On the surface, Nio (NASDAQ:NIO) has all the makings of a Chinese stock that would be taken to task amid a contagion such as the novel coronavirus. Yet in February, Nio lost just 3.28%, a stellar performance relative to the 9.3% shed by the S&P 500 during the same span.
As has been widely noted, the catalyst keeping Nio from a disastrous February showing was news out on Feb. 25 that the company entered into an agreement with the municipal government of Hefei for $1.42 billion in financing.
“Under the framework agreement, Hefei government expects to provide resources and funding support for the long-term growth of NIO in Hefei, and NIO plans to establish NIO China headquarters, further expand its operations and deepen its relationship with local ecosystem partners in Hefei,” the company said in a statement.
By now, Nio’s long-running profitability woes and financing issues are well known, so the government funding is helpful but some analysts remain skeptical.
“We remain dubious over the company’s fundamental outlook, and remain concerned about Tesla competition,” said Bernstein analyst Robin Zhu in a recent note. “But the existence of a government backstop means the ‘EV call option’ thesis for investing in NIO gains some credibility.”
Competitive Concerns And More
Yes, Tesla (NASDAQ:TSLA) represents a credible threat to Nio in its home market of China, although the former is a luxury car brand while the latter is positioning itself as a mass market play. To be sure, Tesla shares were bludgeoned last week due to slumping automobile registrations in China, a scenario widely attributed to COVID-19 epidemic.
“Data from LMC Automotive showed that 3,563 Tesla vehicles were registered in China in January, up from 853 vehicles a year earlier, but down from the 6,613 vehicles registered in December,” according to Reuters.
It’s not unreasonable to surmise that if vehicle registrations are sliding in China due to the coronavirus, then this is a scenario that will impact a broad swath of automakers, including Nio. There are indicators the world’s second-largest economy is on fragile ground and that could be a drag on Nio stock.
On Saturday, China’s official Purchasing Managers’ Index (PMI) reading for February checked in at a grotesque 35.7, well below the 46 handle economists were expecting (readings below 50 indicate contraction). Putting that into context, this is the most rapid pace of contraction in Chinese economic history. It’s hard to envision a scenario where this is good for Nio stock.
The PMI report gives credibility to the slew of banks that have recently ratcheted down first-quarter GDP growth estimates for China, some to as low as 2.5% or even 2%. Remembering that automakers are classified as consumer discretionary companies, it’s hard to make a case for Nio against the backdrop of declining Chinese economic growth.
The Bottom Line on NIO
There are other bleak data points confirming that coronavirus is a drag on Nio. The company delivered January sales figures of 1,598, down 11.9% from a year earlier. With the outbreak worsening since then, investors may want to brace for slack February and March sales figures, pointing to an increasing likelihood of an overall dismal first-quarter for the electric vehicle maker.
The good news is that the aforementioned financing from the Hefei government acts as an insurance policy, protecting Nio from concerns regarding its near-term viability. That good news is baked into the stock, but more coronavirus-related headwinds and slowing Chinese economic growth are not.
Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold a position in any of the aforementioned securities.
