Sales Rebound but Stock Price Still Drops, What Can NIO Do to Save Itself?

NIO Inc. (NIO.N) released its first-quarter financial report for 2024 before the US stock market and after the Hong Kong stock market on June 6th Beijing time. Despite NIO's sales volume steadily increasing over the past two months, with the stock price recovering by 40% from its lowest point, the actual results for the first quarter have dampened expectations. Let's take a detailed look:

1. Negative Revenue Growth: Total revenue was 17.1 billion, a year-on-year decrease of 7.2%. However, since sales volume is the main focus rather than revenue itself, the key points to observe are the unit price of cars and the gross profit margin from car sales.

2. Decline in Gross Profit Margin from Car Sales: The car sales gross profit margin dropped to 9.2% in the first quarter, lower than the market's expectation of 10.9%. The decline can be attributed to new car deliveries in the last month of the quarter, leading to promotions on older models. The average selling price per car this quarter was only 279,000 yuan, a decrease of nearly 30,000 yuan compared to the previous quarter and lower than the implied 283,000 yuan by the company. The accelerated price decline is influenced by both promotions on older models and the higher proportion of cheaper ET5 sales.

3. More Serious Issue: Guidance for the Second Quarter: One of the key incremental pieces of information from this financial report is the market's anticipation of NIO's sales stability in June, the first month after the reduction in BaaS promotion benefits. However, NIO's guidance for the second quarter is a major disappointment: the sales guidance is 54,000 to 56,000 units. With known figures for April and May, implying a monthly sales range of 18,000 to 20,000 units, and with weekly sales exceeding 6,700 as of June 2nd, the maximum monthly sales for June would be 20,000 units. After the reduction in BaaS promotion benefits, NIO's sales are expected to decline again.

This essentially indicates that the sales recovery for NIO this time is similar to the effect after last year's decoupling of car sales and battery swap benefits – a short-term boost in sales without sustained growth. The current battery swap benefit promotion by NIO is also only a short-term boost in sales and cannot truly drive a steady increase in sales expectations for the second half of the year.

4. Issue with Revenue Guidance and Implied Gross Profit Margin for the Second Quarter: NIO's revenue guidance for the second quarter is 16.6-17.1 billion RMB, implying an average unit price of only 276,000 yuan. This suggests a further decline in average unit price compared to this quarter. Market expectations were for the second quarter to focus on new car sales without price reductions, leading to an average unit price of around 300,000 yuan. Therefore, the implied gross profit margin for car sales in the second quarter is estimated to be 13%.

Behind this guidance lies the difficulty for NIO to restore its unit gross profit margin to market expectations even after moving past the old car promotions. The main reasons estimated by analysts include 1) existing promotional policies (oil car replacement with NIO new cars, eligible for a 10,000 yuan optional equipment subsidy from NIO with a total budget of 1 billion); 2) high proportion of ET5 sales; 3) the impact of the BAAS model's battery rental fee discount of 4 for 1 within five years; and 4) the possibility of more price reduction promotional policies in the future 5. Operating expense leverage effect not released: With a gross profit margin of less than 5%, but an operating expense ratio of 59%, the loss rate can be imagined. However, the widening of the loss rate this quarter is mainly due to issues with car sales. In terms of absolute expense values, research and development should have shown a more obvious convergence after layoffs, but administrative and sales expenses have been slow to decrease due to increased channel deployment and additional sales personnel.

6. Rapid cash consumption: The company's cash and cash-like assets on the books this quarter amounted to 45.3 billion, a significant decrease of 12 billion compared to the fourth quarter of last year's 57.3 billion. Net cash on the books for the first quarter was only 22.4 billion, mainly due to a 5.6 billion decrease in accounts payable (centralized repayment to suppliers) and a 4.9 billion loss adjustment in SBC this quarter, consuming approximately 10.6 billion in cash.

Dolphin Research's viewpoint:

From the first quarter performance, Nio's performance is indeed poor - negative revenue growth and a gross profit margin dropping below 5%. However, with Nio's monthly sales gradually recovering, the market is not likely to scrutinize past sales and performance too much.

The real marginal incremental information in this financial report is: a. How will the sales recovery driven by the price reduction of BaaS and policy adjustments play out in the future? b. How is Nio's gross profit margin during its worst season? c. With sales recovery ahead, how much elasticity is there for the gross profit margin to improve?

Unfortunately, Nio's answers to these three crucial questions are disappointing. Firstly, the sales guidance for the second quarter implies that after the decline in BaaS benefits for new car purchases, sales may fall again, indicating that the stimulus of BaaS benefits on sales is short-term. It may be difficult for Nio's main brand to maintain a monthly sales trend of 20,000 in the second half of this year.

