NIO Valuation
Company History
NIO is shown as 蔚来 in
Chinese characters. It means Blue Sky Coming which shows their commitment to a
more environmentally friendly future. It develops and manufacture higher-end electric
vehicles.
It was founded in 2014. NIO began generating
revenues in 2018 when it started to deliver the seven-seater ES8. In the same
year, NIO was listed on the New York Stock Exchange. In 2022, it was listed on
the Main board of the Hong Kong Stock Exchange by way of introduction.
NIOs
revenue is generated from:
1)
Vehicles sales
2)
battery service
3)
Sales of charging piles
4)
Sales of packages: energy package and service package
5)
Automotive regulatory credits
6)
Others: sales of accessories, embedded products and services, others.
Management Team
Mr. Bin Li is the founder and CEO of
the company. In 2000，Bin co-founded Beijing Bitauto
E-Commerce Co., Ltd. which is a leading automobile service company. Bitauto
Holdings Limited was also NYSE-listed.
Mr. Lihong Qin is the co-founder and
the director and president of the company. Mr. Qin worked previously in a
leading property development and investment company in China.
The top management team has been quite
volatile for the recent years. At the end of 2018, Padmasree Warrior
resigned. Later, the Vice President of
operations, Ping Jiang also left the company. Between 2019 and 2020, there was
a large organization change in the middle-top management team. Recently, the assistant VP of autonomous
driving left NIO and joined a startup.
Products &
Innovations
Vehicles
NIO currently sell the following
vehicles in China and Norway. It plans
to expand to global markets.
Batteries
NIO has also heavily invested in battery
development. In 2021 September, NIO
launched an all-new standard-range (75 kWh) hybrid-cell battery cell battery
pack. It has efficiently reduced the cost and thus increased the gross profit
margin.
CATL has been NIOs sole battery
supplier from the beginning. In March 2022, the founder of Beijing WeLion New
Energy Technology Co., Ltd mentioned the company is planning to cooperate with
NIO to launch a hybrid solid-liquid electrolyte battery with a range of 1000
kilometers on ET 7. It will mitigate the
risk of battery delay from CATL.
My thoughts:
Companies on the EV supply chain are like rowing a boat upstream, if you stop
moving forward you fall back. When EV companies are trying to strengthen their
impacts on the upstream, the companies on the upstream like CATL are looking
for opportunities to move towards downstream. At the beginning of November
2021, CATL has formally signed a strategic agreement with NETA automobile and
has acquired a stake in Neta. Neta is also an EV company with a target on the
lower-end market.
Innovations (Service and Digital
Technologies)
·
Battery
Swapping
NIO
is currently the one of the few EV company which offers battery swapping
service. The video
displays how the battery is swapped in the NIO Power Swap station 1.0. within 5
minutes. In 2021, the Power Swap station was updated to version 2.0. With the
help of NIOs Autonomous Driving and advanced driver assistance system, the
whole process can be conducted without the involvement of human.
·
Battery as a
Service (BaaS)
Because
of the technology of battery swapping, NIO is able to provide a new business
model. Customers can purchase only vehicles without batteries and subscribe to
the batteries. It means that customers pay a lower upfront purchase price and
enjoy the flexibility for battery upgrades in the future as well. The upfront
purchase price is reduced by RMB 70,000 -128,000 by choosing BassS. The monthly
subscription varies depending on the type of the batteries from RMB 980 -1,480.
·
NIO Autonomous
Driving (NAD) and Advanced driver assistance system (ADaaS)
The
advanced ‘soft equipment’ is one of the major reasons why the new EV attracts
consumers. Consumers can purchase NAD thought a RBM 680/month subscription
under ADaaS from 2022.
My thoughts: Although the income from subscription accounts for only a tiny part, I expect the subscription of the inbuilt software will make larger and larger contribution to the income in the future especially when the technology becomes more proven and trustable.
One distinction of NIOs software-driven vehicle technologies from Tesla is by applying HD (high-definition) mapping and vehicle sensing system. Tesla has deliberately chosen not using HD maps.
My thoughts: Many youtubers have made comparisons between the driving systems of Tesla and NIOs. It turns out at NIOs HD mapping system works better on the highway with many forks. Tesla’s AI system could be trained/developed better in the future but the HD map with sensing seems the best solution for autonomous driving right now.
NIO Adam’s core consists of four NVIDIA DRIVE Orin SoCs. NIO Adam is the super computing platform of NAD. NVIDA Parker SoC is adopted by ES8, ES6 and EC6 while the 3rd generation Qualcomm is used by ET7 and ET5.
· Research and Development (R&D)
NIO has strategically located its offices in places worldwide where the best talent can be accessed.
