“Looking ahead, we can envision the stock outperforming in the 2H of the year at the very least on a relative basis,” Deutsche Bank analyst Edison Yu’s team said.
Deutsche Bank analyst Edison Yu’s team reiterated their belief that NIO (NYSE: NIO, HKG: 9866, SGX: NIO) is embarking on the most significant product cycle in the company’s history, following last week’s first-quarter earnings and the team’s meeting with NIO management on Tuesday.
NIO’s deliveries have been under pressure for the past few quarters due to operational bottlenecks and Covid lockdowns, but they are on track to increase from about 7,000 units per month in May to 25,000 units by the end of the year, shifting the narrative from supply constraints to a strong product supercycle, the team said in a research note sent to investors on Tuesday.
Critical to this is that NIO’s ET7 and ET5 sedans are set to be the most desired cars in China’s premium market this year, potentially representing category-defining products, the team said.
Yu’s team left their forecast for NIO‘s deliveries in 2022 unchanged at 160,000 units and continues to expect the company to deliver 320,000 units in 2023.
The team reiterated their Buy rating and $45 price target on NIO.
NIO gained 16.7 percent to $18.66 at the close of the US stock market on Tuesday, and the price target implies a 141 percent upside.
December run rate could reach 25,000
After being hit hard by the Covid lockdowns, NIO has fully returned to normal production levels. The company’s demand has likewise recovered, with a record order backlog in May, Yu’s team noted.
NIO has been stuck at a peak of 10,000-11,000 deliveries since September, but that will change in the third quarter, when it is expected to see run rates approaching 15,000, the team said.
NIO’s management appears to be on track to increase ET7 sales to 5,000 units by August, while keeping total sales of the first-generation SUVs — ES8, ES6 and EC6 — essentially at around 10,000 units, according to the team.
This translates into sales of about 43,000-44,000 units in the third quarter. Then in the fourth quarter, sales of the new ES7 SUV and ET5 midsize sedan will increase significantly, possibly to 5,000/10,000 units per month, Yu’s team said.
NIO will officially launch the ES7 on the evening of June 15 Beijing time, which will be a higher-end midsize SUV with a base price that could exceed RMB 400,000, targeting the BMW X5 category that has a total addressable market of 200,000 units in China, the team noted.
The ES7 will be built at NIO’s existing Hefei plant and deliveries will begin in late August, NIO’s management has previously said.
Meanwhile, the NIO ET5 is being built at NeoPark’s new plant and should start deliveries in September, with the goal of delivering 10,000 units per month by the end of this year, according to Yu’s team.
To support these higher volumes, NIO’s management has made additional efforts to improve supply chain resiliency.
This includes securing three additional dedicated battery lines from CATL, on top of a total of seven by 2022, the team said, adding that NIO is also placing direct orders with high-value chip suppliers and making multiple purchases of low-value chipsets.
The new NeoPark facility also brings component suppliers closer to the production site, according to the team.
“This gives us confidence NIO will have much more robust supply chain management ability with the new NT2.0 platform (ET7, ES7, ET5) relative to first generation which was developed in a much different backdrop for EVs,” the team wrote.
Overall, assuming some cannibalization on sales of NIO’s first-generation SUV, its total monthly run rate in December could reach 25,000/month, Yu’s team said.
Future growth cadence
Looking ahead to 2023, NIO’s management plans to update all of its first-generation SUVs to transition to the NT 2.0 platform, Yu’s team said, adding that this means it will have six very fresh products by the end of next year.
In addition to NIO’s new products, its semi-solid-state batteries are also expected to be available during the fourth quarter, the team noted.
“Longer term, NIO strategically is aiming for 8-10 models suggesting to us that a MPV and compact SUV model will likely be added to the line-up,” the team wrote.
In addition to its efforts in China, NIO has entered Norway as the first stop for its overseas expansion. The company will also enter Germany, the Netherlands, Sweden and Denmark later this year.
NIO’s initial sales in overseas markets will be low, but the brand is gaining recognition and has big ambitions to roll out its closed-loop charging infrastructure in Western Europe, Yu’s team said, adding that recent media reports suggest NIO is exploring manufacturing battery swap stations in Hungary.
Beyond that, NIO’s mass-market brand is making progress, with the second phase of NeoPark confirmed as a production site. The sub-brand will be priced between RMB 200-300,000 with multiple models expected to be delivered in the second half of 2024, the team noted.
In addition to these plans, NIO has recognized the importance of battery supply, especially in light of soaring raw material prices, and has become increasingly aggressive in battery development.
NIO management said the company has more than 400 employees working in R&D related to chemistry, cell and battery pack design, BMS and manufacturing processes.
The company plans to begin production of these new batteries in the second half of 2024 and use them in NIO’s premium and mass-market vehicles.
NIO will essentially source some of its supply internally and continue to buy the rest externally, similar to Tesla, which naturally brings a tailwind to gross margins, Yu’s team noted.
Sentiment bottoming out
“Looking ahead, we can envision the stock outperforming in the 2H of the year at the very least on a relative basis,” Yu’s team wrote.
Covid lockdowns have certainly delayed the uptick in NIO deliveries, but now appear to be back on track, the team says.
“We think the narrative of going from 7k/month last month in deliveries to 25k/month exiting the year can alleviate many investor concerns about demand and supply chain management,” the team wrote.
It’s worth noting, however, that NIO’s margins are under pressure as raw material prices rise.
NIO did not update its 18-20 percent vehicle gross margin target for the year, but acknowledged that achieving that target will certainly be more challenging amid rising battery raw material costs, Yu’s team said.
Vehicle margins in the second quarter will decline sequentially as NIO switches to a battery cell pricing index that is updated monthly with CATL, the team noted.
NIO’s margin will see meaningful sequential improvement in the third quarter, but could still be lower than the first quarter, depending on trends in lithium carbonate prices, the team said.
“Taken together, we reduce our gross margin forecast for 2022E by 160bps to 16.5%, assuming ~18% vehicle gross margin,” the team wrote.