NIO Inc - Emerging Stronger From The Trough
- NIO (SGX:NIO) is the first Chinese smart EV maker to break into the premium car segment, which is currently dominated by global auto brands. NIO has made remarkable achievements within a short period since commencing its premium smart EV business in 2016, with accumulated vehicle sales reaching 260,000 units. NIO’s vehicle ASP at over RMB300,000 per car places it in direct competition to incumbents, especially the premium car makers. NIO has an in-depth understanding of the Chinese consumer market and culture, car buyers’ preference, and has put in place a competitive pricing strategy.
- NIO constant upgrades of its vehicle portfolio is key to enhancing its brand awareness and boosting sales, with the EV models being upgraded every three years. NIO is also venturing into the SUV and sedan segment to capture the growth across the various vehicle types. 2022 will be an exciting year in terms of new models on its latest NT2.0 technology platform. Besides upgrading the current ES8, ES6 and EC 6 models, NIO has ET7, ET5 and the latest ES7 to drive volume sales in FY23-24F. It would be another exciting year for NIO in 2024 with the launch of a mass market EV brand at an ASP
- NIO's management has guided 4Q22 vehicle deliveries of 43k-48k units, bringing FY22F total deliveries to about 130k units, y-o-y growth of about 40%. Going forward, we anticipate vehicle shipments to stay strong on scale expansion, to be supported by improving supply chain and new vehicle models. Hence, we forecast total vehicle shipments to reach ~280k units in FY24, representing a CAGR of 46% from FY21.
Leading the pack in innovation with its BaaS and potentially ADaaS.
- NIO’s management had strong industry foresight and implemented an innovative strategy with the introduction of battery as a service (BaaS), swapping stations, charging services to better serve customers, differentiating itself from peers. This strategy offers car buyers the convenience in terms of charging support and lowers the initial car ownership cost as consumers can rent the battery pack from the company.
- NIO has over 1,200 battery swapping stations and some 2,000 charging stations across the major Chinese cities to support its customers. The proposed expansion of its battery swapping network should support sustainable growth in vehicle services revenue, which has grown by over 200% per annum from FY18-21 and is projected to chalk up 58% annual growth from FY21-24F.
- To enhance vehicle competitiveness, new models (ET7 and ET5) will incorporate its latest NIO autonomous driving (NAD) technologies as well as support longer driving range of up to 1,000km. Also, the 150-kWh battery power pack will be made available in its latest models to enhance the product’s competitiveness. NIO is planning to offer the service to users via a monthly subscription option under Autonomous Driving as a Service (ADaaS) when this becomes commercially viable. We believe this business model should enhance its future sales based on the success of its BaaS. For instance, some 50% of its new customers in FY21 had opted for BaaS subscription, implying customer penetration has room to increase.
New manufacturing concept and growth strategy; positive on asset efficiency.
- The innovative solutions and technology development spearheaded by a strong management team will pave the way for its future development. More importantly, NIO adopted an asset light manufacturing concept whereby the company has outsourced part of its vehicle assembly operation to a third-party in the early stage of development, thereby reducing the heavy capex commitment and focus on R&D activities.
- To limit the operating cost outlay, the company uses online and offline direct sales channel to execute its sales. The benefit of direct sales is that NIO has a better understanding of customer needs and concerns, hence the ability to address their issues promptly. As a result, NIO’s asset turnover ratio has been improving as shown in the chart below.
- NIO is currently developing the NeoPark in Xinqiao, Hefei with Anhui government as a strategic shareholder in NIO China as well as providing support to establishing an EV eco-system that covers EV assembly, automobile parts & components, and EV batteries. The Park will also be crucial to NIO’s mid-market brand rollout in 2024. In total, the Park is designed to support up to 1m units of EV capacity and 100GWh battery output. In the longer-term, NIO will have better control over the production of key EV components and costs, thus enhancing its future margins.
Financials to improve on revenue and margin expansion.
- After years of upfront investment, NIO turned profitable at the gross level in 2Q20, and vehicle gross margins have been hovering at ~17-20% from 4Q20-1Q22. While the pandemic lockdowns and commodity inflation had affected its 2Q-3Q22 operations, we anticipate FY23F vehicle gross margin improvement on scale expansion and mix enhancement. Besides, stimulative measures to support the NEV (new-energy vehicle) auto industry is expected to be positive on sales.
- Lastly, improving supply chain and logistic on auto parts and components should smoothen EV production.
Supported by a strong new model pipeline, we estimate total revenue to reach ~Rmb134bn in FY24F, at a CAGR of ~55% from FY21.
- The better revenue mix is expected to lift overall gross profit margin by 4.7ppts from trough in 2Q22 to 17.8% by FY24, filtering down to the bottomline. For instance, the new ES7 mid-large size SUV is a good margin driver given its value content and higher ASP of over RMB450k/car.
- The benefits from NeoPark is another catalyst to future profitability. Hence, we estimate FY24F core net losses to decline by about 90% from FY22F.
NIO – Valuation & Peers Comparison
P/S ratio better reflects EV sales ramp up.
- The Chinese start-ups are trading at forward P/S ratios of 1-1.5x, about 2 standard deviation below their historical average. Also, the P/S ratios of the Chinese EV start-ups are at a discount to global EV maker, Tesla (FY23F 5x), largely attributable to their smaller revenue scale and China focused business.
- Based on FY21 sales revenue, the Chinese EV start-ups revenue size is about 6-10% that of Tesla and the latter has a large exposure to the battery storage sector. Hence, this resulted in the Chinese pure EV players trading at a sharp discount to Tesla.
- Given that NIO is still under a ramp-up stage and has yet to generate profits, the price-sales (P/S) ratio valuation methodology is more suitable for these type of startup companies.
Valuation upside potential on improving sales outlook.
- NIO’s valuation was affected by the weak vehicle shipments in 2Q due to the pandemic lockdown. But we believe its valuation has hit a trough level and a rebound is possible on improving volume shipments especially with the new models to support FY23F sales prospect.
- Underpinned by the anticipated sales recovery in FY23, we have made references to the NEV (new energy vehicles) sector peers (e.g. BYD, Xpeng, Li Auto, Lucid Group, etc)’s FY23F average P/S as well as NIO’s historical average performance.
- NIO's Share Price is currently trading at about 1.6x P/S ratio, equivalent to 1 standard deviation below its historical average.
- We benchmarked NIO’s target P/S to 2x FY23F (about 60% discount from historical average) to arrive at target price of US$16 or HK$130. We initiate coverage on NIO (SGX:NIO, NIO US, HK:9866) with BUY rating.
Above is the excerpt from report by DBS Group Research.
Clients of DBS may access the full report in PDF @ https://www.dbs.com/insightsdirect/.
Rachel Miu DBS Group Research | https://www.dbs.com/insightsdirect/ 2022-11-17 2022-11-17