Ø Shanghai – vehicle engineering, smart hardware, autonomous driving, digital cockpit, digital system, product planning, NIO app, design, electric powertrain and battery teams in Shanghai; coordination of the global R&D
Ø Beijing – digital cockpit, digital system, digital development and autonomous driving teams
Ø Hefei – vehicle engineering, manufacturing engineering, test and quality
Ø Silicon Valley – autonomous driving, smart hardware, digital cockpit, and digital system (incl. operating system and digital security)
Ø Munich – product and brand design
Ø United Kingdom – computer-aided engineering and advanced vehicle engineering
Manufacturing
Jianghuang Automobile Group Ltd (JAC),
a major state-owned automobile manufacturer in China, has been manufacturing
NIOs vehicles since 2016. In May 2021, NIO and JAC established a joint venture,
Jianglai Advanced Manufacturing Technology (Anhui) Co., Ltd., for manufacturing
management and operation where NIO hold 50% equity interest.
JAC has an annual production capacity
of 120,000 units for the production of the ES8, ES6, and EC6 and ET7. In
addition, JAC has planned to expand its annual production capacity to 240,000
units in the middle of 2022 which is based on double shifts, 4,000 hours per
year. The capacity could be increased to 300,000 units if the work time is
extended to 5,000 work hours per year.
JAC-NIO are also building a new
manufacturing plant in Xinqiao Industrial Park with a predefined annual
production capacity of up to 300,000 units based on 5,000 work hours per year.
The new factory is designed to begin producing in 2022Q3.
Electric Powertrain Manufacturing
NIO has established Advanced
Manufacturing Technology and Engineering Center in Nanjing, for the production
of electric powertrains.
Distribution
Direct distribution channel is
organized by NIO through NIO Spaces & Houses. NIO has followed Tesla’s direct
distribution strategy rather than the traditional dealership model. Direct
distribution requires significant expenditures but it also benefits companies
in other ways. In return, the company can better manage the relationship with
the consumers, standardize the process of sales and services and achieve
uniform pricing in the same country.
Detailed information regarding vehicle
distribution channels in China:
The traditional Automobile Sales Service
Shop (4S) is a full-service approach which integrate sales, spare parts,
service and surveys in one shop. Nearly all of the car manufactures in China
chose 4S dealership model before Tesla entered Chinese market. Tesla has
applied an order online and pick-up offline 4S shop approach in China.
Following the same concept, NIO has
established NIO House and NIO Space. NIO Houses serve as a clubhouse for NIO
users and friends. Couples can even have their proposals at NIO Houses. NIO
Spaces are generally smaller and sales-focused. At the end of December 31,
2021, there were 37 NIO Houses in tier-one and tier-two cities and 321 NIO
Spaces in 142 cities in China.
The target market of NIOs current
products is higher-end. However, it is trying to produce lower priced vehicles.
My thoughts: EV
market is developing so quickly. The lower-end market is much larger than the
higher-end. MINIEV manufactured by WULING sold 426,482 units in 2021 is ranked
as nr 1. in BEV market in China. Model 3 and Model Y following MINIEV are
ranked as nr 2 and 3 respectively. The price range for MINIEV is between RMB
32,800 – 69,800. The top 10 on the list are all priced lower than NIOs
vehicles.
NIO has been focused on the higher-end customers in tier-one and
tier-two customers in China. There is much more potential in tier-three and
tier-four cities regarding the size of population. Compared with tier-one and
-two cities, the consumption power is much lower in tier-three and -four. It is
necessary for NIO to provide cheaper models to expand to the tier-three and
-four cities. The EV market is far from saturated in the smaller cities. At the
same time, cheaper models can also strengthen NIOS competition ability in
tier-one and -two cities. The boost sales of Tesla also come from the cheaper
models. In 2017, Model 3/Y
accounted only for 2% of its total delivery while Model S/X took 98%. In 2021,
the situation was reversed with 97% deliveries from Model 3/Y. I personally think
it is a good idea to target the EV Mass Market. Especially NIO has made its
name in China now. The founder
Mr. Li stated firmly in 2021Q4 conference call that they would invest more in
R&D.
In 2022, NIO launched ET5 with price range from RMB 328,000 -386,000. It
can be purchased through BaaS model. The upfront purchase price could be
reduced to RBM 258,000. The huge investment in R&D
would lead to more cheaper models.
Valuation
NIO began generating revenue since 2018. It is still in the high growth phase with negative EPS. The most common and classic valuation method for this type of companies especially with uncertainty of capital structure in the future is FFCF (free cash flow to the firm). It is very important to bear in mind that the estimates from this model extremely highly depend on the assumptions of the inputs for the model.
