NIO: A gamble on electric vehicle battery technology | Private Equity Weekly

The first quarter of 2024 isn’t off to a bad start for Chinese electric vehicle (EV) company NIO ( NIO ).NYSE: NIO), the year-to-date (YTD) price has fallen sharply by 52%, following a 7% decline in 2023.

Disappointing like this In other words, performance needs to be viewed within the context of the entire industry. The S&P Kensho Electric Vehicle Index also fell. down 7.2% YTD. Additionally, the five largest EV stocks by market capitalization have all seen significant price drops, suggesting NIO is not alone. In fact, Weilai’s decline is not the most serious, Rivian (Rivigne) saw larger declines (see chart below).

However, there are also some underlying reasons for concern about NIO’s deliveries and first-quarter 2024 revenue prospects. On the other hand, the company is making a big push to improve EV battery technology, which could also bode well for the future. Here, I’ll consider two aspects to assess where the stock will go next.

Weak February delivery data weighs on first-quarter 2024 numbers

The company’s weak deliveries undoubtedly cast a pall over its revenue growth expectations for the first quarter of 2024. Deliveries fell 3% annually in the first quarter (Q1 2024), making it the only company other than electric vehicle giant Tesla ( TSLA ) to report a decline.

At the same time, there are two points worth noting here. First, the drop was smaller than Tesla’s 8.5% drop. Secondly, the decline can be explained by the weak performance in February during the Lunar New Year. Housing sales fell 33% this month. In comparison, January and March deliveries grew by a healthy 18.2% and 14.3% respectively.

But this is not an entirely satisfactory explanation. By comparison, other EV companies such as BYD (OTCPK: BYDDF) and Li Auto (LI) saw deliveries grow by 13% and 53%, respectively, in the first quarter of 2024, suggesting that demand for NIO may not be as strong. stable.

Weaker revenue more likely

Considering delivery trends, it’s no surprise that the company expects revenue to decline in the first quarter of 2024 Annual increase of 1.7% In RMB terms (2.2% in USD terms), its guidance range is the midpoint of RMB 10,499-11,087 million (USD 1,479 – 1,562 million). This compares poorly to the modest 3.8% growth in the first quarter of 2023.

Still, recent data suggests there is still some room for optimism. For example, in the fourth quarter of 2023, the company’s actual revenue exceeded the midpoint of the guidance range of $2,204-$2,289 million by 7.2%. If the same scenario repeats in the first quarter of 2024, NIO’s dollar revenue will actually grow 4.8% instead of contracting.

That said, a surprise upside is less likely in the first quarter of 2024 than in the fourth quarter of 2023. In the fourth quarter of 2023, the company had the advantage of a 4.6% year-over-year increase in deliveries, which are now down 3%. However, it does suggest that the numbers could be better than expected.

Long-range battery pack is in production

After the past quarter, NIO is undoubtedly making positive progress. When I last wrote about the stock, the company’s CEO, William Li, had just promoted its long-range battery pack via a 14-hour livestream. As of now, this battery pack has begun mass production and is expected to be available for purchase starting this season.

Since the purchased battery pack is expensive, in line with the price of the company’s ET5 sedan, it will only be available for lease initially. Buying a car without a battery pack is a smart move and could make Nio more competitive.When the company launches the service Back to 2020, thus reducing the upfront cost of purchasing a car by 20%. This has worked out well for the company. Sales from 2021 to 2023 are more than double those from 2018-20.

Additionally, cost reduction is more important than ever as price competition among manufacturers increases, impacting profit margins. For example, NIO’s gross profit margin will drop from 10.4% in 2022 to 5.5% in 2023. If the latest battery packs find favor with customers, the profit decline could be curbed somewhat.

Upgrading electric vehicle technology through battery replacement

On the other hand, the company continues to expand battery replacement partnerships with Chinese electric vehicle manufacturers. When I last checked, it was already partnered with Changan and Geely Holding. Chinese manufacturers Chery and JAC are now also on board.

In addition to the early signs of profit in battery replacements it noted last time, the company now says it has completed 40 million replacements. The company also plans to add 1,000 battery-swapping stations to its existing 2,300 this year, reflecting its confidence in the technology.

low market multiple

With NIO shares now trading at their lowest levels since mid-2020, the stock’s trailing 12-month (TTM) price-to-sales (P/S) ratio has fallen to 0.95x. When I last checked, it was already a low 2.1x compared to peers. While other EV stocks have also plummeted, NIO is now cheaper than all of them (see chart below).

Based on the average TTM and forward P/E ratio of the five largest EV stocks, NIO stock currently has room for at least 3x upside.

What’s next?

But the big question is whether the upside can be realized soon. I wouldn’t be too pessimistic. The company’s fourth-quarter 2023 revenue beat expectations, and the same is likely to be true when quarterly numbers are released later this month. While its deliveries have been weak, February’s Lunar New Year-related weakness could be viewed as a one-off if it shows continued growth going forward. But that remains to be seen.

The company does have new ideas, though. The company has made rapid progress from demonstrating the effectiveness of the remote battery pack to starting production. The pack is also expected to be available soon. It is also making progress with other EV manufacturers on battery replacements, which have the advantage of shorter charging times.

Although the development of electric vehicle technology is impressive, it has not yet paid off. At the same time, its numbers look disappointing. But considering the share price has fallen so much, I don’t see any point in selling the stock now. Let’s wait and see what happens next, there are indeed positive possibilities. I retain my hold rating on NIO.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.