LCID - NIO: Likely Found A New Bottom - FY2023 Projections Still More Than Decent

2023-03-28 10:39:53 ET

Summary

• NIO has chosen to stick with its premium branding, opting to refrain from the ongoing price wars and staying with its pricing approach.
• However, it is uncertain how successful this strategy may be in attracting consumer demand and sales growth due to the end of EV subsidies and cut-throat competition.
• Combined with NIO's compressed margins over the next two quarters, the stock may retrace to the March bottom in the intermediate term.
• However, given the CEO's confidence in achieving FY2023 sales/margin targets, we reckon interested investors may still add the stock at the recent bottom of $8.

We previously covered NIO Inc. (NIO) here, focusing on its rapid expansion in China and the EU through houses/spaces (akin to clubhouses/showrooms), on top of the expansion in its EV model line-ups. This strategy had naturally impacted its gross margins and increased its operating expenses, triggering headwinds to its profitability. However, with the normalization of supply chains and management's ambitious guidance, we believe we might see the company deliver improved numbers in 2023.

In this article, we shall discuss NIO's performance in the recent FQ4'22 earnings call on March 01, 2023. Its deliveries seemed to have decelerated YTD, likely attributed to the intensifying price war in China. The company also reported lower vehicle gross margins, potentially worsening its cash burn and impacting its balance sheet moving forward. Nonetheless, given the CEO's confidence in achieving FY2023 sales target of 250K EVs, we reckon interested investors may still add the stock at opportunistic levels.

The EV Comp etition Is Only Intensifying

NIO had decided not to engage in price wars, as highlighted in its recent FQ4'22 earnings call . However, the company continued to face headwinds in China, attributed to the drastic price cuts initiated by Tesla ( TSLA ) and followed by XPeng ( XPEV ) and BYD ( BYDDF ) thus far.

While some analysts might have posited that the effects of TSLA's price cuts had waned in China, the fact of the matter was the company still delivered 33.92K of domestic retail sales in February 2023, expanding by +26.3% from January levels of 26.84K units ( -35.9% MoM ).

Unfortunately, the same could not be said about NIO's deliveries in the first two months of the year. The company delivered 12.15K (+42.9% MoM) of vehicles in February 2023 and 8.5K (-46.2% MoM) in January . The sum amounted to a slower YTD increase of +30.9% YoY, compared to TSLA's +42.8% YoY and BYD's +80.8% YoY at 161.96K YTD.

Part of the decline might also be attributed to the end of the Chinese government's subsidy and the intensifying competition from various domestic automakers, where there had been nearly 250 models of BEVs by November 2022.

Demand appeared to be weak in the EU as well, with NIO expecting to only deliver 10K units in FY2023, suggesting underwhelming investment returns in the region. This was attributed to the continuous capital expenditure, such as NIO houses and swap stations in multiple European cities.

Therefore, the company likely faces more cash burn ahead, due to its compressed margins. The company reported unsatisfactory vehicle margins of 6.8% in FQ4'22, compared to 16.4% in FQ3'22 and 20.9% in FQ4'21. Even after adjusting for the inventory provisions and losses on purchase commitments, the number was still at 13.5% for the latest quarter, suggesting a headwind of -2.9 points QoQ and -7.4 points YoY.

In the meantime, NIO's transition to its NT 2.0 platform (next-generational models with improved autonomous driving systems, expanded mileage, and premium pricing strategy) also contributed to the temporarily declining margins.

In addition, the company recorded a sustained increase in operating expenses by +35.4% QoQ/63.4% YoY to $1.06B in FQ4'22, or expanding by +69.1% YoY to $3.01B for the fiscal year. Given that it only reported a top-line expansion of +25.6% YoY, the cash burn was felt indeed, significantly worsened by the projected deceleration in domestic demand at +30% YoY in 2023, against the +114% reported in 2022.

Nonetheless, there may be some tailwinds for recovery in NIO's vehicle margins to 20% by FQ4'23 and 25% in the long term , as highlighted by the management. This is attributed to the higher-margin NT 2.0 models (ES8, ES6, EC6) set for deliveries from FQ2'23 onwards. It also expects lithium prices to decline by -66.5% to RMB 200K by the end of the year, due to the increasing supply globally.

The CEO still confidently guided for FY2023 total deliveries of up to 250K vehicles recently as well, potentially growing by +104.2% YoY. With the company electing to keep its prices stable and branding premium (with no plans to release lower-priced models), we reckon these may translate to improved margins moving forward, as highlighted by William Li, CEO of NIO, in the recent earnings call:

For the NIO brand, we do not have any plan to cut the features and functions of product. And I think that, this is consistent of branding and the pricing strategy because of low pricing is not a part of the strategy or the DNA of the new brand. ( Seeking Alpha )

Meanwhile, we understand the market pessimism since its premium branding may work against the waning consumer demand, as the market leaders continue to offer discounts and introduce lower-priced models.

The same has been observed with Lucid Group ( LCID ), preferring to compete with long-established legacy players, such as Mercedes Benz ( MBGAF , MBGYY ) and BMW ( BAMXF ). While the wealthy may have expanded discretionary spending, delivery numbers have been limited indeed, with the S-Class comprising only 4.4%/15.92K of MBGAF's 2.05M global deliveries in 2022.

As a result, it seems NIO's decision only targets an overly niche segment, potentially alienating the average consumer, especially worsened by the gap between its prices and competitors. On top of that, XPEV's CEO highlighted that the price war may continue in the near term.

BYD has also strategically introduced lower-priced vehicles at an average of RMB 150K in 2022 , compared to TSLA at RMB 330K and NIO at RMB 400K . Only time may tell how long NIO decides to stick with this premium approach, since BYD's strategic choice has proved to be a boon to domestic sales growth and consumer demand.

So, Is NIO Stock A Buy , Sell, or Hold?

NIO 6M Stock Price

We believe it is due to the above mentioned factors that the previous November and December 2022 bottom around the $9s have been breached as of early March 2023. With the NIO stock unable to break through the $9 resistance level last week, we reckon there may be more volatility in the short term.

Therefore, while the stock trades very attractively below its 50-day moving averages, anyone looking to dollar cost average here must proceed with caution.

NIO is still not expected to record break-even cash flow in the near term, with market analysts projecting positive Free Cash Flow generation only by FY2025 and GAAP profitability by FY2026. While the company still boasts $5.66B in cash/short-term investments by the latest quarter, the cash burn has been obvious, due to the notable declines in its balance sheet by -10% QoQ and -31.3% YoY.

While we are cautiously optimistic that the company may achieve its FY2023 deliveries and profit margins, we reckon the stock may potentially retrace to the March 2023 bottom of roughly $8 in the short term, due to the uncertain macroeconomic outlook. Investors looking to add NIO may consider adding there, for an improved margin of safety.

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