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Education Series: Single-Stock ETPs

NIO: A Chinese Carmaker Going Global

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Websim is the retail division of Intermonte, the primary intermediary of the Italian stock exchange for institutional investors. Leverage Shares often features in its speculative analysis based on macros/fundamentals. However, the information is published in Italian. To provide better information for our non-Italian investors, we bring to you a quick translation of the analysis they present to Italian retail investors. To ensure rapid delivery, text in the charts will not be translated. The views expressed here are of Websim. Leverage Shares in no way endorses these views. If you are unsure about the suitability of an investment, please seek financial advice. View the original at

NIO Inc. – also called Shanghai Weilai Automobile Co., Ltd. in its motherland – is an electric vehicle (EV) carmaker that has long held Western investor interest. Today, the company stands poised for big changes, both by its design and by virtue of the changing global landscape.

In this article, we highlight the company’s unique selling proposition and the latest events affecting that a shrewd investor should take into consideration.

Not Just Another Chinese Carmaker

NIO started off as “yet another” Chinese EV car company in 2014 but it drew enormous interest from major China-based players such as Tencent and Lenovo. At present, its three biggest shareholders are Tencent (11.47%), company founder William Li’s Originalwish Ltd. (11.1%) and Scotland-based asset management firm Baillie Gifford & Co. (8.35%). The day the company was launched marked the debut of its EP9 sports car. Two years later (October 2016), the company received its “Autonomous Vehicle Testing Permit” in California where it began testing on public roads under the “Autonomous Vehicle Tester Program”.

NIO drew the attention of motorheads and retail investors in May 2017 when the EP9 became the fastest car around Germany’s punishing Nürburgring Nordschleife after beating the then-reigning champion – the Lamborghini Huracan Performante – by almost seven seconds. (The McLaren P1 LM – the hybrid limited-edition street-legal version of its P1 GTR – went on to break the EP9’s record by two seconds two weeks later).

This came three months after the EP9 lapped the Circuit of the Americas racetrack in Austin, Texas at a top speed of 160 mph – only 30 seconds slower than one with a driver behind the wheel – making it the fastest autonomous car in the world. The very next year, the company went on to raise $1.8 billion via an IPO at the NYSE, despite having sold less than 500 cars but with an order book of more than 17,000. The company went on to fulfil about 11,000 of them that year.

An interesting value-added solution to its customers has been its battery swap service for quicker recharge turnaround – an approach Tesla tried and eventually abandoned in favour of Supercharging. Now, NIO’s offering in China’s crowded EV market has never been on the cheap side. Thus, its customers tend to be from the relatively more-affluent segment. This solution shows an innate understanding of its customer base: its customers’ travel distances aren’t necessarily predetermined and a “down-time” of a few hours while the vehicle is charged fully is a negative experience to its customer base.

By mid-2019, the company reported that its battery swap network along the G2 Beijing-Shanghai expressway is online with the G4 Beijing–Hong Kong–Macau Expressway between Beijing and Shenzhen also being covered. These regions also represent a significant portion of the company’s relatively-affluent customer demographic.

By mid-2020, the company showed its battery swap network marching westward into Chengdu and Chongqing and registering 500,000 cumulative EV battery swaps by its ES6 and ES8 buyers. The company also estimated that, as of March that year, 48.7% of all its cars sold used the battery swap facility at least once. A battery swap has been variously reported to take up to 6-10 minutes, not counting time in queue. The company offers its buyers software solutions to schedule the swap to avoid the queue.

In August 2020, the company launched Battery as a Service (BaaS) – which encompasses both the swapping facilities and the requisite software solutions for end users – and formed a battery asset management company in collaboration with its primary battery supplier Contemporary Amperex Technology Co., Limited (CATL).

By no means does the company simply focus on battery swaps. The company has also invested in a substantial charging network and offers home services to its customers. Data till the end of November this year shows the company’s presence as both swap station and charging station ever-growing westwards and increasing in concentration in its eastern bastion.

In July this year, the company offered BaaS to other EV makers “in order to share its achievements with the automotive industry and smart electric vehicle users”. In that same month, the company began physically building out its network in Norway, with four swap stations scheduled to come online by year’s end.

The company aims to aim at five countries in Europe next year, with Germany widely touted to be one of them. NIO even debuted its long-in-the-works sedan ET7 in Germany recently, ahead of deliveries in 2022.This is the first sedan by the company, which has traditionally been selling SUVs.

In September this year, the company announced that its new battery pack comprising of a mix of lithium-ion chemistries – Nickel Manganese Cobalt (NMC) and Lithium Iron Phosphate (LFP) – would simplify production and assembly by 10% and increase energy density by 14%. To compensate for the weaknesses of LFP chemistry at lower temperatures and in state-of-charge (SOC) estimation, the company claims to have found new software and hardware solutions.

Financials and Stock Performance

With respect to results from previous years, NIO vehicle sales’ contribution to net revenue has slipped in favour of “other sales”, which encompasses its battery and related services as well as automotive regulatory credit sales.

China’s automotive regulatory credit sales programme was modelled on a similar initiative in California. NIO, like Tesla, has done quite well here by selling credits to carmakers that are unable to meet fuel consumption targets for their vehicles. Until recently, a little over 60% of China’s 117 carmakers had negative credits which, in turn, turned out to be a windfall for the likes of NIO. However, the Chinese government has already reported that it will revise this policy to encourage “long-term quality growth”. This could stymie this segment’s already-modest contribution to the bottom line in the future.

