LI - Why I Believe NIO's Valuation Could Double

2023-04-05 18:32:14 ET

Summary

• NIO Inc. reported a strong rebound in delivery momentum in February.
• Sedan deliveries are now sitting at 7 thousand units monthly and represented approximately 70% of total deliveries in March.
• NIO shares remain fundamentally undervalued as China's economy reopens.

Shares of electric vehicle ("EV") manufacturer NIO Inc. ( NIO ) have not been going anywhere in the last six months, and the firm's delivery card for the month of March also didn't do much for the stock's price momentum. However, I believe this could change in FY 2023 as China's economy reopens, and sedan deliveries continue to ramp up.

NIO did see a strong rebound in its delivery momentum in February, which is when deliveries soared 98% compared to the year-earlier period and NIO delivered more than 12 thousand units. March deliveries also remained solidly above 10 thousand monthly units, and NIO continues to aggressively scale its sedan production, which has now risen to a near-70% share. With shares still being cheap based off of revenues, I think NIO's valuation could double over the next 2-3 years!

NIO's deliveries rebounded in Q1'23

After a stressful and challenging year, 2023 could see a major turnaround of NIO's delivery prospects. The key reason for this is that the Chinese economy is reopening and the International Monetary Fund ("IMF") projects China's GDP to grow 5.2% in 2023 , as opposed to just 3.0% last year. Due to the passing of the Chinese New Year and a reopening economy, NIO saw a strong rebound in its February delivery volume. NIO's deliveries didn't grow as strongly in March (3.9%) as they did in February (98.3%), but the monthly delivery volume is now back to over 10 thousand units again.

NIO delivered 10,378 electric vehicles in March, delivering about 50% more EVs than the third-ranked XPeng Inc. ( XPEV ), which delivered only 7,002 electric vehicles to customers last month. The biggest momentum clearly is with Li Auto Inc. ( LI ) right now, which delivered 20,823 electric vehicles last month. Li Auto had twice the monthly delivery volume as NIO and delivered almost 3.0 X more vehicles than XPeng. Li Auto has had a massive success with its Li One sport utility vehicle, which has been a best-selling car and sees consistently strong sales. Since Li Auto also has simpler production lines due to its core focus on just one SUV product, the Chinese company was able to ramp up production and deliveries faster than its EV rivals.

(Source: Author)

NIO's sedan deliveries are now sitting at about 7 thousand units per month

What underpins NIO's delivery growth has been the ramp in ET5 and ET7 production. The ET5 and ET7 are sedan models, and they have replaced a lot of NIO's initial growth stemming from its SUV portfolio. NIO delivered 7,175 electric sedans in March, which calculates to a nearly 70% sedan delivery share, showing a 10 PP improvement month over month. Clearly, sedan production and deliveries are now driving NIO's total delivery results, and I expect NIO to grow its sedan delivery share to 75-80% by the end of the year.

(Source: Author)

NIO's valuation could double

NIO is currently valued at less than 1 X FY 2024 revenues, which is too low a valuation multiplier considering that China's economy just reopened and that NIO rebounded fast from the Chinese New Year-related sales slump. With China's economy set to grow almost twice as fast in FY 2023 as it did in FY 2022, I believe the delivery situation could improve for NIO... and with it the company's valuation prospects. For three years, consumer demand has been suppressed due to COVID-related lockdowns, and now China (and NIO) face the potentially powerful unleashing of pent-up demand. NIO's revenue prospects are also very cheap compared against other EV rivals... and NIO is growing faster than XPeng right now.

Compared against its historical P/S ratio, NIO has serious revaluation potential. NIO has traded at an average P/S ratio of 1.95 X in the last year, and I can totally see NIO return to the valuation level if the company continues to scale production of its ET5 and ET7 models upward in FY 2023. In terms of revenues, NIO is expected to continue to grow rapidly, with forecasts calling for year-over-year revenue growth of 45% next year. This year, analysts expect 74% growth, so NIO's growth prospects are not nearly as muted as the market prices in right now.

Risks with NIO

The biggest risk right now is that the reopening of China's economy is not leading to a boom in demand... which would support NIO's production and delivery growth prospects. A slowdown in the ramp of NIO's sedans is also a potential risk factor that could weigh on the EV manufacturer's valuation. The biggest operational risk, as I see it, is that a price war in NIO's core market erodes vehicle margins or leads to a delayed profitability date.

Final thoughts

NIO Inc. has seen a nice production and delivery rebound in February, and the March delivery level was above the psychologically-important 10 thousand unit mark. The sedan delivery share increased to almost 70% in March, up from 58.6% in the previous month, driven by accelerating ET5 and ET7 production. NIO's shares are also still quite cheap, and the company is expected to see a significant revenue ramp in the coming two years that I believe is not yet fully reflected in NIO's valuation.

Given that NIO Inc. has traded at a much higher valuation ratio despite lower monthly production/delivery figures last year, I believe NIO's valuation could reasonably double... and shares wouldn't be overpriced then, either!

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