Article by Finance Master Li
Master Li admits that the title is slightly sensationalized, but it can be confirmed that NIO’s growth cycle in the secondary market is about to arrive soon.
Despite the recent poor performance of the global capital market, NIO’s performance in the US stock market has been impressive. Although NIO’s stock price fell on the last trading day of last week due to the overall market downturn, it saw continuous gains for over 5 days with an increase of over 20% since the release of its Q2 report on September 7th.
The main factor that drove NIO’s market value to rise was its Q2 report– NIO’s Q2 revenue for the first time exceeded 10 billion yuan. Although the financial indicators are not particularly outstanding, the secondary market still has high expectations for NIO, and many institutions have begun to adjust their ratings for NIO. Today, Master Li will talk to everyone about what information there is in NIO’s financial report, who is optimistic about NIO in the secondary market, and what is NIO’s new valuation logic?
What’s in NIO’s financial report?
Before talking about NIO, Master Li will first talk about the development trend of the new energy vehicle industry in recent times. From both the industrial and capital perspectives, the overall momentum of the new energy vehicle industry is good and has always been on an upward trend, but the sub-sector of new energy vehicles in the secondary market has performed poorly and has been in a lukewarm or even declining state for the past three months.
Although we maintain an optimistic attitude towards the development of the industry, many industry insiders have put forward new views on the competition pattern of new energy vehicles. They believe that traditional car companies may be the new driving force for the development of the new energy vehicle industry in the next stage, such as BYD, Changan Automobile, and so on, while new automakers may encounter new obstacles on their development path.
The point that Master Li expressed in the article he wrote some time ago, “New Forces are no longer new, and Old Forces are no longer old,” is exactly this point. With the release of the Q2 report, let’s take a look at NIO first.
Sales:
The delivery in Q2 reached 25,059 units, a YoY increase of 14.4%, and a slight decline from the previous quarter.
Revenue:
The total revenue of Q2 was 10.292 billion yuan, for the first time exceeding 10 billion yuan in a single quarter, with a YoY growth of 21.8% and a QoQ increase of 3.9%.
Profit:
The Q2 operating loss, excluding stock-based compensation, was 2.3551 billion yuan, an expansion of 360.3% YoY and an increase of 37.3% QoQ.
Master Li will now explain the hidden indicators behind the financial report.# NIO’s Financial Report Analysis
NIO’s trend is positive as it achieved record quarterly revenue, despite a decline in sales. The growth of revenue suggests an increase in NIO’s Average Selling Price (ASP), driven mainly by ET7.
However, although revenue increased, profits declined due to a high investment in research and development of 2.15 billion yuan in Q2 and a decrease in gross profit margin in vehicle sales, which was 16.7% in Q2 and 18.1% in Q1.
Overall, NIO’s financial report is within neutral preference as it is not exceeding expectations from the data. But contrary to expectations, the release of the financial report led many institutions in both domestic and overseas secondary markets to increase their ratings on NIO.
It is well-known that the ratings on the domestic secondary market are generally “for reference only”, whereas the ratings on the overseas secondary market have actual value. Overseas institutions, including Deutsche Bank and Morgan Stanley, are optimistic about NIO, while CICC, a domestic institution, has consistently given NIO a “buy” rating. Many of old Li’s friends are also studying NIO closely due to its rising market value.
Old Li believes that this recent rise in NIO is different from the past, as investors have developed a better understanding of NIO’s fundamentals. Old Li recently discussed NIO, XPeng, and Li Auto with some USD funds, and many friends gave the opinion that NIO’s development is the most promising. Although Li Auto has the highest single-vehicle profitability, it is difficult for them to maintain high sales and profitability. On the other hand, although XPeng follows a high-volume strategy, there is still pressure from new players emerging in the market.
NIO has almost no competitors in the subdivided market, and can maintain a certain moat. However, its primary issue is its high investment. Generally, for traditional automakers with a revenue scale of 30 billion yuan, the financial report should at least break even or have a net profit of 5-10%. But NIO’s financial report has always been losing money, partially due to its high costs, and also due to continuous investment in new branding and models.
Why are the secondary markets optimistic about NIO?
In the business world, there are many differences between the development of an industry and the development of an enterprise. In general, a company consists of multiple business segments, each of which must go through its own nascent stage, growth stage, and maturity stage. A successful business segment represents a “growth curve,” and a successful company continually replicates these “growth curves”. The new energy vehicle market is currently in the mature period, with some companies, such as NIO, still in the nascent and growth stages.# English Markdown Text:
According to the development law of enterprises, we can see that NIO’s “866” model, XPeng’s G3, P5, P7 and Li Xiang ONE are its first growth curves, driving the first stage of enterprise development, including NIO, XPeng and other new forces.
The reason why the secondary market is optimistic about NIO is mainly because people think that NIO’s “growth curve” is more diversified. In addition to 866, ES7, and ET7 in the NIO brand, ET5 will also assume a new growth mission, and NIO’s second and third brands will become new growth curves in two or three years.
