Is NIO Stock A Buy?

Is NIO Stock A Buy? NIO [NYSE: NIO] is a Chinese automobile manufacturer which designs, manufactures, and sells electric and autonomous vehicles in the People’s Republic of China, the United States, and Europe.

Car sales, car consulting, maintenance and repair are all services offered by Nio but the question these days is whether that business can survive in light of a global slowdown?

NIO Had Struggled To Gain Traction But…

It has been a bumpy ride for quite some time for investors of the Chinese manufacturer of premium electric vehicles (EVs).

The struggling carmaker has had a turbulent time of late with its finances in total disarray, thanks to spiraling costs and falling vehicle sales.

Nio had struggled to gain traction in better market conditions before the pandemic stuck and sent the economy into a tailspin. The company, sinking under steadily mounting losses, was quickly running out of funding to sustain operations.

However, amidst all the doom and gloom, a silver lining emerged in the form of new capital infusion to the tune of 7 billion renminbi ($989 million) from an investment group based in the Chinese city of Hefei.

The positive news comes after an announcement in February that NIO had entered into a collaboration framework agreement with the municipal government of Hefei, Anhui province, where the company’s main manufacturing hub is located.

Under the framework agreement, the Hefei government expects to provide resources and funding support for the long-term growth of NIO in Hefei.

NIO now plans to move its headquarters to Hefei, expand operations, and deepen its relationship with local ecosystem partners in Hefei.

As per the new agreement, current NIO shareholders will own 75.9% of the new firm created while the rest will be held by outside investors.

The new agreement gave the choking company urgently needed oxygen. In the latest quarter, the company reported a massive loss of over 2.813 billion renminbi ($397 million), amounting to EPS loss of -2.73 renminbi or $0.39.

With a dwindling cash reserve of 1.056 billion renminbi or $150 million, in the same quarter, the electric carmaker managed to keep its head above the water by selling $235 million in convertible notes.

The new agreement has given the company some breathing space, but concerns remain about how long the cash infusion can keep the company from downing its shutters. The experts’ apprehensions are perfectly justified given the company’s past history of financial woes.

After all, it is not the first time that a Chinese government entity has intervened on the company’s behalf. Last May, it received up to 10 billion renminbi ($1.411 billion) from a state-owned fund after a steep decline in revenue owing to the reduction of subsidies for EVs by the Chinese government, which has made it abundantly clear that it would remove subsidies completely after 2020.

Analysts, however, believe that the reduction of state subsidy will only hurt the EV makers, including NIO, but only in the short term. It is extremely difficult to obtain a combustion engine license in any major Chinese city.

The Chinese government, in order to reduce pollution, has been heavily promoting the EV market, and one of the ways of doing it is to make the procurement of a license extremely difficult.

Licenses for a combustion engine vehicle are generally disbursed through a lottery system where the odds of obtaining one is less than 1%. And those lucky enough to get a license have to shell out over $14,000 as fee. In sharp contrast, a license for an EV can be had by anyone and that, too, without paying a single dime as fee.

China is already the world’s largest electric vehicle market and the Chinese government has been heavily promoting the sale of electric vehicles.

The government has ambitious plans to ensure that electric vehicles constitute 20% of the country’s total car sales by 2025. As mentioned above, the impact of subsidy removal will be felt only for a short period of time and the surging EV market could help NIO thrive, even as the short-term outlook does not evoke much optimism.

Risks of Investing in NIO

The new agreement and subsequent capital infusion by the Hefei-based investment group only buys the company a small amount of time.

Judging from the latest quarterly loss of 2.813 billion renminbi, the 7 billion renminbi ($989 million) funding will not last more three quarters, which means NIO will be out again looking for handouts.

Even without factoring in the competition from Tesla or the coronavirus, there seems to be no end in sight for NIO’s financial anguish.

