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Stock Watch

How has China’s tech crackdown affected the Nio share price?

Nio share price: Nio electric car front view

The Nio share price has fallen 20.1% so far in 2021 (through 24 August). However, this loss is less than that suffered by the Chinese technology sector. The Invesco Golden Dragon China ETF has collapsed by 28.4% in the same period. As of 24 August, Nio was the fund’s second-largest holding with a 10.3% weighting.

Meanwhile, artificial intelligence (AI) and internet services company Baidu saw its stock decline by 28.3% in the year-to-date (through 24 August), while agricultural ecommerce platform Pinduoduo has seen its share price crash by 44.2%. Ride-hailing firm Didi’s share price has also fallen 38.5% since its 30 June IPO

Given its peers’ downward trend, Nio has got off relatively lightly as Beijing clamps down on its technology giants. Baidu, Pinduoduo and Didi have all been targeted by specific probes by the Chinese authorities, while Nio, as yet, has not. However, its performance so far this year trails that of Tencent and Alibaba (down 12.7% and 26.2%, respectively, as of 24 August), two of the country’s largest tech companies, both of which are being actively investigated by Chinese regulators.

Part of the reason for this may be that – besides suffering from a general lack of appetite for Chinese tech stocks amid the government’s crackdown – the Nio share price has also been hit by a widespread selloff in luxury goods producers following signals from Beijing that the state is also planning a crackdown on income inequality President Xi Jinping has called for limitations on the “excessively high incomes” of China’s wealthiest individuals as part of a drive to alleviate poverty in the country, according to state media. Such a move would naturally reduce the market for luxury carmakers like Nio.

Are supply chain disruptions dragging the Nio share price down?

Nio is also suffering more from a recent spate of supply chain disruptions than some of its rivals. In the company’s second quarter 2021 earnings call on 11 August, founder and CEO William Li said that supply chain capacity would determine overall delivery volume, adding that this had been impacted by the Covid-19 pandemic as well as extreme weather events. 

A total of 21,896 vehicles were delivered in the second quarter, and Li expected that figure to rise to between 23,000 and 25,000 in the third quarter. At the most conservative, this represents an increase of around 5%. However, rival electric vehicle (EV) producer Li Auto recently reported an 11.4% increase in delivery numbers from June to July, suggesting it is handling the supply chain disruptions better than Nio.

Despite this, narrowing losses and a 127.2% year-over-year increase in revenues pushed the Nio share price up more than 1% in after-hours trading following the earnings announcement, although it closed the following day 3.4% down.

Analysts optimistic following positive earnings

Looking ahead, there is reason to believe that the Nio share price will be sheltered from the worst of the Chinese government’s interventions in its technology sector.

Luke Lango, writing for InvestorPlace , argued that “China needs NIO to succeed if the country wants to compete in the global EV market, and not have its auto market dominated by Tesla”, adding “plus, NIO is just a $70bn company — it’s not big enough to be regulated yet.”

According to Benzinga , Ming-Hsun Lee, an analyst with BofA Securities, reiterated a buy rating and a $62 price target for the Nio share price following the positive earnings report. In a note, he observed that the upper end of expected deliveries would mark a 14% increase and that the company is expected to accelerate its R&D spending with a view to cracking autonomous driving.

 

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