Shares in Chinese car manufacturer NIO (NYSE:NIO) hit an all-time high in the last couple of days. Last week they crossed the $28 level in US trading. The stock is now up over 600% since the start of the year and it looks as if COVID has had little impact on its growth in value.
NIO listed an ADR on the New York Stock Exchange in September 2018. At the time it looked like a risky venture stock, but since then it has managed to get its first electric car into sales rooms in China. The original model, the ES6, is a five seater SUV. It has now added a larger SUV and a coupe and is reportedly delivering 12,000 vehicles every quarter.
NIO is riding the post-lockdown wave in China
NIO shares were trading at around $2.40 when the pandemic hit but do not seem to have been overly affected. Since then NIO’s stock price has risen to the dizzying height of $28. NIO went cashflow positive in Q2, which has been a big factor in the success of the NIO share price over the summer months. It has now moved over 50,000 cars off its production line.
Brokers had initially set a target price of $18 for NIO, but it has smashed that. Revised target prices of $26 have also been passed in recent days. According to IG, most brokers have not had time to revise their target prices. JPMorgan has now set a new target price of $40. This is based on an enterprise value of 3x predicted sales for 2025.
JPMorgan’s valuations for NIO are a little more conservative than for Tesla. This is because NIO is outsourcing quite a bit of its business, including manufacturing. When comparisons are made to Tesla, this has to be borne in mind.
Vast domestic market for EVs
However, the bullish case for us when it comes to NIO is the vast Chinese market it is sitting on. China’s demand for electric vehicles is so big, NIO can happily just sell into its domestic back yard for the next decade and never hatch any export plans. According to the China Association of Automobile Manufacturers, China will buy around 3m electric vehicles every year between now and 2025.
NIO also benefits from government subsidies for electric vehicles, which China says it will now support through to 2022, having originally scrapped plans to do so last year. It is obvious that the nascent EV market in China still needs government backing for the time being.
NIO is not the only electric car manufacturer in China, and there is plenty of competition in the market, including from Tesla itself, but the sheer size of the market is breath taking. On top of this, NIO could end up being more agile than competitors if it can continue to outsource and indeed scale up manufacturing.
We think it is key that NIO shelved plans to start its own factory in Shanghai last year. This could have proved costly and devoured much needed capital at this early growth stage. Instead it is continuing to partner with JAC Motors. According to CEO William Yi, NIO could be in a position to build 150,000 vehicles a year by the end of 2021, compared with 60,000 this year.
There remain risks and obstacles ahead for NIO, of course. Competition in the Chinese EV market is going to heat up and there are signs that Tesla is adding a bit of price competition to the mix. The recent NIO stock price leap from $20 to $28 may also have been a little over-enthusiastic in the near term, so investors could see some short term profit taking around the $26 mark. But expect further revised broker forecasts to give the NYSE ADR some further boosts over the next six weeks.