NIO Inc - Performance powering up
- Anticipate better margins in 2H23 on improving product mix, scale effect and lower battery cost
- Extensive battery swap and charging power network to drive future sales and potential collaboration opportunities with other OEMs
- Expect capex to peak soon as most investments have been made
- Maintain BUY with TPs of HK$140
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Business update
Since rolling out the NT2.0 platform, it has supported eight EV models available in the market. Being a premium EV car maker, NIO has secured about 37% of the premium BEV market share. In 1H23, due to model changes, the company delivered 54.6k units of vehicles, up by 7% y-o-y but down by 24% h-o-h. New models have however helped to lift vehicle shipments to 55k units in 3Q23, up 75% y-o-y. The goal is to achieve 20-30k of unit shipments per month especially with the launch of its second EV brand.
The company has built slightly over 2000 battery swap stations and operates some 24,000 chargers (both in cities and highways).
What is the technological progress on battery manufacturing?
NIO was the first to develop hybrid battery pack based on LFP+NCM chemistry. CATL and CALB are the two battery cell suppliers and the standard battery pack it offers to customers is based on 75kWh technology while a higher end battery pack (100kWh) is also available for customers who opt for a longer driving range. The long-term plan is to manufacture the battery cells itself to lift its profitability.
Is NIO monetising its battery swap stations? How long is the payback period? Potential collaboration with global OEMs? Power charging network strategy?
NIO is open to share its battery swap technology as auto players start to place more attention on this potential especially after the company achieved accumulated deliveries of 415,623 cars as of Oct-23. The company is in discussions with both foreign and domestic auto OEMs. However, other automakers still need 2-3 years to develop cars that can adopt NIO battery systems for swapping.
NIO battery swapping has a quick turnaround time of 3.5 mins per swap and the network helps to promote the NIO brand. The company has installed some 2000 swap stations in major cities and highways. In 2024, the plan is to roll out swap stations in the lower tier cities to provide better coverage.
NIO is monetising its battery swap stations. It charges between RMB30-50 per swap service. Capex is RMB3.5m per station and estimated annual cost (inc D&A) is about Rmb1m. A swap station could potentially breakeven if it carries out 60 swaps per day.
At present, about 20% of NIO battery swap stations have achieved 60 swaps per day while some stations in Shanghai have a higher utilization rate of 100 swaps per day. Currently, the average swap per station per day is about 30.
NIO partners with Sinopec (which owns 200,000 gas stations in China) and around 300 NIO swap stations are located at various outlets. NIO has also partnered with other companies such as iKEA and Accord Hotel Chain.
Most of NIO’s stations are concentrated in East China (in tier 1 cities such as Shanghai) at strategic locations.
NIO provides Battery as a Service (BaaS) as a subscription service to customers, which helps to reduce vehicle cost and gives customers more flexibility.
Since the company has strategically rolled out its power charging network, it will slow down deployment of battery swap stations next year (deployed 2000+ this year in strategic locations) as good locations to build its charging network are becoming more difficult to secure. This will subsequently lower capex going forward.
NIO has invested substantially in infrastructure and R&D. But sales volume has been below expectations to justify the investment. What changes will NIO implement to improve sales? How is competition affecting vehicle margins?
Previously, sales were affected by model cycle changes. Since 3Q23, volume sales have been gradually picking up. The company has eight models in the market - ES6, ET5 and ET5 Touring which contributed the bulk of revenue (targets the <Rmb350k ASP market). The ES8, ES7 and ET7 models target the more premium market in China in the >Rmb450k ASP segment while EC7 and EC6 is aimed at a niche market.
While NEV market competition is keen, NIO believes vehicle margins can reach 18% to 20% especially as it targets the premium car segment. In fact, since delivery of its higher price models in 2H23, margins are improving. Better gross margins are due to (i) improving product mix, (ii) increase in sales volume, and (iii) lower battery costs. NIO targets 20% gross margin going forward.
In the premium BEV market, NIO has about 37% market share. The eastern part of China contributes ~50% of NIO sales volume. The company is rolling out its footprint outside of East China through three initiatives – expanding its sales force, sales network (from 3Q onwards) and swap stations network.
The launch of its second brand will also help to drive volume sales. This mass market brand will offer cost competitive products, leveraging on NIO’s existing technological strength and investment. Regarding the upcoming product launches under the ALPS/FIREFLY code name, it is still too early to provide guidance on gross margins. ALPS price range likely to be RMB200-300k per car.
Apart from lower volume shipments which had affected 1H23 vehicle margins, EV cars naturally require more R&D investment as compared to traditional gasoline cars. Going forward, NIO can have greater R&D efficiency compared to others (e.g., Tesla, Lucid, Rivian, BMW). VW's CARIAD has spent a lot more on ADAS development as compared to NIO. NIO expects to achieve >10% vehicle margin in 2H23.
Who owns NeoPark - NIO or JAC? JAC has put up its manufacturing plant for sale. Is NIO planning to take over the plant? Will NIO need to raise capital to purchase JAC plant?
The park is jointly developed by NIO and Hefei government. NeoPark also uses the latest technology manufacturing used by other OEMs. About 90% of manufacturing processes are automated. All manufacturing and quality assurance processes are owned and operated by NIO.
NIO has sufficient plant capacity, given that NIO produces <200k vehicles this year (out of total 300k unit capacity on single shift). NIO will use existing plants to produce ALPS car series.
NIO intends to buy over the production plant from JAC for about Rmb1.6bn, funded by internal resources. As of end Jun-23, the company has about Rmb31bn cash and cash equivalents on hand, therefore no new capital is required.
Please share your overseas/ Europe market strategy and early experience selling to European consumers. Is there a plan to enter the North American market in the future, or is it permanently out of reach due to local protectionist policies?
The company has no plans to enter North America, after considering the supply chain and production efficiency, due to tariffs and geopolitical tensions. NIO has penetrated five European countries – The Netherlands, Norway, Germany, Denmark, and Sweden. The company is devoted to its global footprint development.
Please elaborate on recent cost cutting measures. What projects are cut?
There are plans to cut 10% of its headcount to save costs and expenses. NIO intends to restructure its departments such as ALPS and FIREFLY brands, consolidate duplicated teams, and streamline teams such as vehicle engineering, design, manufacturing etc. NIO aims to have more operational efficiency by sharing manpower resources across different sub-brands.
Any update on news of potential collaboration with an overseas OEMs and strategic investors?
For technology partnership, NIO is open to this, key technology sharing will be NIO’s battery swapping technology. It will take 2+ years for other OEMs to buy into battery swapping technology and design suitable car designs for the technology.
NIO already has a strategic investor from Abu Dhabi to support strategic growth for international markets. NIO will have to assess if it is keen to have another strategic investor on board.
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