Ever since its earning call on March 5, NIO has tumbled from $10.63 to slightly below $6. That's about 43% of loss within 10 days.
Has investors lost faith in NIO's narrative? Does NIO has a future? Can NIO survive?
EMERGING CHINA EV MARKET
First and foremost, we have to understand China's attitude towards electric vehicles (EVs).
In a 2015 article by Harvard Kennedy School, Beijing has 4 concerns:
There are four elements driving China’s consistent political support for EVs. i) Technological upgrading ii) Energy security iii) Local pollution reduction iv) Carbon emissions.
All of these 4 elements are crucial to national policies - creating jobs, earning export revenue, less dependency on oil from other countries, better air quality, and its commitment towards Paris Agreement.
Since Beijing decides to move along this direction, we have seen automakers such as BAIC and Changan making commitments to end the manufacturing of fossil fuel vehicles by 2025, aligning themselves with government policies.
China EV100, an EV association of over 200 leading Chinese electric mobility companies, has estimated that China will exceed 15 millions sales of EVs by 2030. Based on the average price of local EVs (71 models, not including Tesla & BMW) of RMB173,000 or USD$26,000, the China EV market would be worth USD$390 billion in sales.
And there is definitely no shortage of middle-class Chinese who can fuel this growth. In 2015, UBS & PWC have estimated that there are about 109 million-strong middle class with annual income between USD$50,000 - USD$500,000.
Q1/19 POOR RESULT
In the last earning call, investors are in a dilemma - the good Q4/18 vs the bad Q1/19. Does it means that customers don't like NIO anymore?
For the past few months, I have been active on Weibo, China's Twitter, to find out more about NIO from the chinese social media.
Everyday, many people shared their stories with NIO - the buying experience, the road trips, the events, and of course comparisons with Tesla, etc.
Most of the people are happy with their NIO vehicles, but there are some complaints about the reduction of battery range due to low temperature, as well as software bugs, of which a woman in Beijing was stuck in the traffic due to OTA. Still, majority of NIO owners didn't regret buying their ES8.
So what happen? If people don't dislike NIO, why did it sales halved?
From what was reported by NIO, Q1/19 results were negatively impacted by the inland migration during Chinese New Year, and government policies.
As a Chinese myself, I do hear stories on Chinese New Year in China. There will be mass interland migrations as people are traveling back home to visit their families. For a country with more than a billion people, you want to travel earlier so to avoid congestion, especially if you can afford to.
For government policies, December 2018 was the last month before there was reduction of subsidies, and any companies will tend to be more aggressive in getting customers' buy-in before the subsidies end. And because of this FOMO (Fear Of Missing Out) effect, these subsidies cut will create volatility in consumers' purchase patterns, but consumer demand will normalized over time.
Given that NIO is still a young company, there are certain measurement methods that we can and cannot use. Let's start with those we cannot use such as year-to-year, or quarterly.
Since NIO only start production from June 2018, we cannot use year-to-year comparison. As for quarterly, there are always supply & demand quirks (think natural gas during winter and summer). Right now, we don't know whether the poor Q1 results was NIO fault, or just a change of weather.
Instead, I did some analysis on 6-months trailing figures, starting from September 2018 to February 2019. The reason is to average out the seasonal kinks, but not going too early as NIO has just started.
For the 6 months, the total deliveries is 12,362 vehicles, thus working out a monthly average of 2,060 vehicles. Thus if NIO is able to deliver 2,060 vehicles every month without hiccups, that's 24,724 vehicles a year or USD$1.66 billion ($67,000 per ES8).
I think most of us are expecting NIO to sell 3,000 vehicles a month based on Q4/2018 sales. That's 36,000 vehicles a year or USD$2.4 billion. That's about 30.8% reduction. This is much less than expected, until we realize that this is just for 1 model and we have no projections for ES6 and ES8 (2nd variant) yet.
There is a statement in the earning transcript that states that by end of February 2019, there are over 4,200 ES8 orders. I assumed that this figure is for January and February 2019, each month gathering about 2,100 orders or 70 orders per day. This 70 daily orders is inline with Q3/2019 statement that NIO gets about 50 to 80 orders per day.
One thing that I'm alway confused is order vs deliveries. In the transcript, NIO is predicting to see 3,500 to 3,800 deliveries in Q1/2019. However, there are already 4,200 ES8 orders. If I'm not wrong, that means the company has been suffering from production issues than demand issue (any automotive analyst around?). But if demand wasn't an issue, why did they terminate their own manufacturing plant?
TERMINATION OF MANUFACTURING PLANT
The termination of NIO manufacturing plant has made investors wary because it seems that demand is down.
For 2018, the results were good and there was positive sentiment over company's growth prospect. NIO has raised capital from IPO and notes, and it was investing ahead.
However in 2019, there are 3 major events - Tesla's price reduction, change in goverment policies, and seasonal volatility in demand. Out of the 3 events, what was unpredictable was Tesla's sudden new pricing.
Although NIO was prepared for competition from Tesla's Shanghai Gigafactory, the sudden price reduction certainly attracted NIO customers, who are after all price-sensitive, especially those who just want an EV (no brand preference). In such circumstance where your competitor is going into a price-war, what matter most is capital preservation.
Building a plant takes years to break-even, leaving NIO financially exposure to new developments in which it cannot control. Since NIO is working with JAC, there are less financial commitment and more flexibility (at a price). If the demand comes back, NIO can still scale up with JAC or bring in an additional manufacturing partner.
Has NIO lost the battle? It's still too early to say. After all, it's just 1 quarter of poor result.
China market is still growing, and NIO is still in its infancy. The key is to keep coming out different vehicles that people want to buy, and slowly become profitable. It's really that simple.
Disclosure: I am/we are long NIO.
Additional disclosure: All information are from public domain.