Jun 15, 2021
[12 min Read]
Why Nio is a great investment and why it is so much more than the “Tesla of China”.
I am sure you all have heard of a Chinese Electric Vehicle manufacturer that goes by the name $NIO - NIO Inc., and I am sure that you have heard them been called the “Tesla of China” but this title is very deceiving and gives the impression that Nio perhaps copied $TSLA - Tesla. However, this is false because Nio has a completely different business model and very different technology (especially in their swappable batteries) than Tesla does. Nio is up nearly 1000% on the year, so I decided to do an analysis to find out what all the hype was about and if this hype can be justified.
Nio is a leading manufacturer of premium, smart, electric vehicles. Nio designs, develops, manufactures, and sells their vehicles to their main customer base in China. Furthermore, Nio is constantly looking to improve upon their autonomous driving, digital technology, battery technology and their powertrains, in order to differentiate themselves from their competition.
Nio has industry-leading battery swapping technology, which drives their battery as a service (BaaS) business. Additionally, Nio also has proprietary autonomous driving technology, which enables their Autonomous Driving as a Service (ADaaS) business.
Nio currently sells their vehicles in China, however they are planning on expanding their business into international markets, to capitalize on the growing demand for EV's. Nio has 4 vehicle models, their ES8, ES6, EC6, and their ET7.
Battery Swapping (BaaS):
Nio's battery swapping technology is supported by over 1,200 patents and this technology is supported on all of Nio's vehicles. This technology provides Nio customers with the convenience of quickly swapping their battery for another one to continue their journey quicker through a seamless recharge.
Nio is releasing their Power Swap Station 2.0 in 2021, which will decrease their swap time to roughly 3 minutes and have the capacity for 13 rotational battery packs. In 2020, Nio had 172 Swapping Stations in 74 cities that swapped 1.4 million batteries.
Nio's Battery as a Service business generates revenue through “battery subscriptions”, in which users have flexible subscription options that they can choose to fit their battery swapping needs. Currently, Nio has several subscriptions for both their 70 kWh, and their 100 kWh batteries.
If a customer were to select the 70-kWh subscription, they would enjoy approximately $11,000 (USD) off of the purchase price of their vehicle and pay a monthly subscription of approximately $150 (USD).
If a customer selects the 100-kWh subscription plan, they will enjoy approximately $20,000 (USD) off of the purchase price of their vehicle and pay a monthly subscription of $231 (USD).
Autonomous Driving (ADaaS):
Nio has worked on their autonomous technology since day one and now delivers their products that come with “Nio Pilot”, their Advanced Driver-Assistance Systems (ADAS). Furthermore, Nio is about to roll out their Nio Autonomous driving (NAD).
Consisting of 23 sensors, a front-facing tri-focal camera, 4 exterior cameras, 5 radars, 12 ultrasonic sensors and an interior driver-monitoring camera, Nio Pilot is Chinas only ADAS that is on the market. Nio Pilot has fleet learning and AI analysis capabilities that will be able to update their cars over the clous and improve their algorithms using their extensive backlog of driving data.
In January 2021, Nio announced their Autonomous Driving capabilities (NAD). The NAD system was developed in-house and features perception algorithms, localization, control strategy software, and platform software. The NAD technology uses their super computing platform “Adam”, and their super sensing system “Aquila”.
Nio is planning to roll out their NAD to their customers, through a subscription model similar to their battery sapping service. This subscription is estimated to cost users $106 (USD) per month.
Nio has developed, designed, and manufactured their own proprietary electric powertrains in house since their inception. Nio makes powertrains that are specific to their vehicles, and through their Firmware over-the-air (FOTA) Nio is able to continually improve, update, and adjust their cars to fit the behaviour of their driver.
Nio has greatly improved their motors moving from their 240-kW 2nd generation induction motor to their 300-kW 3rd generation induction motor. Additionally, Nio has improved their magnet motors from 160 kW (2nd gen.) to 180 kW (3rd gen.)
It is this constant drive to keep improving their technology that will help separate Nio from their competitors and help Nio to become one of the best EV manufacturers.
Nio is very committed to R&D and innovating their battery technology. Currently, Nio offers two battery options: their 70-kWh battery, and their 100-kWh battery.
