NIO's stock (NYSE:NIO) has been on a tear in recent weeks since announcing resilient 2Q22 results. The stock rose more than 30% in the week following its second quarter earnings release, before giving up some gains amid last week's violent market rout, though still outperforming the shares of its domestic electric vehicle ("EV") peers by wide margins over the same period.
Investors largely rejoiced over the Chinese premium EV maker's resilience in ramping up production and delivery volumes despite supply chain disruptions that have come one after another, spanning persistent COVID disruptions and more recently a power crisis in Sichuan province - China's lithium hub. Even NIO's sequential margin contraction in the second quarter due to rising raw material costs ensuing from ongoing supply chain bottlenecks have done little to faze investors as they cheered over the company's continued growth.
With NIO expected to further scale up productions of its new vehicle line-up in the second half of the year, with some boasting higher margins enabled by better pricing and cost efficiencies stemming from its newest platform NT2.0, the company is expected to onboard another inflection point that will usher it towards greater acceleration into 2023.
2Q22 remained a difficult quarter for automakers worldwide as supply chain bottlenecks stayed pronounced with little respite. For Chinese EV makers like NIO, ongoing mobility restrictions stemming from the nation's stringent COVID Zero approach have also introduced additional internal production challenges, while the recent power crisis in Sichuan province due to extreme weather conditions last month spelled further headaches that count higher input costs due to disrupted lithium supplies, partial closures across all lines of business (e.g. manufacturing, charging infrastructure, store operations), as well as restrictions to consumer mobility.
Yet, NIO's volumes continued to increase y/y and sequentially, with newly introduced vehicle models rolling off the production line and delivered to customers on schedule. In the three months through June, NIO delivered 25,059 vehicles, up 14.4% y/y. Specifically, volumes of its newest ET7 premium electric sedan, which began customer deliveries late in the first quarter, ramped up 41x q/q, underscoring NIO's strength in navigating unprecedented production challenges that have roiled the global automotive industry. The company's newest ES7 SUV also began customer deliveries in August as planned, with volumes reaching close to 400. Paired with the ET5 mid-sized sedan that is already in mass production at the NeoPark manufacturing facility which has recently come online, with deliveries expected to begin September 30th, the company remains well-positioned for further volume acceleration before the end of the year.
In addition to the anticipated jump in volume growth with added capacity ramp-up at NeoPark later in the year, the NT2.0 platform in which NIO's newest vehicle models (i.e. ES7, ET7, ET5) are built on is also expected to unlock a new phase of profitability for the company. As discussed in a previous coverage, the NT2.0 platform enables a higher margin profile based on its cost-efficient build, with management alluding to the next-generation base as a key to unlocking 25% vehicle gross margins over the longer-term, putting the company in a competitive range compared to industry peers. The next-generation platform will also enable a premium pricing model, allowing NIO to better absorb near-term volatility in rampantly rising raw material costs - particularly in lithium, a key battery component, where demand will inevitably outpace supply over coming years:
The EV industry is expected to suffer from a widespread lithium shortage by the end of the decade - representing the next big supply bottleneck following the ongoing chip shortages that have upended the automotive sector in recent years. Specifically, "all the world's cell production combined represents well under 10% of what [EV makers] will need in 10 years, meaning 90% to 95% of the supply chain does not exist" at the moment. And regarding lithium-ion battery supplies, Tesla had recently estimated it will need "more than three terawatt hours for EVs and energy storage by 2030", while the current global industry's supply capacity is only at about one terawatt. Considering it can take up to 10 years to get a lithium mine set up, the industry-wide lithium supply deficit will likely be here to stay for the long haul."
The NT2.0 platform, which also features innovative technologies like NAD (NIO Advanced Driving) powered by "NIO Aquila Supersensing" and "NIO Adam Super Computing" to enable a safe and streamlined self-driving experience, is expected to attract greater demand from the affluent consumer segment as well. NT2.0 is also expected to simultaneously drive adjacent margin expansion in "other sales" by enabling a recurring revenue stream from NAD's subscription-based business model, dubbed "ADaaS" (Advanced Driving as a Service) at RMB 680 per month. Taking a page from industry leader Tesla (TSLA), the deployment of vehicle software under a subscription-based model is a key profitability driver as "it has effectively zero marginal cost". And as NIO embarks on a journey to "further launch more products based on the NT2.0 technology platforms next year … with all [legacy] products rolled over to the new technology platform 2.0" as well, the company is expected to progress favourably towards market expectations for profit realization within the next three to four years.
