NIO is Revolutionising the Electric Vehicle Industry

Updated: Nov 25, 2020



By Timothée Roques, Derome Robinson, Emil Frey, Analysts at LSESU Trading Society


Company Structure and Performance:

NIO label themselves as pioneers within the Chinese premium electric vehicle market. They believe in revolutionizing the automotive industry, redefining what premium service and a positive user experience means for a car company. This, along with their commitment to

creating a better, more sustainable future is at the forefront of what they do and in our opinion, their future looks bright. Their Q3 earnings report was released on the 17th November 2020, showing they had delivered 12,206 cars for the quarter (8,660 ES6s, 3,530 ES8s and 16 EC6s). This was an 18.15% increase in car deliveries from 2020 Q2 and a 154.34% increase in comparison to the same time last year. These numbers are a great indication of future growth; In fact, in October 2020, deliveries hit a monthly record of 5,055 so expect even better performance in Q4 2020.


In terms of actual earnings, NIO beat analyst expectations again for the 3rd time this year, constantly outperforming the general consensus. Take it from the company's management themselves, earlier this year NIO raised approximately $1.5 Billion through offering new shares on the secondary market. They chose to use some of this money to increase their stake in NIO China from 75.9% to 86.4% (approximately). For background knowledge, NIO agreed to sell a percentage of their company to Chinese investors when they were on the verge of bankruptcy. The fact they are buying some of this back so early may indicate the confidence they have in the future of their business as they are choosing a larger share over the other things they could've spent that money on.


Car Models:

ES6 - A high-performance five-seater premium SUV coming in sporty, performance and premier versions

ES8 - A seven-seater and six-seater version, labelled as the cheaper competitor to Tesla’s Model X

EC6 - A smart premium electric coupe SUV (NEW) NIO is also looking to release more vehicles, priced in order to compete with more of their competitors models such as the Model 3 sedans by Tesla.


NIO ES8, Source: https://www.nio.com


Lithium and Batteries:

Lithium is at the heart of the electric vehicle revolution. Currently, the lithium market is oversupplied and prices of lithium-ion batteries are falling. This is great news for companies such as NIO (and their investors) as it means they are likely to reach profitability quicker, opening themselves up to a larger pool of believers.

Source: Globaldata.com


The correlation between EV battery demand and lithium consumption is evident, and so the price of this commodity is an important factor to consider when looking into the future of EV companies. Especially since battery costs account for anywhere between 20-30% of the total car costs (according to a MarketWatch article - Data Source: Benchmark Mineral Intelligence)


Key Drivers:

To justify our positive outlook on the company, we would like to draw on a few key drivers that we think may increase the value of the company in the near future. Firstly, we believe that NIO is constantly gaining more and more attention. This increased presence can be seen physically through more car deliveries or through the constant articles being published in the news. Analysts are constantly raising price targets and invoking large amounts of

interest.


Secondly, China remains the world's largest EV market with around 2.3 million electric vehicles in 2019 (far exceeding the US and Europe), almost half of the global stock of EVs. Despite this, only 5% of China’s vehicles are electric. With NIO’s dominant position in China, and the Chinese government’s move towards more environmentally friendly vehicles, there's a large total addressable market they can take advantage of. To add, Asia will likely be the only region in the world with actual GDP growth in 2020 and 2021 according to BNP Paribas and so NIO, being based in the largest Asian economy, may benefit greatly from this in the near term. (NIO also has plans to expand internationally; starting with Europe in 2021).


“Electric vehicles are seen as the future in China, with market size and demand continuously growing, and it is expected that electric vehicles will make up between 25 and 50 percent of the country’s passenger vehicle market by 2025” - Statistica


In China, 21.44 million passenger vehicles were sold in 2019. To emphasise, let's assume it will be 20 million in 2025 and instead of 25-50% we chose 20%. This would equate to 4 million EV cars being sold. If NIO even took just 0.5% of this, they’d be selling 200,000 cars. An analyst at Bank of America forecasted that NIO’s share of the Chinese EV market would rise from 2% in 2019 to 9% in 2022 according to Bezinga, so this presents a positive outlook for the company.


Valuation:

In order to deduce NIO’s fundamental value, we have made a Comparative Company Analysis of NIO with its two strongest rivals XPeng and LiAuto. Given that 2 of the three carmakers are still reporting losses, each company’s Enterprise Value was measured against its revenues of the last three years. Our results indicate that NIO’s fair share price would be $51.58 whereas it is currently trading at a market price of only $48.53 per share. This means that in comparison to LiAuto and XPeng, NIO is 6.6% undervalued.


Technical Analysis

If fundamental analysis leads us to believe that NIO’s future is most likely to be prosperous and that the company’s stock value is expected to reach impressive summits, technical analysis on the other hand tells us to be more cautious on short-term variations of the asset, without ruling out the possibility of sustainable growth.

Source: TradingView


Our analysis will be conducted in 2 parts, we will start by going through the short-term value fluctuations of NIO’s stock, then we will examine its long and intermediate trends.


First, we can compute that NIO’s stock value has witnessed an average daily growth rate of 2.2% the last 36 days, which means that, had you invested in NIO on the same day last month, then the value of your assets would have doubled today. For reference, NASDAQ had an average daily growth rate of 0.1% in the same time period. On top of that, 9-day rates of change attain monumental values, reaching over 25% 3 times in 3 months. However, concerns may arise as to whether NIO’s growth is sustainable. Indeed, we can see large upwards spikes in the RSI and MACD oscillators which result in sudden bearish momentum, as illustrated by the white double-arrow on September 13, where the price dropped from $54.20 to $42.44 in a matter of hours, representing a 21.7% dip in the stock’s value. However, these pullbacks never seem to be too consequential, they merely represent an attempt of the market to regulate itself. Consequently, we see that even though NIO’s stock appears to be quite volatile, we are still confident in its ongoing upwards trend. This assurance is further reinforced by the diverse powerful trend lines we can sketch on the stock’s chart. We observe that the main significant resistance line (red) was broken through on November 1. From this point onwards, the stock’s growth rate unquestionably increased, which leads us to pin down a new support line (orange), which predicts intermediate-term sustained growth.


Risks:

- NIO’s beta value is 2.61, making it one of the more risky assets. With upwards movement (+1,152.42% this year) mainly stemming from exceeding expectations, panic selling can easily be triggered if people start to question their outlook. Beware of unreliable sources that may be trying to cause these reactions with a recent example being Citron Research. Although, this high beta value leads to higher expected stock returns via models such as CAPM, thus leading to future overvaluation which could be more beneficial to a short term trader.


- The company’s financial health in its current state is questionable, with negative gross profits and operating cash-flow, other investors could become doubtful if their quarterly and annual reports don’t hold up. However, it is important to consider that Tesla was also in a similar financial situation going back to 2016 and before, and is now in a much more stable position.


Conclusion:

In terms of how to play this trade, there are many ways. Over the last week, the stock has been currently testing the $50 price level. In comparison to previous weeks, the upwards momentum hasn't been as strong and so we wouldn't recommend a buy here unless you were planning to hold for the long term (late 2021 onwards), remaining aware of any risks that may prevent NIO from performing well.


In terms of a medium term buy, we’d wait to see if there was a pullback due to the stock being close to overbought territory. Entering at a price of around $47.50 and opportunistically taking profits at $55-60 if another large bullish candle is created that we can benefit from. Based on past pullbacks, these have in turn acted as supports for future price stability so it would be expected for the next pullback to behave in a similar manner; in that situation, it would be more beneficial to hold the stock for longer.



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