With NIO gaining popularity among investors in the capital markets, more Chinese analysts are joining their Wall Street peers to publish bullish reports on the Chinese electric vehicle (EV) maker.
In a November 13 report, Zhongtai Securities analysts led by Su Chen called NIO one of the country's leading new carmakers, with more advanced self-driving technology and new electric models expected to attract more customers and open up more room for growth.
The report said the NIO is designed with more luxury and comfort in mind, using a high price to reduce the risk of subsidy rollbacks.
On autopilot, the Celeste is more in line with Chinese driving conditions than Tesla, enabling lane level self-location with an accuracy of up to 20 centimeters and better smoothness on-ramps, the report said.
The report expects 45,000 NIO deliveries in 2020, possibly over 80,000 in '21, and sales are expected to reach 240,000 by 2025.
Here is the full translated version of the report.
One of the leaders of the new powerhouse in car manufacturing
1.1 Record-setting deliveries and top 10 sales ranking
NIO is one of the leaders of new car-making forces in China, with market capitalization surpassing traditional car companies.
Founded in November 2014, NIO's main businesses include developing, manufacturing, and selling electric vehicles, promoting innovation in automated driving and artificial intelligence, and providing comprehensive and convenient charging solutions.
The company first delivered the ES8 in June 2018 and successfully listed it on the New York Stock Exchange in September of the same year.
As of October 20, NIO has delivered a total of 63,000 EVs, maintaining eight consecutive months of year-over-year increases, making it one of the leading new car makers in China.
As deliveries continue to rise, NIO's market capitalization has also been rising since 2020. As of November 10, 2020, the NIO has a market capitalization of $56 billion, surpassing Ford ($33.3 billion), and SAIC ($306.7 billion).
It's trending well in demand, with record deliveries, and consistently maintains a top 10 domestic ranking.
NIO deliveries in October 2020 were 5,055 units, again doubling the company's monthly delivery record year-over-year.
NIO's cumulative deliveries for January-September 2020 ranked sixth in the country and surpassed its deliveries for all of 2019.
By model, the ES6 ranks fifth in cumulative deliveries.
Since the first ES8 delivery in June 2018, the company has delivered a total of 63,300 EVs as of October 2020, including 27,900 ES8s and 34,500 ES6s.
The new model EC6 was delivered in September 2020, and we expect NIO deliveries to remain positive through a broader product portfolio and a competitive advantage in product offerings.
1.2 NIO is leading the new car-making powerhouse from product to service
NIO's core team comes from the world's leading car companies and internet companies.
NIO Founder William Li Bin, also known as the "Godfather of Travel" in China, has a wealth of entrepreneurial experience, as the founder of Bitauto, and has extensive experience in automotive e-commerce and Internet marketing.
He is also familiar with the capital operation, and led NIO to a successful IPO in the United States, making NIO known as one of the earliest mass-produced models on the ground among new domestic carmakers.
NIO now has executives from more than 20 countries and regions, including BMW, Volkswagen, Ford, and Tesla, among others.
Its executives cover a wide range of fields and have extensive experience in automotive manufacturing, design, procurement, logistics, and sales.
NIO started with a high-end model, and its product lineup has been diversifying, and its advantages are becoming apparent.
From the various track records of the electric supercar EP9, to the ES8 redefining the high-performance smart electric SUV, to the ES6 and EC6 diversified product lineup, NIO has to some extent referenced Tesla's strategy.
Its product line starts from the high-end and focuses more on luxury and comfort in design, which makes its brand known and reduces the risk of fluctuation in product performance-price ratio brought about by subsidy withdrawal at a high price.
Its manufacturing process, technical level, and service system have gradually been recognized by the market, the model planning began to promote to the low-end.
Despite the market's never-ending doubts, it is undeniable that NIO's deliveries have continued to increase, gaining a firm foothold in the market and its advantages becoming apparent.
This is due to NIO's continuous technology iterations, improved battery life, improved production break-in cycles, faster software updates, flexible charging solutions, and a comprehensive vehicle service system.
Continuous improvement pushes the envelope, while maintaining the interests of long-time owners.
ES8 was officially delivered in 2018, focusing on luxury and comfort in its design.
