To The Moon

Models produced by Chinese carmaker NIO Inc ( $NIO Inc.(NIO)$ or $NIO Inc.(NIO.SI)$) are neither the cheapest nor the most expensive ones on offer in China's crowded automobile market; the addressable market can roughly be described as being the "middle-to-upper" income segment. Despite high technical watermarks, there are a number of other competitors that cater to this segment. Furthermore, this segment is arguably the most vulnerable to the economic headwinds China is beginning to feel (as described in an article published in December). 

Its latest earnings release is stated to have missed analysts' expectations; however, this isn't likely to significantly impact on the stock's valuations since they have already been in a gentle decline over the past year. 

Why they were deemed to be missing expectations, despite some very good top-of-the-line metrics, is worthy of examination. 

Trend Drilldown

In general trends, it can be seen that the company generally runs on very thin margins.

While the impact of cost of sales on total revenue did have some encouraging downtrends through 2020 and 2021, this has steadily trended upwards since to consume nearly all of revenue earned. The company's revenues used to be almost entirely driven by the sales of cars. In the past year, revenues from  "other" sources -- namely the sale of accessories and power solutions, resale of used cars, sale of power piles, etc. have shown some encouraging increases. The growth of "other" sales is indicative of a strong sense of user retention. Overall, total operating expenses are paring down to somewhere around the 45-50% share of total revenue. 

While the company has never shown positive net incomes, gross profits have been positive since 2020. In the past year, its share within total revenues is at 4-year lows. 

In first-order (i.e. "Year-On-Year" or YoY) terms, however, there are a number of encouraging trends. 

While the company's trends in number of vehicles delivered is paring off from the massive upticks seen in 2020 through 2021, there have been no downturns. In Fiscal Year (FY) 2023, the company delivered a little over 160,000 vehicles and offers guidance that Q1 2024 sales will be 31,000-33,000 vehicles. Considering that 10,055 vehicles were delivered in January  this year and 8,132 in February, this implies that the company hopes to deliver somewhere around 12,000-15,000 vehicles in March. Given the ongoing crush on household expenditures and the downtrend seen in February, this is a rather interesting assertion.

Despite gross profit being positive over the past few years, first-order trends indicate that this is under some pressure which the company explains (at least in this past year) as primarily being due to the decrease in gross margin from the provision of power solutions as a result of an expanded power network across China. The company also states that it has begun to attract a relatively higher vehicle margin (11.9%) which isn't altogether surprising; NIO's models generally aren't known to be deficient in quality. 

Perhaps the most interesting trend to be seen are those in net income and Earnings Per ADS (American Depositary Share): over the past two years, the former has shown a fairly strong uptrend while the latter has had a pretty strong uptrend for the past three years. While earnings per ADS has been 36% lower than in the previous year at a loss of $1.75, it is a far cry from the loss of $10.21 in 2018. 

Overall, this impact on the bottom line is a par for the course for the company: it is known to aggressively push for greater automation and other forms of production floor upgrades, as well as substantial R&D effort. It is entirely likely that the earnings breakeven which was expected to happen in 2024 would be deferred by at least a year.

Going over vehicle sales, et al relative to vehicles delivered for that year might not be wholly meaningful for any given year since most buyers of higher-end vehicles typically wait a period of time to collect their orders after making payment. Nonetheless, overall trends are rather telling. The ratio of vehicles sales to vehicles delivered has substantially flattened from a little over $62,000 per delivery in 2018 to around $43,000 (i.e. roughly the price of an ET5, the cheapest model) in 2023, thus suggesting that buyer expectations are largely set and a relative "size of the market" is largely determinable by the company. This is also borne out by strong trends in "other sales" relative to the volume of vehicles sold. The relative downtrends in gross profit and the rising increase in net losses also suggests an increasingly-clear addressable segment, which implies that the company's battle with other carmakers (such as BYD) catering to that same segment. 

Investor Sentiment: China vs the U.S.

As described in the recent Baidu earnings article as well as others over the years, it isn't entirely possible for most global investors to own an interest via stock ownership; instead the "American Depositary Share" (ADS) format followed by most Chinese companies traded in American bourses act as a form of a promissory note that offers a defined portion of the profits of the company instead. 

NIO's ADS has always been equivalent to one Chinese share. There are a number of differences in market player participation, as exemplified in performance logged over the past one year. 

Overall, the ADS tends to be slightly better than the Chinese share in terms of performance: from 2023 through the 5th of March this year, the ADS declined 43% while the share declined 47%. This is at least partly explainable trends in volumes: traded volumes of the ADS tend to be anywhere from 5 to 322 times that of the Chinese shares' volumes. In 2024, the ADS' daily volumes are 34 times that of the Chinese shares on average. 

Key Developments and Conclusion

The company isn't exactly content with staying within its best-addressable segment: in its annual user gathering "NIO Day" this past December, the company unveiled the ET9 electric executive flagship in Xi’an, China.

NIO Founder William Li presenting the ET9

Touted to have over 100 NIO full-stack technologies - including 17 world-firsts and 52 leading advancements such as the Adam 2.0 super computing platform and China’s first Full-Domain 900V Architecture which enables 600kW peak charging power and a 255 kilometer range extension in just 5 minutes - this model (with deliveries expected in 2025) will be the company's attempt to cash in delivering a luxury brand experience coupled with peak performance to unlock inroads into a more recession-proof user segment. 

The company's technical achievements have been also been garnering attention from other quarters in some interesting ways. After picking up an aggregated 7% stake in NIO in June, the Abu Dhabi government's investment fund CYVN Holdings injected another $2.2 billion to bring its stake in the company up to 20% in December. On February 26, a subsidiary of NIO Inc., entered into a technology license agreement with CYVN subsidiary Forseven that grants the latter access to the company's "existing and future technical information, technical solutions, software and intellectual property rights". It is entirely possible that this transaction was enacted to propel an EV project that will be indigenous to the United Arab Emirates, a federation of seven emirates.

While the company might not be currently profitable, that doesn't necessarily mean the company isn't successful. However, there are a plethora of other stocks that don't have negative earnings trends that will likely be preferred by many investor over the company's.

For broader articles that deep-dives into business and culture in Asia, visit asianomics.substack.com. The latest article summarizes all of the talking points featured in media outlets regarding Nvidia’s earnings and the ongoing US sanctions regime regarding tech exports to China.