BYDDY - NIO Q4 2022 Earnings Quick Take: Management's Cautious Optimism Reinforces 2 Key Risks

Summary

• NIO's fourth quarter earnings release was a substantial double miss, with the topline plagued by persistent supply chain constraints, and the bottom line pressured by higher-than-expected non-recurring charges.
• Looking ahead, management has reiterated a tone of cautious optimism, with a modest guide as acute operational headwinds in 2022 persist into the new year.
• While NIO stock trades at an attractive ~1x EV/'23 sales, with continued accrual of value in the underlying business, persistent external and internal risks in the near term will suppress upsides.

NIO Inc.'s ( NIO ) fourth quarter earnings commentary continues to underscore relative resilience in the business despite ongoing macroeconomic and industry-specific uncertainties in its core Chinese market, as well as its overseas presence in the European market plagued by slowing demand. The stock had initially trended slightly upward in pre-market trading before it headed into the reverse following NIO stock's fourth quarter earnings release, which captured a double miss due to higher-than-expected non-recurring charges primarily driven by the write-down in value on the "existing generation of ES8, ES6, and EC6" premium SUVs as they transition to newer models on the NT2.0 platform, as well as ongoing production and delivery inefficiencies due to persistent supply chain constraints. Meanwhile, management's cautious optimism for the current quarter - which we view as prudent in tempering investors' expectations amid the volatile and uncertain market climate - continues to be high persistency of two big risks facing the stock - 1) geopolitical, and 2) company- and industry-specific fundamental risks.

From a valuations perspective, the NIO stock remains in a modest spot on both a relative and absolute basis considering it remains one of the best-selling premium electric vehicle ("EV") brands in the world's largest and fastest-growing market, with a robust balance sheet needed to fund continued growth initiatives at the business to ensure adequate capitalizing of longer-term opportunities. Yet, ongoing macroeconomic uncertainties and company-specific execution risks remain core near-term roadblocks that will likely continue to cap the stock from unlocking sustained upside potential reflective of its longer-term growth prospects.

NIO Q4 2022 Earnings

NIO reported fourth quarter revenue of $2.33 billion, up more than 62% y/y, but underperformed consensus estimates of close to $2.6 billion. Meanwhile, adjusted earnings came in at -$0.44 per share, missing consensus estimates of -$0.23 per share by wide margins due to higher-than-expected one-time charges pertaining to inventory write-downs for existing models of the ES8, ES6, and EC6 SUVs as they transition to the updated version on the NT2.0 platform, as well as surging battery costs observed industry-wide.

Looking ahead, management has opted for a conservative guide in the current quarter, expecting vehicle deliveries of 31,000 to 33,000 units. Much of this would depend on the production ramp-up progress on NIO's five new model launches based on the new NT2.0 platform in 2023. Specifically, the current quarter vehicle delivery guide represents y/y growth of 20.3% to 28.1% - a significant deceleration when compared to premium EV rival Li Auto Inc.'s ( LI ) multi-fold acceleration guided earlier this week. First quarter sales are expected to range from $1.58 billion (RMB10.9 billion) to $1.67 billion (RMB11.5 billion), a modest increase of 10.2% to 16.5% y/y.

Resurgence of Heightened Regulatory and Geopolitical Risks

The rally in Chinese equities earlier this year, fueled by momentum from China's rapid reversal of its economy-suppressive COVID Zero policy stance late last year, has been dampening in recent weeks. The stark turnaround reflects the resurgence of investors' caution over Chinese assets, as regulatory and geopolitical risks return to the spotlight.

On the regulatory front, China-specific risks such as sporadic rule changes aimed at curbing big tech influence should come as no surprise after a gruesome years-long clampdown campaign that has only just started to slow, though persists. Nonetheless, the recent disappearance of "high-profile tech deal-maker" Bao Fan and news of potential curbs on short video view times for youths have come as a needed reminder of the fickle regulatory environment over Chinese assets that could easily upend any and all optimism on the post-pandemic recovery narrative.

Meanwhile, on the geopolitical front, restored optimism over President Xi and President Biden's " Bali handshake " late last year has swiftly vanished as the recent balloon debacle turns the dial on U.S.-China tensions back up. Rekindled concerns over the fraying relationship between the world's two largest economic powers continue to limit the full potential on China's reopening narrative, which was previously viewed with optimism as a compensating trade to the broader slowdown in global demand as major central banks (e.g., Federal Reserve; European Central Bank) sought after aggressive tightening of monetary policies to curb generation-high inflation.