Operating cost share for vehicles might be indicative of the company’s increasing quality of offering. It bears mentioning that this is likely due to its joint venture with state-owned Jianghuai Automobile Group Co., Ltd. (JAC), which operates a plant in Hifei for the company. Hence, the company’s per-vehicle cost is largely fixed and locked to its agreement with JAC, which was renewed earlier this year.

The company’s gross profit shows a very solid growth in the YTD relative to that in 2020, which was the first time this line item went positive while trends in operating and net incomes – both of which are currently negative but trending to be less and less so – indicates the company’s line item discipline is strong.

In terms of vehicle mix, the company’s EC6 shows a very strong rise in sales and bears out the rising quality perception in the company’s offering.

The company has also traditionally doubled its total units sold (more or less) over the past few years. This year is poised to be no different. With one month left to go, NIO is just 6,000 vehicles shy of meeting this trend, despite having witnessed a slowdown in sales early on over the past twelve months due to the pandemic. The target looks pretty easy, given recent sales figures.

NIO has long been compared with Tesla Inc by some investors. While the latter’s Model Y is indeed a competitor to NIO’s SUVs, the company’s fiercest competitors in its preferred customer segment have been Li Auto Inc and XPeng Inc. NIO’s SUVs are more expensive than the Model Y and “BaaS” provides a localized value addition absent in Tesla, so the comparison is weak.

The comparison with Tesla does hold to some extent when it comes to Europe. NIO’s expansion plans in Europe puts it at odds with fellow incumbent Tesla’s SUV sales in the Continent. Both face fierce competition from European powerhouses BMW Group, Daimler AG and VW Group. However, Tesla has a slight edge over NIO with its Giga Berlin plant.

NIO’s modest sales numbers, whilst wholly suitable for the high-end segment, are hardly indicative of its ambitions: the company is scheduled to operationalize the first phase of a plant that will be 12 times the size of Tesla’s Fremont plant with an annual production capacity of 1 million cars by Q3 2022. Purportedly in the works are a compact sedan ET5 (which was spotted doing road tests on the 10th) which will likely prove to compete with Tesla’s Model 3 and a new brand for mass-market EVs, as announced in its Q2 update, to compete with VW and Toyota in China.

The company’s stock performance in the YTD relative to the benchmarks Nasdaq-100 (NDX) and S&P 500 (SPX) hasn’t been great, although it has been seen to be trending with the benchmarks since mid-Q3.

The timing of the slippage in stock performance aligns quite neatly with Western institutional investor selloffs in the wake of China’s tech crackdown. The current market action can thus be construed as an “idiosyncratic” event, independent of the company’s fundamentals and valuation trajectory.

However, even though it’s “idiosyncratic”, it’s an indicator that retail investors shouldn’t expect continued availability to the stock in the long run. While NIO’s recent share buyback bears some resemblance, at first blush, to that of Baidu as well as that of Alibaba, the context is slightly different but significant.

In early 2020, the company did a structuring of sorts by establishing a subsidiary (“NIO China”), which encompassed its China-specific assets, in Hefei and selling a minority stake of the same to a number of investors and state-owned enterprises in exchange for a $1 billion investment. Over this year, the company has been repurchasing its stake from some of them in preparation for an IPO, which is expected to happen next year.

Going by the queue of companies preparing for “dual-primary” listing at the Hong Kong Stock Exchange (HKSE), it wouldn’t be out of the question to see the bulk of Chinese companies’ stocks departing U.S. shores within two years, i.e. by mid-2023 or thereabouts. DiDi already announced its plans to depart the U.S. for the HKSE on the 11th, which could very well be a signal from the Chinese Government to U.S.-listed Chinese companies.

The present focus on the affluent customer segment (which tends to be somewhat recession-proof), high operational achievements via its joint venture, leadership’s clearly-defined and ambitious plans for growth and steady focus in building out infrastructure for its offering (both current and future) are net positives for the company. In light of its rather humble presence in the EV market in absolute numbers, the fierce competition and its continuing investment in building out a mass-market brand, now’s a good point for an investor to initiate a holding in the company within the “core” portfolio and follow its progress over the next couple of years for further action.

Investors with access to the HKSE are in less-risky position as compared to investors in the U.S. stock. Such investors are advised to watch for the stock’s upcoming IPO and perform a buy-in at an opportune moment. Given that cross-border investor interest will be largely institutional, the valuation would likely be quite tight and reasonable.

For investors interested in the U.S. stock, however, they must bear in mind that given the company’s steadily-improving high technical achievements, its dependence on the government for manufacturing and its plans to launch a mass-market brand, it is entirely possible that the government will expect the company to leave the West and return to its embrace sooner rather than later, thus leaving the U.S.-listed “stock” in limbo (if not entirely valueless). Thus, retail investors holding the U.S. stock should exercise due care.

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

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Sandeep Rao

Research

Sandeep joined Leverage Shares in September 2020. He leads research on existing and new product lines, asset classes, and strategies, with special emphasis on analysis of recent events and developments.

Sandeep has longstanding experience with financial markets. Starting with a Chicago-based hedge fund as a financial engineer, his career has spanned a variety of domains and organizations over a course of 8 years – from Barclays Capital’s Prime Services Division to (most recently) Nasdaq’s Index Research Team.

Sandeep holds an M.S. in Finance as well as an MBA from Illinois Institute of Technology Chicago.

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