NIO: Why is the price going down?

History

Early days and vision

Successful stories don’t always start from the bottom. NIO’s history demonstrates exactly that.

William Li, it’s founder and current CEO, was previously the founder of another venture in the car business: Bitauto Holdings Ltd.

The company is to date involved in providing internet and marketing services for the automobile industry, especially in China.

William Li has a vision: driving the electric vehicle revolution in his country, China.

NIO’s Chinese name can be translated as “Blue Sky Coming”, referring to the sustainability shift that electric vehicles are for sure empowering.

No wonder William Li is dubbed as the “Elon Musk of China”: just like the South African-born entrepreneur, he used the cash obtained from the sale of his first “blockbuster” company in 2013 to finance the development of the first car model, the NIO EP9 sports car.

This vehicle was presented in November 2014, on the day of the official establishment of the brand, and introduced in to the market in 2016.

Immediately after the launch of the company in 2014, several firms invested in NIO, including Baidu, Sequoia and Tencent. We recently published a full analysis of Baidu and of Tencent. Go check them out after this one!

In October 2016, NIO announced to have been given an “Autonomous Vehicle Testing Permit” by the California DMV, to begin testing its vehicles on public roads. This would lead to the development and launch of vehicles with level-three and level-four autonomy.

Traction

After the introduction to the market of the first model, NIO got immediately back to work to then make public launch of ES8, the company’s first volume manufactured electric vehicle, in late 2017.

ES8 is a 7-seater premium electric SUV, with an all aluminum-alloy body and offers functionality, performance and upper-level lifestyle experience.

Early 2018 saw an interesting service being put to the market from NIO: battery swap stations, where clients can swap batteries to remove the need of a long charging time. The service is restricted to clients and for the ES8 model only.

To seek funds needed for the further development of new models and the scaling of production, NIO filed for a $1.8 billion initial public offering on the New York Stock Exchange.

During the annual “NIO Day” event in December 2018, another SUV was launched. This time the car is a high-performance 5-seater named ES6. Deliveries will start in June 2019.

In late April 2020, NIO bounces against the reality: it’s not selling enough vehicles, despite having a compelling business model. At this point the company announced new funding of approximately $1 billion, coming from a group of Chinese investors. As part of this deal, NIO transferred its assets to a new subsidiary called NIO China, headquartered in Hefei.

In August 2020, NIO launched Battery as a Service (BaaS) and officially formed a partnership with Contemporary Amperex Technology Co., Limited, Hubei Science Technology Investment Group Co., Ltd. and a subsidiary of Guotai Junan International Holdings Limited. This venture, in which any of the players holds a 25% stake, has the function of a battery asset management company.

BaaS helps lower the purchase price of NIO EV by about 25%.

To make clear how NIO acquires money, let’s reflect on the structure of the company!

Structure of the company

Despite its recent foundation, NIO has several divisions that concur to bringing value to customers.

But first, let’s consider the locations where NIO has centers. Below a synthetic graph, divided between Mainland China and International locations.

NIO’s subsidiary structure is fragmented due to its many partnerships. To better understand the services and products offered by the firm, we feel it’s better to divide them by general function and category, rather than in subsidiaries.

The large number of controlled entities could confuse the reader without giving a clear picture.

Below a list of the activities that involve NIO, grouped for main categories.

• Charging Solutions
  • Power Home, a home charging solution;
  • Power Swap, a battery substitution service (in physical “outlets”, similar to gas stations);
  • Power Mobile, a non-fixed charging service through proprietary trucks;
  • Public Charger, a fast-charging solution in public places;
  • Power Express, a 24-hour on-demand pick-up and drop-off charging service (concierge charging service);
• Repair and Maintenance Services
  • Network of official service points;
  • Courtesy Car service;
  • Roadside assistance;
  • Data packages;
• Product Manufacturing
  • E-power trains;
  • Battery Packs;
  • Cars (through JAC Motors, a state-owned automaker)
• Insurance (through Partners)
  • Statutory
  • Third-party liability
  • Vehicle damage

Interestingly enough, NIO doesn’t produce its cars. The contractor is a state-owned manufacturer by the name of JAC Motors.

This constitutes a strategic issue, being technically connected and dependent on JAC Motors’ production capacity. It’s not easy to find another supplier if the state-owned entity decides to make NIO pay more for cars or stop supplying.

Before going deeper into NIO’s business model, let’s check out the management team and the board of directors, both led by the founder, Li Bin (William Li).

