How much trust can be eroded due to NIO's numerous ideas but poor execution?

NIO Inc. (NIO.N) released its Q4 2022 financial report before the U.S. stock market on March 1st, Beijing time. Dolphin Analyst guessed that NIO's Q4 results would be poor, but the actual performance was even worse than expected:

1. Poor sales and revenue: Poor sales is known information, and revenue was 16.1 billion yuan, 1 billion yuan less than market expectations. This was mainly due to the low unit price, which is not a major problem.

2. Collapsed gross profit margin: Gross profit margin fell directly to 6.8%, even excluding the cost provision of 1 billion yuan caused by the model change for this quarter, the gross profit margin was only 13.5%, significantly lower than the market expectation of more than 16%.

3. Worse guidance: The sales guidance is 31,000-33,000 units, with the sales of January and February already disclosed. This implies that the sales in March will be at most the same as February, which is 12,000 units. The guidance is obviously weak.

What's more, the revenue guidance of 10.9-11.5 billion yuan implies that the unit price may drop to around 320,000 yuan, a decrease of 45,000 yuan. Although the drop in lithium carbonate prices may alleviate the cost pressure of up to 10,000 yuan per unit, the gross profit margin of the first quarter will continue to be weak.

4. Unstoppable investment: Because NIO has a broad plan, it needs to develop new cars, go overseas, and create new brands, which leads to continuous investment. While revenue and gross profit margin collapse, expenses soar. These investments may benefit NIO's future, but may not be effective in the short term, causing fourth-quarter losses to spiral out of control, with an operating loss of nearly 7 billion yuan. It harks back to NIO's loss level in 2019 when the company was in a life-and-death crisis.

Dolphin Analyst's overall view:

When NIO's performance was poor last quarter, Dolphin Analyst emphasized the possibility of NIO's marginal improvement behind the extremely pessimistic valuation of $9 per share. Later, it rose from $9 to $14, and now it has fallen back to $9. Currently, the market's valuation is approaching a pessimistic hypothesis.

However, after observing for some time, Dolphin Analyst's impression of NIO has dropped sharply because among all the companies it follows, the worst thing is the company with too many ideas and poor execution, even if the company is in a good track.

As the earliest listed new energy vehicle company, NIO was supposed to be the best quality company among new players in the market with a high brand tone and a complete product portfolio.

But after a period of continuous tracking, Dolphin Analyst found that NIO's problem is also very obvious: it wants too much, but lacks execution. It wants to make luxury electric cars, but also wants to move down to the middle and low-end markets; it wants to develop power batteries, charging piles, battery swaps, invests in intelligent driving, goes overseas ... After the stunning new cars were released one after another, whether it was the too-long delivery time or various delivery bugs, NIO has been continuously consuming the patience and trust of the capital market.

One problem can be said to be accidental, but frequent problems and excuses will make people doubt the company's execution ability. Can it withstand such a grand dream?

Of course, NIO's stock price has returned to $9, and the market has already incorporated enough pessimistic expectations, but if the execution efficiency is slow to improve, how can the market believe that it will stand out from its peers in the cruel competition ahead?

Later, Dolphin Analyst will organize the minutes of this earnings call for everyone. The teleconference will focus on the orders and deliveries of ET5 and ES7, the order status of EC6 and new ES8, capacity ramp-up/exchange stations, gross margin, delivery guidance, competition expectations, etc. You can add Dolphin Assistant's WeChat account "DolphinR123" and join the Dolphin Research and Investment Exchange Group to get the content of the teleconference as soon as possible.

I. The delivery prospect of collapse

Currently, vehicle delivery volume is the most critical indicator for new energy vehicle brands. Every car manufacturer will announce the previous month's sales at the beginning of each month, and delivery guidance is the key to sales at the time of the financial report.

First-quarter sales outlook: NIO expects vehicle deliveries to be between 31,000 and 33,000 in the fourth quarter. NIO delivered only 8,500 vehicles in January and 12,000 in February. This guidance implies that even at its upper limit, deliveries in March will be at the same level as February.

Dolphin Analyst originally estimated that deliveries in March should have been at least 2,000 vehicles higher than in February, which corresponds to a delivery volume of approximately 33,000-35,000 vehicles in the first quarter.

