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I am resuming coverage of NIO with a Positive rating and a $57 price target. I believe that EV penetration will dramatically increase, led by China and Europe markets, and NIO will be a key beneficiary. The company is well-positioned to win in the luxury EV category; new model introductions will outpace competitors, and its service focus should generate success. However, I view the risk/reward as balanced, moderated by NIO’s R&D investment spending.
41.11% appreciation potential at a price of $40.40
· My Thoughts. I see the November delivery results as further validation of the strong growth in NIO’s business. Even though LI Auto and Xpeng both posted higher numbers in November, NIO’s month-to-month comparisons give reason to be optimistic. I remain Positive on NIO’s positioning and longer-term secular opportunity to be a leader in the luxury electric vehicle space.
· November Deliveries. Deliveries of 10,878 vehicles, up 105.6% y/y, was 4.5% below my estimate; ES8 deliveries of 2,683, up 66% y/y, was 3.9% below my estimate; ES6 deliveries of 4,713, up 68.1% y/y, was 3.3% below my estimate; EC6 deliveries of 3,482, up 83% y/y/, was 6.7% below my estimate. November posted a strong recovery from October’s numbers, and it seems the manufacture retooling was successful.
· Setup for December & 4Q. NIO previously provided guidance for 24,500 vehicles for 4Q at the midpoint, and management specifically noted that October delivery numbers reflected manufacturing capacity for 10 days. Taken in conjunction with the November delivery numbers, I note the positive setup into 4Q with announcements of successful ET7 Batch production. December has historically been a strong month for 4Q, and I expect this pattern to continue.
Valuation. I value NIO on an EV/Revenue basis to arrive at my $57 price target. I project the business revenues 1-1.5 years into the future and apply a blended multiple based on similar competitors like XPEV and LI, as well as EV segments of other luxury vehicles like BMW when possible.
EV/Revenue Price Target = $57 Per Share
I believe the EV/Revenue approach is the most appropriate valuation method for NIO as the company is highly focused on growth and market share gains in a highly competitive market. Revenue serves as a strong proxy for vehicle delivery, market uptake, as well as market penetration. I forecast revenue in local currency on an FX-neutral basis, with adjustments towards average per vehicle revenue contribution. I also use a Terminal EPS-Multiple method as guidance, to better gauge the spending related to NIO infrastructure and R&D; The company must move towards both profitability and market performance, continuing to innovate in new models and capabilities.
Price target and Risks
My price target of $57 is based on the EV/Revenue and is equivalent to ~9.5x EV/2022 revenue
Upside Risks: EV market outperformance, faster than expected penetration of new markets with European expansion, outperformance in the rollout of new ET7 model, the success of partnership ventures, material improvement in Autonomous Driving
Downside risks: Production capacity bottlenecks, continued unprofitability, continued R&D issues, EV market downturn.
Catalysts: NIO day 2021, New Swap Station Deals, ET7 Model mass production, NEO park manufacturing facility, New Batteries
I employ the following rating system:
positive: at least 20% appreciation over the next 12 mo.
neutral: within +/- 20% over the next 12 mo.
negative: at least 20% depreciation over the next 12 mo