When it comes to Chinese electric vehicle companies, Nio (NIO, Financial) often takes center stage. Despite concerns about Nio's lofty valuation, the company's increasing sales and total deliveries as well as its unique business model make it an attractive growth prospect.
Nio has a home advantage in China, the largest EV market globally. Operating in this dynamic market allows Nio to tap into an immense customer base and leverage the country's evolving infrastructure for electric vehicles. With over 1.4 billion people and a growing emphasis on sustainable transportation, China offers a fertile ground for Nio's innovative EV offerings. By catering to Chinese consumers' unique needs and preferences, Nio has positioned itself strategically in the heart of the world's largest EV market, enabling the company to thrive and contribute to the ongoing transition towards a greener automotive landscape.
In addition to its domestic presence, Nio has proactively pursued international expansion by establishing stores in Norway and auto showrooms in Germany. These strategic initiatives aim to position Nio favorably in Europe, a burgeoning EV market, and offer the company potential avenues for growth.
While Tesla (TSLA, Financial) dominates the industry in terms of the highest stock price and sales of "affordable luxury" EVs, Nio has successfully carved out its niche by focusing on innovative features and premium design. With its advanced battery-swapping technology, Nio offers a compelling solution to address charging infrastructure challenges EV owners face.
Nio versus domestic competition
In its April report, Nio showcased a year-over-year growth rate of 31.2% for deliveries with the delivery of 6,658 electric vehicles. It's important to note that last year's April results were impacted by supply chain issues, resulting in a lower delivery benchmark in the year-ago period. Despite falling below the significant 10,000 unit threshold in April, Nio adjusted its production lines and transitioned to sedans, contributing to the temporary decline. However, it is worth mentioning that this was the first time since January that Nio's deliveries fell below this psychologically important threshold.
Comparatively, Li Auto (LI, Financial) outperformed its counterparts with an impressive delivery performance, delivering 25,681 electric vehicles in April, exhibiting a substantial year-over-year increase of 516.3%. Considering these numbers, it seems Li Auto is gaining pace against NIO.
On the other hand, XPeng (XPEV, Financial) reported another month of declining year-over-year delivery growth.
Among these three Chinese EV manufacturers, Nio recorded the lowest monthly delivery volume, while Li Auto achieved the highest. However, with Nio's increasing production of sedans and the impending launch of new models, there is potential for a rebound in Nio's delivery growth rate in the upcoming months.
New product launches
Nio has witnessed significant business growth driven by the success of its sedan products, namely the ET7 and ET5, launched last year. Recognizing the shifting preferences in the Chinese market, Nio has strategically increased its focus on sedan production, gradually scaling back on SUV production. This strategic shift has paid off, with Nio's sedan delivery share rising to 74% in April. It is anticipated that the company's sedan share could increase to 80% by the end of the fiscal year 2023.
The growing popularity of electric vehicle sedans in China has been a key driver behind Nio's aggressive ramp in sedan deliveries. This demand surge has allowed Nio to tap into a receptive market and expand its customer base. As the company continues to capitalize on this trend, it is expected to attract renewed investor interest, potentially leading to a higher valuation of Nio's shares.
In addition to the emphasis on sedans, Nio's pursuit of new product launches serves as another catalyst for growth. The recent introduction of the EC7, a five-seater coupe sport utility vehicle, has opened up new avenues for delivery expansion. Moreover, Nio unveiled the ES6 sports utility vehicle and the ET7 flagship sedan at the Shanghai auto show in April, with deliveries for these models slated to commence in May 2023. Furthermore, the eagerly awaited flagship ES8 sports utility vehicle is set to start customer deliveries in June. These new product launches are expected to fuel Nio's delivery growth, particularly as the company's sedan lineup expands.
With a robust sedan portfolio, increasing market share and an array of new models on the horizon, Nio is well-positioned to capitalize on the flourishing EV market in China. The company's strategic decisions and commitment to innovation place Nio at the forefront of the industry's growth trajectory, ensuring a promising future for its business and shareholders.
The Chinese EV market's growth outlook
China has firmly established itself as a dominant force in the global automotive industry, leveraging its position as the world's largest car market and emerging as a significant producer and exporter. By recognizing the immense potential of electric vehicles early on, China has made substantial investments in developing a robust EV ecosystem.
According to Allianz, a leading global financial services company, Chinese EV manufacturers possess a competitive edge throughout the entire value chain of battery electric vehicles. Their expertise spans various aspects of EV production, reinforcing China's leadership in this rapidly evolving industry.
The sales of passenger EVs in China have witnessed a remarkable surge, with an astonishing 87% year-on-year growth in 2022. This nearly doubled the figures from the previous year, highlighting the increasing popularity of EVs among Chinese consumers. Notably, EVs now account for 25% of all cars sold in China. However, within the EV market, preference has shifted, as the proportion of battery EVs declined while plug-in hybrid EVs (PHEVs) increased their market share to 24%.
Regarding global sales volume, China ranks as the second fastest-growing market, responsible for approximately 59% of total EV sales worldwide. This impressive market share further solidifies China's influential position in shaping the future of the EV industry.
Nio, as a prominent player in the Chinese market, benefits from its unique position as the largest EV market in the world.
Risks
Nio's most significant commercial concern in my opinion is the possibility of a further slowdown in delivery growth. A deceleration in the rate at which Nio can deliver its vehicles could have multiple implications for the company.
Firstly, a slowdown in delivery growth can hinder Nio's ability to achieve its desired top-line revenue growth. If Nio fails to maintain a robust pace of vehicle deliveries, it may struggle to meet its revenue targets and milestones. This could delay the company's path to profitability and extend the timeline for reaching the break-even point.
Secondly, Nio's expansion plans and production capacity are closely tied to its delivery growth. If the company experiences a significant slowdown in deliveries, it may lead to underutilization of its manufacturing facilities and production lines. This, in turn, could result in higher costs per vehicle produced, negatively impacting Nio's margins and profitability.
As a growth stock operating in a growth industry, Nio is more vulnerable to broader economic concerns.
Regarding valuation, Nio's price-sales ratio is below the industry median in the vehicles and parts sector. With a price-sales ratio of 1.71, Nio ranks worse than around 71.88% of the 1,227 companies within the industry.
Lastly, Nio's focus on ramping up the production of sedans introduces an additional risk factor. Any challenges or delays in the ramp-up process could impede Nio's ability to fulfill customer demand and further exacerbate delivery growth concerns. It is crucial for Nio to effectively manage the transition to sedan production while maintaining a steady growth trajectory.
Takeaway
In conclusion, as a prominent player in the electric vehicle industry, Nio faces several risks that could impact its future performance. The foremost commercial risk lies in the potential slowdown of delivery growth, which could delay Nio's path to profitability and extend the break-even timeline. The company's ability to maintain a robust pace of vehicle deliveries is crucial for achieving its revenue targets and ensuring optimal utilization of manufacturing facilities.
Overall, though, I believe Nio is a great growth prospect. The company's innovative features, premium design and advanced battery-swapping technology have positioned it as a competitive player in the EV market. Moreover, Nio's expansion into international markets and its commitment to providing exceptional customer experiences through an extensive service network showcase its determination to grow and compete effectively against industry leaders.
