BYDDY - NIO: Returns On Battery Swap Can Take Their Time

2024-01-03 02:18:41 ET

Summary

• NIO might have had an underwhelming 2023 in the stock markets, but it started the year well with better than expected vehicle delivery figures for Q4 2023.
• However, its full year revenue growth is still expected to slow down significantly in 2023. Notably, it doesn't compare well with peers. Ballooning operating losses don't help either.
• There's potential in its long-endurance battery and battery swap technology, but the outcome remains to be seen.

China’s electric vehicle manufacturer NIO ( NIO ) saw an underwhelming 2023 at the stock markets with a 7% loss in value at year’s end. However, it has started 2024 with good news, at least in terms of delivery figures.

The company has reported a 31% increase in vehicle deliveries in 2023. Its 18,012 deliveries in December are the third highest on record, behind those in July and August (see chart below). But how far can this translate into a positive stock market performance?

Focus on batteries

NIO certainly has a few ideas for creating its own niche in the EV market. And that’s through its focus on batteries. Recently, its founder and CEO, William Li put the company’s long endurance battery pack to the test by live-streaming his 14-hour road trip across China. The 1,000-kilometre range battery ended the trip with a 3% charge remaining.

It's also developing its battery swap technology, which marks a break from the usual method of charging batteries. It can be swapped for a fully charged one in less than three minutes, making it a time efficient charging solution. As the current price of a battery pack is over USD 42,000, NIO recommends buying it on a subscription instead. This could also make for a more visible revenue model for NIO if and when the technology picks up pace.

It’s not alone in its faith in technology, either. Late last year, it entered into agreements with China’s Changan and Geely Holdings, both of which feature among the top 10 NEV companies in the country (see chart above), far higher than that for NIO. They will collaborate on the construction of a battery swap network and models.

There are already signs of some success with the technology. The company’s battery swap business is said to have delivered profits in Shanghai already, where these stations average 80 orders a day. This is higher than the 60 orders required per station to clock profits.

Not profitable so far

However, it could take a while before NIO becomes profitable as such. In the meantime, the company is struggling with losses. Its trailing twelve months [TTM] operating loss has been growing every quarter (see chart below) as its operating expenses grow.

In the third quarter of last year (Q3 2023) alone, the SG&A expenses, in particular, grew by 33% year-on-year (YoY) and 26.3% sequentially due to growing both personnel and sales and marketing activities as it launches new products.

While it’s still profitable on a gross basis, the gross margin has declined on a TTM basis for the past two years too. Declining margins aren't foreign to EV makers, though as the market heats up. Tesla ( TSLA ), the biggest EV company by market capitalisation, also faces the same challenge .

There is reason to be hopeful though. NIO has seen its gross margin improve significantly to 8% in Q3 2023, the highest in four quarters. This is despite a 55.7% increase in the cost of sales, as revenue growth was very healthy at 46.6%.

Mixed outlook

The revenue growth is unlikely to be sustained, however. For the final quarter of 2023, NIO expects revenue to come in the range of USD 2204-2289 million. If it comes in at the midpoint, the full-year revenue growth will come in at 6.7%, the slowest growth in five years.

With the deliveries coming in 4.3% higher than the midpoint of the target range in Q4 2023, however, the revenues could come in slightly higher at 8%, though. It's still a come-off from the 26.6% rise seen last year in any case.

There’s some room for optimism, though. Analysts expect a pickup in revenues starting in 2024 and going up to 2026. However, it’s not before 2027 that it’s expected to become profitable. To be fair, it’s hardly the only EV company to be unprofitable at present. Among the biggest five EV stocks by market capitalisation besides NIO, only Tesla, BYD ( BYDDF ) and Li Auto ( LI ) are profitable so far.

But here’s the rub. The two companies besides NIO that aren’t, Rivian ( RIVN ) and VinFast Auto ( VFS ) look much better in terms of revenue growth. While analysts expect Rivian to grow by 22.5% in 2023, VinFast is expected to grow by 44.7%.

The market multiples

It’s in this context that the stock’s TTM P/S needs to be seen. It has the lowest TTM price-to-sales (P/S) ratio 2.1x among its peers after BYD(see table below). The forward P/S for 2023, which is not very different from the TTM considering that three-quarters of the numbers are already incorporated in it, is also in the same position.

While market multiples can indicate that a stock is undervalued, in the context of the discussion above, there’s good reason for it. NIO isn’t yet profitable and its revenue growth is also expected to lag behind peers in 2023. I would be tempted to consider the forward P/S for 2024 instead, but I’d like to see real traction in its numbers before going by them.

What next?

As one of the ten NEV companies in China, NIO has much potential, particularly as its battery-related developments go. A live stream of its long-endurance batteries and the collaborations on its battery swap technology, give it weight.

However, for now, NIO is struggling with ballooning operating losses and revenue growth is expected to slow down despite healthy deliveries as per its latest data. Its soft market multiples would be attractive at any other time. But considering that its growth is slower right now compared to peers, takes away from it.

Nevertheless, things could improve in 2024. The gross margin already showed an improvement in Q3 2023. Further, analysts expect double-digit revenue growth in 2024. But I’d like to wait to see further progress before buying it. I’m going with a Hold on NIO for now, though the rating can change sooner than usual if its performance picks up.

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