Despite the recent power crisis induced by extreme weather conditions in China, which has prompted NIO to temporarily suspend some of its battery swap stations in Sichuan province, as well as mobility restrictions resulting from sporadic COVID lockdowns across the region, swap demand has continued to soar toward new heights, with completion volume to date surpassing 12 million. NIO has not only pioneered mass market adoption of battery swap technology within the EV ecosystem, but has also benefited from consumer demand for its vehicle drawn from the expansive network. To date, NIO has installed close to 1,100 Power Swap stations, progressing positively towards its goal of having 1,300 active Power Swap stations by the end of the year. In addition to its vast network of Power Swap stations, NIO also boasts an expansive network of more than 1,800 Power Charger stations that offer more than 5,000 public chargers to its users.
Availability and convenient accessibility to public charging infrastructure is a key driver of EV adoption. This is further corroborated by trends observed in China - the world's largest and fastest-growing EV market currently boasts the most expansive network of public charging stations that account for "more than half the world's public charging points". The country has more than 465,000 public fast chargers for its fleet of EVs, enabling "one of the most favourable charger-to-EV ratios" averaging 16 EVs per public fast charging point and 6.6 EVs per public charging point (including standard level 2 chargers).
With increased access to public charging infrastructure being a "meaningful contributor" to China EV sales, NIO is well-positioned to benefit from this trend, as its growing network of Power Swap and Power Charger stations worldwide buoy sustained demand for its EVs, while enabling another recurring revenue stream that increases visibility into the company's long-term growth trajectory. Recall that NIO currently offers a "BaaS" (Battery as a Service) subscription service for its battery solutions - buyers can purchase a NIO vehicle without the battery at a discounted price, and instead opt for a monthly battery subscription that allows flexibility to choose between different pricing and range / power options based on user needs. And this business model currently sits on favourable industry tailwinds - increasingly stringent global emissions standards would require more than $360 billion in charging investments by 2030 and $1+ trillion to support the required global EV fleet, underscoring the charging demand that NIO is poised to benefit from should it further expand its network of Power Swap and Power Charger stations within China and in markets overseas.
Taking into consideration NIO's actual second quarter performance and management's guidance for the current quarter based on volumes observed in the two months through August, as well as forward trends enabled by the company's long-term competitive advantages discussed in the foregoing analysis, we remain optimistic that deliveries will top 120,000 units by the end of 2022. This is expected to drive revenues of RMB 49.6 billion ($7.1 billion), which also factors in the expectation for higher average selling prices based on recent hikes to vehicle MSRPs and a shift in sales mix to the higher-priced new vehicle models.
NIO's margin trajectory for 2022 is also expected to improve in the second half. As discussed in the earlier section, NT2.0 offers a better profitability profile. And as volume productions of the ET7, ES7 continue to ramp, with the addition of the ET5 beginning in the fourth quarter, margins are expected to expand accordingly beginning 2H22, offset by near-term early-stage production start-up costs at NeoPark. The vehicle margin benefits of NT2.0 are expected to place a greater impact on the company's bottom-line through 2023 when all new and upgraded vehicle models achieve full-year contribution, offset by elevated operating costs in the near-term to facilitate NIO's long-term growth initiatives including global expansion and continued research and development efforts. As a result, NIO's losses are expected to peak in 2023, and narrow towards mid-decade, with nominal profit realization of RMB 5.3 billion ($760.8 million) by 2026.
On the valuation front, we are maintaining the near-term price target at $27, which represents upside potential of about 30% based on the stock's last traded price of $20.90 on September 19. The valuation analysis assumes an exit multiple consistent with a 5% perpetual growth rate in line with massive growth headroom still in the nascent EV industry, as well as blended economic growth across NIO's core markets (i.e. China, Europe, North America), offset by a continued regulatory risk overhang on U.S.-listed Chinese stocks as well as broad-based market challenges in the near-term.
NIO's technological and charging competencies remain its core long-term competitive advantages within the increasingly crowded EV landscape. Not only does NT2.0 and the continued build-out of its global public charging and battery swap network facilitate growth and profit realization across NIO's existing business in premium EV sales, but it will also assist the company's longer-term aspirations in capturing substantial market share across the mass market segments, underscoring favourable valuation prospects ahead. Although near-term macroeconomic uncertainties as well as China-specific regulatory risks will continue to weigh on the stock's performance, NIO's favourable long-term fundamental outlook remains intact to support renewed valuation upsides once industry-wide headwinds subside.
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Disclosure: I/we have a beneficial long position in the shares of NIO 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.