However, due to design flaws and immature technology, ES8 was initially exposed to many defects, including short-range, software bugs, poor sound insulation, poor filtering effect, and energy recovery problems.
After a brief flush of launch, sales continued to slip from December 2018 onwards, selling less than 100 units per month from November 2019 to January 2020.
But compared to Tesla, NIO sticks to the customer first and pays more attention to owners' feedback and makes improvements.
NIO launched the ES6 in June 2019 to share a platform with the ES8, but improved the range and added a heat pump air conditioning system that is more energy-efficient than traditional PTC heating and air conditioning.
The ES6 also uses carbon fiber lightweight materials throughout the vehicle, improving the driving experience and energy performance.
The 2020 new ES8 has more than 180 configuration upgrades, including range improvement, replacement of the front motor, and replacement of the heat pump air conditioning system, which also speeds up the frequency of software and hardware upgrades.
At the same time, compared with Tesla's one-sided pursuit of sales and significant price cuts, NIO fully considered the interests of older car owners, a good balance between vehicle iteration and user maintenance.
NIO has increased the price of the new car by RMB 20,000 and introduced five upgrades for existing customers including power battery, LCD instruments, center screen, vehicle roof, and NOMI.
From November 7, 2020, owners will also have the option to upgrade to a new 100kWh battery pack to further improve range.
NIO plans to launch new models to open up the incremental market.
The NIO ET7, based on the second-generation all-electric platform NP2, is the company's first luxury electric sedan, which is expected to be launched at NIO Day in December 2020, and will be developed around the L4 level of automated driving technology, with a planned launch in 2021-2022.
NIO says its strategy will be to introduce new products to the market at a rate of one new car per year, while it plans to prepare for overseas markets.
We expect more advanced self-driving technology and the new electric models to attract more customers and open up more incremental space for the company.
The slowdown in the construction of NIO House and the increase in NIO Space, with cost reductions and efficiency gains, contributed significantly to orders.
The company's flagship offline store, NIO House, was originally intended to enhance brand image power and provide a variety of services to owners.
However, the annual rent for some of the stores amounted to tens of millions of RMB, resulting in lower cost-efficiency.
NIO started building the smaller, more sales-focused NIO Space in August 2019, which typically has an area of less than 200 square meters and an average cost of less than RMB 1 million.
And some stores choose to be built with partners, with NIO responsible for operations, easing financial pressure.
As of September 20, NIO Space has opened more than 140 stores in nearly 60 cities across the country, and is accelerating its deployment to third- and fourth-tier cities, and the company plans to have more than 200 stores by the end of 2020.
Looking through the current launch of NIO Space, it has directly led to a rise in deliveries.
With a strong brand influence, we expect the additional stores will significantly attract more potential customers, and the expansion of the sales network in third and fourth-tier cities will be an opportunity to break the delivery bottleneck.
NIO has mastered the core technology of electric drive to create an intelligent electric power platform.
NIO's electric drive system, battery system, and software are developed and manufactured by XPTNIO Drive Technology.
Its plant in Nanjing has an annual capacity of 300,000 units and can produce integrated electric drive systems with integrated high-performance motors, high-torque gearboxes, and PEU motor controllers with 95% automated production capacity.
More than 50,000 units of the integrated electric drive system have rolled off the production line from January to September 2020, with integrated motor system efficiency of 94%, reducer NVH 3-5 decibels lower than competing products, and weight more than 15% lower.
NIO said XPT's 240kW induction motor is the only high-power asynchronous motor 3-in-1 system in China, with features including the world's first dual three-phase topology inverter, the first mass-produced copper rotor technology in China, and a 15,000-rpm high-performance gearbox, which is currently at the leading edge in China and has received cooperation interest from high-end European customers.
NIO is using OEM production and gradually increasing its production capacity.
NIO is now partnering with JAC to build a new plant in Hefei, Anhui province, and using the OEM mode of production.
In its second-quarter earnings meeting this year, NIO stated that it could produce up to 150,000 units per year in two shifts.
The advantages of foundry production include.
1. OEMs are generally traditional car factories that have been in production for many years and have perfected their management, workers, and production equipment.
2. new car-making forces can reduce one-time investment costs and focus on product design and development.
3. Softer and more efficient inputs to the manufacturing line.
4, can provide better quality electric core technology for car companies.
