XPEV - NIO: Less Pain More Gain

Summary

• Although NIO posted a lackluster delivery report in January, don't fret. January's weakness has likely been anticipated.
• NIO's progress hinges on its ability to ramp production efficiently, gaining market share and staying ahead as China's EV growth potentially slows down.
• NIO's European expansion is vital to unlocking a critical growth vector, but only if it can secure a strong position in the world's second-largest EV market.

NIO Inc. ( NIO ) stock has started 2023 well, up more than 20% from our late December update , outperforming the S&P 500 ( SPX ) ( SPY ). Unfortunately, its momentum has stumbled recently, as January delivery numbers were weak. However, the robust recovery of Chinese equities in January has helped sustain the buying sentiments in NIO.

Accordingly, NIO delivered 8.51K of vehicles in January, down 46% MoM. As such, the momentum has softened significantly from December as it coincided with the Chinese New Year festivities. Moreover, recent price cuts from Tesla ( TSLA ) reportedly caused buyers to dither over their purchase decisions, anticipating a " wait-and-see " attitude.

The weakness seen in NIO's January numbers was industry-wide, impacting even China's NEV leader BYD ( BYDDF ). The company posted a 35% MoM decline in deliveries.

Deutsche Bank ( DB ) believes that January's weakness is temporary, with the industry poised for a recovery moving ahead. Moreover, China's reopening from its peak COVID wave should relieve the unpredictable supply chain disruptions that impacted NIO's production and deliveries in 2022.

Despite that, 2023 could still prove to be a challenging year for NIO. China's NEV sales reached 5.67M in 2022 , up 90% YoY, despite the lockdowns. Moreover, the NEV penetration rate in China is world-leading at 27.6% (including hybrids), well above the global EV penetration rate of 10%.

As such, there's still significant potential for Chinese NEV players, including NIO, to grow, but the momentum is expected to slow further. Accordingly, the China Passenger Car Association ((CPCA)) expects the industry to post NEV sales of 8.5M in 2023, up nearly 50% YoY. Still fast but slowing down.

BloombergNEF's estimates are more pessimistic, seeing 8M sales , but expects Chinese NEV players to spread their wings to the European market. DIGITIMES estimates are at the higher end, seeing 9M in sales. Notably, it highlighted that the momentum in China NEV sales has widespread support from the Chinese government, helping to lift its cadence further. It added:

China has become the world's largest market for EVs due to government's support for EV manufacturers, including boosting consumption of EVs in rural areas, extended tax exemptions, and more than 20 local government subsidies for vehicle purchases, as well as the highest density of charging stations among all countries. For now, China is winning the race not only in EV production but also consumption. China has formed industrial clusters and complete eco-systems. China's EV industry has a global market share of over 50% in major production segments such as battery raw materials, integration and charging infrastructure, and exports are still price-competitive. - DIGITIMES

As such, we think NIO remains well-placed to navigate 2023 as it continues to build on its new vehicle launches . It's also worth watching NIO's progress in Europe as it seeks another critical growth vector to mitigate a slower-growth Chinese market.

Europe is expected to avert a damaging recession , which could benefit consumer spending as inflation falls further. Hence, it should also provide another tailwind for NIO's European expansion as it starts its EL7 SUV deliveries.

The company is also set to launch its two sub-brands , Firefly and ALPS, as NIO moves to scale further and widen adoption. However, care must be taken by management to avoid pushing out its profitability ramp, as seen in the case of XPeng ( XPEV ). The company's lower-priced offerings saw significant hurdles against BYD's prowess and Tesla's price cuts.

The consensus estimates still expect NIO to report adjusted EBIT profitability by FY25. Therefore, the company needs to remain focused on scaling its production while benefiting from a potential normalization in lithium prices.

The ability to ramp efficiently will be a critical driver in 2023, as we highlighted in a recent TSLA article . Therefore, if CEO William Li & team could lift investors' expectations at the upcoming FQ4 earnings release of its ability to improve its production costs further, NIO's medium-term recovery should remain intact.

Rating: Speculative Buy (Reiterated).

For further details see: