Another Massive Loss! Can NIO Now Only Rely on Middle Eastern Backers for Survival?

NIO Inc. USD OV (NIO.N) released its 2023 fourth-quarter earnings report before the U.S. stock market on March 5th, Beijing time, and once again, the performance was dismal. Let's take a detailed look:

1. Lackluster Revenue: Total revenue was 17.1 billion, a 6.5% decrease year-on-year. Due to weak sales volume, revenue itself is not the focus of the market.

2. Slow Growth in Gross Profit Margin: The gross profit margin for car sales was 11.9%, showing a trend of quarterly recovery, but the pace is too slow. Although the market did not believe the management's pledge of 15%, even achieving 13%+, it is significantly below market expectations.

3. Fortunately, Q1 Guidance is not worse: The new quarter's sales guidance is 31,000-33,000 units. Based on January and February data, it implies March sales of 13,000-15,000 units. With weekly sales recovering to 3,600 units in the first week of March, the monthly sales rate is around 15,000 units. This guidance is within Dolphin Research's expectations and shows some improvement compared to the cold January and festive February.

4. Potential Pressure on Q1 Gross Margin: NIO's Q1 revenue guidance is 10.5-11.1 billion RMB, implying an average unit price of only 283,000 RMB, a decrease of 22,000 RMB from the fourth quarter. This suggests significant inventory clearance promotions for the old models during the transition to new models.

However, with lithium prices rebounding in Q1, the cost reduction benefits from materials are no longer available, coupled with much lower sales volume than the fourth quarter, the gross margin is expected to face significant pressure.

5. Continuous Cash Burn: Operating expenses hit a record high in the fourth quarter, with both sales and administrative expenses reaching 4 billion RMB each. This increase is due to the company's expanded channel deployment, rapid addition of sales personnel, and events like NIO Day. Research and development costs surged by 1 billion RMB quarter-on-quarter due to new product investments and additional R&D functions.

Dolphin Research's Viewpoint:

Clearly, both the fourth-quarter performance and Q1 guidance indicate a visible decline for NIO. Some positive information previously mentioned by Dolphin Research, such as:

1. Cutting non-core businesses like batteries and phones, with a 10% overall group layoff: Not reflected in this quarter;
2. NIO obtaining manufacturing qualifications, potentially saving 10% in production costs: Obtained in December, with no short-term effects visible;
3. Improving sales efficiency by increasing sales personnel: Short-term ROI is not favorable during the onboarding period;
4. Focusing resources and manpower on the new NT vehicle platform and next year's Alpine: The new brand may only contribute to sales in the second half of the year, likely impacting the fourth quarter.

To some extent, NIO's poor fourth-quarter performance and even worse Q1 performance are related to the company's product cycle iteration and operational adjustments. However, looking at Nio's product positioning, they have always emphasized not engaging in price wars. Currently, the new models they have released, like the ES 6 and ET 5, follow the same strategy as Li Auto, with no decrease in starting prices.

The issue lies in the fact that among their two main products, the ES 6 and ET 5, the latter doesn't seem to be a competitive product based on current trends. Whether its sales can improve remains to be seen and will depend on the adjustments made in their direct sales channels.

Moreover, from the current trends, Nio's operational adjustments this time involve both contraction and investment. It's difficult to determine how much operational costs can be saved in absolute terms. Ultimately, the profit margin will be determined by sales volume and gross profit margin.

Fortunately, with a major Middle Eastern investor, the company has over 57 billion in cash and cash-like assets. Even with a cash loss of around 6 billion per quarter, the company has enough funds to sustain operations for two years.

Looking at the business cycle, even if Nio improves, it may not be until the second half of the year that we see a turnaround. The pressure to improve performance in the first half of the year remains significant. Dolphin Research advises caution for those considering bottom fishing.

The following is a detailed analysis:

1. Making money by selling cars, Nio missed market expectations this quarter

As the most critical indicator every time results are released, let's first look at Nio's profitability from car sales.

Nio's guidance in the third-quarter conference call was to achieve a 15% gross profit margin in the fourth quarter. Market expectations were that due to the decline in battery costs and the higher proportion of the higher-priced EC6 in the sales structure, offsetting some of the discount drag on the gross profit margin, the gross profit margin in the fourth quarter would increase compared to the previous quarter, reaching 13.6%.

The actual gross profit margin for the automotive sales business in the fourth quarter was only 11.9%, lower than market expectations and company guidance.

