As another volatile month gets underway, I’d like to discuss the outlook for China-based electric vehicle maker Nio (NYSE:NIO). Over the past year, NIO stock price is down almost 26%. It is currently hovering around $3.60.
For comparison, SPDR S&P Kensho Smart Mobility ETF (NYSEArca:HAIL) is off 16.8% in the same period. Nio is that exchange-traded fund’s third-biggest holding, at 4.16%, of the 63-stock portfolio.
Chinese economic development has been the main driver behind the growth of the car industry, including EV sales. Since its start in 2014, the firm has been touted as the Tesla (NASDAQ:TSLA) of China. (TSLA is the top holding in the above-mentioned ETF, at 6.39%.)
Yet Nio is still a relatively young company which has not yet grown into a sustainable operation. Given current nervousness over the potential global economic effects of the novel coronavirus pandemic — with a particular eye on China — I would not be willing to commit any new capital to Nio stock, at least not before analyzing the company’s Q2 results that are due in June.
How Nio Makes Money
The group currently sells cars exclusively in China. Its two main models are the ES8 (a seven-seater SUV). and the ES6 (a five-seater SUV).
On March 18, it reported Q4 and full year 2019 financial results. Q4 revenue was $409.1 million, an increase of 55.1% from Q3 2019 and a decrease of 17.1% from Q4 2018 (i.e., year-over-year, YoY).
Quarterly net loss was $411.5 million, an increase of 13.6% from Q3 2019 and a decrease of 18.2% YoY. Vehicle margin was negative 6.0%, compared with negative 6.8% in the third quarter of 2019.
Despite the quarterly revenue increase, analysts noted that the car maker has been burning through a large amount of cash. In late April, Nio management announced a capital partnership with a group of China-based strategic investors, including the local Hefei government. Nio will now establish its headquarters in the city’s economic development region as Nio China. And it will give up a stake of the business to the strategic investors.
Put another way, as liquidity has dried up, Nio has, for now, managed to secure state aid of about $1 billion. In return, these new investors will get a 24.1% stake in Nio China. I’d like to highlight that Nio will also need to invest about $600 million into this new entity.
When the rather complex deal was initially announced, Nio stock immediately increased from about from $3.40 level to $4. But the rally has since faded. As investors take a closer look at this new structure, they may begin to wonder if the current Nio stock price can be sustained as the deal progresses.
China’s EV Market is Under Stress
China is now the largest EV market in the world the world as “1.2 million plug-in electric vehicles (PEVs) were sold in China in 2018, standing for 56% of global PEV sales.”
Nonetheless 2019 was a trying year for the EV market in the country. Indeed CEO William Bin Li commented in late 2019 that “the electric vehicle sector experienced substantial softness in the second half of 2019 after the reduction of EV subsidies in China.”
Now, amid the worries over the economic impact of the Covid-19 pandemic, we are beginning to get important updates regarding the state of the Chinese car manufacturing industry, supply chains, and EV sales. And the numbers are not all that encouraging.
The China Passenger Car Association (CPCA) issues regular metrics on the trends in the industry. January numbers showed a more than 50% YoY decrease in EV sales. Similarly, February numbers also reported a 65% YoY drop. Although March numbers showed substantial improvement over February, they were still down about 50% YoY. So, it’s going to be important to see how April numbers fare.
Bottomline on NIO Stock
We can expect China’s EV companies to be rather vulnerable as a result of the pandemic. Therefore, I would not commit new capital into NIO stock before analyzing the next quarterly report.
I’d like to highlight that much of Wall Street expects Nio management to report quarterly earnings in mid-June. However, that date may change. U.S.-based, publicly traded companies have to file their quarterly 10-Q within 45 days of the end of their quarters. In the U.S., Nio stock is traded through American Depositary Receipts (ADR). Therefore, the filing requirement does not apply to Nio. So you may want to watch for updates on InvestorPlace.
When those earnings do arrive, the Street will look not only at the sales numbers and margin levels but also at the problematic balance sheet. Investors would also like to get a better appreciation for the company’s prospects after the newly injected cash. Just because the company has lost about a third of its value in a year does not necessarily make it a bargain.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.
