After a run-up through June on increasing production and delivery ramp-up improvements, the NIO stock (NYSE:NIO) has been range-bound near the $20 level in recent months as China’s months-long COVID interruptions to supply chains began to alleviate.
Other positive catalysts that have helped the stock rise from an all-time low in the $10 range in mid-May to its current $20 range include favorable policy support from the central and municipal Chinese governments on boosting E.V. adoption in the region, as well as NIO’s aggressive growth plans, such as the upcoming introduction of new sub-brands to penetrate mass market opportunities better.
The following research will look at both views and how they affect the forecast for the NIO stock. Despite continuous evidence of solid fundamentals from the core company, we remain cautious about regulatory concerns as the most significant factor limiting the stock’s potential to unlock its actual valuation upsides.
2Q22 and July’22 Production and Deliveries
As previously discussed in our most recent stock coverage, NIO’s record-breaking second-quarter deliveries, particularly in June, continue to highlight the company’s impressive strength in re-ramping productions as the worst supply and logistics constraints caused by recent COVID restrictions in core Chinese manufacturing hubs begin to ease.
The encouraging results highlight the multinational automobile manufacturer’s ability to navigate through significant disruptions caused by supply chain constraints across the car sector. Production of the new ET7 sedan, which began in March, was a particular highlight, with a 40x increase during the second quarter.
Despite a little hiccup in July owing to a shortage of casting components used in the manufacturing of its ET7 cars, the company has maintained progress in scaling up production, delivering 2,473 units of the premium electric sedans in the first month of 3Q22. This equates to a delivery run rate of at least 7,400 ET7 units in the current quarter (approx. +10% q/q), especially given the company’s continuous efforts to “work closely with supply chain partners [to] expedite vehicle production in the following months of the third quarter of 2022.”
Key Focus Areas Weighing on NIO’s Fundamentals
Looking ahead, multinational automobile manufacturer is projected to have an even stronger second half of the year, thanks to the introduction of a robust product pipeline that includes the launch of the new ES7 SUV later this month, as well as upgraded 2022 ES8, ES6, and EC6 SUVs. Favorable governmental support in China will also help NIO’s operational success in the year’s second half.
- Near- to Medium-Term Focus
From a basic standpoint, the major emphasis area remains its capacity to ramp up production and deliveries inside the supply-driven car sector, as indicated before. The car sector has been upended in the last year by a shortage of supply and persisting logistical limitations from pandemic-era disruptions, particularly for Chinese OEMs due to the region’s tight COVID Zero policy, which remains a significant downside risk for the manufacturer.
This is further supported by the Chinese E.V. maker’s July supply limitations, which hampered its ET7 sedan and EC6 SUV volumes, according to its recent delivery report, illustrating how NIO’s production and delivery success has been mostly controlled by “supply availability” over the last year.
- Longer-Term Focus
In the long term, NIO’s efforts to increase market share through globalization, particularly domestic development with newly planned sub-brands to better exploit mass market potential, will be critical in reinforcing its basic performance. China is the largest E.V. market, highlighting the multinational automobile manufacturer’s future development prospects as it tries to expand beyond the premium market.
China, in particular, is predicted to sell at least 6 million E.V.s by the end of the year, more than double the 3 million E.V.s sold in 2021. In July, China’s E.V. sales accounted for more than a quarter of total new car registrations, highlighting the quick recovery in demand following the implementation of tough COVID mobility restrictions in the prior months.
This continues to provide favorable tailwinds for local E.V. producers like NIO, which now accounts for about a fifth of China’s E.V. sales and is increasing. The numbers also support existing market observations of no major demand erosion in the Chinese E.V. market despite the recent economic slowdown, highlighting the industry’s resilience and ongoing development as supply restrictions – the primary hurdle to future expansion – continue to lessen.
Key Focus Areas Weighing on NIO Stock’s Valuations
Including NIO on the SEC’s rolling list of delinquent issuers whose auditors are currently non-compliant with PCAOB inspection requests is the largest drag on the stock’s valuation from a “multiple” standpoint.
While we previously highlighted NIO’s partly state ownership (about. 8%) as a possible buffer against ongoing regulatory troubles at home by data-heavy tech businesses over the last year, the same structure may backfire. Given the consortium of local government agencies minority participation in NIO, the recent flurry of voluntary delisting from U.S. exchanges across “China’s state-owned firms” raises the prospect of a similar destiny for NIO. As previously stated, national security concerns remain the primary basis for China’s opposition to US-mandated PCAOB audit inspections.
With NIO being a massive source of data on personal travel patterns across the domestic population, as well as a meaningful organizational structural link to state-backed agencies, it could become entangled in the ongoing regulatory tug-of-war between the CSRC and the US SEC, which remains the primary drag on its valuation discount to peers in the U.S. E.V. market.
Final Thoughts
Based on the preceding research, it is apparent as day that regulatory issues continue to be the most significant drag on the NIO stock, even as it continues to make positive fundamental progress in ramping up volumes and expanding market share. Any positive development in the ongoing HFCAA negotiations between the United States and China, or related efforts by NIO management to resolve the issue, will be catalytic in lifting the NIO stock out of its range-bound trading with renewed valuation upsides that can match those of its American peers with similar fundamental growth profiles.
While we remain bullish on NIO stock at present levels, with a near-term price objective of $27 based on its strong business growth potential, restoring NIO’s reputation as a viable high-growth investment will eventually depend on the total elimination of the regulatory risk overhang. For the time being, we continue to warn of increased delisting risks for NIO due to its organizational structure’s relationship to state-backed enterprises, as well as broad-based market worries over China’s near-term domestic economic downturn, which might introduce more volatility to the NIO stock.
Featured Image: Megapixl © Timonschneider