Such implied delivery confidence is significantly different from that of Li Auto -- Li Auto's guidance implies that sales in March will be around 22,000 vehicles, and the teleconference clearly guides that monthly sales can remain stable at 30,000 after May and June.

The "866" (ES8, ES6, EC6) on the current NT1.0 platform is already old, and the "775" (ES77, ET7, ET5) on sale is the main model. ET7's performance is mediocre, and demand for ES7 is also diminishing marginally. At present, the delivery time has been shortened to 3-4 weeks, and ET5 is currently the only model that can support sales, but the monthly deliveries are far below the target of 10,000 units per month.

After continuous tracking of these new forces for some time, Dolphin Analyst can clearly see from their "empty promises, delivery differences" that, unlike the internal chaos behind XPeng G9's terrible performance, NIO's main problem is that the supply and delivery management levels are too poor. When the delivery is lower than expected, NIO always has various excuses -- silicon carbide, electronic differential lock EDS, metal casting parts, and so on. There is no end to various component problems.

At the end of December, when the delivery guidelines for the fourth quarter were lowered from 43,000-48,000 to 38,500-39,500, NIO gave various reasons again -- in addition to supply chain constraints, the epidemic caused problems with its production and delivery, so the guidelines were lowered.

Obviously, NIO's problems are still stuck in the era of "supply is king": the supply chain lacks this and that; the new car was released early and was very avant-garde when it was launched, but the delivery was delayed, and various problems in delivery have been occurring continuously.

But the market has already turned to "demand is king" since the second half of last year. New energy vehicles are no longer "hard to find a car". In the waiting process, car owners have already turned to the embrace of other brands. This kind of "lousy" delivery capability is also constantly eroding the patience and confidence of the capital market.

Looking back at the delivery in the fourth quarter, it was basically the result of the above-mentioned unresolved problems: the original target was at least 43,000 units, but only 40,000 units were actually completed.

Of course, from the perspective of the vehicle matrix, NIO is still a relatively outstanding one among the new forces: on NIO DAY on December 24th last year, two new cars were released -- the new ES8 and the new EC7, both based on the new NT2.0 platform, priced in the range of RMB 500,000 to 600,000. However, the time difference from the release to the sale is nearly half a year.

2. The consequences of poor sales: a sharp drop in profits and worse expectations

In addition to the weakness of sales guidance, the "eye-catching" aspect of NIO this time is mainly on the gross profit margin of car sales. Both problems are fatal. Single-vehicle gross profit margin directly dropped from 16%+ to 6.8%, and the reasons behind it are almost the same as those in the third quarter: "inventory impairment provision, accelerated depreciation of production equipment, and loss of the old 866 purchase agreement."

These expenses amounted to nearly RMB 1 billion in the fourth quarter, directly dragging down its gross profit margin by 6.7 percentage points. But the problem is that even if these losses in upgrading and replacement are added back, NIO's automobile sales gross profit margin in the fourth quarter is only 13.5%, still lower than the market's expected 16%+.

From the structure of sales, ES7 and the cheaper ET5 are the main selling models, and the average price decline has affected the gross profit margin. In the fourth quarter, the unit price of NIO cars was 368,500 yuan, a decrease of 9,000 yuan from the previous quarter.

From the perspective of single car economics, while the marginal decline in single car prices, the cost of single cars has increased by 3,000 yuan, leading to a decrease in single car gross profit of 12,000 yuan. NIO made a gross profit of 50,000 yuan per car sold in the fourth quarter. However, the R&D expenses of a car were as high as 100,000 yuan, resulting in a large gap.

It is particularly noteworthy that NIO's single-car power consumption is higher than that of peers, and its cost is more sensitive to the price of lithium carbonate. In the fourth quarter of 2020, the price of lithium carbonate rose by 100,000 yuan (according to NIO's estimation, it eroded the gross margin by about two percentage points), which also had a relatively large impact on the gross margin.

As for short-term outlook, there is still great pressure on NIO's gross profit margin:

1) In the first quarter, in addition to poor sales guidance, old cars in the sales structure were discounted to clear inventory, and there will also be certain pressure on gross profit margin when the new platform climbs up.

2) NIO expects revenue of RMB 10.9-11.5 billion in the first quarter. With a contribution rate of 8% from non-automotive sales, the automotive sales revenue of RMB 10.3 billion implies an average unit price of only RMB 320,000, which will drop another RMB 45,000 on the basis of RMB 368,500 in the fourth quarter.