With the deep development of automotive intelligence, future software systems, hardware architecture, design brand, and OEM may be separated, in the long term, we expect that OEM is likely to be the main trend.
NIO provides a full range of charging battery swap services to dispel users' range anxiety.
NIO's NIO Power charging system establishes unique supercharging (home charging station, supercharging station), battery swap (battery swap station), and power-up (one-touch power-up, charging car) modes.
As of October 5, 2020, NIO car owners have conducted over 1 million battery swaps, and 155 battery swap stations have been built across the country.
Also, the battery swap service is a "lifetime free battery swap for first-time owners" policy.
Non-first-time owners and operating vehicles will be charged for battery swap: Fee = battery swap* (electricity charge 1.35 RMB/kWh + service charge 0.39 RMB/kWh).
In September 2020, NIO announced the "Power Up Plan" incentive program, with the goal of deploying more than 30,000 20kW destination DC piles nationwide to form a nationwide destination charging network, with a total subsidy of RMB 100 million, with an average of RMB 1,000 per charging station per year for 3 years.
Charging stations vs. battery swap stations.
(i) Advantages of charging station include: 1) fast-charging technology advances to shorten charging time (Tesla V3 can run 120 km in 5 minutes); 2) interface is easy to unify the standard, different operators can use; 3) construction costs are relatively low.
Disadvantages include: 1) if the owner does not have a fixed parking space, it is impossible to install exclusive charging stations; 2) the average utilization rate of a single charging station is relatively low, and the return on investment is long; 3) increasing the power distribution load of the urban power grid; 4) land constraints prevent large-scale installation, etc.
(ii) Advantages of battery swap station include 1) short battery swap time and high efficiency; 2) small footprint; 3) more convenient battery recycling; 4) lower purchase threshold of electric vehicles, and solve the problem of low residual value of new energy vehicles.
Disadvantages include: 1) it is difficult to build a universal battery swap station; 2) the investment and operating costs are relatively high; 3) the battery safety responsibility issue, etc. We expect the battery swap station to be more efficient in the future.
We anticipate that the future model will focus on charging, supplemented by battery swap. the battery swap is more suitable for non-parking space owners, as well as rental, two-wheelers, and other public areas.
NIO's NIO Pilot is continuously updated to better suit Chinese road conditions.
Equipped with Mobileye EyeQ4 chip, NIO's NIO Pilot (automatic driving assistance system) is completely self-developed and provides more than 20 driving assistance functions, and continuously adjusts and optimizes the algorithm for China's road conditions.
Launched in October 2020, the NOP2.0 system will enable vehicles to automatically enter and exit ramps and switch main roads according to the navigational planning path, adjust speed automatically according to the speed limit and environment perception, intelligently change lanes, and automatically overtake slow vehicles in highway and urban expressway environments.
According to Auto Home's evaluation, the NIO NOP system performs better than Tesla's NOA in entering and exiting highway ramps and intelligent lane merging and is more closely related to real-life scenarios in Chinese road conditions.
Due to the different road conditions and driving habits in China and the United States, Tesla's algorithm development is more mature, more aggressive, and in pursuit of diverse functions.
NIO insists on putting safety first, and with the help of high precision maps, it can achieve positioning and control in more than 98% of scenes in China.
The ultimate user experience is one of NIO's "moats".
Traditional car companies leave sales and after-sales to 4S stores, which are not accessible to car owners.
Tesla has reconstructed this relationship and improved the user experience through its direct sales model, owner forums, OTA upgrades, and supercharger network.
William Li Bin said, "NIO's business model is based on the ultimate user experience.
Through NIO House, NIO Space, NIO Power and NIO Service, NIO provides a full range of services including test drive experience, sales and delivery, battery swap, repair service, community activities, and online and offline interactive platforms to support car sales.
According to the company's management, the proportion of customers transacted through Utsau is about 50% of the total number of customers transacted.
Closer to the Chinese market, NIO's route is more realistic.
(1) Battery: Tesla's development route is to continuously increase the energy density of electric cells to obtain a longer range. However, technological progress takes a long time to develop, and the slow cost reduction of batteries leads to higher vehicle costs and lower EV economics.