To sum up, Lao Li believes that the reasons why people are optimistic about NIO are mainly as follows:
The first is that the fast product replacement makes up for the downtime, and NIO is the fastest among all new forces in intergenerational switching. ES8, ES6, EC6 and other models will switch to the NT2.0 platform, and almost all new models are developed based on the new platform.
It can be seen that NIO has released 6 models and delivered 5 of them, which is the development and listing speed of traditional fuel vehicle companies. In comparison, XPeng has only released 4 models and delivered 3 of them, while Li Xiang has released and delivered 2 models.
With the steady volume of existing models, the successive delivery of ES7 and ET5 has increased everyone’s expectations of NIO’s sales volume. Many researchers believe that the fourth quarter of this year is the time when NIO’s car delivery volume will increase significantly.
The second is that NIO has launched popular products, realizing the transition from “product-driven sales” to “market-driven sales”.
In the 400,000-level luxury brand market, NIO is the leader, and Lao Li also believes that NIO’s market position in this field will not change for a long time in the future. However, the problem is that this segmented market is too small and there is no room for imagination. NIO has relied on brand and product to drive sales in recent years.
ET5 changes the market pattern. As the first boxing product of the second generation of NIO’s model cycle, ET5 has pulled NIO into the largest 300,000-level market share, and ET5 has promoted NIO to enter a new stage of “market-driven sales”. A fund manager joked that ET5 is to NIO what the C-class is to Mercedes and the 3 Series is to BMW, making us closer to NIO.## Translation
At a recent closed-door meeting of stockbrokers, a certain vice president of a fund stated that in today’s automotive industry, profit relies on hardware and sales volume is king. Those who have good sales have the power of speech. In the past, people were fond of hearing stories, but now everyone loves to see sales figures.
Old Li believes that the business world of new energy vehicles is also simple. In the early stages, everyone had money to invest and listened to stories together. Those who told good stories received funds in the primary market. In the current stage, everyone has no stories to tell and is competing on their capabilities. Those with strong capabilities are recognized in the secondary market.
What is the new valuation logic?
From a long-term perspective, how does the secondary market view NIO? To be frank, the domestic secondary market has always had mixed views on NIO in recent years. When NIO was at its darkest in 2019, most people in the secondary market had little faith in NIO because the capital market was also difficult at that time. After 2019, the number of people in the secondary market who held a positive view of NIO increased. Until now, people’s view of NIO remains mixed. This is also understandable. As a group of “outsiders,” people have different views on the development of companies and preferences for founders.
From a rational perspective, Old Li believes that some researchers in the secondary market have a novel thought process for assessing NIO. Old Li is happy to share it with everyone:
Their thinking is that the future new energy vehicle market will be split into three categories: 100,000-200,000 yuan, 200,000-300,000 yuan, and 300,000-400,000 yuan. If Xiaomi automobiles are priced in the first category, Huawei automobiles are priced in the second category, and Apple automobiles are priced in the third category, which domestic companies might compete with these three companies? Companies that can compete are high-quality companies.
Everyone’s answer may be relatively consistent: BYD is one, Tesla is one, and NIO is another.
From this perspective, we can easily understand why NIO is laying out the Alpine project, why it is laying out a third brand, and why it is laying out the smartphone industry.
In the long-term strategy, NIO’s approach is like casting a wide net. It will have competitiveness in various niche markets because the strategy of targeting high to low-end markets is an effective strategy that has been tested by traditional companies over the past century. NIO has obvious advantages in the market above 400,000 yuan. New technologies can be continuously replicated into new brands, just like the Porsche-Volkswagen-Skoda in the gasoline car market. When advanced technology is applied to economic models, NIO will be able to more easily dilute its costs and achieve an increase in gross margin.In the short term, before the second and third brands are officially released, everything is still a story. In terms of revenue, everyone is still competing based on sales volume. At the Q2 earnings conference, NIO announced that the expected total delivery volume for Q3 would be 31,000 to 33,000 units. Based on the sales volume in July and August, it is estimated that NIO’s sales volume in September will be about 10,000 to 12,000 units, which is also NIO’s best delivery performance in history.
The secondary market is more optimistic about NIO’s sales volume and earnings in Q4. With the coming of the peak season in Q4, sales of NIO’s existing models will reach new highs. In addition, the delivery of NIO ET5 is scheduled for September 30th, so its sales and revenue will mainly be reflected in the Q4 report. Some analysts believe that as long as NIO has sufficient production capacity, its monthly sales volume is likely to exceed 20,000 units, which is an imaginative number for its market value.
As for NIO’s short-term performance in the secondary market, Mr. Li believes that the imagination will not be too big. The current bullish news for NIO has not yet materialized, and more is forward-looking communication among investors. The most important reason is that there are many uncertainties in the current US stock market. But from the time line of Q4 or next year, if there is good liquidity in the secondary market, NIO’s market value will have greater room for growth, and all of these will depend on NIO’s delivery volume.
This article is a translation by ChatGPT of a Chinese report from 42HOW. If you have any questions about it, please email bd@42how.com.