From a per-vehicle economic perspective, mainly due to lower than expected per-vehicle cost savings:

1. The average price per vehicle in the fourth quarter was 308,000 yuan, which was 0.6 thousand yuan lower than the previous quarter but slightly higher than the market expectation of 305,000 yuan.

The decrease in the per-vehicle price this quarter was mainly due to Nio's promotional activities (customers who ordered ET5/ES7 display cars in August enjoyed discounts of 24,000/32,000 yuan and received vouchers for battery swapping experiences). However, Nio's terminal discounts are still relatively small compared to other brands, and the higher-priced EC6 accounts for a higher proportion of sales, so the decrease in the per-vehicle price is not significant.

1. The per-vehicle cost in the fourth quarter was 272,000 yuan, lower than the market expectation of 263,000 yuan, indicating insufficient cost reduction efforts.

Although the per-vehicle cost in the same period fell by 0.7 thousand yuan compared to the previous quarter, mainly due to the continued reduction in the cost of lithium carbonate leading to savings in variable battery costs, the dilution of per-vehicle cost reduction was lower than market expectations this quarter due to a slight decrease in sales volume compared to the previous quarter.

1. With a per-vehicle price of 308,000 yuan and a per-vehicle cost of 272,000 yuan, Nio earns 37,000 yuan in gross profit for every car sold in the fourth quarter.

However, the 37,000 yuan gross profit per vehicle is still far from covering the substantial gap between gross profit and expenses, with each vehicle incurring nearly 160,000 yuan in R&D, sales, and administrative expenses this quarter. On another note, Dolphin Research would like to clarify that in early June, Nio adjusted the prices of new cars and the rights to use the vehicles (the starting price of the entire new series of cars was reduced by 30,000 yuan, and the free battery exchange service for first-time car owners was changed to a pay-per-use model for battery exchange), essentially decoupling the sale of services (battery exchange) from the sale of products (cars), each with its own pricing.

After the adjustment, those who are unwilling to use the battery exchange service end up paying less, which accelerates the release of sales volume. However, this adjustment should not have a significant impact on the individual car prices according to current accounting standards. Even before the adjustment, although Nio sold cars and services together, the revenue from selling cars and services was recognized separately and in different categories, so it should not have a significant impact.

Second, the gross profit margin in the first quarter is expected to decrease significantly due to model upgrades, discounts, and declining sales volume

1) Sales volume guidance for the first quarter is 31,000-33,000 units

The company expects the sales volume in the first quarter to be between 31,000 and 33,000 units. Since the sales volume for January and February has already been disclosed, it implies that the sales volume for March is between 13,000 and 15,000 units.

In February, Nio has already announced the upgrade information for its entire 2024 model lineup. The prices for the new models are the same as the old ones, but Dolphin Research believes that the product upgrade this time is relatively minor, with the main upgrade being the upgrade of the intelligent driving cockpit to the Snapdragon 8295 chip, with minor adjustments to the exterior styling and interior.

Most of the new models will be delivered in March, and Nio's latest weekly sales are around 3,600 units, corresponding to an estimated monthly sales of around 15,000 units. Achieving this sales target should not be a big issue.

2) The implied unit price for the first quarter is 283,000 yuan, and the gross profit margin is expected to decrease significantly

The company's revenue guidance for the first quarter is 10.5-11 billion yuan, with an implied unit price of 283,000 yuan. This expected unit price is a decrease of 25,000 yuan compared to the unit price of 308,000 yuan in the previous quarter. This is mainly due to Nio being in a period of model upgrades in the first quarter, with significant discounts on the old models (the entire 2023 model lineup enjoys discounts of 24,000-48,000 yuan, with cash discounts of 24,000-36,000 yuan for ET5, ET5T, ES6, EC6, and 32,000-48,000 yuan for ES8, EC7, ES7, ET7). Comparison with Li Auto in the same period of model change

During the model change period, Li Auto reduced the prices of its old models by 33,000 to 38,000 yuan across the board. Despite this, the expected unit price in the first quarter only decreased by 4,000 yuan (indicating that the new cars will quickly fill the gap). Nio's execution in model upgrades is significantly lower than Li Auto's.

As the per-vehicle income is expected to decline due to anticipated discounts on old models, sales guidance also indicates a 34% to 38% decline compared to the fourth quarter of 2023. Dolphin Research predicts a significant decrease in gross profit margin for the first quarter of this year.

Lower-than-expected delivery volume in the third and fourth quarters

Nio delivered 50,000 vehicles in the fourth quarter, a 10% decrease compared to the third quarter. Although it exceeded the delivery expectation of 47,000 to 49,000 vehicles given during the third quarter earnings release, it fell short of the market's expectation of 51,000 vehicles.