NIO solves the range and life issues by providing higher energy density batteries through BaaS. At the same time, consumers can choose to purchase the entire vehicle plus the flexibility to lease the battery, significantly reducing the cost of purchasing the vehicle.
(2) Charging: Tesla has chosen to build more Supercharging stations to meet the charging needs of its customers. However, the charging time is relatively slow, and at the same time, land and parking space are tight, which makes it not completely suitable for the Chinese market.
NIO dramatically shortens the charging time through battery swap, solve the shortage of parking spaces, and improve the efficiency of car use.
(3) Autopilot: Tesla vehicles collect global road information to train the neural network and improve the autopilot system, but China's road conditions and road signs are more complex.
NIO chooses high precision maps and targeted algorithm optimization to achieve better-localized autopilot, which is more in line with Chinese users' driving environment and habits.
At the same time, NIO's autopilot system is deeply integrated with NOMI to provide humanized voice guidance for the car owner.
(4) Design: Tesla chooses a minimalist design language with a high degree of integration in terms of functions, which is an important reflection of technology.
NIO's design pays more attention to the overall atmosphere and details, positioning it as a luxury model and strengthening the brand's competitiveness.
NIO multi-faceted cost reduction.
The BOM of NIO ES8 is about RMB 400,000 and that of ES6 is about RMB 300,000.
The higher BOM is due to the choice of components are high-end products, including ZF's CDC electromagnetic suspension, Brembo's brake calipers, ThyssenKrupp's steering machine, Bosch's four-wheel drive system, Mobileye's vision chip, Fuyao's double-laminated glass, and so on.
We believe that ways to reduce the cost of bicycle manufacturing include supply chain optimization, continuous reduction in battery pack costs, rising production scale and sales management optimization.
For example, choosing Anhui Zhongding Sealing's air suspension can reduce costs by about 30% over Continental's air suspension.
Manufacturing subsidies for JAC will also be reduced as a result of the production ramp-up, and the company said on its 2019 annual report conference call that it could reduce manufacturing costs by about 30 percent in 2020.
The new 100kWh battery pack reduces cost per kWh by about 20% compared to 4Q19.
1.3 Gradual improvement in NIO's operations and positive gross margin on vehicle sales
NIO's overall revenue maintained growth, with a clear trend of narrowing net loss.
NIO achieved revenue of RMB3.719 billion in the second quarter of 2020, an increase of 147% YoY and 171% YoY.
Net profit attributable to ordinary shareholders decreased by RMB1.208 billion, narrowing by RMB2.106 billion year-on-year and RMB515 million YoY, making the loss the lowest in history.
Revenue for the first half of the year was RMB5.091 billion, up 62% year-on-year, while net profit attributable to ordinary shareholders fell by RMB2.931 billion, narrowing by RMB3.035 billion year-on-year.
The company maintained its overall revenue growth as deliveries continued to improve, while significantly reducing expenses on the cost side, with a narrowing trend in net loss from Q1 2019 onwards.
NIO deliveries improved with lower costs and positive gross margin on vehicle sales.
Operating expenses for the second quarter of 2020 were RMB1,473 million, a decrease of 46% YoY and an increase of 5% YoY.
Automotive sales gross margin turned negative to positive at 9.7% in the second quarter of 2020.
The company said the positive gross margin was mainly due to lower purchasing costs for certain materials in the second quarter, as well as lower unit manufacturing costs as a result of higher production volumes.
Research and development expenses for the second quarter of 2020 were RMB545 million, down 58.1 percent year-on-year and up 4.4 percent sequentially. This year-over-year decrease was primarily due to costs associated with the extensive testing of the ES6 prior to mass production in the same period last year, as well as streamlining the number of overseas employees.
Selling, administrative and general management expenses were RMB937 million, down 34.1% year-on-year and up 10.4% from the previous year. Its year-over-year decrease was mainly due to the company's improved internal management efficiency, lower marketing fees, and a slowdown in NIO House construction. During the earnings call, the company said it may achieve double-digit gross margins by the end of this year.
NIO's Inventory Turnover Days Declined.
NIO's inventory turnover days were 34.83 days in the second quarter, an overall downward trend that benefited from the advantages of its direct sales model.
Tesla has a higher days turnaround than NIO because it sells to all regions of the world.
