Automotive Author:Hang Yang , Ivan Platonov Editor:Luke Sheehan Jan 11, 2021 05:55 PM (GMT+8)

NIO launched ET7 on January 7 which is also the 'NIO Day.' The car will be available at the beginning of 2022 with prices starting from CNY 448,000 and the maximum range of over 1,000 km.

NIO et 7

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  • NIO is cooperating with TSLA's supplier CATL on lithium iron phosphate batteries.

  • There is a surging volume of local government policies bolstering EV development in China.

  • The CEOs of NIO and XPEV consider the Model Y rollout a catalyst rather than a hurdle, backed by internal sales data.

  • 2021 is likely to see significant NIO sales growth

  • We upgrade NIO to buy, with a target of USD 62 apiece.


Having been through a fruitful year, China's NEV market is still in an early development phase, and is set to boom consistently. One of the leaders in the space, NIO had a splendid journey in 2020. It is likely to surprise investors in the coming year with the tailwind of the secular trend shaped by the shift from ICE cars to EVs. We think NIO is positioned to get traction from many aspects, including the TSLA-triggered sales boom, the well-cultivated NEV ecosystem in China's tier-one cities, possible shipments to the EU and a well-diversified product portfolio.

NIO and CATL are confirmed that they are testing lithium iron phosphate battery models. December 2020 also saw a set of local governments’EV-related policies being announced. For example, those of Hefei and Kunming, as well as Luoyang's three-year plan regarding charging pile installation. Xiamen, a Fujian province city, is planning to use BEV to cover all the online car-hailing services.

 

How NIO reacted to the Model Y launch in China

On the first day of 2021, TSLA rolled out its first China-made Model Y. The highlight was the slashed price, which was set at around CNY 340,000 for the long-range model and CNY 370,000 for the performance model. This left many worrying about the Y's potential of squeezing NIO, XPEV and Li Auto's market shares.

However, TSLA's hyperactivity in the world's largest auto market has its pros and cons for the local vendors. First of all, there is a certain facilitating effect: TSLA's take-off is 'feeding' the whole EV space, and the attention to other EV makers is also being on the upswing.

Simultaneously, some NIO car reservations have been recently canceled, with the buyers switching to Model Y, per multiple Chinese sources. In fact, due to the distinctive nature of its product menu, NIO is poised to be affected way more than XPEV and LI at the micro level.

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The emerging industry's top executives have already responded verbally to the Model Y's new price, on different occasions. Below are some of the translated quotes:

William Li, founder and CEO of LI: “The current price of Model Y is higher than I expected, and I think the price will go down as Tesla production volume rises – to be within CNY 300,000. I hope Tesla won't sue me.”

Qin Lihong, President and co-founder of NIO: “Viewed from the recent day sales of brick-and-mortar stores [two days after Model Y's price was trimmed], we feel confident about our orders…”

He Xiaopeng, CEO of XPEV, posted on his Weibo: “We have achieved an excellent sales record during the New Year's Day. This time, we are quite confident even the price reduction of the competitors' has an impact. We didn't even hold the internal telephone meeting. The data has fully proven that this price reduction is just a marketing tactic, but is also a double-edged sword.”

According to the Chinese EVs top execs, TSLA's move had almost no influence on car sales these days. One thing that needs to be noticed, they shared a somewhat similar idea, which strengthens the reliability.

As the market is far from eventual saturation, Model Y's release will nourish more rather than squashing competitors, ICE vehicles' customers are being driven away by each of the NEV vendors. Elon Musk has lately said that the biggest threat for TSLA will likely come from China, implying that there hasn't been too much competition from the current rivals thus far.

 

Continued high growth

Other than the Model Y release, NIO's business seems to be healthy. We think the company can keep being a local shining star in 2021.

NIO has been relying on the tier-1 and tier-2 cities as a premium model maker. The key engine of China's economy, these cities have recovered fully and are back to the pre-pandemic high growth in the vast majority of aspects. Consumers in these cities have strong consumption capacity and desire to buy premium cars.

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More importantly, according to the diffusion of innovations theory, once new ideas, technology's penetration rates reach a threshold of 10-20%, it will accelerate the way up. So 2021 is likely to be another high growth year for NIO.

 

2020 Financials/ Valuation

As we showed in our previous SeekingAlpha article about NIO, the company is projected to first break even in the fourth quarter of 2022. However, given the aforementioned drivers, this can happen even earlier.

Beyond that, we set the 2021 target price at USD 62 per share for 2021 based on the current 16.8x 2021 PS ratio, CNY 37.25 billion revenue for fiscal year of 2021. (USD 5.73 billion under the exchange rate of USD/CNY = 6.5)

Specifically, we project that NIO will capture 2.6% of China's passenger market by 2030. For a reference, BMW and Mercedes-Benz's current market shares in China are 2.6%, 2.7% (as of 2019). As NIO's founder also admitted that they are aimed to become China's premium brand like BBA, our model is not aggressive. In 2021, NIO's market share will hit 0.4%, delivering 104,504 (138% YoY growth) vehicles, with each generating CNY 356,413 (USD 54,832) on average. 

Meanwhile, possible shipments to the EU have not been taken into account in the model. The company's management has been pondering over exporting cars to that market, and 2021 has been mentioned several times as a starting point, With a goal of 7,000 shipments in total for 2021-2022.

 

Last but not least

NIO's new sedan model-ET7 will enrich the product line and spur car sales. There are quite a few signs of NIO becoming the next game-changer – and it is a solid 'buy' right now.


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