Everything you need to know about investing in NIO, the Tesla of China

In case you didn’t know

NIO, dubbed the Tesla of China, has been one of the hottest stocks in one of the hottest industries of the year.

The company debuted on the New York Stock Exchange on Sept. 14, 2018:

• Pre EV hype: Its stock fell over 75% over the next 18 months after its IPO
• Post EV Hype: its stock has grown over 19x since Mar. 2020.

Founded in 2014 by entrepreneur William Li, NIO is backed by some of China’s largest companies including Tencent, Lenovo and Baidu.

The company competes against Chinese EV makers BYD, XPeng, Li Auto and foreign competitors like Tesla. The company has 3 models in production — EC6, ES8 and ES6.

It hasn’t been a smooth ride for NIO so far… NIO was on the brink of bankruptcy at the end of 2019 until the company received an investment of nearly $1b by a Chinese state-owned entity.

It’s a similar story amongst other EV companies — Tesla nearly ran out of cash trying to bring its Model 3 into production.

Source: NIO

The only way to stand out is to be different… Just not too different

NIO has two key features that differentiate itself from other EV car makers and solve two big problems with owning an EV — time to charge the cars’ battery and the high cost of an EV:

• Ability to swap batteries, which takes ~3 minutes to swap a fully charged battery — while it can take 30 minutes to 8 hours to charge a regular EV battery.
• Leasing the battery, the most expensive part of an EV, instead of owning — saving EV owners over $10k on the purchase price.

However, the same features that define NIO could become a roadblock to the business’ growth:

• It’s expensive to build out swapping stations and if it wants to scale its battery swapping feature outside China, it’ll have to invest heavily into its own charging infrastructure.
• As battery technology improves and charging time decreases, customers will have less incentive to use its battery swapping feature or lease its batteries.

China, the EV goldmine

When it comes to the EV market, China is an electric goldmine. With the largest population in the world (1.4b), China has the highest middle-class population and demand for transportation. It also has a strict mandate to cut down on pollution.

• China is pushing for heavy EV adoption, who wants 25% of all car sales in the country to be EV by 2025 — 5.2% of all vehicles sold were electric in 2019.
• China is the largest EV market in the world, making up 45% of the world’s EV sales in 2019.

NIO barely makes it to the top 5 EV cars sold in China with just 3% of China’s EV market share and selling 17k units (Jan- Sept 2020) of its top-selling model, ES6. The most popular EV is still Tesla’s Model 3, which made up 12% of the country’s plug-in EV sales.

Source: Inside EVs

Unleash the Competitors

You might only recognize BMW in the list above but in a couple years, the EV landscape in China could be completely different.

Traditional carmakers are gunning for the top spots and they’re bringing years of experience and billions of dollars in capital behind them:

• Capital and expertise… Scaling global manufacturing is an expensive and knowledge-intensive process.
• Established sales networks… It’ll be easier for traditional car manufacturers to scale through existing partnerships and dealers.

But what they’re really lacking is the technology, which they’re acquiring by partnering with existing EV car makers (e.g. Toyota and BYD’s collaboration) or by pouring billions of dollars into R&D.

For Volkswagen and General Motors, money isn’t a problem. In Nov., Volkswagen increased their planned investments into EV to $86 from $20b and General Motors followed by increasing its EV investment from $20b to $27b.

With over 20 EV vehicles already in production and plans to transition more factories to build EVs, Volkswagen expectsto produce more EVs than any other carmaker by 2023.

2023, the year for EV to shine… According to the Financial Times, the price of EV batteries is set to drop to $100 per kWh by 2023, down from $160. At this point, the price of EVs will be equivalent to traditional internal combustion engine cars — which could ignite the adoption of EV vehicles.

How fast is NIO growing?

The NIO today looks a lot different from a year ago when it was on the verge of bankruptcy.

On Nov. 17, the company reported its third-quarter earnings with financials that have significantly improved:

• $666.6m in revenue, an increase of 146.4% from the third quarter of 2019.
• 12,206 vehicles delivered, a 154% increase from 4,799 in the third quarter of 2019.
• $3.3b cash on hand, compared to $274.3m in the third quarter of 2019.

That definitely doesn’t look like a company that’s about to run out of cash but it also doesn’t look like a company that should be worth $67b.

For investors… Bubble or not?

Each EV automaker is being valued like they’re all going to be the next General Motors or Toyota — and it’s likely some will, but many could fail at trying to compete.

NIO has picked up enough traction to stay around, but whether it’ll be as big as the largest car makers today isn’t certain.

Sales growth is strong and running out of cash is no longer a concern but no matter how you look at it, NIO is likely overpriced.

• At a $67b market cap, the company is worth more than General Motors ($61b), BMW ($47b), and Honda ($36b).
• Comparing apples to apples… At a price-to-revenue multiple of 19.7, the company is even more expensive than Tesla (10.9x multiple) and General Motors (0.5x multiple).

There’s likely no doubt that NIO’s share price is being propped up by the hype in the EV market but the important question is — how long can this last?

As we previously wrote, emerging industries (e.g. electric vehicle, cannabis, cryptocurrency) will often go through a boom and bust cycle of rapidly increasing stock prices with an eventual collapse.

If we’re in the boom cycle of the EV growth, investors could be in for a surprise. Unfortunately for investors, it’s impossible to predict when a bubble will burst.