Management Overview

As mentioned earlier, the founder still holds the apical positions in NIO’s corporate structure.

The auto-mogul also serves as Chairman and CEO at Beijing C&I Advertising Company Limited, another venture of his, operative since 2002.

Moreover, Li is the Vice-Chairman of China Automobile Dealers Association (CADA) and he was recognized by this institution in 2008 as one of the top 10 most influential and distinguished people in China’s automobile dealer industry in the past 20 years.

Mr. Li holds a bachelor’s degree in Sociology from Peking University, with a minor in Law.

Mr. Quin has previously served as a senior consultant and project manager at Roland Berger Strategy Consultants from 2003 to 2005 and as an assistant brand manager at the Marketing Department of Procter & Gamble (Guangzhou) Ltd. from 2001 to 2003.

Mr. Qin received his bachelor’s degree and a master’s degree in law from Peking University in 1996 and 1999 and a master’s degree in public policy from Harvard University in 2001.

He holds a Bachelor’s degree in Engineering from Tsinghua University and a Master’s degree in Automotive System Engineering from RWTH Aachen University in Germany, jointly with Tsinghua University.

Other notable executives are Mr. Feng Shen, Executive Vice President and Chairman of Quality Management Committee, Mr. Xin Zhou, Executive Vice President and Chairman of Product Committee, and Mr. Ganesh V. Iyer, Managing Director of NIO US and Global Chief Information Officer.

Still, the same question remains: what is NIO’s business model? Let’s see it in the next paragraph!

Business Model Spotlights

The company has as key partners world-class internet and technology leaders, as well as tech providers and components suppliers. However, the partnership that influences the structure of NIO the most is the one with JAC, the Chinese automaker.

This is because JAC has a direct and indirect control on NIO.

JAC Motors, apart from controlling NIO’s production supply chain, is state-owned, which makes the company founded by William Li an easy target of the Chinese Government’s will.

It’s clear that NIO doesn’t have control over its supply chain. What does its operation consist of? NIO is directly engaged in several key activities, including R&D (through its many Research Centers worldwide), Design (through the Munich Center) and Software and Hardware development.

One of the key resources that NIO leverages is its workforce: more than 4000 employees with a strong engineering background.

NOMI has also to be considered a true key asset for the company: it’s an AI-powered digital companion which learns the driver and passenger’s interests and information to meet their needs.

Moreover, NIO can be proud of having in production one of the fastest electric cars in the world.

Recent reports, a tribute to NIO over 300 patents, should guarantee the company a steady growth in the upcoming year if employed properly.

The main value proposition for the company is the one of being a customer-centric firm, redefining what premium service means for a car company. To do this, they develop electric vehicles that provide a better user experience and deliver enjoyment beyond expectation, while doing good to the planet.

Several attributes are specifically chosen to target its customer segment: the feeling that NIO transmits is the one of a next-generation lifestyle smart company, with a combination of high-performance, premium service, and cutting-edge AI assistance. The customer that embraces this set of values is a modern version of premium car buyers: the same people that buy a Tesla Model X.

The channels that NIO uses to reach those customers need to be high-quality and modern enough.

Apart from the well-built website, the company uses Service Centers and Battery Swap Station as fixed marketing premises. Moreover, inside the NIO houses, there’s a space to spend time with other users or friends, making the brand feel even more exclusive.

NOMI, the AI-powered assistant, is a clear channel with which to reach the current customer base. Moreover, social media, blogs, and email newsletters also constitute a part of the channel strategy.

The Formula E Championship also provides incredible marketing, where NIO races against other electric car firms. While the team isn’t having impressive results in the competition, the popularity and the R&D innovations make participating in the races an investment and not a liability.

While the revenues are mainly composed of the sale of cars and lateral services associated, NIO has a broad cost structure.

Costs comprehend: offices, research centers, more than 4,000 employees, and mobile recharging trucks and battery swap stations. Software and hardware development also absorb an enormous quantity of cash, with some investment always needed to pursue international expansion.

Competitors and threats

The EV is very competitive at this particular moment. Hundreds of companies worldwide are attempting to conquer a market that could be one of the biggest revolutions of the next decade: electric vehicles and autonomous driving.

And since a 45% share of the global demand for these vehicles comes from Mainland China, the internal Chinese market for these cars is surging, day by day.