3) The price of lithium carbonate decreased by 100,000 yuan. Based on a single-car price of 400,000 yuan, the impact on NIO's gross profit margin is 2%, which equals to only saving 8,000 yuan. It is highly probable that NIO's first-quarter profit will be weak.

Third, average income only comes with the result

NIO's fourth quarter revenue was RMB 16.1 billion, a year-on-year increase of 62%, which was significantly lower than the market's consensus expectation of RMB 17.3 billion. Given the known sales volume, the main problem is that the unit price is lower than the market's expectation.

On the revenue side, NIO is different from its peers. As NIO is known for its services, other revenue items account for a slightly higher proportion than that of its peers. For example, non-vehicle revenue contribution rate for Li Auto is 2%, while NIO is between 7% and 8%.

This is mainly because NIO's other businesses, apart from car sales, mainly include sales of energy packages and service packages, as well as revenue generated by embedded products and services such as charging piles and car-connected Internet services that accompany vehicle sales.

The company has always maintained a high-end strategic positioning, hoping to bring better services and experiences to car owners through better brand management and user community with better gross profit margins.

Data Source: Company Financial Reports, Dolphin Research Institute

Data Source: Company Official Website, Dolphin Research Institute

In addition, at NIO's Berlin conference in October, the models mainly sold overseas will be charged by fixed leasing and floating subscription. For example, the leasing time provided by fixed leasing fee is generally from 1 to 5 years, using the fixed monthly rental method. As for short-term flexible car use, it can be subscribed on a monthly basis, and short-term subscriptions can be cancelled at any time within two weeks in advance, and vehicles can be changed at will. Moreover, as the age of the vehicle increases, the monthly fee will correspondingly decrease.

This kind of revenue will also be reflected in other revenues, rather than vehicle sales revenue. It is expected that direct car sales to users will also be launched in Europe in the future, but the sales volume is expected to be relatively late.

In the fourth quarter of 2022, the company's other businesses achieved revenue of 1.3 billion yuan, a year-on-year increase of 48%. However, the gross profit margin became worse in the epidemic, and the gross loss rate increased by nearly 10 percentage points to 30% on a month-on-month basis, mainly due to the multi-income of regulatory points in the third quarter.

4. Gross Margin is Better Than Nothing

As mentioned earlier, NIO's automobile gross margin in the fourth quarter was lost, and the gross margins of other businesses were also relatively sluggish. These two correspond to NIO's overall dismal gross margin in the fourth quarter: only 600 million, and the gross margin dropped straight to 4%, even if 1 billion inventory and contract impairment were added, it was only 1.6 billion. Compared with NIO's huge investment, it can only be said that it is not enough to fill the gap between teeth and gums.

5. The Investment Cannot be Stopped

Although NIO's deliveries, profits, and guidance are poor, the company invests heavily. In addition to continuous rigid new car and new technology R&D investments, in marketing networks, personnel expansion, store expansion, and market promotion, especially those that are currently expanding overseas, all of this means that regardless of whether the revenue is strong or weak, the cost end is unrestrained.

1) R&D expenses are seriously out of control: R&D expenses of 4 billion are equivalent to an increase of more than 1 billion from the previous quarter, and R&D investment is amazing; and this does not need to be expected to slow down. Expense ratio 25%.

2) Sales and administration cannot stop: Sales and administrative expenses are as high as 3.5 billion, and the expense ratio has reached 22%.

The combined expense ratio of these two items is already 45%, while the gross profit margin of automobiles is only 6%. You can imagine the extent to which NIO is losing money this quarter. Even the gross profit margin of NIO, which can reach 16-17% under normal circumstances, cannot cover the current level of expense investment. After such a huge investment, deliveries are still frequently delayed. In the opinion of Dolphin Analyst, in addition to increasing deliveries to dilute costs, the frequent appearance of supply chain management issues on the delivery side points to possible bugs in NIO's operations and execution efficiency.

As for the cost outlook, NIO's game is too big to curtail investment: it has to develop batteries, lay out charging piles (fast charging), develop new cars, promote new brands, and go global, all of which require investment. However, the problem is that these investments are large, but short-term effectiveness is an issue. When sales volumes are not sustained, costs become very out of control.