BYD, on the other hand, uses the traditional 4S store sales model and has a higher inventory turnaround days than the previous two.
NIO has improved cash flow and higher debt ratio.
In the first half of this year, NIO's net cash flow from operating activities was RMB -523 million, an increase of RMB 6.116 billion year-on-year.
The company's ability to generate positive cash flow improved significantly due to higher average revenue per vehicle as a result of the expanded scale of deliveries, as well as by improving the company's operational efficiency and optimizing its cash flow management.
Monetary capital was RMB10,495 million in the second quarter. The gearing ratio was 97.7%, an increase of 0.2 percentage points year-on-year and a decrease of 45 percentage points from the previous quarter.
The ratio of interest-bearing debt, which had risen sharply since FY19, moderated to 202.9% in the second quarter.
Assuming that NIO is able to subsidize its operating expenses with these funds through financial means, we expect the debt-servicing pressure to ease.
NIO has a stable shareholding structure and is backed by state-owned capital, enhancing its cash flow reserves.
The largest shareholder and de facto controller of NIO, a US-listed entity, is William Li Bin, accounting for 24.8% of the company's total share capital. The company's management accounts for a combined 13.6% and Tencent 12.8%.
In April 2020, NIO signed an investment agreement with three strategic investors, Hefei Investment, Guotou Investment & Merchants and Anhui High-Tech, which will invest 7 billion RMB in NIO China.
NIO invested RMB 4.26 billion in NIO China and injected core businesses and related assets including vehicle R&D, supply chain and manufacturing, sales and services, and energy services within China into NIO (Anhui) Holdings, the legal entity of NIO China.
In September 2020, NIO signed a $669.9 million subscription agreement for additional registered capital of NIO China, which will result in a total of 86.5 percent controlling stake in NIO China upon completion of the contribution and previous equity redemptions.
NIO's positioning as a luxury electric vehicle with a broad market space
2.1 Annual SUV sales of nearly 10 million units
China's SUV market has a wide space and its share is increasing year by year.
According to the China Passenger Car Association (CPCA), the cumulative sales of SUVs in China from January to September 2020 totaled 5.966 million units, down 7.2% year-on-year, accounting for 48.2% of the total.
From historical data: SUV sales in 2017-2019 were 1,032,000, 9,503,000, and 9,164,000 units, respectively, accounting for 42.3% of the total. , 42.5%, 44.3%, and in 2020 it is close to 50%.
The trend of domestic consumers preferring SUVs is more obvious, and this feature is also more consistent with the international market, with SUV sales in Europe and the United States already higher than car sales.
2.2 Strong market demand for luxury cars
NIO premium car sales up year-on-year, luxury SUVs top growth rate.
According to the CPCA, the domestic passenger car market totaled 12.928 million units sold in January-September 2020, down 12.5% year-on-year.
But luxury SUV and luxury sedan sales in January-September were 747,000 units and 1,019,000 units respectively, up 16.3% and 7.4% year-on-year, the only brand broad categories to achieve positive growth.
In terms of price stage, January-September sales of models priced ≥Rmb300,000 totaled 1,296,000 units, up 12.4% year-on-year.
Among them, SUVs priced ≥ CNY300,000 sold 640,000 units, up 24.5% year-on-year, the highest year-on-year growth rate.
By model, 5.966 million SUVs were sold, down only 7.3% YoY, which was lower than cars and MPVs.
Among them, B-class SUV sales totaled 1.057 million units, up 13.1% year-on-year, with a higher growth rate than C-class and B-class sedans.
The above data reflect the general downturn in the auto market in the background, the domestic economic strength and spending power of strong customer base in the epidemic has been suppressed after the rapid recovery of demand for cars, including large luxury SUV cars is the preferred choice for car purchase.
2.3 SUV electrification prospects
SUV electrification penetration rate of 2.8%, room for improvement is large.
According to CPCA, from January to September 2020, domestic electric SUV (BEV + PHEV) sales totaled 169,448 units, accounting for 28% of the total sales of new energy vehicles, accounting for 2.8% of the total sales of SUVs, there is greater room for improvement in the electrification penetration rate.
Breakdown, January-September B-class SUV BEV sales of 33,882 units, +81.4% year-on-year. The NIO sales accounted for 77.8% of the segment.
