Automotive Author: Niko Yang Editor: Luke Sheehan, Zhiqing Chen Mar 16, 2021 02:45 PM (GMT+8)

The company is preparing some important moves, including its expansion to the European market.

NIO et 7

●  2020 was a bumper year for NIO, with significant improvements on revenue and costs metrics. 

●  NIO's 4Q profit was affected by the strong yuan and weak dollar.

●  The management's international expansion plan and the tightening global supply chain have loomed over its 2021 performance.

●  Compared with Toyota and even Apple, NIO is not looking so expensive anymore.

●  Long-term EV investors should take advantage of the current dip.

 

Top-down glance

According to its fourth-quarter earnings statement, NIO Inc. delivered 17,353 vehicles in 4Q 2020, a QoQ increase of around 42%. The company's vehicle sales generated USD 946.2 million, a YoY increase of 130%. The total revenues were over USD 1,01 billion, a YoY increase of 133.2%. According to the company, "the increase in vehicle sales over the third quarter of 2020 was mainly attributed to the sales of EC6s which began deliveries in late September 2020." In short, the most important indicator of judging EV stocks, revenue growth, beat the street’s estimates.

Glancing over the income statement, as the size effect showed, NIO's gross margin was 17.2% in Q4 2020, compared with a negative 8.9% from the prior year. In terms of operating expenses, 4Q 2020 R&D expenses were CNY 829.4 million, decreasing by 19.2% YoY, increasing by 40.4% QoQ. The drop in R&D expenses year-over-year resulted from the EC6's R&D finished process before September 2020. Besides, the company's overall cost-saving initiatives and improved operational efficiency also contributed to the decrease in operating expenses.

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Likewise, the slide in SG&A expenses YoY was primarily driven by the company's overall cost-savings efforts and improved operational efficiency. Specifically, SG&A expenses for the same period were CNY 1.2 billion (USD 185 million), decreasing by 21.9% YoY, increasing by 28.3% QoQ. In addition, the firm explained that "loss from operations in the fourth quarter was CNY 931.4 million (or USD 142.7 million), representing a decrease of 67% YoY and a decrease of 1.5% QoQ."

Our thoughts on 2021:

Still burning cash to bolster growth

NIO's 2021 strategy is to acquire more orders through expansive services including wider sales networks, a vast charging network of supercharging and swapping stations, and after-sales services. This strategic decision will increase the burn rate of cash flow.

Besides, we expect the R&D fee to increase massively as the ET7 research and development proceed. The management claims the decrease in R&D expenditure YoY was due to the less cost of new car development. Given that NIO is in the process of developing ET7 based on the new technology 2.0 platform, it is natural to consider that the R&D fee will rebound significantly in 2021.

SG&A fee will be much higher than the prior-year with sales and charging network expansions. According to the earning call, NIO now has 23 NIO Houses and 303 NIO Spaces, covering 121 cities in China. It also plans to open 20 new NIO Houses and 120 new NIO Spaces in 2021. More importantly, the management’s attitude is clear that they will build a store in cities where BBA 4S stores are located. Other than the sale network, NIO prepares to enlarge charging infrastructures to ramp up to at least 500 power swap stations in total. Specifically, the current network owns 127 power charger stations and over 1,700 destination chargers, which will reach 600 and 15,000 respectively by the end of 2021.

Investors should be careful about the 2Q deliveries

Production capacity will be constrained by chip and battery shortage at least in the second quarter, NIO's CEO William Li indicated. Li explained two factors: self-production and supply chain capacity will decide NIO's real production capacity. He added that 1Q's supply is enough but remained uncertain about 2Q's supplies. But they still maintain a monthly delivery target of over 7,000 for 2Q 2021.

Under the global supply chain turmoil, many reasons caused the chip and battery shortage. More recently, Samsung, NXP, and Infineon chip fabs shut down in Texas. However, the future impact on EV production is unclear as there is usually a 5-6 month lag before shipping components from upstream to the EV makers. Furthermore, the world's biggest foundry – TSMCpromised to give priority to auto semiconductor manufacturing. So investors should take a look at the real effects by the middle of 2021.

From the company to the stock

Over the last two months, NIO has had a bleak performance. Technically speaking, the stock has been oversold on several indicators. From another perspective, the benchmark which I used to gauge the stock, forward PS ratio, doesn't suggest that NIO is expensive from a longer-term point of view on sales.

Under the current market cap, NIO will maintain 3.6x sales in 2025 (as of March 7, 2021). The assumption is that only 20% of car sales in China will be EV by that time. By contrast, Apple, a consumer electronics company will maintain 4.9x revenue, even though its products, such as smartphones and PCs, face much lower growth than EVs. Besides, ICE car makers Toyota is trading at 1.7x 2021 PS ratio as a good reference for a mature car maker growth prospect. For EVs in 2030, NIO's multiples will decline to around 2.1. By that time, a reasonable assumption is that China's EV penetration rate will not pass 50%, undoubtedly meaning there are still huge sales opportunities. So 2.1 is not a justifiable multiple for NIO. That being said, the consideration is whether NIO can reach the sales targets. It's hard to argue this, but what we know for now is that the company is the leader in this sector. For investors interested in the EV sector for the long term, pioneers like Tesla and NIO are assuredly the top selections.

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In a nutshell

As NIO is facing global supply chain chaos, the company might not give satisfactory delivery figures in 2021. In addition, its heavy SG&A and R&D expense and EU expansion plan will further accelerate cash burning.

NIO will probably not bring any net income to its investors in the next two or three years. One key fact that investors need to realize is that perhaps the craze around EVs (which we witnessed in 2020) has passed and will never be repeated. For those long-term 'EV believers,' NIO is a candidate to be considered as a priority – i.e. buy the dip. 

EV