NIO Warns of Challenges as China Cuts Subsidies. Is it Time to Sell?

January 6, 2023

Chinese electric vehicle maker NIO Inc. (NYSE: NIO) (SGX: NIO) (SEHK: 9866) warned of the challenges in the first half of next year.

This is mainly due to a cut in the Chinese government’s subsidies and the global economic slowdown, both of which could dampen demand in China.

Supported by years of government policies and subsidies, China’s electric vehicle (EV) market is expected to see record sales of 6.5 million units in 2022, nearly double 2021’s 3.5 million units.

However, with the cutback in subsidies, prices will be more expensive for EV buyers in China and this could be a setback to EV makers in China, such as NIO.

To put it into perspective, EV buyers enjoy a discount of between RMB 4,800 (US$695) and RMB 12,600 (US$1,833) with the subsidies.

However, despite concerns surrounding the impact of higher prices on demand, I don’t think long-term investors should worry about the fluctuations in the market.

So, for those of us focused on the EV market and looking at sustainable investment opportunities, they should consider NIO for their portfolio.

Here are some of the reasons why I think this is the case.

1. Strong growth of deliveries of EVs in China in 2023

Despite the potential slowdown in demand for EV, the China Passenger Car Association, expects to see deliveries of new-energy vehicles, pure electric and hybrid vehicles, to hit 8.4 million by 2023.

That’s about 30% higher than the expected deliveries number for 2022.

This indicates the robust demand for EVs in China, even without the government’s subsidies.

2. NIO deliveries hit another record high in December 2022

NIO has achieved new record monthly vehicle deliveries of 15,815 vehicles in December 2022, an increase of 50.8% compared to a year ago.

Vehicle deliveries for the last quarter of 2022 grew by 60.0% year-on-year (yoy) to 40,052 vehicles. Meanwhile, NIO delivered 122,486 vehicles for the whole of 2022, representing an increase of 34.0% yoy.

While the COVID-19 restrictions in China have forced NIO to miss out on its annual delivery target of 150,000 units by the end of 2022, the ramp-up in production towards the last quarter of 2022 is a positive sign for the EV maker.

NIO’s path towards profitability by 2024 should remain intact and here are some of the indicators that investors should watch out for.

3. China’s relaxation of its “COVID-Zero” policy

China’s “COVID-Zero” policy has disrupted production, logistics and deliveries in 2022.

However, with the shift away from the “COVID-Zero” policy, this could support NIO’s production in 2023.

Aside from that, the Shanghai-based automaker has also learned to better manage its inventory by storing more components, increasing orders from the original chipmakers and exchanging semiconductors with other automakers.

NIO has also set up a system with suppliers to disclose inventory conditions for semiconductors and raw materials.

4. NIO’s expansion into oversea and mass market

NIO’s expansion plan is also another potential reason for investors to look into the EV maker, known for its battery-swapping technology.

NIO recently announced that it is about to enter the German, Swedish, Dutch, and Danish markets.

There are various challenges for its expansion into Europe but the initial response from its product launches has been positive.

Aside from that, NIO plans to roll out its first mass market model in 2024, lowering the entry price for EV buyers to own a NIO.

In the longer term, management has guided that NIO has the ambition to develop and produce its own batteries and chips.

NIO continues to lead in the premium EV segment in China

With the removal of the government’s subsidies, there is a lot more emphasis on competition in the EV market in China.

NIO commands a strong 70% of the premium EV market segment in China. This leadership position gives the EV maker a competitive edge over its peers.

Aside from that, NIO is also gaining market share from premium, conventional diesel-run vehicles, which are starting to roll out their own EV models.

The innovative technology swap and diversified product line-up of NIO – as well as its expansion plans – position NIO as one of the EV players that investors should keep an eye on, despite the near-term challenges.

Disclaimer: ProsperUs Investment Coach Billy Toh doesn’t own shares of any companies mentioned.

Billy Toh

Billy is deeply committed to making investment accessible and understandable to everyone, a principle that drives his engagement with the capital markets and his long-term investment strategies. He is currently the Head of Content & Investment Lead for Prosperus and a SGX Academy Trainer. His extensive experience spans roles as an economist at RHB Investment Bank, focusing on the Thailand and Philippines markets, and as a financial journalist at The Edge Malaysia. Additionally, his background includes valuable time spent in an asset management firm. Outside of finance, Billy enjoys meaningful conversations over coffee, keeps fit as a fitness enthusiast, and has a keen interest in technology.

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