The B-segment SUV BEV market is expected to maintain rapid growth.
According to the companies plan, the future will be launched in the domestic market of new pure electric SUVs priced over 300,000 RMB including Model Y, BMW iX3, ID4, Audi e-Tron, etc., plus, Ideal One, Mercedes-Benz EQC and other models, pure electric SUV market share will increase, competition will intensify.
However, the current market penetration of EVs is less than 5%, and we expect EV sales to continue to grow rapidly, while NIO will remain competitive with its accumulated customer reputation, continuously updated intelligent driving system, expanded sales network and multi-product lineup.
Accelerating trend of electrification
3.1 Strong market demand and gradual increase in production and sales volume
We expect NIO deliveries of 45,000 units in 2020 and possibly over 80,000 units in '21.
NIO has upgraded the capacity of its JAC plant as market recognition of the NIO brand has increased and orders have increased.
In its second quarter earnings call, the company said that in September it achieved a full supply chain capacity of 4,500-5,000 units per month on a single shift (previously <3,000 units), and the plant's double-shift annual capacity could reach 150,000 units, and it plans to locate its fourth model in the JAC plant.
Given the company's capacity plan and best-selling market, we expect the company's EV deliveries to be 45,000 and 88,000 units in 2020 and 2021 respectively, up 119% and 96% year-on-year, and expected to reach 240,000 units in 2025.
Capacity release drives higher demand for batteries and upstream materials.
Based on the projection of production and the assumption of future average battery capacity, we expect NIO's demand for power batteries to be 3.7, 7.4 and 11.2 GWh in 2020, 2021 and 2022, respectively, an increase of 138%, 100% and 51% year-on-year. Meanwhile, battery swap station battery block and BaaS business will contribute to the marginal demand.
According to the current NCM811 technical route, under the assumption of average unit consumption, we expect the demand for ternary anode material in 2022 to be about 19,400 tons, separator about 188 million pings, anode about 0.86 million tons, and electrolyte for 12,000 tons.
3.2 Battery swap station layout accelerated
We expect to invest over 1 billion RMB in battery swap stations. As of October, NIO has more than 150 battery swap stations nationwide.
According to NIO's plan, more than 300 second-generation battery swap stations will be added in 2021, and the goal of establishing 1,000 battery swap stations nationwide will be achieved within three years.
We estimate that the current investment cost of a single battery swap station is around 2 million RMB (5 battery packs about 300,000-400,000 RMB increase in operating cost 300,000 RMB + construction cost 300,000 RMB + equipment cost 800,000-100,000 RMB + depreciation, rent and other about 200,000 RMB), the total investment of the new battery swap station will be more than 1 billion RMB in the next two years.
Shandong Weida Machinery is one of the core suppliers of NIO battery swap station, and together with NIO owns nearly 300 battery swap patents such as battery swap robot RGV, bayobolt bolt, etc. The scale of business is expected to benefit from the investment and construction of battery swap station.
3.3 Under the trend of large-scale localization of electric vehicles, the domestic supply chain ushers in new opportunities.
The new car-making force, represented by NIO, has plowed into the domestic market and strengthened cooperation among local suppliers.
Meanwhile, Tesla, Volkswagen MEB, BMW iX3, Mercedes-Benz EQC, Audi e-Tron and other electric vehicles have all chosen localization, bringing new cooperation opportunities to the domestic supply chain.
By virtue of their cost and production capacity advantages, Chinese manufacturers have successfully become the world's main supply base, which has led to the emergence of world-class manufacturers in some segments such as batteries and diaphragms, and global core supply chain companies for spare parts such as thermal management systems.
New energy vehicle subsidy policies may not be as high as expected: There is a possibility that the subsidy policies of various countries may be rolled back in advance, and there is a risk of uncertainty in the rate of subsidy rollback or a higher than expected reduction in the rate of subsidy; China's double-points system and Europe's carbon emission regulations may not be implemented as expected, resulting in a risk of lower than expected demand for EVs.
Sales of new energy vehicles will be affected by macroeconomic factors, industry support policies and consumers' willingness to purchase, which will lead to uncertainty.
Risk of substantial price decline due to intensified competition: There is a risk of substantial price decline due to intensified competition caused by overcapacity in some segments of the battery industry chain.