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Make or break for Nio’s share price amid competition congestion?

Chinese electrical vehicle manufacturer Nio [NIO] has faced a series of bumps, scrapes and reverses in 2019. It has suffered sales disappointment driven by China’s economic headwinds, the loss of industry subsidies, thousands of battery recalls and intense domestic and global competition. 

As a result, its shares which traded as high as $10.16 in March now stand at just $3.08. This is a recovery from its $2.60 low, but it has been enough for some industry experts to raise doubts about its future. Seeking Alpha, for example, has stated that Nio is “on the borderline as the company fights for survival”.

 

Stalling sales

Nio isn’t the only Chinese electric vehicle manufacturer feeling the heat. Sales of new energy vehicles (both battery powered cars and other hybrids) dropped were down 4.7% in July and 15.5% in August, according to figures from the China Association of Automobile Manufacturers (CAAM). This was just months after the Chinese government began withdrawing subsidies for electric vehicles. 

In June, Bloomberg reported that subsidies for “pure battery cars” with a range of less that 250 miles, as opposed to the previous 150-mile range, would be halved to 25,000 yuan. The subsidies had kept electric vehicles affordable for Chinese drivers, but their removal means higher prices and faltering demand.

Between January and August Nio recorded 11,779 sales, an increase of 348.7% year-on-year and making it the top Chinese electric vehicle manufacturer in the sector, according to China Car News. However, this was still far short of its 2019 sales target of 40,000.

348.7%

Year-on-year sales increase

 

Competition congestion

According to Bloomberg there are 486 registered electric vehicle companies in China. This has raised concerns from some industry experts that a potential bubble has been created, which could result in several company failures or M&A, in the next couple of years.

US electric vehicle group Tesla will add to the crowded field when it begins production in China towards the end of 2019. Tesla, which is looking at an initial manufacturing capacity of 150,000 units recently won a 10% purchase tax exemption for Chinese production, according to Seeking Alpha.

Ford is also eyeing up Chinese production and in the next three years it plans to launch 10 electric vehicles in China, while also boosting its research and development investment in the country “to focus on the development of local vehicles and services”.

The challenge from US manufacturers is likely to pose a threat to Nio due to their financial power and ability to “wage a pricing war to gain market share,” Seeking Alpha said. “With removal of subsidy and heightened competition, the EBITDA margin is likely to remain pressurized.”


Investment strains

Nio is expected to ramp up investment in product innovation and R&D to stave off this competition and boost demand. Research and development expense for the first quarter came in at RMB 1,078m, a 55.4% increase compared to the same period in 2018, Seeking Alpha stated. Combined with lower sales and lower pricing to boost volumes this means “sustained pressure on margins and further cash burn”.

“With removal of subsidy and heightened competition, the EBITDA margin is likely to remain pressurized.” - Seeking Alpha


Finance engine

However, as Seeking Alpha noted, Nio has RMB 7,536 in cash and other equivalent so it has headroom to keep innovating. This was recently boosted by a $200million raise via a convertible debt offering bought by Chinese conglomerate Tencent Holdings and Nio chief executive William Li (see pictured). 

The group might also be boosted by a cooling in the China/US trade war if talks planned for October go well. Although Nio isn’t directly impacted by the China/US trade war given that its main market is domestic, it is hoped that a resolution could help boost the Chinese economy and lift consumer confidence.


Government backing

China is certainly backing the move to electric vehicles. According to Reuters, China’s state council has asked local governments to encourage the purchase of new electric vehicles and Bloomberg recently reported that China is making ambitious plans, mandating that electric car sales make up 60% of auto sales by 2035.


Future path

 

Market cap $3.27bn
Forward P/E -4.05
EPS (TTM) -44.10
Total Debt/Equity (MRQ) 314.11

Nio share price vitals, Yahoo finance, 19 September 2019

 

Nio is facing strong headwinds and with heightened competition – particularly from US manufacturers - the road to recovery looks long. If there is a price war then Nio, viewed as a premium brand, will suffer both in demand and margin.

However, in its favour is the backing of Tencent and with that it can keep investing in new products and technologies such as autonomous cars to make it more distinct from the competition. However, Nio must boost demand to ensure that investment doesn’t destroy its balance sheet. If there is any risk of that then Nio may become an M&A target.

But, the support in the form of local governments could help drive sales. China is a huge market and with a growing middle class there will be demand if Nio can get their product and pricing right. The company could also give greater focus to its marketing and advertising and build more glamour and excitement around the brand. This will also make it stand out against the mainly state-backed domestic competition and US giants. 

The globe cannot regress to full fossil fuel dependency. The dial on environmental thinking has turned and electric vehicles are here to stay. Nio needs to keep driving forward to take the opportunity.

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