NIO is one of China’s leading consumer EV manufacturing companies. After the company’s ADRs listed on the NYSE last year, the stock has become one of the best-performing companies in the market. The stock has been rising on account of a flurry of new tech-hungry investors and the prospects of a Joe Biden victory. Biden is a vocal proponent of electric mobility.
The stock is up nearly 650% this year and is trading at $27.5.
Cash flow troubles
NIO has passed through a very turbulent phase this past year. As of October last year, the company was said to have burned through nearly $6 billion and was facing severe cash flow and liquidity issues. The struggling company then received a $1 billion cash infusion from a group of Chinese government-backed investors and another investment from Chinese tech giant Tencent in June. The stock has also benefited from the Chinese Government’s decision to extend its EV subsidy program until 2022 after scrapping the plan last year.
Strong September numbers
NIO delivered 4,708 vehicles in September 2020, a new monthly record representing a strong 133.2% year-over-year growth.
It delivered 12,206 vehicles in the third quarter of 2020, representing an increase of 154.3% year-over-year and exceeding the higher end of the Company’s quarterly guidance.
The company’s strong performance has led to a flurry of broker rerates of its stock, the most recent being from JPMorgan. Morgan Stanley and UBS put out bullish outlooks in August. (CMC)
Promising EV market
According to JPMorgan analyst Nick Lai, EV penetration in the Chinese market is on track to increase from barely 5% last year to nearly 20% over the next 5 years. Lai reckons that fuel-powered cars and EV’s can achieve cost-parity as soon as 2023, as long as production can scale with demand. In an interview with Yahoo Finance, Lai said, “China is witnessing ‘a rising tide lifts all boats’ phenomenon, which is not only leading to a fast-growing new energy vehicle (NEV) addressable market but also benefiting suppliers relevant to the broader EV supply chain.”
One of NIO’s biggest strengths is the sheer size of the burgeoning Chinese EV market, which is supposed to big enough for the company to scale to substantial production levels without even considering exporting to international markets.
According to the Chinese Association of Automobile Manufacturers, the EV market size in China will be at least 3 million new vehicles every year, in the very worst case.
Moves to garner more market share
The company has successfully ironed out its liquidity issues and become the strongest home-grown EV player in China. Its products are also considerably cheaper than those of Tesla, its main rival.
Recently, the company also announced a very unique BaaS (Battery as a Service) offering aimed at making cars substantially cheaper and spreading out costs over time. Under the program, the upfront cost of the car drops by about $10000, a substantial amount, and customers pay about $145 a month for the battery, which is the average spent by Chinese commuters on gasoline. (Investor Place)
The company is also the only EV manufacturer to successfully implement battery swapping technology. (Seeking Alpha)
The bottom line
NIO faces significant challenges in terms of scalability, competition from domestic players, and cheaper options from main rival Tesla, it is in a prime position to capitalize on the coveted Chinese EV market.
However, the stock’s recent bull run might be a little over-extended. The price trend now depends on its Q3 earnings report due to be published next month.
Hence investors should wait for clarity on earnings before taking advantage of a potential buying opportunity.