Chinese electric vehicle (EV) maker NIO Inc. (NYSE: NIO) (SGX: NIO) (SEHK: 9866) saw a strong rebound in its share price over the past week.
This has brought about an increase of about 25% in June alone, elevating NIO’s share price to its 3-month high.
Here are some of the reasons why investors should look into adding NIO into their portfolio, as well as the risks involved.
Monthly deliveries recovered in June
Investors anticipate growth in Nio’s sales, capitalising on its advanced charging technology and infrastructure.
The recent boost in the company’s stock value is likely due to the anticipation of a recovery of its monthly June deliveries after NIO reported four consecutive months of declines from 12,000 in February to slightly over 6,000 in May.
In June, NIO delivered 10,707 vehicles, consisting of 6,383 premium smart electric SUVs and 4,324 premium smart electric sedans.
For Q2, NIO delivered a total of 23,520 vehicles.
Collaboration with Chinese oil titan
One of the key advantages for NIO over its competitors is the battery swap stations that allow customers to cut initial vehicle costs by opting for a monthly subscription battery service.
This will also generate sustainable recurring income for NIO in the long term.
Over the week, news of an agreement signed between NIO’s energy subsidiary and Chinese oil titan, China National Offshore Oil Corporation (CNOOC), is expected to create a partnership that will enhance its comprehensive charging and battery swapping infrastructure in China.
The news reported that the collaboration will leverage the oil firm’s expertise and strengths to boost NIO’s charging and battery swapping network rapidly.
Inexpensive valuation
NIO is also trading at a fairly attractive valuation as compared to its peers.
Currently, NIO is trading at around the same level to its expected sales for this year, which is considered inexpensive as compared to its peers that are trading at around two to eight times their sales.
However, the low valuation could be due to the intense competition in the market, impact on vehicle margins and the operating losses recorded at the moment.
Aside from that, here are some of the other risks that investors should pay attention to when considering NIO stock.
Earnings slowed and missed expectations
On 9 June, NIO reported its first-quarter earnings.
Net losses for the quarter (ending 31 March 2023) have significantly increased to RMB4.86 billion ($707.6 million) as compared to RMB1.27 billion reported in the same period last year.
Meanwhile, total revenue experienced a modest rise of 7.7%, reaching RMB 10.68 billion (US$1.55 billion).
However, this falls short of consensus expectations of RMB 11.80 billion. Vehicle sales also saw a slight decrease of 0.2%, totalling RMB 9.224 billion.
Aside from that, cost of sales increased significantly by 24.2%, outpacing the revenue rise.
This surge resulted in a contraction of the gross margin to 1.5% from the previous 14.6%.
On a positive note, deliveries saw an uplift of 20.5%, totalling 31,041 vehicles.
For the second quarter, NIO anticipates total revenue to be in the range of RMB 8.74 billion to RMB 9.37 billion.
This projection is below consensus expectations of RMB 17.98 billion.
The company also predicts a drop in vehicle deliveries, expecting between 23,000 and 25,000, a reduction from 25,768 reported a year ago.
China’s EV competitive pricing compressed NIO’s margin
China’s EV market’s competitive pricing is compressing NIO’s vehicle margin, which dropped from 20.1% in 2021 to 13.7% in 2022, and year-over-year from 18.1% to 5.1% in the first quarter of 2023.
Despite declining margins, Nio continues to invest in its Power Swap network. It attempts to offset this pressure by reducing marketing expenses, but its adjusted operating loss nearly tripled year-over-year in the first quarter.
Meanwhile, other Chinese EV makers, such as Li Auto Inc (NASDAQ: LI) (SEHK: 2015), which manufactures plug-in hybrid electric vehicles, saw its deliveries surge by 177% in 2021 and rise by 47% to 133,246 vehicles in 2022.
In the first quarter of 2023, Li Auto’s deliveries increased by another 66% year-over-year and grew 14% sequentially to 52,584 vehicles, maintaining a much higher vehicle margin of 19.8%.
Pricing competition could hurt NIO
Today, NIO stands out from its rivals with a network of battery swapping stations and a diverse range of electric SUVs and sedans. It offers a “Power Swap” service for a monthly subscription fee, and provides discounts on vehicles for those subscribing at the time of purchase.
However, the EV pricing competition in China could hurt NIO as Tesla Inc (NASDAQ: TSLA) led the aggressive pricing strategy in China.
This has resulted in slowing sales growth and escalating losses amid the inflationary pressure and rising interest rate environment.
Investors should trade with caution even as the share price has rebounded to its three-month high level.
Disclaimer: ProsperUs Investment Coach Billy Toh doesn’t own shares of any companies mentioned.
