NIO: A Possible Entry Point - NIO Inc. (NYSE:NIO)

Externally, the overall macro market is experiencing turbulence, but the EV segment is still strong. This is coupled with what appears to be improving internal efficiencies.

The stock is trading at all-time lows and valuation metrics are low compared to what normal growth stocks trade at.

China's vehicle market is in shambles right now. I have long been against the electric-vehicle manufacturer, NIO (NIO), and I am still against the stock. Since the IPO, the stock has been extremely overvalued for the majority of its time on the market, however, this may have reached an inflection point.

The overall Chinese vehicle market shrank in 2018 by just under 3% after decades of positive growth. This is a concerning shift as China is also the global leader for vehicle manufacturing by a large margin (~6 percentage points higher than the continent of Europe). Contraction of buyer demand could have devastating effects on the Chinese economy.

However, it is a catch-22. Below, we can see that despite the last 10 months of overall decline, there has been strong growth within the EV segment, at least up until 2019.

This shows the major discrepancy within the Chinese market, there are many more combustion engines being sold than electric which provides ample opportunity for companies such as NIO. As of last year, EVs only represented ~7% of new vehicle sales with a compound growth rate of 118% since 2011 according to Bloomberg.

The Chinese government is doing everything it can to boost car sales in order to save its slowing economy. Beijing is no longer allowing local governments to impose restrictions on vehicle purchases and is removing any that apply to 'new energy' vehicles. Beijing is also pushing for local governments to allow pickup trucks and bigger vehicles to boost sales. The reason for the slump in vehicle sales is 1) Urban populations are becoming saturated and 2) Government subsidies are being cut.

Just a decade ago, China's vehicle market sold 13.6 million vehicles. In 2017, at the peak, the market sold nearly 29 million vehicles, more than 100% growth in less than a decade.

As of 2018, there were a total of 327 million registered vehicles within the country. Going back to 2005, this was a measly 31.6 million. The growth has come from the purchasing patterns of the urban environments. More than 60 cities have at least 1 million vehicles, 27 have at least 2 million, and 8 have more than 3 million registered vehicles.

Now that urban buyers have a saturated vehicle market, the growth has to come from the rural side of the country. This shift in demographics is seen across every industry within the Chinese market. Rural is home to the majority of the population, but they have less disposable income and have historically been neglected by companies. This leaves a gap for EVs to fill.

The EV market has long been spurred from government subsidies. However, since 2016, this has been on the decline. Earlier this year, the Ministry of Finance stated that (1) subsidies will be decreasing and (2) the requirements to qualify will be increasing. According to a Jefferies analyst, the combination of these two changes resulted in a total reduction of 67%.

The goal of the government is to shift the costs onto the manufacturers in an attempt to relieve some of the ever-increasing government debt, as all subsidies for EVs are reportedly phased out by 2020. Some auto-manufacturers have stated that this will actually cause them to raise prices, but unless they already own substantial market share, I do not foresee that being a liquid strategy.

This has a direct impact on smaller, newer manufacturers such as NIO. Large players such as Ford (F) are upping their EV offerings within China and they have more margin to play with and price squeeze competitors. NIO has no margin of error and cannot afford to up its price unless the market directly values the luxury style EV more than standard, which I doubt considering the growth is forecasted in rural areas.

NIO is trading at all-time lows. At the current market price, the company has deflated down to $2.67 billion in market cap. Compared to sales, the stock trades at roughly 3x revenues, extremely low for what is considered a growth stock.

Furthermore, the income statement also appears to be improving. While revenue for the latest quarter was about half of the previous, if we compare 2019-03 to 2018-09 (similar revenues), we can see an improvement in expenses and profit margins.

Revenues increased (compared to 2 quarters ago) in the most recent quarter, but operating expenses decreased and net income increased. Of course, we can see that was because of the massive preferred dividend.

I would not categorize NIO as a conviction buy, rather, if you have that 'gut feeling', then this is a price point to initiate. The EV market is forecasted to outperform despite headwinds, and the company is also internally improving. However, it is yet to be seen how much demand there is for the product and the extent of cannibalization as the ES6 is released.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Seekingalpha.com

Powered by NewsAPI.org

Keywords:

Nicaraguan córdoba • Nicaraguan córdoba • New York Stock Exchange • Nicaraguan córdoba • Macroeconomics • Turbulence • Growth stock • Trade • China • Market (economics) • Electric vehicle • Nicaraguan córdoba • Nicaraguan córdoba • Stock • Initial public offering • Market (economics) • Inflection point • China • Market (economics) • Economic growth • China • Globalization • Manufacturing • Europe • Recession • Economy of China • Catch-22 • History of China • Combustion • Electricity • Nickel(II) oxide • Electric vehicle • Sales • Economic growth • Bloomberg L.P. • Government of China • Sales • Economy of the United States • Beijing • Regulation • Plug-in electric vehicle • Beijing • Vehicle • Recession • Sales • Subsidy • China • Market (economics) • Vehicle • Market (economics) • Vehicle • Economic growth • Vehicle • Vehicle • Vehicle • Vehicle • Economic growth • Demography • Industry • History of China • Disposable and discretionary income • Electric vehicle • Electric vehicle • Market economy • Subsidy • Ministry of Finance of the People's Republic of China • Cost • Government debt • Subsidy • Electric vehicle • Price • Market share • Nickel(II) oxide • Ford Motor Company • China • Competition (economics) • Nicaraguan córdoba • Price • Market (economics) • Economic growth • Nicaraguan córdoba • Market capitalization • Trade (financial instrument) • Revenue • Growth stock • Income statement • Revenue • Fiscal year • Revenue • Profit margin • Revenue • Fiscal year • Fiscal year • Operating expense • Net income • Preferred stock • Nickel(II) oxide • Trade • Price point • Market (economics) • Corporation • Demand • Cannibalism • ECMAScript • Corporation • Stock market • Seeking Alpha • Stock market •