TSLA - NIO Resilient During Price Wars

Summary

• We remain bullish on NIO.
• We expect NIO to boost its topline growth, driven by China’s economic recovery and the company’s expansion into Europe.
• While we believe Tesla’s price cuts may pressure NIO deliveries in the near term, we don’t expect the price wars to harm NIO in the mid to long term.
• We continue to believe NIO is well-positioned to outperform in FY2023 and recommend investors buy the stock as it dips below October levels.

We continue to be buy-rated on NIO ( NIO ). We believe NIO is well-positioned to beat its deliveries last year and expect the company to boost its top-line growth, driven by China's re-opening and the company's expansion overseas. We previously wrote on NIO in mid-December, arguing that the company provides a favorable rebound investment opportunity as China lets its economy off the leash. Since our note in December, the stock is down around 13%. We believe the company took a hit as Tesla ( TSLA ) surprised the EV space, slashing prices by up to 20% , and after the slowdown in production due to the Lunar New Year Holiday. We're too not concerned about the price wars impacting NIO in the mid-to-long run as we expect NIO to be well-positioned to experience demand tailwinds in the Chinese market and as it expands to Europe with its Battery-as-a-Service (BaaS) program.

Fundamental business is still intact and expanding

NIO stock is down 56% over the past year, but we believe the company's fundamental business is still intact and growing. We expect NIO to grow in FY2023, driven by its expansion into European markets and into the energy business.

We're constructive on NIO's efforts to differentiate itself from other EV markers by expanding its Battery-as-a-Service (BaaS) program through Power-Swap-Stations ((PSS)). NIO's stations allow customers to pay a monthly subscription fee on top of the traditional plug-and-charge model. The PSS is an attractive option for customers as it will enable them to cut the wait time on charging their vehicle by simply exchanging their empty battery for a charged one. Currently, the company operates over 1,300 stations in China and 10 in Europe. NIO's goal is to increase the PSS to 1,700 in China and 120 in Europe by the end of the year. We expect the company is on the right track to expand overseas and broaden its PSS presence. We believe NIO is well-positioned to beat its deliveries last year after China's reopening, reversing the nation's Zero COVID policies that had caused an economic slowdown in the past. We recommend investors buy the pullback.

Price war triggered

We believe Tesla's price cuts of up to 13.5% in China triggered a price war in the EV space and took a toll on EV manufacturers in the first month of the year, but we don't expect this to pressure NIO in the mid-to-long term. NIO, XPeng ( XPEV ), and Li Auto ( LI ) recorded sales declines this January; we believe the weakness is the result of disrupted production due to the weeklong Lunar New Year Holiday and Tesla's price cuts. NIO reported 8,506 vehicle deliveries to mainland customers, recording a 46% decline from December and an 11.9% drop Y/Y. While the drop is not insignificant, NIO is relatively resilient compared to XPeng, where deliveries dropped nearly 54% from a month earlier. Still, in comparison, Tesla's sales in China surged 76% in the second week of January compared to the first week. XPeng followed Tesla's footsteps and lowered prices by up to 13% on some of its models. We don't expect NIO to reduce prices, but we're not too worried about Tesla's price cuts pressuring NIO in the mid-to-long term.

We believe NIO and other EVs in China have the advantage of having a more diverse product mix than Tesla. Currently, Tesla only has its Model 3 and Model Y vehicles offered in China, while NIO and BYD provide a broad range of alternatives; NIO has six vehicle options, while BYD has 60 . We believe Tesla's aging product line is a real issue, even if the price cuts in China boost demand in the near term. We believe Tesla is in trouble if other EV start-ups in China, including NIO, choose to slash prices significantly and simultaneously provide a wider variety of choices. Tesla's market share in China is also shrinking, from 15% in 2020 to 10% in 2022, according to China Passenger Car Association (CPCA) data. While Tesla's price cuts have heated demand for the company's vehicles, we don't believe this means it's game over for other EV start-ups, especially not NIO.

Another factor in the price war situation is that NIO targets a high-end EV market north of $40,000. NIO's vehicles exist in the price range of around $49,000 to $69,000. We believe NIO's customers should not be too impacted by Tesla's price cuts as we expect NIO retains a unique position in the EV market as the Chinese Tesla, with a foot in EV manufacturing and in the energy business.

Valuation and word on Wall Street

We believe NIO is relatively cheap, trading at 2.2x EV/C2023 Sales versus the peer group at 2.3x. We believe NIO's valuation is attractive at current levels and recommend investors interested in entering the EV market buy into NIO.

Wall Street shares our bullish sentiment on the stock. Of the 31 analysts covering the stock, 26 are buy-rated, and the remaining are hold-rated. The stock is currently trading at $10 per share. The sell-side median price target is $17, while the mean is $18, with a potential upside of 65-77%.

The following tables illustrate NIO's sell-side ratings and price targets.

What to do with the stock

We believe NIO is well-positioned for a long-term price rally as it rebounds from the eye of the harsh macro environment. We expect NIO to experience demand tailwinds as it enters and expands its place in the European EV market. We're also constructive on the company's expansion into the energy business as it broadens its power-swapping stations. We expect the stock price to be volatile in the near term due to the slowdown of production during the Lunar New Year Holiday and Tesla's price cuts. Yet, we believe the pullback over the past year provides a favorable entry point into NIO's long-term growth.

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