Home » NIO: Delisting, Supply Constraints, And A Faltering Chinese Economy

NIO: Delisting, Supply Constraints, And A Faltering Chinese Economy

by WorldFinance
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The NIO stock (NYSE:NIO) has been range-bound at the $20-level in recent months after the run-up through June on accelerating production and delivery ramp-up improvements as China’s monthslong COVID disruptions to supply chains started to ease. Other positive catalysts that have supported the stock in its current $20-range after its climb from an all-time low in the $10-range in mid-May include favourable policy support from the central and municipal Chinese governments on shoring up electric vehicle (“EV”) adoption in the region, as well as NIO’s aggressive growth plans such as the upcoming introduction of new sub-brands to better penetrate mass market opportunities.

Yet, ongoing weakness in economic sentiment spanning a worsening domestic property slump and slowing consumption in China, as well as the fluid COVID situation remain prominent risks weighing on the NIO stock’s near-term performance. The recent slew of voluntary exits from U.S. exchanges by state-backed companies have also renewed concerns of delisting risks stemming from the “Holding Foreign Companies Accountable Act” (“HFCAA”) enforced by the U.S. SEC.

Heading into NIO’s second quarter earnings call, the key focus area beyond its production and delivery ramp-up efforts is where the Chinese EV maker stands when it comes to managing regulatory risks, as well as how it will fare within the increasingly competitive landscape while broader macro uncertainties continue to worsen. On one hand, NIO’s progress in ramping up volumes – a key focus area for most automakers within the industry’s supply-driven operational environment – will be a core driver of the “fundamental” factor weighing on its valuation prospects. Meanwhile, on the other hand, NIO’s position amid mounting regulatory risks and broad-based market uncertainties will determine the “multiple” factor weighing on its valuation prospects.

The following analysis will explore both perspectives and their related implications on the NIO stock’s outlook. We continue to caution regulatory risks as the largest factor that has been capping the stock’s ability in unlocking its true valuation upsides, despite continued demonstration of resilient fundamentals from the underlying business.

2Q22 and July’22 Production and Deliveries

As previously discussed in our most recent coverage on the stock, NIO’s record-setting deliveries during the second quarter, especially in June, continues to underscore its impressive strength in re-ramping productions as the worst of supply and logistics constraints resulting from recent COVID restrictions in core Chinese manufacturing hubs start to ease.

Specifically, productions of the newest ET7 sedan, which began in March, was a highlight with 40x growth during the second quarter. Despite a slight setback in July due to limited supply of casting parts used in the production of its ET7 sedans, NIO has maintained momentum in ramping up productions with 2,473 units of the premium electric sedans delivered in the first month of 3Q22. This represents a delivery run-rate of at least 7,400 units of the ET7 in the current quarter (approx. +10% q/q), especially given its ongoing efforts in “working closely with supply chain partners [to] accelerate vehicle production in the following months of the third quarter of 2022”. The positive results continue to underscore NIO’s strength in navigating through unprecedented disruptions from supply chain bottlenecks across the auto industry.

Key Focus Areas Weighing on NIO’s Fundamentals

Looking ahead, NIO is expected to post an even stronger second half of the year, with the introduction of a strong product pipeline that adds the newest ES7 SUV to its sales mix later this month, alongside updated 2022 ES8, ES6 and EC6 SUVs. Favourable policy support in China will also continue to be a boon to NIO’s operational performance in the second half of the year.

1. Near- to Medium-Term Focus

Specifically, from a fundamental perspective, the key focus area remains on NIO’s ability to ramp up productions and deliveries within the supply-driven auto industry as mentioned in the earlier section (see deeper dive ). The lack of supplies and lingering logistics constraints from pandemic-era disruptions have upended the auto industry over the past year, especially for Chinese OEMs due to the region’s strict COVID Zero policy which remain a pronounced downside risk for NIO. This is further corroborated by the Chinese EV maker’s struggle with supply shortages in July that have impacted its ET7 sedan and EC6 SUV volumes per its latest delivery update, highlighting how NIO’s production and delivery progress have largely been determined by “supply availability” over the past year.

Investors will remain focused on updates regarding NIO’s working relationship with suppliers at the EV maker’s upcoming earnings call to gauge whether production can accelerate through the third quarter and the remainder of the year as management had promised. Another key focus area remains on whether any positive progress has been made since NIO’s July delivery update press release, which in our view would imply improving fundamentals, lifting the stock from its current range-bound situation.

2. Longer-Term Focus

Over the longer-term, NIO’s progress on growing its market share through globalization, and primarily, domestic expansion with newly planned sub-brands to better penetrate mass market opportunities will be the core piece in bolstering its fundamental performance. China remains the largest EV market, underscoring NIO’s growth opportunities ahead as it works to extend its reach beyond the premium market.

Specifically, China is expected to sell a new record of at least 6 million EVs by the end of the year, which would be double of the 3 million EVs sold in 2021. In July, China’s EV sales represented more than a quarter of total new car registrations, underscoring the rapid rebound in demand following stringent COVID mobility restrictions in the preceding months. This continues to serve favourable tailwinds for domestic EV makers like NIO, which currently represent close to a fifth of China’s EV sales, and growing. The statistics also validate current market observations of no material demand destruction observed across the Chinese EV market despite the recent economic slowdown, underscoring the industry’s resilience and sustained growth as supply constraints – the primarily roadblock to further expansion – continue to ease.

To better penetrate the growing domestic opportunities, NIO has been diversifying its portfolio of premium offerings to address demand across various price and vehicle segments, as observed through its recent introduction of newly designed mid-sized SUVs, as well as premium sedans. More importantly, NIO’s upcoming launch of new lower-priced sub-brands focused on the mass market will further its fundamental growth over the longer-term.

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