XPEV - NIO: When It Rains It Pours

Summary

• In a surprise announcement, NIO Inc. lowered its delivery outlook for Q4’22 yesterday, just days after its NIO Day event.
• The guidance adjustment is the latest setback for the EV company.
• Negative sentiment overhang and more muted growth prospects in FY 2023 could result in NIO retesting its last lows.

Shares of electric vehicle ("EV") manufacturer NIO Inc. ( NIO ) dropped 8.3% yesterday after the company made a surprise announcement that informed investors of a guidance cut for the fourth-quarter. Citing the recent COVID-19 surge in China, NIO lowered its Q4’22 delivery forecast quite materially from a prior range of 43,000-48,000 electric vehicles to 38,500-39,500 electric vehicles, showing a downgrade of 14%. I believe that given the disappointing news, and sharp market reaction in response to the announcement on Tuesday, that shares of NIO are going to retest their 1-year lows at $8.38 in the near future!

Updated delivery target for the fourth-quarter

NIO made a surprise announcement yesterday in which the EV company withdrew its delivery guidance for the fourth-quarter due to persistent supply chain challenges and “disruptions on delivery and registration procedures.”

NIO now expects to deliver 4,500-8,500 EVs less than guided for just two months ago. The EV company is on track to deliver 43,000-48,000 electric vehicles in Q4'22 which, at midpoint, translates to approximately 82% year over year growth. In the year-earlier period, Q4’21, NIO delivered 25,034 electric vehicles. The new outlook for the fourth-quarter now implies that NIO will deliver between 121,000-122,000 electric vehicle in FY 2022 which implies a year over year growth rate of 32% on the low-end and 33% on the high-end of the new guidance range. In FY 2021, NIO delivered 91,426 electric vehicles which at the time represented a year over year growth rate of 109.1%.

NIO's updated fourth-quarter outlook caps off a year that has been marked by multiple setbacks for NIO and other EV companies. NIO, in part due to supply chain constraints and COVID-19 lockdowns in China, has seen a highly volatile delivery picture in 2022 that has resulted in monthly deliveries ranging wildly from only 5,074 electric vehicles in April to 14,178 electric vehicles in November 2022. What went well for NIO in FY 2022, however, was the delivery ramp of its sedan models (ET5 and ET7) which have been driving NIO’s delivery growth in recent months.

XPeng already warned the market of limited delivery possibilities

NIO isn’t the only company that is disappointing the market with its Q4’22 delivery results. What was likely already a warning sign for the EV sector was that XPeng (XPEV) issued a very light forecast for Q4’22 deliveries in November which called for just 20,000-21,000 electric cars to be delivered to the company’s customers due to supply chain problems. To give this perspective, XPeng’s Q4’22 delivery projection implies a ~50% year-over-year decline in deliveries in the fourth-quarter.

NIO’s new EV products and delivery possibilities in FY 2023

NIO officially introduced two new SUVs at its NIO Day in Hefei last week which included the EC7 -- a mid-large size coupe SUV -- and the ES8 -- a six-seat smart electric sport utility vehicle -- with prices ranging between $70,000 to $84,000, depending on battery pack configuration. Both new models are expected to see the start of deliveries in mid-2023.

NIO faces muted delivery prospects next year, however, despite a growing and more diverse product line-up and it is unlikely that NIO will be able to return to its triple-digit annual delivery growth rates of the past. While a general reopening of China’s economy could provide a boost to reservation and delivery growth, especially for NIO’s new models like the ET7, I believe that persistent problems with the supply chain and high raw material costs continue to pose a formidable challenge to the Chinese EV sector in general. Additionally, a resurgence of COVID-19 and new lockdowns across Chinese manufacturing hubs are a very credible risk for NIO’s production ramp in FY 2023. I expect a delivery volume of 150,000-160,000 for NIO next year, but I could be completely wrong about this if China closes down its economy again.

NIO’s valuation

Shares of NIO have been brutalized this year, losing 68% of their value. As a result, the market is pricing much less optimism into NIO’s valuation than at the beginning of the year, but the company faces challenges going forward. As much as I like NIO’s prospects, growing product portfolio and sedan-driven delivery growth, there is a good chance that the EV company will retest its lows after yesterday’s surprise announcement.

NIO’s P/S ratio currently is 1.2 X and the lowest when compared against its two closest rivals in the Chinese EV sector, Li Auto ( LI ) and XPeng.

Risks with NIO

Heading into FY 2023 and considering NIO’s lowered delivery outlook, I believe NIO will ramp up deliveries at a much slower pace next year than in the past. The supply chain as well as new COVID 19 outbreaks that could delay a full reopening of the Chinese economy are severe risk factors for NIO and other electric vehicle manufacturers. A more specific NIO risk, as I also explained earlier, is the decline in vehicle margins which have contracted in FY 2022 due to higher raw material costs. As a premium EV manufacturer (with higher vehicle margins than its rivals), NIO would likely be severely affected by continual margin pressure.

Final thoughts

2022 was not a great year for NIO, and the company is ending the year on a disappointing note as well. The downgraded NIO Inc. delivery outlook for Q4’22 confirms my suspicion that strong increases in valuation after presentation of November delivery results were unjustified given the bleak short-term delivery outlook. XPeng already warned of slowing delivery growth in the fourth-quarter and NIO’s down-graded delivery outlook casts doubts over the company’s delivery prospects for FY 2023. As much as I like NIO Inc., I believe shares are going to retest their 1-year lows!

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