The quarter-on-quarter decline mainly stems from the temporary sales boost brought by the unbundling of battery swapping rights in the third quarter, which only lasted for about two months and did not establish sustainability. Nio's sales are still on a marginal downward trend.

All 8 models of the NT2.0 have completed their upgrades. The management originally expected to achieve a monthly sales target of 20,000 units in the fourth quarter after the upgrades, and even prepared for 30,000 units internally. However, there seems to be a significant gap between the target and reality.

The fundamental reasons may lie in: 1) It is difficult for high-end pure electric luxury SUVs to further penetrate the market; 2) Insufficient product strength: Nio's range and power lag behind competitors in the same price range (such as ZEEKR 001). While Li Auto addresses range anxiety with extended range and XPeng with 800V technology, Nio only offers battery swapping (which incurs additional fees after unbundling, and the scale of battery swapping stations is too small), failing to truly solve users' range anxiety issues.

Looking ahead to 2024, before the launch of its sub-brand Alps in the second half of this year, Nio has no new models on the market. Based on the current sales trend, Nio's sales are unlikely to make a breakthrough, especially in the more intense competition this year. The current models are only minor facelifts, with no fundamental improvement in product strength. Alps has become the "lifeline" to revive Nio's sluggish sales.

After discussing these two major issues, let's take a look at the overall situation of Nio:

Nio's revenue slightly below market expectations, gross profit margin significantly lower than market expectations

Nio's overall revenue in the fourth quarter was 17.1 billion, a year-on-year increase of 6.5%, slightly below the market expectation of 17.25 billion.

The gross profit margin for this quarter was only 7.5%, significantly lower than the market expectation of 10.1%. Not only did the automotive business fall below market expectations this quarter, but losses in other businesses further intensified. The gross profit margin of other businesses decreased by 10% from -23.8% in the third quarter to -33.6% in the fourth quarter, possibly due to the exit from the unbundling of battery swapping rights.

Double High Expenses: R&D and Sales & Administrative Expenses Both at 4 Billion

This quarter, both R&D and sales expenses significantly exceeded market expectations. Specifically:

1. R&D expenses this quarter were 39.7 billion, significantly higher than the market's expected 33.7 billion.

Compared to peers, Nio's R&D investment direction seems to be too diversified: involving non-core businesses such as mobile phones (fortunately already reduced), self-developed batteries (slow progress, currently also reduced business), self-developed LiDAR chips, and more. However, in the second half of the race for intelligent driving, Nio lags behind its peers in terms of the speed of opening cities for NOA and the mapless mode.

The high increase in Nio's R&D expenses this quarter was mainly invested in new product development (mainly possibly focused on the development in the Alps, with a small contribution to minor updates). Nio's previous guidance was that Non-GAAP R&D investment in each quarter would remain at 30-35 billion.

1. Sales and administrative expenses this quarter were 39.7 billion, higher than the market's expected 37.7 billion.

The increase in sales and administrative expenses this quarter was mainly due to the company's expansion of channel deployment, rapid addition of sales personnel, and events like NIO Day.

Nio had previously stated its position of not participating in price wars, and the management plans to increase sales volume by expanding the sales team. Currently, the sales staff are still in the familiarization period after being put in place, which has not brought good short-term ROI and has not yet translated into sales volume.

Pressure on 2024 Sales Expectations, High Uncertainty in the Alps

Due to the lower-than-expected gross profit margin in the automotive business this quarter, coupled with "continuing to burn money" on operating expenses, the quarterly operating loss has deepened from -48 billion in the third quarter to -66 billion in the fourth quarter, higher than the market's expected -54 billion.

Fortunately, with the cash injection from Middle Eastern investors, the company had 57.3 billion in cash and cash-like assets in the fourth quarter. Even with a quarterly loss of around 60 billion, Nio still has approximately 2 years left.

However, Nio's current model update efforts are minimal, and the product strength is insufficient. Based on the current sales trend, Dolphin Research estimates that existing models can only contribute to sales of 160,000-180,000 units for the full year of 2024. Therefore, from an operational cycle perspective, Nio may need to wait until the second half of the year to see the situation when the Alps come out (but it is expected that sales will only contribute in 4Q). Alps' pricing range of 200,000 to 300,000 yuan is bound to lower Nio's gross profit margin, and the competition in the pure electric segment at this price point is very intense. It is reported that Alps will be equipped with an 800V fast charging architecture, using the NT3.0 platform, smaller battery packs, and internally developed electric motors. In terms of intelligent driving, it will only be equipped with 4D millimeter-wave radar (without LiDAR) and one ORIN X chip (currently with 4 chips), bringing cost savings.