NIO reported a loss of 26.85 billion renminbi ($3.79) per share in 2018 and 10.63 billion renminbi ($1.50) per share in 2019.  This is neither near the beginning nor the end of its financial struggles as analysts forecast more gloomy days ahead, expecting the EV carmaker to lose $6.66 per share this year and $5.42 per share in the next.

The company is also struggling with its revenue. The pandemic is expected to make matters worse as delivery of vehicles took a severe hit when the pandemic was at its peak in China.  Even if deliveries return to pre-pandemic levels, the lower demand for its vehicles will adversely affect the company’s revenue. Further compounding the woes of the distressed automaker was the decision of the Chinese government to reduce subsidies.

Are NIO Competitors a Threat?

Despite mounting losses and plummeting stock price, NIO has often been compared to the EV giant Tesla. Many have gone so far as to call it the “Tesla of China.”

However, Tesla’s new Giga factory in the Shanghai plant has been manufacturing the super-popular Model 3 electric sedans for the past six months, in the process putting intense pressure on cash-strapped local rivals like NIO.

Ever since Elon Musk started his made-in-China offensive, local EV manufacturers have found themselves at the receiving end of plummeting demand and falling revenue.

Tesla, in just over six months, has managed to grab over 25% of the EV market in China, and its share of the pie keeps getting bigger as its strong brand cachet keeps attracting more and more buyers with deep pockets.

The Chinese government’s decision to scale back the subsidies, which turned China into the world’s biggest EV market with hundreds of companies setting shop, has further made matters worse for EV automakers like NIO.

All these factors are making life extremely difficult for local manufacturers and risk exposing the multibillion-dollar Chinese EV push as a bubble.

The Chinese government, worried over the massive pollution caused by combustion engine vehicles, has been vigorously promoting the alternative-energy vehicle sector over the past two decades. It has been actively persuading foreign carmakers such as Tesla and Volkswagen AG to set up their companies in China.

As a result, the market that was initially dominated by local manufacturers became fiercely competitive.  As of June, more than 500 China-based EV companies operated in the People’s Republic of China

Is NIO Stock a Buy: the Bottom Line

NIO, despite near-term sales headwinds and fierce competition from Tesla (monthly Tesla registrations in China now exceed 10,000), still carries a lot of weight in the burgeoning Chinese market, thanks to the huge amount of publicity it generates. Slowly but surely, it has managed to reign in its losses and increase its revenue.

Out of about 100 Chinese startups developing electric cars, a diminishing group of just 11 were able to attract investors’ attention and raise funds.

NIO was one amongst them which, apart from taking care of the company’s short-term solvency issues, also inspires confidence in its future.

Additionally, NIO enjoys a strong brand proposition that stretches beyond its vehicles. NIO House facilities have an open showroom which, apart from housing vehicles, also boast a members-only space upstairs, where buyers can read, shop and relax. Further, NIO also has an app boasting close to one million users as well as a virtual currency, courtesy its strong social media presence.

Tesla’s growing clout and weaker demand after reduced EV subsidies has led to a sharp decline in NIO’s stock price. Given its financial challenges and intense competition arising from Tesla’s increased presence and weaker demand after reduced EV subsidies, investors need to be cautious about investing in the company.

Only time will tell if NIO can successfully overcome the challenges it faces from all quarters and make a strong comeback. Though, on the positive side, it enjoys a strong brand presence, which could help it carve out a niche for itself in the booming Chinese EV market.  Additionally, a fall in share price of more than 50% from its IPO price could be tempting for investors to scoop up its shares.

Bonus: Nio 101

Nio offers an innovative suite of charging solutions to its users, including Power Home, a home charging solution; Power Swap, a battery swapping service; Power Mobile, a mobile charging service through charging trucks; Public Charger, a public fast charging solution; and Power Express, a 24-hour on-demand pick-up and drop-off charging service. NIO Limited was founded in 2014 and is headquartered in Shanghai, China. The company made its debut on the New York Stock Exchange in September 2018.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.