable condition. Maybe we should not have allowed All those jobs to be off shored to China and other countries. So, please let me know which country is helping those in need the most?

The Republicans could care less about poor folks in this country. The Democrats say they do, but in fact they have done next to nothing just like the Republicans. In Commie China, they have hauled out Hundreds of Millions from poverty. That is great for them and not so great for us.

Money or Soul? I could say the same for our country. I suggest you do a bit more homework about the Country of China. There is more to understand than throwing out the word Communist as you did.

[Cosmic Dust]

@Hopeful17 do you know how much earning qualifies one as in poverty in the US vs. in China? A bit googling is going to surprise you. Poverty in this country vs in China is quite a different concept.

[FlexEthos]

Well researched and easy to track your thought process over the months. Thanks for sharing.

[6228371]

"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."

You seem to lack an understanding of the huge risk involved in holding NIO shares. TSLA shares are also quite risky now.

[bullbearnme]

@6228371 do you mean the American hedges such as Blackrock didn’t know the risk of holding NIO?

[Murrs700]

@6228371 Haha, try telling that to the TSLA cult following. It odd how little anyone brings up the whole issue with China controlling all the rare earth metals right now as well. I'm sure that going to end well...

[tmdoherty]

@6228371 The risk in shares of TSLA is dwarfed by the risks of "owning" shares (actually, owning ADRs based in the Cayman Islands) of NIO. Specifically:

1) The CCP allows only Chinese citizens to own shares of any company in China. That severely limits (eliminates, for all effective purposes) any possible legal remedies for everybody else in the world who invests in Chinese stocks.

2) Because of #1, a Chinese company has no real incentive NOT to defraud investors.

3) There are additional CCP-risks associated with all Chinese stocks. For example, you definitely cannot eliminate the possibility--the PROBABILITY, in some cases--that the company will be declared "illegal" and that the CEO will be disappeared.

[Invest5life]

Also why is this the top of trending? It’s got 22 comments (including mine). Smells like outside $$$$