In China’s EV Bubble, Nio Stock Straddles Line Between Target and Victim

NIO stock suffers from intense competition and premium EV pricing amid a sluggish economy

Nio Inc (NYSE:NIO) stock has been an under performer since the IPO last September. The stock touched a low of $2.42 in June. A relief rally followed and NIO stock has clawed back 28% to yesterday’s $3.09 close.

With China's EV Bubble, Nio Stock Straddles Line Between Target and Victim
Source: THINK A /

The rally was supported by the company’s second quarter delivery update and a temporary bounceback in China’s auto sales amidst discounting.

However, I remain bearish on Nio stock with macro-economic and industry specific headwinds likely to result in continued cash burn for the company.

This article will discuss the specific factors that are likely to impact the electric vehicle maker in the coming quarters.

EVs EVerywhere

China is in the midst of an economic slowdown and sluggish growth will hit an already-overcrowded electric vehicle sector.

To put things into perspective, there are 486 electric vehicle manufacturers registered in China. That’s more than triple the number of two years ago.

Indeed, the EV industry has grown at a scorching pace in China. However, the senior executive of Beijing Electric Vehicle is of the opinion that only 20 to 30 companies might survive. I do agree with this assessment.

It is worth noting that traditional car manufacturers have also ventured into production of electric cars and that has intensified competition. Big names in the automobile industry have the financial flexibility to sustain the initial cash burn, which can kill smaller players.

Another challenge for the local EV companies in China is potential cut in government subsidies. Beijing intends to spur innovation-driven cost decline for electric cars, but the impact is likely to be negative in the near to medium-term. EV manufacturers need to increase the selling price or take a hit on margins.

Increasing prices can negatively impact Nio, among other players in the industry.

As an example, Nio has SUVs that are priced at CNY 450,000 ($63,877).

Tesla (NASDAQ:TSLA) will start production from its China gigafactory toward the end of 2019. The company’s Model 3 will have a base price of CNY 328,000.

Tesla will also be launching Model Y in 2020 and does not expect its cost of production to be significantly higher than Model 3. Therefore, the popular crossover can be more attractive than Nio SUV in terms of pricing.

Cash Burn Worries

Nio reported total cash of CNY 4.9 billion as of March 2019. In addition, the company had CNY 2.5 billion in short-term investments. Clearly, the liquidity is not a concern for the foreseeable future, but cash burn is a worry.

With current delivery volumes, Nio is unlikely to report positive cash flows. This concern will impact NIO stock as investment in R&D remains high. Even if R&D is excluded, Nio still needs higher sales volumes to deliver positive EBITDA and cash flows.

The EV maker also reported short and long-term debt of CNY 9.0 billion, as of March 2019. Therefore, the company has significant debt servicing cost, which adds to the balance sheet stress.

With weak credit metrics, Nio is faced with weak market conditions and heightened competition. These factors will put pressure on the stock.

Will Nio Get Caught in Consolidation?

A natural course of progress in the Chinese EV market will be toward merger and consolidation in the industry.

Nio has a market capitalization of $3.25 billion and the company still looks expensive considering that there is no free cash flow visibility.

However, if NIO stock continues to trend lower, there can be a potential case of the company as an acquisition candidate.

There was news that Daimler and BMW are looking at joint production of EV in China to save money. The joint platform could potentially save $7.85 billion for each car maker. However, as the report states, brand dilution could be a concern for BMW.

I believe that bigger players will consider acquisition of beaten-down manufacturers as a relatively cost-effective way of making an entry in the Chinese EV market.

My acquisition view is speculative, but likely in the next 12-24 months as margin pressure takes a toll on Nio.

Bottom Line on Nio Stock

Nio stock is likely to remain sideways to lower as headwinds of economic slowdown, competition and cash burn weigh on the company’s outlook and credit health.

Considering the crowd of EV manufacturers in China, consolidation is the way forward and Nio can potentially be a good acquisition target sometime down the line.

As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.

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