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Education Series: Single-Stock ETPs

NIO: Tactical Investment Opportunities Arise

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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

In the article for Chinese EV carmaker NIO published in December, the points in favour of the company (as opposed to the U.S.-listed stock) included high operational achievements via its joint venture, leadership’s clearly-defined and ambitious plans for growth as well as its steady focus in building out infrastructure for its offering.

What merited an advisory was the threat of delisting in light of growing regulatory pressure, with an advisory to investors with access to Eastern exchanges to keep an eye for the company’s IPO over there. Since then, the company has gone on to successfully list in both the Hong Kong Stock Exchange (HKSE) as well as the Singapore Stock Exchange (SGX) four days ago. The SGX listing offers a layer of ease for investors averse to the HKSE as well as ease of access to investors in the prosperous ASEAN belt. 

However, given the economic scenario as well as the company’s performance, the overall outlook for the company would do well with a nuanced consideration. 

Fiscal and Ratio Trends

The company’s most recent earnings release was the annual report at the end of April this year, which provides an excellent foundation for trend studies:

The study of trends reveal:

  1. While growth in revenue holds steady year-on-year, growth in total cost of sales and operating expenses have relatively increased.

  2. While gross profit – signifying earning efficiency from the production and sale of goods and services – has surged spectacularly, net income – signifying overall profitability – continues to be depressed (albeit improving).

An interesting pattern in recent commentary regarding the company’s offering has been its positioning versus Tesla, Inc (TSLA): various publications have indicated that NIO could be a “Tesla Killer”. Be that as it may, a comparison versus Tesla isn’t completely ridiculous: in China (and over the new few years in Western Europe), both companies’ products have significant overlap in terms of addressable consumer segment.

A ratio analysis of both companies’ stock performance, however, don’t show any significant disparities beyond a general “ratio cool-off” since the end of 2021:

Now, data providers typically don’t furnish ratios that are too high or too low on account of such information being meaningless in terms of actionable insight. This is certainly true for NIO’s PE Ratio (PE). In the Price to Sales (PS) and Price to Book (PB) Ratios, both instruments show roughly analogous drops.

However, not all sources decline to furnish data on “meaningless” ratios. For instance, Zacks’ shows that – unlike with Tesla – the company has had highly adverse PE valuations (which continues to be so).

Given that prices can never be negative, this indicates that the company has witnessed a significant rally in prices even during its low-earning periods. This isn’t surprising, given the trends seen in 2019 through 2021 – a highly overvalued equity market in the U.S..

Another investment tracking service has an eclectic selection of companies that it considers to be comparators for NIO, albeit with slightly different terminology. Relative to this selection, the company’s PE Ratio is listed as being “at loss” – similar to other “pure-play” EV newcomers Lucid and Rivian:

As mentioned in the previous article about Nio, given that the company had announced a new brand for mass-market EVs in its Q2 update to compete with VW and Toyota in China, it can be expected that the company’s expenses will continue to impose a strain on its profitability. In fact, consensus estimates – as per Nasdaq – indicates that this ratio will likely worsen all the way through 2023 followed by a very sharp turnaround by the end of 2024: 

In Conclusion

Given the facts presented and strong industry consensus, NIO shows strong potential to be a “growth stock” with a two-year horizon. The company’s offering is attractive and its breadth of addressable consumer segments is likely to improve with the inclusion of a “mass-market” EV roster. The quest for the latter, however, will weigh down profitability for the next few years given the capital-intensive investments necessary in this industry but there’s no indication at present that that the company will fail in its endeavour. It bears noting that competition in its primary market – the People’s Republic of China – will be cut-throat, to say the least.

As highlighted in the article on the biotech sector, current times aren’t very conducive for ever-rising price trajectories in growth stocks. Thus, this stock would likely be quite attractive to those investors who are willing to wait a couple of years to see a substantial and sustained positive portfolio impact.

Currently, there are some indication that the stock is undergoing price discovery – albeit with a somewhat declining trajectory due to its “growth stock” status. For European investors, there are a number of leveraged/leveraged inverse exchange-traded products (ETPs) based on the company’s stock that capitalize on the current price discovery patterns. It bears noting, however, that investment into ETPs require both discipline and active management: inter-day price trajectories determine the payoff structure as well as the risk profile.

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.

Violeta Todorova

Senior Research

Violeta joined Leverage Shares in September 2022. She is responsible for conducting technical analysis, macro and equity research, providing valuable insights to help shape investment strategies for clients.

Prior to joining LS, Violeta worked at several high-profile investment firms in Australia, such as Tollhurst and Morgans Financial where she spent the past 12 years of her career.

Violeta is a certified market technician from the Australian Technical Analysts Association and holds a Post Graduate Diploma of Applied Finance and Investment from Kaplan Professional (FINSIA), Australia, where she was a lecturer for a number of years.

Julian Manoilov

Senior Analyst

Julian joined Leverage Shares in 2018 as part of the company’s premier expansion in Eastern Europe. He is responsible for web content and raising brand awareness.

Julian has been academically involved with economics, psychology, sociology, European politics & linguistics. He has experience in business development and marketing through business ventures of his own.

For Julian, Leverage Shares is an innovator in the field of finance & fintech, and he always looks forward with excitement to share the next big news with investors in the UK & Europe.

Oktay Kavrak

Director

Oktay joined Leverage Shares in late 2019. He is responsible for driving business growth by maintaining key relationships and developing sales activity across English-speaking markets.

He joined LS from UniCredit, where he was a corporate relationship manager for multinationals. His previous experience is in corporate finance and fund administration at firms like IBM Bulgaria and DeGiro / FundShare.

Oktay holds a BA in Finance & Accounting and a post-graduate certificate in Entrepreneurship from Babson College. He is also a CFA charterholder.

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