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Why NIO’s Q3 Earnings Might Make Tesla Happy

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NIO (NIO), once touted as China’s Tesla (TSLA), is scheduled to release its third-quarter earnings on December 30. Yesterday, NIO ADRs fell 0.8%. At 6:03 AM ET today, NIO ADRs rose 1.4% in the pre-market. So far in 2019, the ADRs have lost more than 60% of their value.

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What to expect from NIO’s Q3 earnings

The Wall Street analysts surveyed by Reuters expect NIO’s third-quarter revenues to rise 11% to 1.63 billion Chinese yuan ($233 million). However, the net losses will likely widen by 11.9% to 2.65 billion yuan ($379 million), which translates to a loss of 2.43 yuan (35 cents) per share.

Among the 14 Wall Street analysts surveyed by Reuters, only two recommend a “buy” rating on NIO, while seven recommend a “hold.” The other five analysts are bearish on NIO ADRs. The average target price of $3.07 points to a 21.3% potential upside compared to Monday’s close. However, the median target price of $2.05 points to the possibility of more downside in NIO’s ADRs. There are plenty of reasons why NIO’s third-quarter earnings might not arrest the fall.

Subsidy cut headwinds in 3Q and beyond

The third quarter will be NIO’s first full quarter after China rolled back electric vehicle subsidies in June. At the time, China fully rolled back the EV subsidy for vehicles under the range of 250 kilometers (about 155 miles). China halved the subsidies for longer ranges.

The cut in EV subsidies had a negative impact on NIO and other companies. China’s new energy vehicle sales and production have declined since the beginning of the third quarter. In November, China’s new energy vehicle sales, which include plug-ins and hybrid electric vehicles, fell 43%. While NIO is performing better than other major Chinese peers, it has been impacted by dullness in China’s market. In November, NIO delivered 2,528 units—flat on a month-over-month basis. The figures weren’t great news for a company eying for Tesla-like growth. Tesla’s deliveries in China rose by 13x in November. The company delivered 5,597 electric vehicles during the month, according to China Automotive Information Net. Last November, Tesla delivered 393 vehicles in China.

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The subsidy cut headwinds will likely continue into 2020. China is devising a new subsidy policy. CAAM (China Association of Automobile Manufacturers) said, “Next year there will be different NEV manufacturing quotas for carmakers. I think next year will also be an adjustment period.” CAAM also said, “NEV output and sales are likely to rebound in December, while it will still face greater challenges next year.”

3Q marred by internal issues and trade war?

At the beginning of the third quarter, NIO recalled 4,800 ES8s batteries due to a potential safety issue. NIO’s chairman said, “During the month, we prioritized battery manufacturing capacity for this effort, which significantly affected our production and delivery results. In addition, some deliveries were pushed forward into June in anticipation of further electric vehicle subsidy reductions that took effect at the end of June. Lastly, China’s macroeconomic and auto market conditions remained challenging, exacerbated by the US-China trade conflict.”

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While the trade tensions have eased lately, they peaked during the third quarter. China’s economic growth was 6% during the third quarter, which missed analysts’ expectations. China also devalued the yuan during the third quarter. As a result, NIO’s US dollar results will also be impacted by negative currency translation.

Competitive pressures are rising

Going beyond the third-quarter earnings, NIO’s outlook looks bleak with fresh competition from industry stalwarts. Right after the third quarter, Tesla opened it’s Shanghai Gigafactory 3 to mass-produce the Model 3 electric vehicle in China. Tesla expects to save costs and cut deeper into the Chinese EV market with this move. Cutting costs will also help the company compete better on the price with homegrown players like NIO. Tesla is already taking steps to push Chinese customers to buy locally made Model 3s. Earlier this month, Reuters said that Tesla might increase the prices of imported Model 3 cars in China.

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Tesla’s Shanghai Gigafactory ramp-up might be going smooth. Oppenheimer analyst Colin Rusch was positive about Gigafactory 3. In a note, he said that “expectations for a relatively smooth (production) ramp of Tesla’s China facility are increasing.” According to reports, Tesla has also secured a $1.4 billion loan for Gigafactory 3.

NIO has more concerns than Tesla. Apart from other Chinese players, global giants like Volkswagen, General Motors (GM), and Ford (F) are revamping their China strategy to include more electric vehicles in their portfolio. Recently, Ford launched its Mustang-based Mach-E SUV, which might eventually compete in China. Ford’s F-150 electric is also on its way.

NIO’s biggest disadvantage against these players lies in its business model. NIO doesn’t produce its own vehicles. As a result, the company doesn’t have complete control over the product. Scalability is also an issue. NIO had a setback in October when a local government ended talks about building the first NIO factory. With finances already in dire conditions, not having a factory could be a gamble.

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NIO’s liquidity position is a concern

At the end of the second quarter, NIO had just over $500 million in cash, cash equivalents, and short-term investments. The amount is almost equal to the company’s net losses in the second quarter. Back in October, Bernstein analysts said, “As it stands, we think NIO’s liquidity is now measured in weeks. It appears inevitable to us that investors will start question NIO’s ability to remain a going concern.” With no backup from fixed investments in factories, NIO is in a desperate liquidity position.

Will 3Q delivery surprise help?

NIO’s third-quarter deliveries beat the expectations and its own guidance. The company delivered 4,799 vehicles during the quarter compared to its own outlook of 4,300 deliveries at the midpoint. The deliveries were also 35% higher compared to the second quarter. Despite 35% higher deliveries, the revenues might grow by a much lower percentage, which points to lower realization per vehicle sold.

Tesla raised car prices in China during the quarter due to the falling yuan. NIO’s lower realization could be a strategy to attract price-conscious customers.

However, NIO is running out of time for experiments. Lower revenues per vehicle might pressure the company’s bottom line and liquidity. Can NIO live up to the liquidity challenges? Tesla might find happiness in NIO’s third-quarter earnings.

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