Nio Stock: Bottom Fishing or not?

Topic: Energy

Nio (NYSE: NIO) the electric vehicle manufacturer had a roller coaster ride this year with all the hassle and external factors affecting the sales and revenue. The company develops and manufactures autonomous driving technology, digital technology, electric power trains, and batteries. Nio also innovates and offers industry-leading battery swapping technology in the vehicle, Battery-as-a-service, or BaaS also their proprietary autonomous driving technology, and Autonomous Driving as a Service ADaS. The company has launched various electric vehicles supporting the technology.


Q4FY21 Earnings:

The company reported better than analyst expectation revenues in Q4FY22 at $1,553.6 million representing a 49.1% increase on a year-on-year basis. Despite the sales challenges domestically as well as internationally the company reported solid revenues and profit for the quarter. The deliveries of the vehicles were marginally higher from Q3 of this year, standing at 25,034 units, which includes 5,683 units of ES8 models sales 12,180 ES6s, and 7,171 units of EC6s models. The vehicle sales increased by 44.3% from Q4FY20 and 2.4% from Q3FY21.

The gross profit of the company increased by 48.8% YoY to US$266.7 million and based on Q-o-Q there has been a decrease of 14.7% from Q3FY21 profits.

The gross profit margins stood at 17.2% as compared to 20.3% in Q3 of the same fiscal year. The Q3 gross margins were boosted because of the sales of regulatory credit. The vehicle sales and revenue bottlenecked due to the ramp-up of revenue has led to NIO’s P/S ratio declining.

Despite the volatility and supply chain issues the company closed FY21 on a strong note with deliveries of vehicles for the entire year at 91,429 units indicating a 109.1% surge from last year.

The shares of the company have dramatically underperformed the broader market in the last year. The share price briefly outperformed the market in the month of June and July 2021and continued the volatility for the entire year. This was led due to various treacherous reasons.


Covid-Zero Strategy in China:

In Shanghai, the country’s prominent and resourceful region in March 2022 was under full restriction to curb the Covid-19 infection. This led to a rapid lockdown and mass testing as well as quarantine rules. Previously, the city was lucky to be able to avoid covid restrictions at the time of infection was at its peak in other parts of the world, so the city is underprepared for an extensive lockdown.

Since the cases are reducing there has been a gradual opening of the city back to work. The Vice Mayor of Shanghai indicated that shopping malls, department stores, and supermarkets will return to in-store operations and there will be regulations to be followed by customers. But for the plants and other businesses to resume at full capacity is still difficult.

Although the company’s plant is in Hefei there is still collateral damage by the lockdown in Shanghai since there was a halt due to supply chain partners from Jilin, Jiangsu Shanghai, and other locations that were negatively impacted by the Zero-Covid Policy. In April, the company delivered 5,074 vehicles half of the march supply i.e., 9,985 units.

CPCA in May announced that the passenger car sales in China have plunged by 35.7% to 1.04 million units in April this year. This has been the biggest drop in production since March 2020. In early May as well the sales of the passenger car segment are bleak declining 21% YoY to 254 thousand units from 1st to 8th May 2022. (Source: Seeking Alpha)


Other Factors Affecting the Company:

There has been an industry-wide semiconductor chip shortage which has led to enormous supply chain issues amongst the auto carmakers. This led to a shortage of auto parts and a lag in automotive supply during the year.

Apart from this, on May 4, 2022, the U.S. Securities and Exchange Commission included around 80 or more companies to their provisional list that might face delisting of their securities on the US stock exchange, it also including NIO. All the companies that were added have until May 25 to dispute the SEC’s classification.

The Chinese companies with shares listed in the US were given the mandate to let U.S. regulators audit their books but Beijing had been denying access to U.S. regulators citing national security concerns. Despite the denial of access, until now companies could be listed and traded on the stock exchange. This as well as rising inflation concerns have led to the broader market being in the doldrums.

NIO’s production might get thwarted if the United States raises security concerns and denies them semiconductor chips. The company has long-term contracts and direct strategic cooperation with Nvidia and Qualcomm as well as deals with Texas instruments also Infineon a German-based company for their raw materials.

These concerns and uncertainty led to turmoil in the stock price. But improving sales and expectation of better margins in the future. New and advanced electric vehicle models already launched as well as those in the pipeline have kept the company prices afloat. The company has indicated that they aim to become more affordable, which will help them enjoy a wider audience.

In these scenarios, the fundamentals and technical analysis of the company play a significant role for an investor as well as traders to predict the earnings and the market price of the company.


Source: Nio website (EP9 model)


Ratios to look out for:


 1. Debt-to-Equity Ratio (D/E):

The automotive industry is capital intensive. It includes research and development, design manufacturing, and marketing of parts or vehicles. In this case, it is important to evaluate metrics that apply to the industry NIO is a part of. The debt-to-equity ratio measures the overall financial health and indicates the company’s ability to meet its financial obligations.

 An increasing D/E ratio indicates (but is not necessarily true in every case) that the company is being increasingly financed by creditors rather than their equity. Hence both the investors as well as lenders interested in the company prefer to see a lower D/E ratio.


2. Working Capital Ratio

This ratio helps in assessing the health of the company investor wants to invest in involving measuring its liquidity. Liquidity here refers to how quickly they can turn their assets into cash to pay their short-term obligations. This ratio helps in measuring the company’s ability to pay its current liabilities through its current assets.

The Working Capital Ratio is calculated by dividing current assets by current Liability.


3. Return on Equity Ratio (ROE):

This ratio measures the rate of return that the equity holders (owners) of the company will receive based on their shareholdings. This ratio signifies how good the company is at generating returns on the investments received from the shareholders.

ROE is calculated by Net Income divided by Shareholder’s Equity.

These ratios along with PE, P/S, and Price to book as well as technical indicators can help the investors to make an informed decision while investing in the companies. Also, the type of investments based on the person and their risk appetite can be chosen by them.


Source: Nio Investor relations


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