For this reason, many companies jumped in the race by attempting to manufacture and sell their vehicles. The breakneck expansion alarmed the Chinese government, which in return cut in half the financial incentives on EV purchases in 2018. By doing this, a series of crashes among the weakest companies followed.

The biggest competitors for NIO, however, are a few of the biggest global players: Li Auto, Tesla, BYD, BJEV (BAIC), SAIC, XPeng, and Geely.

While the Chinese counterparts are for sure a competition to fear, the battle seems more on a global scale, with Tesla and the United States on one corner and NIO together with China on the other.

Tesla’s SUV Model X is at the moment the biggest threat for NIO’s expansion also in Mainland China.

With Tesla’s recent profitability pivot point and NIO’s constant expansion, the battle is more intense than ever.

Delivery numbers are obviously on two different dimension scales, with 2020 that led the American player to deliver 499,550 cars and the Chinese one deliver only 43,728.

NIO can however count on strong domestic demand and growing international attention for the EV market. The fourth quarter of 2020 saw “Blue Sky Coming” reach its record revenues of $1 billion, with a 95% contribution by car sales.

Although Tesla and the other international players might be dangerous, the Chinese Government’s propension to protect internal companies will presumably give NIO the needed sprint to face the competition.

Financial Performance

Above is an overview of NIO’s income statement, which displays figures in $USD thousand. While revenues grew at a considerable pace, the operative margin remains negative.

The margin from car sales has reached an all-time high in the fourth quarter of 2020, peaking at 17.2%. In the same quarter of 2019, NIO had a negative figure of -8.9%.

The company has managed to turn the gross margin figures positive during 2020.

This is for sure a tremendous achievement for the sort of industry, but to be sustainable in the long term, NIO needs a higher margin to finance fundamental activities, like Research and Development and global strategic expansion.

NIO went through important financial changes during the last year: the management took care of excessive costs, lowering especially the non-variable costs, like the ones related to general and administrative tasks, as well as R&D investments.

While this could have a negative impact from a business point of view, we truly think it was a needed move to allow NIO to grow without too much external capital injection.

Another important factor that helps for sure the management’s strategy has been the number of deliveries. In the table below is reported the distribution of the deliveries, divided by quarterly and yearly figures. Q2 of 2020 can be considered the point in which NIO was starting to gain traction in deliveries.

Amidst the pandemic outbreak, the company had several problems with the suppliers, because they weren’t prepared to handle a supply chain disruption.

After that, with the situation easing in Mainland China, operations restarted quickly, with a nice bounce in deliveries.

Deliveries are estimated to grow further as the EV market is expanding globally, and especially in China.

Our team, weighing declarations of the management and the opinion of other analysts, apart from ours, set some estimations on the figures of deliveries in the years to follow:

• The 100,000 delivery milestone is expected to be hit during this year, 2021;
• 2022 is expected to lead to a 40% increase on the previous year, reaching 140,000 deliveries;
• In 2023, NIO is expected to deliver  182,000 cars, while in 2024 and 2025 the estimations are set respectively at 218,400 and 262,000.

Balance sheet figures, still in $USD thousand, show an expansion caused by new equity inflows. The company, despite the painful moment in 2019, didn’t excessively rake up in liabilities, maintaining the debt to equity ratio well under 1, with a current value of 0.71.

Comparable Analysis

To better understand the intrinsic value of NIO, a competitor analysis has been performed. As a non-profitable company, NIO must be valued using multiples. For this reason, we selected peers that could constitute a group of similar companies to the business model of NIO.

In this group, we selected car manufacturers, especially from China, and Tesla, NIO’s best-known American competitor.

The tables below show the different ratios and margins considered.

As several EV manufacturers are not profitable, much information is missing. However, as a helpful comparison, we can consider the example of Tesla, which has incredible multiples.

The numbers of the deliveries that our team estimated have been used then to try to calculate the possible income statement figures for the years to come, until 2025.

The revenue figure is expected to more than double during 2021, just like the number of deliveries.

Below is the table that sums up the assumptions on the income figures.

The ratios that have been used to try and estimate the Enterprise Value of the company for the next three years are EV/EBITDA and EV/EBIT.

Following the above estimation of revenues and the mean values extracted from the comparative analysis, the following Enterprise Values have resulted.

While for this year the current price of the company on the market will not be justified, in 2022 and 2023 the holders will be repaid for their patience.

In 2022, in fact, the company will have double the current enterprise value and in 2023, the value will quadruple.

