Is NIO Stock A Sell After Fourth Quarter Delivery Announcement?

Elevator Pitch

My investment rating for NIO Inc.’s (NYSE:NIO) (9866:HK) stock is a Hold.

I previously evaluated NIO’s delivery volume metrics for October 2022 with my earlier November 9, 2022 update for the company. This current article discusses NIO’s Q4 2022 and December deliveries, China’s Electric Vehicle or EV market outlook, and the attractiveness of the stock as a potential investment candidate for 2023.

I stick to my Hold rating for NIO. NIO’s Q4 2022 and December deliveries fell short of my expectations, and it appears that NIO isn’t likely to go ahead with price hikes in 2023. On the flip side, NIO’s valuations have come down to more reasonable levels after its share price fell by -66% in the past year, and the market’s sentiment towards Chinese companies is turning positive after China announced reopening plans.

Why Did NIO Cut Their Q4 Delivery Outlook?

Earlier, NIO lowered its delivery guidance for the fourth quarter of 2022 with a press release issued on December 27, 2022. Subsequently, the company published a media release on January 1, 2023, disclosing actual delivery numbers that were close to its updated Q4 delivery outlook.

Specifically, NIO had reduced the midpoint of the company’s Q4 2022 delivery forecast by -14% from 45,500 units to 39,000 units in late-December last year. NIO’s actual Q4 2022 deliveries turned out to be 40,052 units which were +3% higher than the company’s updated guidance, but this was -12% lower as compared to its prior estimate.

In its December 27, 2022 press release, NIO cited “challenges in deliveries and productions” and “supply chain constraints” as the reasons for the cut in the company’s fourth quarter delivery outlook. But it appeared that NIO also didn’t execute as well as some of its peers, based on a review of the most recent December 2022 delivery volume metrics, which I detail in the next section.

NIO Stock Key Metrics

NIO only achieved a +12% MoM increase in delivery volume for December 2022, while its competitors, XPeng (XPEV) and Li Auto (LI) saw their respective deliveries grow by +94% and +41%, respectively on an MoM basis in the same time period.

Considering that all the Chinese EV makers have to deal with similar headwinds related to supply chain disruptions, it is a cause for concern that NIO’s December 2022 deliveries growth in MoM terms was considerably slower than its key competitors.

Also, a +156% MoM jump in ET5 deliveries for the company was partially offset by a -57% MoM drop in ET7 delivery volume and a -15% MoM contraction in ES7 delivery numbers. This is derived based on my tracking of NIO’s historical monthly delivery volume data.

NIO had introduced the new ET5 sedan and the new ES7 SUV models in December 2021 and June 2022, respectively to compensate for the moderation in sales growth for its flagship sedan, ET7 which was brought to the market two years ago in January 2021. The recent December 2022 delivery data suggests that NIO’s ET7 deliveries are declining at a rather fast pace, and this is offset by the substantial growth in the sales of ET5.

But it seems that the new ES7 isn’t doing as well as the other two key vehicle models, according to the monthly delivery volume data for December. This might be attributable to either execution issues (ES7’s selling price is higher than ET5 and ET7, so consumer buy-in might be a challenge) or difficulties in ramping production of its newest vehicle.

Where Is The EV Market Heading?

China’s EV market as a whole should experience slower growth in 2023, according to NIO’s management commentary and forecasts published by various research organizations.

A December 27, 2022 Seeking Alpha News article cited NIO’s CEO comments in a Bloomberg interview noting that the company and its peers could face a “challenging first half” in 2023 considering “a cut in government subsidies and the broader economic slowdown.” It is critical to note that China’s EV subsidy policy is “completely phased out” this year, as indicated in Chinese media Caixin Global’s December 7, 2022 news article.

Separately, China EV sales volume growth is projected to moderate considerably from +164% and +105% for 2021 and 2022, respectively, to +38% in the current year. This forecast is drawn from Chinese broker CGS-CIMB Securities research report (not publicly available) titled “NEV Market: Growing Fast But Competitive” issued on December 30, 2022. Similarly, the China Association of Automobile Manufacturers predicts that EV unit sales growth for the Chinese market will slow to +35% in 2023, as noted in Chinese state media The Global Times’ January 3, 2022 article.

Will NIO Be A Good Pick For 2023?

I don’t think that NIO is a good pick for 2023.

Although the Chinese EV market is forecast to grow slower this year, an industry growth rate of +30% or higher is still pretty decent. In picking EV names for 2023, one should focus on companies which have executed well on production despite supply chain challenges and have the ability to raise selling prices to offset the headwind relating to EV subsidy withdrawal.

In an earlier section of the article, I noted that NIO’s MoM delivery volume growth rate for December 2022 was much lower than what its peers achieved in the same month. I also highlighted that the deliveries for NIO’s newest vehicle, ES7, have actually decreased in recent months. In addition, NIO’s actual Q4 2022 delivery numbers fell short of its prior guidance (before the update in late-December). Taking into account these metrics, I don’t have a very positive opinion of NIO’s execution capabilities in the face of supply chain issues.

On the other hand, there are expectations that NIO might possibly keep the selling prices for its existing vehicle models unchanged, instead of imposing price hikes to compensate for a potential decline in sales volume due to the China EV subsidy policy change.

I reviewed NIO’s recent announcements, transcripts and news, and there doesn’t seem to be any indications that the company will increase its vehicle pricing for 2023. In contrast, China’s largest EV maker, BYD (OTCPK:BYDDF) (OTCPK:BYDDY) has already announced plans to lift the selling prices of its EVs. Also, a January 2, 2023 research report (not publicly available) relating to NIO issued by Credit Suisse (CS) noted that “NIO is expected to maintain its tagged price.”

In a nutshell, even though there are still investment opportunities within the China EV space, NIO isn’t my pick.

Is NIO Stock A Buy, Sell, Or Hold?

NIO’s shares are rated as a Hold. On the negative side of things, NIO’s recent delivery metrics were below expectations, and it is likely that NIO won’t raise prices on existing vehicle models this year. On the positive side of things, the share prices of listed Chinese companies in general have staged a strong recovery since China abandoned its COVID-zero policy, and NIO’s valuations aren’t demanding. As a reference, NIO currently trades at 1.29 times consensus forward next twelve months’ Enterprise Value-to-Revenue as per S&P Capital IQ data.