BYDDY - NIO: Look Past Recent Struggles

2023-04-02 06:28:10 ET

Summary

• NIO's Q1 deliveries fell short of their midpoint guidance, signaling another quarter of underperformance.
• We assessed analysts had already marked down Q1's estimates significantly. As such, the disappointment is likely reflected.
• Despite slashed estimates, NIO's recent bottom suggests investor optimism as they anticipate a robust H2 production and delivery ramp-up.
• NIO is grappling with the formidable challenge of achieving its ambitious 250K deliveries target for 2023 - making the EV maker's H2 execution crucial to its 2023 performance.

NIO Inc. ( NIO ) released its March delivery report , including its finalized delivery figures for FQ1'23.

Accordingly, NIO posted 10.38K (up 3.9% YoY) in deliveries in March, resulting in a Q1 total of 31.04K vehicles.

However, its performance was below par, as it came in below its previous midpoint guidance of 32K vehicles . As such, investors expecting a robust report are likely disappointed after the company also underperformed in FQ4'22.

Despite that, we assessed that Wall Street analysts have likely reflected significant pessimism in NIO's projections. Accordingly, the company is expected to post Q1 revenue of $1.7B, down 27.3% QoQ. NIO delivered 40.05K of vehicles in Q4, about 30% more than the deliveries in the most recent quarter.

As such, we believe the estimates should be relatively close this quarter (after missing significantly in Q4), with investors likely focusing their attention on the company's performance in H2.

Management attempted to assure investors two weeks ago that the company will not engage in vicious price cuts to grab market share, highlighting its confidence in its brand value.

NIO articulated that Tesla's ( TSLA ) price cuts disrupted market dynamics as it attempted to defend its market share in China. China's leading NEV maker BYD Company ( BYDDF ) remains a threat and is the market share leader in the "RMB 100K to RMB 200K" segment.

However, NIO mainly operates in the premium segment priced between the " RMB328K to RMB656K" range. Hence, it should help the company avoid head-on competition against BYD as it attempts to hit 3.6M in vehicle sales this year.

However, we believe NIO must continue to improve its gross margin profile, given last quarter's massive disappointment. In addition, NIO CFO Steven Feng stressed that the company is confident of hitting its 250K sales target for 2023, suggesting that an inflection point in H2 deliveries is critical.

Analysts' estimates indicate H1 revenue of $4.33B. However, analysts project NIO's revenue in H2 to surge to $7.3B, suggesting a nearly 70% increase relative to H1's projections.

Although the company's Q1 delivery slate is within the company's guidance range, it implies NIO will need massive production and sales momentum to achieve nearly 219K in vehicle deliveries over the next three quarters.

We think the execution risks are very high, as NIO has underperformed in the past two quarters. NIO posted TTM deliveries of 127.76K in March. While the steep decline in lithium prices should help to alleviate significant pressure over its gross margin profile, we are leaning on NIO to disappoint against its ambitious annual target over the next three quarters.

However, we believe management will likely remain sanguine at its Q1 earnings conference as it looks ahead to its Q2 ramp. Accordingly, management is confident of achieving its target through "new models, expanding the charging and battery swap network, and unlocking self-driving technology."

Despite that, we believe investors will be cagey in attributing significant optimism to management's commentary after two quarters of below-par performance.

Hence, investors will likely remain in a "show-me" phase, even as they anticipate a more robust H2 performance.

NIO formed a validated bullish reversal against its March lows three weeks ago. As such, even as analysts cut their revenue estimates for Q1, NIO bottomed out.

We believe the recent recovery suggests that the market has reflected significant pessimism, with investors looking toward H2.

NIO's downtrend bias should be clear, suggesting that investors consider any opportunity speculative, as the company is still not profitable.

With the recovery over the past two weeks, NIO has already surged past its optimal buy point, which was close to its support level at its March lows. Hence, we don't have a price action trigger at the current levels.

We assessed that the near-term resistance zone is close to the $12.5 level. Hence, investors should avoid buying close to that level. They should also accord an appropriate discount to reflect significant uncertainties in its production ramp in H2.

With NIO about 20% away from the above resistance zone, we assessed that the current opportunity to add is still reasonable.

However, investors can also consider waiting for a pullback if they already have a sizeable exposure in NIO. Also, the lack of a price action trigger weakens the thesis. Given its subpar delivery performance, some bottom-fishers could use the recent rally to cut exposure and take some risks off the table.

Rating: Speculative Buy (Reiterated). See additional disclosure below for important notes accompanying the thesis presented.

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