STLA - NIO: Brace For A Rough Quarter

2023-07-25 07:45:14 ET

Summary

• NIO’s vehicle deliveries in Q2 were down Q/Q and Y/Y.
• While the company managed to secure funding from external sources, most of that funding will be gone in a single quarter at the current cash burn rate.
• At the same time, margins are likely to be squeezed even further due to the ongoing price war and make the company’s stock an unattractive investment.

After I published my latest article on NIO (NIO) more than a month ago, new sales data came out which showed that the company's vehicle deliveries in Q2 were down Q/Q and Y/Y. This has already led to the belief that once NIO reveals its upcoming earnings report, it will show that the company has experienced a Y/Y decline in revenues in Q2 and a further margin squeeze due to the ongoing EV price war in China. At the same time, even after securing a new round of funding from external sources, it's likely that NIO would also be required to look for other options to raise additional liquidity in the future due to the unsustainable cash burn rate that would make investing in the company's stock not worth it in the first place.

Therefore, as investors are waiting for the upcoming earnings report, this article highlights all of the company's recent major developments and outlines the potential headwinds that have a high chance of negatively affecting NIO's performance in the following months.

The Recovery Is Stalling

In my previous article on NIO, I've explained how capital-intensive the company's business is and how another capital raise is likely on the way as the automaker continues to burn cash at unsustainable rates. In Q1 alone, NIO's net loss stood at nearly $700 million. Shortly after that article was published, the company announced that it has received a $738.5 million investment from the Abu Dhabi-linked investment fund in exchange for issuing new shares at a price below the current market price that would dilute all the other ordinary shareholders. While for some this might seem like a strategic move on behalf of NIO, the company's latest weak performance indicates that new investment is unlikely to significantly improve the company's growth prospects as the business continues to struggle even back home in China, which is currently the largest EV market in the world.

Earlier this month, the Q2 delivery numbers came out, which showed that NIO delivered a total of 23,520 vehicles from April to June. For comparison, in Q1 its deliveries stood at 31,041 vehicles, while a year ago in Q2'22 during the height of Chinese lockdowns, the company managed to deliver 25,059 vehicles. Therefore, without any lockdowns, NIO nevertheless saw a Q/Q and Y/Y decrease in deliveries and is now even further from achieving a full-year target of over 200,000 deliveries in 2023.

What's worse is that there are also reasons to believe that NIO's margins would contract even further as the Chinese EV price war appears to be far from over. Earlier this month, it was announced that the agreement signed by some of the biggest EV makers in China to end abnormal EV prices has been cancelled just two days after it was initially signed. This is because companies like Tesla (TSLA) and others once again announced another round of price cuts along with the introduction of new referral bonuses. While such a move in the past helped Tesla, BYD (BYDDF), and others increase their delivery numbers, it also had a negative impact on their bottom-line performances.

If we go through Tesla's latest earnings report for Q2, we'll see that the company's margins were down substantially Y/Y despite the higher number of deliveries due to the ongoing price war. However, while Tesla might afford a margin squeeze thanks to a significant amount of liquidity and the ability to remain profitable even in such an environment, the same can't be said about NIO which is in a much tougher spot than the established automakers. At this stage, NIO needs to have sustained growth like its peers and it's not having one.

On top of that, the relatively weak performance of the Chinese economy could have an even greater negative impact on NIO's performance in the following quarters. Despite Beijing's efforts to revive the economy after the harsh lockdowns in 2022, China's domestic travel spending and home sales stay below the pre-pandemic levels, while consumer confidence remains weak. At the same time, China's economy grows below the forecasted levels, its unemployment among young people recently reached a new record, and there are now talks about a potential deflation in the future. As a result, the structural problems of the Chinese economy along with the ongoing EV price war are more than likely to continue to make it harder for NIO to reach its targets and become profitable in the foreseeable future.

More Global Challenges Ahead

In addition to the domestic challenges, there's now additional indication that NIO's efforts to expand to other markets and become a global brand would also not come to fruition anytime soon. I have already stated in the past that NIO is unlikely to successfully enter the U.S. market by 2025 and become a dominant player there due to the challenging political environment. A couple of weeks ago, NIO's CEO himself criticized the American protectionism policies that make it harder for Chinese carmakers to penetrate the U.S. market. Considering that the US Treasury Secretary Janet Yellen recently stated that it's too soon to talk about the lifting of tariffs on Chinese goods, which include a 27.5% tariff on Chinese-made cars that were put in place under the Trump Administration, it's unlikely that NIO would be able to penetrate the American market and diversify its business in the following years.

At the same time, there's an indication that European policymakers could also impose additional tariffs on Chinese-made cars in the foreseeable future. Currently, the import duties on Chinese-made cars in the European Union stand at only 10% and Chinese EV makers could also apply for various European national subsidies that decrease the overall cost of shipping and selling their vehicles in the old continent. If no measures are taken, then Chinese-made cars could account for 15% of the EU EV market by 2025.

To ensure that that doesn't happen, France is currently leading an effort within the EU to prompt the European Commission to imitate anti-dumping proceedings against Chinese electric vehicles and enforce punitive duties in order to protect the interests of its national carmakers such as Renault (RNSDF) and Stellantis (STLA). Thanks in part to those efforts, the European Commission recently set new standards for EV batteries and will lead an anti-dumping and anti-subsidy investigation that could make it harder for Chinese brands such as NIO to access the European market, which is currently the second biggest EV market in the world after China. As a result, it's safe to say that NIO's efforts to become a global brand could be thwarted in the foreseeable future as it becomes harder for Chinese automakers to access global markets with each passing day at a time when the Chinese EV price war destroys margins while the Chinese economy fails to fully return to pre-pandemic levels.

The Bottom Line

Considering all of this, it's hard to see how NIO would be able to successfully grow at an aggressive rate anytime soon, given the number of challenges that it faces. The only major positive development that NIO currently has going for it is the overall growth of the stock market that's caused by the improvement of the American economy along with the ongoing AI momentum, which could push its shares higher in the short-term. That's why shorting the stock at the current levels with a minimal margin of safety is not worth it at this stage as well.

Other than that, there are no other major positive developments that could help the company greatly improve its overall performance in the foreseeable future. The street has already made several downward revisions in the last few months and expects NIO's revenues to decrease Y/Y in Q2 given its relatively weak delivery numbers during the quarter. Add to all of this the fact that margins are likely to be squeezed even further due to the price war while profitability is nowhere near in sight, and it becomes hard to justify NIO's current market capitalization of $18 billion. At the same time, as the investment from the Abu Dhabi-linked fund would only cover around one-quarter of losses at the current burn rate, it's likely that an additional capital raise, which would dilute the existing shareholders even more, is only a matter of time.

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