Their 70-kWh battery is designed, developed and manufactured in-house, and combines Nickel-Cobalt-Manganese) NCM prismatic cells, liquid cooling systems and intelligent battery management systems.
Their proprietary and patented 100-kWh battery features thermal propagation prevention, climate thermal management, and bi-directional cloud Building Management Systems (BMS).
Nio has also announced their 150-kWh battery which is expected to release in Q4 2022, or Q1 2023, which is another large innovation to their existing technology and proves their determination to be the most innovative.
Nio has developed a number of proprietary technologies throughout their business journey. Nio relies on their ability to protect their technologies and property through the use of patents, patent applications, NDA's, copyrights, trademarks, and intellectual property licenses.
Nio currently has 2,654 patents that have been approved, 1,397 patents that are in the application process, 3,373 registered trademarks, 804 trademark applications, 133 copyrights, and 686 registered domain names.
One of the most important aspects of high-growth stocks is the management team that is heading the company. We have seen awful management teams destroy promising stocks over and over again, so it important to know the management team, their experience, and their track record(s). With that being said, lets dive into Nio's management team.
The only way in which I could value Nio is through a set of comparable analyses. These analyses will compare some of Nio's financial ratio's/multiples to that of their competitors.
Comparable Analysis #1:
When comparing Nio's EV/Assets multiple to that of their competitors (as listed above), I found that Nio has a fair value of $257.66, which wouldimply a share price increase of 453.39%. This is very optimistic, so I decided to undergo more comparables to find out if this result was consistent.
By Comparing Nio's EV/Revenue multiple to that of their competitors (excluding Xpeng because their ratio was not positive), I found that Nio is $196.70, which implies an increase in value of 322.47%. This is quite similar and consistent with the results achieved in the EV/Assets comparable, so I decided to do one last comparable to gain more insight.
By comparing Nio's P/B ratio to that of their competitors, I arrived at a fair value of $45.19 per share, which would imply a downside risk of 2.94%. This is inconstant with the other 2 results, so I decided to average the results achieved by each comparable to reach an unbiased valuation.
Average Comparable #1:
By taking the average of all 3 comparable that I underwent in this analysis I arrived at a final all-encompassing price target of $166.51, which would imply a price increase of 257.62%.
I decided to undergo a second comparable to factor out the influence of Tesla on the results of my first comparable. I did this for a variety of reasons, which include Tesla being valued so much higher than the other EV comparable companies, Tesla being the only company located outside of China (this is because Chinese companies tend to be undervalued, so taking the comparable for these solely Chinese companies makes more sense), and these other companies pose more of a threat to Nio given their current geographical reach.
By comparing Nio's EV/Assets multiple to XPeng and Li Auto, I found that Nio's fair value is approximately $51.64, which would imply a share price increase of 10.91%. this is very reasonable, however I decided to undergo the other comparable to either validate or invalidate this result.
By comparing Nio's EV/Revenue multiple to Li Auto (because XPeng does not have a positive EV/Revenue multiple), I arrived at a fair value of Nio of $52.00, which would imply an upside of 11.68%. Once again, this is very reasonable and constant with the result from the EV/Assets comparable.
By comparing Nio's P/B multiple to their Chinese competitors, I arrived at a fair value of $37.46, which implies a downside risk of 19.54%. This is not consistent with the results achieved in the previous 2 analyses, and as a result of this I decided to average my results to achieve an unbiased fair value.
Average Comparable #2:
By taking the average of the fair values that I achieved in the 2nd comparable analysis (w/o Tesla), I achieved one all-encompassing fair value of $47.03, which implies an upside of 1.07%, meaning that Nio is approximately at fair value in comparison to their Chinese competitors.
I think the fact that Nio is undervalued when comparing them to their Chinese competitors is very good for the stock. I believe that Nio should be overvalued compared to them because Nio presents a larger upside. The fact that Nio is undervalued is very bullish, and when incorporating Tesla is extremely bullish. I think the comparable with Tesla will be more applicable when Nio starts to expand their operations internationally, as they will likely start to be valued as less of a “Chinese stock” and more of a legitimate EV company.
I think that investors need to keep up to date with Nio's financial reports to make sure that they are on the right track, since here is no way to do a proper DCF right now. But other than this, Nio is looking very bullish.