It’s not a good idea, however, to jump immediately to the conclusion that this is a great stock to buy: see the risk paragraph to discover why!

Peter Lynch company category

Following Peter Lynch’s guidelines, we can categorise NIO as a Fast Grower.

The EV market is still expanding and the company has now attracted the attention of the most sophisticated Chinese customers.

The growth of the company should thus continue in the months to come.

Risk 1: Global political relations

China doesn’t have precisely the best relations with all the countries worldwide. In particular, the relationship with the US has been complicated by the Trump mandate. The new President of the United States Joe Biden is perceived as more peaceful towards the Celestial Kingdom.

However, Biden recently said to be “prepared to act, as well as impose costs”, over the Chinese government’s intervention on Hong Kong’s pro-democracy movement and the heightened intimidation of Taiwan.

The European Union is in the middle, mediating between the need for democracy worldwide and trade freedom.

It could be the European Union to help resolve the destructive conflicts between the US and China.

The error here could lay on the US imposing China tariffs and blocking the export of the oriental power, mostly directed to the States. That could lead the US in a prolonged and intense correction phase, together with the EU, both terribly hit from the perpetrating of COVID-19.

This situation could impact NIO, reducing its power to do business effectively outside China, and it could limit its advertising revenues in the event of a recession.

Risk 2: Number of competitors

Another risk for NIO’s business is definitely the number of competitors. Many companies have attacked the EV market in search of a niche in the new market or a continuation of their brand in electric-powered vehicles.

In both cases, NIO’s competition is intense and will not surrender easily.

Risk 3: State-owned supplier

NIO has a significant supply-chain risk, as JAC Motors, the actual car manufacturer for the company, is state-owned and in disputes, it could have the best treatment.

The Chinese Government is now having small revenge on Tech companies, as several founders attacked Beijing’s international policies.

While NIO has a different position than Baidu, Alibaba, or Tencent, it has been previously impacted by drastic decisions taken by the central government.

When China decided to cut the subsidies to purchase electric vehicles in 2018, the sales of NIO and of the other EV manufacturing companies plummeted.

Risk 4: What do you really own?

In the comparable analysis section, we saw that NIO constitutes on paper a really interesting investment opportunity. However, the situation of the Chinese car manufacturer is not so bright, at least from an ownership point of view.

In fact, in light of 2020 financial difficulties, the firm was offered help with a $1 billion lifeline.

This didn’t come without consequences.

In exchange for this cash inflow to support its activities, NIO got involved in a complete restructuring of the governance scheme of the company.

That is: all the assets inside mainland China have been moved from NIO Inc. to NIO China, a company that is almost wholly owned by NIO Inc.

The word “almost” is really important in the precedent phrase: the Chinese government acquired a rather relevant chunk of stock in NIO China.

By doing this, in case of new cash needs, the government could decide to inject further capital, diluting the actual share owned by NIO Inc. (the company in which anybody can invest) and its shareholders. Eventually, further dilutions could lead to NIO Inc. losing total control of the subsidiary.

Even if management, in fact, “plans to keep control of the company”, we cannot know for sure.

Risk 5: Debt: watch out for dilution

Several bonds listed from NIO in the past and also recently, are convertible notes that can turn into shares in the future. Analysts estimate that the share count will double by 2025.

Consider also this when evaluating a purchase!

Risk 6: A cyclical industry

The car industry is cyclical! Right now, car manufacturers can benefit from an economy that slowly returns to positive gains, but what could happen to NIO in the event of a recession? Can the fragile financial structure overcome the weight of a global financial correction?

NIO recently touched oversold levels and the general expectation is further growth, fueled by delivery estimates.

From a business point of view, the firm presents several interesting points to be leveraged in the next years.

There are, however, several risk to consider before even thinking on investing in this stock.

After the permanence in the overbought territory from the 8th of March 2021 to the 12th, it is now showing a descending stochastic curve.

We believe, however, that this apparent descent will only be a fake signal, with NIO resuming the bull run, fueled by an expanding Chinese economy.

Moving averages and Bollinger bands show, in fact, the presence of an ascending trend in place.

While the Average Directional Index is not showing a clear trend signal, we believe that will soon.

The chart shows a possible retest of the high price of 67$/share reached on the 11th of January of this year, to then further expand in case of good earning reports.

A simple investment strategy is also the most efficient in our opinion: waiting for a clear trend continuation movement and then going long for a future appreciation.