The waning conviction in China's reopening trade is further corroborated by the rapid fizzling of NIO's stock gains through February, despite being a consistent market share gainer in China's prized industry:

NIO has established itself as the most competitive premium brand in the smart electric vehicle market in China, ranking first in the premium battery electric vehicle market segments priced over RMB 400,000 and RMB 300,000 with the market share of 75.8% and 54.8% respectively in the fourth quarter of 2022, according to the retail sales data from China Automotive Technology and Research Center.

Source: NIO 4Q22 Earnings Press Release .

Despite the modest post-earnings movements in pre-market trading this morning in response to NIO's substantial double miss and modest guide, the stock continues to trade lower on a year-to-date basis, wiping out previous optimism on China's reopening trade. This adds to the more prominent setback observed in a cohort of Chinese big tech stocks - the primary beneficiaries of the early-year rally have cumulatively lost more than $190 billion in market cap YTD, despite positive signs of recovery buoyed by a solid earnings season, considering acute supply chain constraints and macro uncertainties experienced over the past year. The lack of positive momentum in Chinese equities despite the slew of positive surprises to fundamentals continue to underscore the pressure on valuations driven by investors' concerns over persistent geopolitical and regulatory risks, in addition to broader macroeconomic uncertainties spanning a looming global economic downturn and stubborn inflation.

Persistent Risk-Off Market Sentiment Highlights Lingering Company- and Industry-Specific Risks

Management's continued cautious optimism in NIO's latest earnings call regarding the industry's near-term outlook is also consistent with expectations for a steeper deceleration in Chinese EV demand. Specifically, Chinese passenger EV sales grew 96% y/y in 2022 to 6.5 million units - representing the world's largest and fastest-growing EV market - which slowed from "growth of 181% in 2021." Looking ahead, passenger EV sales in China are expected to expand 30% in the current year to add 8.5 million units to the existing emission-free fleet in the region. In addition to the sheer size that the Chinese EV market has ballooned into in recent years, the cutback on some of China's federal and state EV subsidies that were critical to the nascent form of transportation's adoption in the past decade will also be a headwind to the industry.

Specifically, for NIO, which has been given preferential treatment in past years with eligibility for the federal EV purchase subsidies thanks to its proprietary battery swapping technology, despite exceeding the pricing threshold, the Chinese premium EV maker is expected to experience a more prominent impact on demand as a result of the removed incentive for prospective buyers. While we consider the company's continued progress made on its planned introduction of two new sub-brands aimed at the lesser-penetrated mass market in lower-tier cities across China next year , and production ramp-up on its newer premium models built on the higher-margin NT2.0 platform as positive compensating factors, they remain some time from materializing into any evident and meaningful impact on NIO's fundamentals.

This leads to the other company-specific overhang on the stock, which is the fact that NIO is likely still years out from GAAP-based profitability. Growing competition in the Chinese EV landscape, paired with decelerating TAM growth, remains risk to NIO's planned expansion of both its top and bottom lines. And the price war that some of the more profitable EV makers like Tesla, Inc. ( TSLA ) and BYD ( BYDDF ) ( BYDDY ) have kick-started earlier this year is of no help either. NIO's unprofitable state also adds pressure to persistent investors' concerns over China-specific regulatory and geopolitical risks discussed in the earlier section, and does not bode well with the ongoing risk-off sentiment in markets, which is corroborated by rival Li Auto's quickly fizzled post-earnings rally earlier this week despite being one of the first Chinese EV pureplay upstarts to eke out profitability.

The Bottom Line

Looking ahead, continued positive progress on NIO Inc.'s longer-term growth initiatives - counting the introduction of new sub-brands to penetrate new lower-tier mass market opportunities, overseas expansion, and continued production ramp-up on NT2.0-based vehicles - will be critical to bolstering its fundamental outlook and underlying value. However, when the built-up value will be reflected in the stock remains an uncertainty as investors' concerns over China-specific geopolitical and regulatory risks continue to overshadow positive corporate earnings results.

Admittedly, NIO's valuation remains attractive at current levels. As discussed in a previous coverage , the stock's current market valuation at a mere 1x estimated sales continues to underperform both its domestic and international peers with similar growth profiles, which makes it a potential longer-term gainer. Specifically, NIO's upcoming entry in the burgeoning Chinese mass market EV category, and continued ramp-up of overseas share gains alongside volume build of higher-margin vehicles, as well as continued technological advancements could potentially point to sustained upsides from current levels over the longer term. Yet, the lack of visibility on China's policy agenda, intensifying geopolitical tensions, and NIO Inc.'s company-specific earnings risks remain near-term risks to consider before rushing in on the compelling risk-reward opportunity.

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