NIO Inc.

Moat: 1/5

Understandability: 2/5

Balance Sheet Health: 2/5

NIO Inc. designs, develops, jointly manufactures, and sells premium smart electric vehicles. It has expanded into areas such as battery technology, autonomous driving, and power solutions, as well as offering a premium lifestyle experience for users.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

NIO’s core business is premium electric vehicles, where it attempts to stand out with technology and high-end service, but it is in a very competitive market.

Business Overview

NIO’s revenues are primarily generated from vehicle sales, with its recent expansion into battery swapping service and its associated power solutions showing growth but still being a small proportion.

It is important to note that revenues are affected by a variety of factors and they are hard to predict, but I will mention a few.

  • Vehicle Sales: Vehicle sales made up the majority of their revenues.
  • Other Sales: Other sales primarily consist of charging piles, accessories and energy packages, are relatively small and growing steadily.
  • Industry Trends: The electric vehicle (EV) industry is highly competitive and is growing exponentially as governments and customers push away from internal combustion engines to electric engines.
  • Margins: Gross margins have seen fluctuations, but are consistently around 10-20%. This is a lower margin than competitors, particularly Tesla.
  • Competitive Landscape: NIO faces stiff competition from global and Chinese players such as Tesla and BYD. They are all rapidly expanding and gaining market share.
  • What makes the company different: NIO’s differentiating factor is its premium brand, including a focus on technology, high-end vehicle features, and luxury branding. They also offer a unique battery-as-a-service model, which allows for convenient battery swapping. They also aim for “premium” experience by providing a lifestyle approach, by building physical stores, and including other services.

Financials

NIO’s most recent financials have revealed some significant headwinds for the company, and I will focus on that:

In the latest report and earnings call, the management showed that revenues are down, margins are under pressure, and losses continue to increase, putting stress on its liquidity and sustainability.

Revenue and Profitability

  • NIO’s revenue was RMB10,662.6 million ($1,552.2 million) in Q4 2022, down 15.9% year-over-year, which indicates some problems. Vehicle deliveries were 40,052 units in Q4, down 7.0% from the same period last year.
  • Vehicle sales were RMB9,908.0 million ($1,440.3 million) in Q4 2022, representing a year-over-year decrease of 15.0%.
  • Other sales were RMB754.6 million ($110.0 million) in Q4 2022, a decline of 27.6% year-over-year, due to lower sales of regulatory credits.
  • Gross margins were 3.9% for Q4 2022. This is a low margin compared to other EV companies, as well as it has declined substantially from 17.2% year-over-year.
  • Net loss for the fourth quarter of 2022 was RMB5.8 billion ($842.2 million), compared to a net loss of RMB2.1 billion in the same quarter last year. This is very significant.

Financial Position

  • As of December 31, 2022, NIO’s cash and cash equivalents, restricted cash, and short-term investments was RMB45.5 billion ($6.6 billion).
  • NIO has high debt, with 33.5 billion RMB as of December 2022 in short term debt and 14.7 billion in long term debt.
  • Free cash flow for 2022 was RMB-11.9 billion. Free cash flow of the last quarter 2022 was also negative at RMB-6.6 billion. These losses indicate a need for capital, a lot of which comes from additional debt.
  • Inventory at the end of the year was very high at RMB8.9 billion, which could indicate less demand.

Recent Concerns and Management View

  • Competition: The company is now facing more competition and also supply chain issues which increase its costs and reduce its profitability.
  • Demand: The company said that deliveries were constrained by supply chain issues, which did seem to have a significant impact on production. The company also noted they are expecting a drop of deliveries in Q1 2023.
  • Profitability: Although revenue growth was higher, profits remained low, with gross margin plummeting. The company has said they are now focusing on improving their operating efficiency and reducing costs.
  • Cash burn and fundraising: The losses are mounting and that is causing a concern for its finances.

Conclusion

NIO is seeing big losses and its moat is diminishing in this growing and competitive market.

NIO’s path towards growth and profitability seems challenging given the competition and increasing macroeconomic uncertainties.

Understandability: 2 / 5

While the basic concept of producing electric vehicles is not hard to understand, fully understanding the complexities of the company’s financial performance, product cycles, and long-term growth prospects and all the accounting rules, requires a certain level of financial and industry understanding. The regulatory environment in China is also pretty confusing and is rapidly changing. Also, it seems that the company changes the reporting metrics frequently which makes financial statements comparisons tough.

Balance Sheet Health: 2 / 5

NIO’s balance sheet is currently far from healthy. They have a large amount of cash but also a huge debt and they are still burning through a lot of cash. This, coupled with recent revenue decline, puts a significant amount of risk.

  • They are at risk of not reaching profitability at all and going bankrupt.
  • They have negative and declining cash flows and low and declining margins.
  • This also means their growth rate will likely diminish soon.
  • Their high reliance on debt is problematic in the long run.