My thoughts: If the inputs do not contain any meaning, it would end up with garbage in and garbage out no matter how good the model is. To avoid making the same valuation mistake as the other people did in the earlier stage of Tesla, I have looked at their previous research work. Although it is still quite disputed about Tesla’s market price, the far more undervaluation from their research due to the underestimation of the development of EV market and especially the growth period of Tesla. Tesla began to roar in 2020 when it came to China but it was entering into mature phase at that point of time according to their estimation. It is not easy and it will never be easy to predict a startup. It requires enormous experience and constant monitoring which refers to right methods and hard-working.
The interview with Mr. BinGuang Han, Founder from New Thinking Investment Management Co., Ltd made a deep impression on me. Mr. Han said he would picture the blue print of several years period for the company which he has investigated. The company normally developed following his imagined blue print. I guess this is an excellent example of experience.
In the following chapters, I describe my inputs and financial model for the valuation of NIO. It is hard to predict the life cycle of NIO precisely. All of the available information about NIO is based on current situation and its plan for the highly foreseeable future. Unfortunately, the only constant in life is change. I will keep a close eye on NIOs development and adjust my inputs and valuation in time.
It is difficult to predict what strategies NIO will take besides the two factories. I have pictured NIO’s life cycle - 3 stages:
Stage
1: 2022 -2026 highly growth
Stage
2: 2027 -2031 slow down period
Two
scenarios: baseline: 5%
real growth rate; better: 20% real
growth rate
My comments: It is highly uncertain.
It is more likely that NIO would plan to build more factories to increase
capacity.
Stage
3: from 2032- plateau with 2% real
growth rate
Global economy
The inflation has reached record high. During 2021Q4 conference call, Mr. Li claimed that they haven’t considered about raising the price, although there has been a big increase in the prices of raw materials.
However,
in the start of May, NIO increased the price by RMB 10,000 to cover the high
cost of raw materials. Since NIO’s primary market is China, the inflation rate
is generally much higher than Europe. The situation will continue for the next
10-20 years. I think NIO is able to transfer the increasing cost to the
customers. The inflation is conducted as price increasing in the estimation.
Stage 1: 2022 -2026, 3% inflation
Stage
2: 2027 -2031, 2% inflation
Stage
3: from 2032 -, 1% inflation
EV market prospect
The detailed information about EV market can be found in the previous chapter in my blog. It is an independent topic. The conclusion is that EV market is still far from saturated but the competition becomes more and more fierce. Many traditional car manufactures have adapted/established production lines to produce BEV. The mass market has much more potential than the higher-end.
Production Capacity
According to the sales data and NIOs 2021Q4 quarterly conference meeting, the sales figure is current limited by production. Shortage of chips and batteries from suppliers have been the obstacles for the production. The problem is supposed to be mitigated in 2022. Guided by the production capacity of the two factories – Jianghuai and Xinqiao, I have made the predictions of production for two scenarios – called baseline and better
Scenarios.
Until now, NIO has only these two factories in the pipeline.
Base scenario –produce 480,000 units in 2026 which means the two factories run under a little more than two shifts; 5% real growth in stage 2.
Better scenario – produce 600,000 units in 2026 which implicates the two factories run under longer work-hours; 20% real growth in stage 2.
The nominal growth rate is assumed to be 3% for both scenarios.
Table 6 displays the number of deliveries in 2018-2021 and the predicted figures for 2022-2026. I have used the predicted produced number as the sales volume.
Stage 1: 2022 -2026 highly growth
Stage
2:
Two scenarios: baseline: 5% real growth rate; better: 20% real growth rate
My thoughts: It is highly uncertain.
It is more likely that NIO would have planned at build more plants.
Stage
3: from 2032 into plateau with 3% nominal growth rate
Gross Margin
In the earlier conference call, Mr. Li mentioned 25% gross margin is their long-term target. NIO has followed Tesla implementing single-piece casting to rear subframe. In 2021, NIOs gross profit for vehicles is 20% and the total gross profit is 19%.
Operating Margin
R&D
In
2021Q4 conference call, Mr. Li mentioned the personals of R&D would be doubled
at the end of 2022.
I expect there will be continuous large investment in
R&D for many years.
SG&A
According
to Mr. Li in 2021Q4 conference call, NIO is expected to achieve breakeven in
2023 Q4. It will generate positive net income from 2024. This information has
been taken into account in the estimation.
Discount rate --WACC
I
have applied two different values of the cost of equity:
1)
10.08% - based on
the annualized price return over the last 10 years from MSCI World Automobiles[1].
Normally,
WACC, a combination of costs of equity and debt, is used to discount FCFF.
Compared with the market cap ($53.6B) at the end of 2021, the market value of
debt of NIO (< $2 B) is negligible in the WACC formula. I will hence apply
the cost equity to approximate WACC.
