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Is Nio’s share price a ‘buy’ after Q1 earnings beat?

Q1 was always going to be a tricky earnings release for Nio [NIO]. The results are the first to show how the electric car manufacturer has performed without government subsidies. They also come at a time when the company faces increased competition for a piece of the biggest electric vehicle (EV) market on the planet; investors weren't expecting much from the share price.

But despite the headwinds, Nio has beaten expectations this quarter, seeing its share price jump over 3% by market close on Tuesday.
Nio 1-year share price performance, CMC Markets, 29 May 2019

 

What happened last quarter?

In Q4, Nio recorded a 133.8% rise in revenue with the help of a 137% jump in vehicle sales. Yet, this translated as a 3.20 Chinese yuan loss per share. Going into the Q1 results analysts expected losses to increase to 3.22 yuan per share.

Nio also accelerated vehicle deliveries last quarter so customers could take advantage of ending government subsidies. The end of these subsidies saw a slowdown in deliveries during the first two months of 2019. Any sign of a continuing slowdown will spook investors.

 

Share price slump post IPO

Since going public in September Nio's share price has slumped a miserable 41%. Things got worse last week when the US-China trade war saw a sell-off in Chinese companies. Nio's share price hit an all-time low as a result.

Also hurting the stock has been a sharp 15% year-on-year drop in wholesale passenger vehicle sales between January and April. Nio, like any car manufacturer in the Middle Kingdom, will have felt this pressure. The decision by the Chinese government to end subsidies for EV purchases won't have helped.

-15%

year-on-year drop in wholesale passenger vehicle sales between January and April

  

Government handouts have seen China become the biggest EV market on the planet. It has also meant China is awash with EV start-ups competing for the same market as Nio. These include Singulato Motors, WM Motor, Xpeng Motors and Byton.

Nio also has to contend with Tesla entering China's premium EV market. Elon Musk's outfit have built a 'Gigafactory' in Shanghai which will soon start rolling out Teslas. Here the trade war seems to have done Nio a favour. Last week analysts slammed Tesla's chances of penetrating the market. The reason? A drop in Chinese demand caused by the trade war.

 

What happened in Q1?

Despite the mounting headwinds, Nio delivered a beat in its Q1 results. Across the board, it delivered numbers that surpassed analyst expectations.

Sales were down 52.5% compared to last year, but at $236 million they handily beat Wall Street forecasts. Losses of $373 million were less than the $472 million expected by Wall Street.

 

Market cap$4.10bn
Forward P/E-2.99
EPS (TTM)-44.10
Total Debt/Equity (MRQ)39.71

Nio share price vitals, Yahoo finance, 29 May 2019

 

Shipments of their ES8 vehicle also beat expectations, coming in at 3,989. This is a key metric in Nio's war with Tesla, and could be a sign that the company can compete against its US rival in the luxury SUV market. 

Nio's chief financial officer commented on the ES8's performance:

"Deliveries of the ES8 in the first quarter of 2019 exceeded the Company's expectation despite headwinds from EV subsidy reductions, slowing macro-economic conditions, increased competition, and seasonal factors around the Chinese New Year holiday period."

Yet, deliveries in the quarter were less than half of last quarter's amount - a number that reflects the challenge Nio faces in a post-subsidies world. Gross margin also disappointed at -13.4%, compared to the 0.4% seen last quarter.

News of the results saw the stock jump over 4% to trade around $4.02 in its American depositary receipts.

 

Where next for Nio's share price?

Nio's ability to deliver the ES8 is important for the company's future. The seven-seater SUV costs 448,000 yuan, $60,000 cheaper than Tesla's Model X. With no government subsidies, price will be a big differentiator this year. And with EV sales expected to grow in China by 27% this year, it's a USP worth having.

Longer-term, the Chinese government wants domestic carmakers to have an 80% share of EVs sold in China. If Nio can manage to position itself as the premium EV over US-backed Tesla, then it could have a bright future.

Analysts seem to have faith that Nio can soar this year. The average price target is $7.64, which would represent a hefty 98% upside if hit. Fans of the stock include Citigroup who upgraded the stock to "Buy" in April.

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