Whether Alps can achieve high sales volume in the fierce competition remains unknown, but prior to that, the more crucial aspect is Nio's strategic adjustments and business layout.

For more in-depth research and analysis of Nio by Dolphin Research, you can click on:

Earnings Reports:

December 5, 2023, Earnings Report Analysis: "Rebounding on the Edge of Life and Death, How Will Nio Regain Honor?"

December 6, 2023, Conference Call Summary: "Continuing to Increase Sales Network and Personnel Investment (Nio 3Q Conference Call Summary)"

August 29, 2023, Earnings Report Analysis: Nio: A Single Quarter Loss of 6 Billion? Keep a Positive Attitude, Hope is Not Far Away

August 29, 2023, Conference Call Summary: "Achieving Low Double-Digit Gross Margin in the Third Quarter, Gross Margin Increasing to 15% in the Fourth Quarter (Nio Summary)"

June 9, 2023, Earnings Report Analysis "Nio: Reflection is More Important than Selling Cars"

June 9, 2023, Conference Call Summary "Nio Summary: ES6 to Reach Tens of Thousands in July, Gross Margin to Return to Double Digits in the Second Half of the Year"

March 2, 2023, Earnings Report Analysis "With Many Ideas and Poor Execution, How Much Trust Can Nio Still Erode?"

March 2, 2023, Conference Call Summary "Nio: Year-End Gross Margin Expected to Reach 18-20%, Lithium Prices Likely to Drop to 200,000"

November 11, 2022, Earnings Report Analysis "Nio: When Pricing is Pessimistic Enough, How Much Impact Can a Collapsed Answer Sheet Have?"

November 11, 2022, Conference Call Summary "Nio: Balance of Profit and Loss in the Fourth Quarter of Next Year, Long-Term Stable Gross Margin of 20-25% is Feasible"

September 7, 2022, Earnings Report Analysis "Don't Be Scared by Explosive Losses, Nio is Approaching Better Days"

September 7, 2022, Conference Call Summary "Production Capacity is the Bottleneck, Record Sales Every Month in the Fourth Quarter"

On June 29, 2022, a hot review titled "This bearish report on Nio could be more heartfelt" was published.

On June 16, 2022, a summary of the new car release titled "Rapid release, rapid delivery, Nio has hope in the second half of the year" was released.

On June 9, 2022, an interpretation of the first-quarter earnings report titled "Nio remains soft, can confidence only rely on new cars?" was provided.

On June 9, 2022, a conference call on the first-quarter earnings report titled "Gross profit margin will be worse in the second quarter, Nio's turnaround depends on the second half of the year" took place.

On March 25, 2022, a review of the 2021 annual report titled "Nio: Under pressure, is the future continuing in the dark or welcoming the dawn?" was conducted.

On March 35, 2021, a summary of the 2021 annual report meeting titled "2022 is the year of Nio's comprehensive acceleration" was presented.

On November 10, 2021, a review of the third-quarter 2021 report titled "Nio: After the 'ankle cut,' will the first half of next year see a deep squat and jump?" was discussed.

On November 10, 2021, a summary of the third-quarter 2021 report meeting titled "Nio: No need to overly worry about temporary delivery slowdown and pressure on gross profit margin (meeting summary)" was provided.

On August 12, 2021, a review of the second-quarter 2021 report titled "Saying goodbye to the boom, what does Nio's future rely on?" was shared.

On August 15, 2021, an update on the viewpoints of the second-quarter 2021 report titled "Nio: High valuation vs low delivery, be cautious about the 'future' in front of you" was released.

Research

June 13, 2023, Nio Hot Topic "Nio: Finally Subtracting"

On December 21, 2021, Nio Day research "ET5, the Explosive Model, Debuts, Nio Aims to Reignite the Future"

In-depth Analysis

On June 9, 2021, Three Idiots Comparative Study - Part 1 "New Forces in Car Making (Part 1): Investing in the Right People, Doing the Right Things, Reviewing the People and Events of the New Forces"

On June 23, 2021, Three Idiots Comparative Study - Part 2 "New Forces in Car Making (Part 2): Market Enthusiasm Declining, How Do Three Idiots Consolidate Their Position?"

On June 30, 2021, Three Idiots Comparative Study - Part 3 "New Forces in Car Making (Part 3): Doubling in Fifty Days, Can Three Idiots Continue to Sprint?"

Risk Disclosure and Statement in this Article: Dolphin Research Disclaimer and General Disclosure