NIO: Panic Time Again; Potential Buying Opportunity (NYSE:NIO)

NIO Adjusts Its Q4 Delivery Outlook After BYD’s Recent Update

NIO Inc. (NYSE:NIO) CEO William Li’s recent decision to adjust its Q4 delivery outlook before it was due (the actual Q4 delivery update is likely slated for January 1, 2023) was astute. Accordingly, NIO highlighted it expects to deliver about 39K vehicles (midpoint) in Q4, down from its previous midpoint guidance of 45.5K vehicles, representing a nearly 15% downward revision.

NIO cited significant challenges relating to the recent supply chain snafu, given China’s abrupt decision to reopen from its harsh COVID lockdowns. As such, it has likely snarled NIO and its supply chain partners, ensnared by the rapid resurgence in COVID infections, impacting production.

However, before any NIO investor goes into a panic, it’s critical to apply the correct context to Li’s decision to provide a prelim Q4 delivery update. For example, just last week, BYD Company (OTCPK:BYDDF) updated in a business forum that it has been impacted by the COVID resurgence, causing China’s leading NEV maker to produce “2,000 to 3,000 fewer vehicles per day.” As a result, BYD could potentially miss its December target by about 25K vehicles (midpoint).

Therefore, we postulate that NIO’s decision to lift the mystery over its delivery performance is shrewd, providing clarity to investors and helping market operators make sense of NIO’s adjustments. We think Chinese companies have learned their lessons well. Previously, Chinese President Xi Jinping’s successful bid to claim his unprecedented third Presidential term led to an unparalleled selloff that crippled Chinese equities investors as investors feared the uncertainties of his one-man rule.

Therefore, we believe BYD and NIO know that investors do not favor uncertainties. And if management can telegraph as much clarity as possible to the market ahead of time, they should do it.

Notwithstanding, the market is also not dumb. Why? Market operators have already forced a top in NIO’s recent recovery in early December, even as China announced more easing measures back then.

Hence, market operators had astutely anticipated that China’s reopening from its COVID curbs could lead to a massive first wave of infection, hampering a fast recovery. As such, Chinese stocks like NIO, BYD, and XPeng (XPEV) have retreated their advance markedly toward their October/November lows.

Therefore, by the time NIO provided its prelim Q4 delivery update this week, NIO had already pulled back more than 30% from its early December highs (as of December 28’s close). But, remember, the market is forward-looking.

China Needs To Pass Its First COVID Reopening Wave Quickly

So, why is China’s Politburo so adamant in its rapid reopening, likely knowing that it could lead to a resurgence that could hamper its recovery cadence?

China is in a pressing need to jumpstart its recovery. Accordingly, Bloomberg reported that its consumer confidence has crumbled to new lows, and home buying interest worsened further recently. As such, Citi (C) argued that China had adopted an approach to “pass the high wave of infections as fast as possible,” paving for a more robust recovery moving forward.

Accordingly, a recent Nikkei Asia survey of economists suggests a consensus forecast of 4.7% GDP growth in 2023, with a bottoming expected from Q2’23. Bloomberg Economics is even more optimistic, seeing upside surprises to its base case forecasts of 5.1% GDP growth.

Therefore, if China could get past a tough H1’23, in line with NIO management’s outlook, H2’23 could see a massive recovery for China’s EV industry.

Moreover, Chinese investment bank CICC corroborated that the leading automakers such as NIO have a strong backlog, as it articulated: “We believe that mainstream car companies such as BYD, Tesla, NIO, and Li Auto have a certain level of order backlog thickness,” bolstering their production recovery in H2.

Therefore, we are sanguine on management’s optimism of surpassing Lexus’s (TM) 200K oil-fuel vehicles deliveries (2021’s metrics) by the end of 2023. Based on NIO’s prelim Q4 delivery update, the company is projected to deliver about 121.4K vehicles in 2022. Hence, William Li’s commentary suggests a YoY increase of nearly 65% for 2023.

The critical question is whether bulls are ready to return to stanch further downside from here?

Takeaway

NIO’s November lows must be sustained for our thesis to play out. As seen above, market operators had correctly anticipated the challenges from a rapid opening as NIO closes in against its November bottom since its top in early December.

Hence, investors looking to buy at these levels have been proffered another fantastic opportunity if they miss its previous bottom. However, a decisive break could lead to further downside.

Given NIO’s unprofitable business model, investors can also consider using a stop-loss measure to mitigate potential downside risks if NIO breaks its November lows decisively.

Accordingly, we maintain our conviction that any position in NIO should be considered speculative, not a core holding.

Rating: Speculative Buy (reiterated)

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.