2)
Derived from
CAPM:
Rf:
risk free rate, 3% - average 10 years treasury rate
Β:
2.45 (5 years monthly)
E(Rm)):
10.5% from the average annual return from S&P 500.
When required return on equity is as high as 21.4%, the value of debt take account for nearly 25% of the terminal value of the company. The cost of equity is not appropriate to be used directly as WACC. The target capital structure for the company is thus assumed to be 25% debt and 75% equity which leads to WACC = 16.1%.
ESG considerations in FCFF
model:
1. Local government
issues: As far as now, local governments generally support NIO.
2. Labor issues:
Recently, overworking is an issue in China. It could become a challenge for the
company if the long working hours have to be reduced by the authorities.
3. Environment-related:
The new manufacturing plant could be subject to delay or suspension due to
environment supervision.
The above risks are not highly like to happen. I believe the management team is capable of handling it. Therefore, the risks are not priced in the model.
Taxation
NIO still hasn’t generated positive profit and thus it is not possible to look at its effective tax. NIOS PRC subsidiaries are subject to a statutory enterprise income tax rate of 25% In China. In addition, its certain subsidiaries which are qualified as high and new technology enterprises are eligible for at preferential enterprise income tax rate of 15%. Up to 2026, I have applied 15% tax rate for the annual years with positive EBIT. From 2027 -2031, I have raised the tax rate from 15% to 20%. For the terminal period, I think it is highly likely that the beneficial income tax rate for new technology enterprises would be cancelled.
A summary of the input assumptions:
Results
1)
WACC =10.08%
USD 1 = RMB 6.7
is applied to convert RMB to USD
The terminal
value of the company: RMB 474 billion (baseline)
The present value
of terminal company value: RMB 181 billion (baseline)
The total present
value of the company: RMB 220 billion (baseline)
Weighted-average
number of ordinary shares outstanding – basic and diluted at the end of 2021:
1,572,702,112
After deduction
of debt, the price per share based on DCF model is RMB 134 ($19.93) and RMB389
($58.07) for the baseline and better scenarios respectively.
NIO Inc ADR was closed at $16.57 on the 27 May, 2022. If the performance of NIO will not worse than the baseline scenario and the required return of the investor is no higher than 10.08%, the current market price is considered undervalued by the investor.
In order to
validate the appropriateness of the model assumptions, I present the multiples
to look at the solution from another perspective.
The third stage
(terminal) is assumed as the mature period of the company and hence its
multiples are comparable with the industry level and other mature companies, e.g.,
Volkswagen and Ford.
For the terminal
period, justified P/E = 14.6 and justified P/S =1.48. P is the terminal value of the equity from
the model. E and S refer to earnings and sales at the first year of the
terminal period.
According to statistics from MSCI World
Automobiles Index[1],
fundamentals P/E=15.99 and P/E Fwd=14.31 for MSCI World Automobiles industry.
It seems the P/E from my calculation is close to the industry level which
implies the discount rate is acceptable.
I cannot find out P/S level for automobiles
industry. I have instead constructed figures for Ford (Table 7)
and Volkswagen (Table 8)
from financial reports and market stock price.
Notes: Stock price used in P/S and P/E is a snapshot
market price at the end of the year.Table 8 The Volkswagen Group
Compared with the modelled P/S=1.46 for NIO,
the average P/S for Ford and Volkswagen is around 0.35 which is far lower than
NIOs estimate. Table 9
displays gross profit margin for Ford and Volkswagen for the last 5 years and Table 10
represents their operating margin over the last 5 years. For the maturity stage,
the gross profit margin and the operating margin for NIO are assumed to be 25%
and 14% respectively. It leads to higher P/E and P/S for NIO.
Table 9 Gross profit margin
Tesla’s gross profit margin in 2021 is as high as 25% and operating profit margin for 2021 has reached 12.1%. I think it is highly likely that NIO’s operating margin will be higher than 14% in 10 years by their continuous innovations in manufacturing process, software for vehicles and distribution channels.
2) WACC = 16.1%
The modelled equity value is 6.6
and 28.6 per share for the baseline and better scenarios. The corresponding P/E
and P/S for the terminal is 8 and 0.8 respectively. There has been so much
volatility in the stock market in the recent years especially for the China-based
tech companies attributed to COVID 19, Ukraine war, extremely high inflation
and the high tension between China and US.
If the investor requires to be
compensated by the volatility of the stock market for NIO, the price per share
for the investor to accept would be much lower than the average required return
is applied.
[1]
https://www.msci.com/documents/10199/9eae1855-a008-4220-82ea-d3a4a8cfd032
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