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Earnings Preview: NIO To Show Strong Order Growth?
Sep. 30, 2018 11:57 AM ET|27 comments | About: NIO (NIO)
Financial Alphas
Financial Alphas
Banks, Asset Management, financials
(376 followers)
Summary
NIO will announce its first quarterly earnings as a public company in the coming weeks.
Investors should be looking for a continuation of the order growth for its premium ES8 model, while operating expense growth slows.
In addition, any news of the smaller ES6 model would be welcomed, with it set to be launched in Q4.
Chinese electric carmaker NIO (NIO) will release its third-quarter earnings - its first as a publicly-listed company - amid continued buzz about the domestic Chinese EV industry. In an earlier report, I was pessimistic about NIO because it seems far too early to judge its potential; the company only began delivering cars three months ago. Nevertheless, these concerns can be allayed as more operating data is released by the firm. Here are the key points from the upcoming earnings release and conference call that investors should watch for.
Order numbers and deliveries
So far, one production car has begun deliveries - the ES8 SUV - while ten of its EP9 supercars are to be sold to the public. Over 1,000 ES8 models had been produced by August and 900 had been delivered.
NIO ES8
The NIO ES8 SUV. Source: NIO
Because there were only three months' worth of order details as of the time of the IPO, it's difficult to gauge demand. However, we can see that July and August both saw just short of 2,200 new orders for the ES8. That's promising.
ES8 Orders
Orders and deliveries of the NIO ES8 SUV. Source: NIO investor relations
This raises two things. First, if orders continue at the current pace, we should see unfulfilled orders between 10,500 and 11,000 by the end of October 2018, and 15,000 by the end of the year. This can probably be seen as a promising start. It's worth remembering that China limits the number of license plates being issued in Tier 1 cities (such as Shanghai and Beijing) by having both a lottery and making the cost prohibitively expensive - sometimes more expensive than the car itself. It's in these Tier 1 cities where a premium EV SUV would most likely be purchased.
The second issue is whether the faster growth of orders relative to deliveries will soon begin to stymie orders. The longer this continues, the longer customers will have to wait for their car to be delivered. It's probably not an issue we'll see in the remaining two quarterly earnings reports this year, but it might be something to watch for next year.
Any signs of slowing expense growth
With only one fiscal half year of reported revenues, it's still too early to expect big growth, but investors should be looking to see a slowdown in the operating expenses. Research and development costs have decreased in 2018, which makes sense given the launch of the ES8 and the imminent release of the ES6, and with no new models announced, I expect the firm will begin to concentrate on sales. In addition, a lot of R&D expense will have been related to the development of the EP9 supercar, which in reality has been a marketing campaign as opposed to car development. Not that there's anything wrong with this, but now that hype has been generated, investors will be looking for sales figures.
Updates on the ES6
Much like Tesla (TSLA) launched the more expensive Model S and Model X before launching the cheaper Model 3, NIO will launch its smaller SUV - the ES6 - in Q4 and begin deliveries next summer. With a starting price of around RMB200k ($30k) - less than half of the price of the ES8 - this puts NIO into a market that I believe will be its most important.
My argument for this is that Chinese buyers tend to be more swayed by the perceived value of foreign brands. That's why Buicks are seen as luxury cars in China, and in a much broader context, Chinese companies quite often acquire small or dead brands overseas to relaunch them in China, proclaiming the heritage of the brand. This relates to NIO because I find it very difficult to believe that enough people would choose the $80k NIO ES8 over a Tesla, Mercedes (OTCPK:DMLRY), BMW (OTCPK:BMWYY), Audi (OTCPK:AUDVF) etc. It's a new Chinese brand that - while having received a lot of domestic media attention - doesn't have the brand value of the aforementioned marques.
However, in the $30k price range, NIO can really make a splash because the brand value of rivals isn't as large. Do remember that imported cars often have an import tax near to 100% of the cars' value, meaning that prestige foreign brands will be too expensive for this price range. As such, investors should be looking for updates on the ES6 in the upcoming earnings release.
As of the time of the writing, NIO hasn't announced the date of the earnings release, but it is likely to be late October or in November, much like most US-listed Chinese firms and accounting for the week-long national holiday just starting in China.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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