V. Back to 2019 NIO?

Eventually, deliveries lag, revenue lags, gross profit margin lags, and costs and investments increase, making the operating profit unappealing**: with a single quarter operating loss of 6.7 billion yuan, a loss ratio of 42%, and a loss ratio of 35% even after subtracting 1 billion yuan of impairment. The market's expected loss rate is only 10%, which is almost a world of difference. The last time NIO performed this poorly was before 2020, when it struggled on the edge of life and death.**

Conclusion: Too Many Ideas, Poor Execution

As the first new force listed, NIO, after going through the life and death struggle of 2019, originally had the strongest qualities among the new forces- high brand positioning and a complete product matrix.

However, through continuous tracking during this period, NIO's problems are also very obvious: wanting too much but lacking execution. To make luxury electric cars, it has to sink its brand to target mid-to-low-end markets; to make power batteries, charging piles, switching stations, to invest in intelligent driving, and to tap into overseas markets.

When stunning new cars launched one after another, whether it was long delivery times, or various problems during delivery, they all consumed the patience and trust of the capital markets. One mishap can be considered accidental, but frequent problems and excuses raise doubts about the company's execution. Can it sustain such grand dreams?

Of course, NIO's stock price has returned to $9, and the market has already factored in enough pessimistic expectations. However, if execution efficiency does not rise, how can it stand out from its peers in the fierce competition ahead?

For more in-depth research and analysis of NIO by Dolphin, click here:

Financial report:

On November 11, 2022, financial report analysis "NIO: When Pricing is Pessimistic Enough, How Much Damage Can a Collapsing Answer Sheet Do?" On November 11, 2022, phone meeting minutes "NIO: balance of profit and loss in the fourth quarter of next year, long-term stable gross profit margin of 20-25% is no problem"

On September 7, 2022, financial report interpretation "Don't be scared by the explosion of losses, NIO is approaching good times"

On September 7, 2022, phone meeting minutes "Production capacity is a bottleneck, sales in the fourth quarter set a new record month by month"

On June 29, 2022, hotspot commentary "This short NIO report can be more heartfelt"

On June 16, 2022, summary of new car release "Quick release, quick delivery, NIO has hope in the second half of the year"

On June 9, 2022, Q1 financial report interpretation "NIO is still weak, can only rely on new cars for confidence?"

On June 9, 2022, Q1 financial report telephone conference "The gross profit margin will be worse in the second quarter, NIO will have to rely on the second half of the year for a comeback"

On March 25, 2022, commentary on the full-year report of 2021 "NIO: under pressure, will it continue to be in the dark or usher in dawn?"

On March 35, 2021, minutes of the full-year report meeting of 2021 "[2022 is a year of full acceleration for NIO](https://longbridgeapp.com/topics/2176374? invite-code=032064)》

On November 10, 2021, the Q3 2021 analysis of NIO was released in the article "NIO: After the "Ankle Cut", will we see a squat jump performance in the first half of next year?"

On November 10, 2021, the Q3 2021 conference summary was published in the article "NIO: No need to worry too much about the temporary delivery slowdown and pressure on gross margin (Conference Minutes)"

On August 12, 2021, the Q2 2021 analysis of NIO was released in the article "Say goodbye to the explosive period, what is NIO's future based on?"

On August 15, 2021, an update was made to the Q2 2021 analysis in the article "NIO: High valuation vs low deliveries, be careful of the "future" in front of you"

Research

On December 21, 2021, Dolphin Analyst conducted research on NIO DAY and published an article titled "[ET5, the blockbuster model, is coming. NIO wants to rekindle the "future"] (https://longbridgeapp.com/news/52444305)"

In-depth analysis

On June 9, 2021, Longbridge conducted a comparative study in the first part of a three-part series titled "New forces in car making (Part 1): Investing in the right people and doing the right thing, examining people and things in the new wave of forces"

On June 23, 2021, the second part of the three-part series was published by Longbridge in the article "New forces in car making (Part 2): Decrease in market enthusiasm, what can the three companies do to consolidate their position?"

On June 30, 2021, the third and final part of the three-part series was published by Longbridge in the article "New forces in car making (Part 3): Can the three companies continue to sprint after doubling in 50 days?"

Risk disclosure and statement for this article: Dolphin Investment Research Disclaimer and General Disclosure Statement