The implied single car price behind the total revenue guidance for the second quarter is 276,000, which is not higher than the 279,000 in the first quarter, but seems to have slightly decreased. The possible implication behind this guidance is that there may be more price reduction promotion policies in the future. It will be challenging to restore the car sales gross profit margin to around 15%.

Although Nio has shown signs of adjustments on the operational side, with restrained spending on Opex and Capex, such as reducing Non-GAAP R&D expenses to 3 billion per quarter and expecting a decrease in sales management expense ratio this year, as well as a year-on-year reduction of 30%-40% in capital expenditure in 2024, it is still difficult to bridge the huge gap between single car gross profit and expenses. The key still lies in the recovery on the sales side.

The market's current expectation for Nio's full-year 2024 sales volume is still around 200,000 vehicles. Dolphin predicts that if we look at the trend of BaaS promoting sales and orders in the short term, the main brand models can only contribute 160,000 to 180,000 in sales for the full year 2024 This means that the achievement of sales expectations mainly depends on the incremental sales brought by Nio's second brand, LeDao, in the second half of the year.

For this model, the market is generally optimistic about sales, with monthly sales expectations for LeDao stabilizing at around 10,000 to 20,000 units.

Currently, the stock price corresponds to a P/S ratio of 1.4-1.6 times in 2024 (considering only the car sales business), and the valuation is already not low. This valuation already includes sales expectations for Nio's sub-brand LeDao. If LeDao fails to meet market expectations, Nio's stock price still faces further downward pressure.

Here is a detailed analysis:

I. Making Money by Selling Cars? Getting Further Away!

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

Nio's operating bottom in the first quarter is already known to the market. Market expectations are that due to Nio's promotional discounts in the first quarter and sales at a bottom state, the gross profit margin of the car sales business has declined to 11% on a month-on-month basis. The actual gross profit margin of the car sales business in the first quarter was 9.2%, lower than market expectations.

From a per-car economics perspective, mainly due to the per-car price being significantly lower than market expectations:

1) The average price of Nio's cars in the first quarter was 279,000 yuan, which is 30,000 yuan lower than the previous quarter and lower than the market expectation of 290,000 yuan.

The downward trend in per-car prices this quarter is mainly due to Nio being in a model replacement period in the first quarter, offering significant discounts on old models in January 2024. The 2023 models enjoyed discounts ranging from 24,000 to 32,000 yuan (ET5, ET5T, ES6, EC6 at 24,000 yuan; ES8, EC7, ES7, ET7 at 32,000 yuan).

Although the 2024 models introduced by Nio have the same prices as the updated old models, the new models started to be delivered gradually in March 2024. Overall, the per-car price in the first quarter still showed a month-on-month decline.

Additionally, due to a decrease in the proportion of the higher-priced ES8 in the model structure and an increase in the proportion of the lower-priced ET5, Nio's per-car revenue in the first quarter was only 279,000 yuan, lower than the implied per-car price of 283,000 yuan given by Nio for the first quarter and the market expectation of 290,000 yuan.

2) The per-car cost in the first quarter was 253,000 yuan, better than the market expectation of 259,000 yuan.

During the same period, the per-car cost fell to 253,000 yuan from 272,000 yuan in the previous quarter, a decrease of 18,000 yuan, which was better than the market expectation of 259,000 yuan.

Dolphin Jun expects that the decrease in per-car costs may be mainly due to Nio obtaining the manufacturing qualification in December of the previous year, which can save 10% of the costs on the manufacturing side. Additionally, due to the increase in the proportion of ET5 in the model structure, but with a decline in sales volume on a month-on-month basis, the amortized costs on the manufacturing side have increased slightly, resulting in a decrease of 18,000 yuan in per-car costs 3) Gross profit per vehicle falls to 26,000 yuan

With the price of a single vehicle dropping by 30,000 yuan and the cost saving only 18,000 yuan, Nio earns 26,000 yuan for every car sold in the first quarter. This represents a decrease of 11,000 yuan compared to the previous period.

However, the gross profit of 26,000 yuan per vehicle is still insufficient to cover the significant gap between gross profit and expenses, considering that Nio's research and development, sales, and administrative expenses per vehicle amount to nearly 270,000 yuan this quarter.

II. Sales guidance for the second quarter is uncertain, with unit price guidance significantly lower than expected

1) Sales guidance for the second quarter is 54,000-56,000 units

While the market has already anticipated the bottoming out of operations in the first quarter, the focus now shifts to whether the stimulus from the BaaS model rental adjustments will be sustainable for orders, as well as the rebound of gross profit margins in the second quarter.

The company expects sales in the second quarter to be between 54,000 and 56,000 units. Since sales figures for April and May have already been released, this implies that Nio's sales in June will be between 18,000 and 20,000 units.

However, as of June 2nd, Nio's weekly sales were 6,700 units. If this pace continues, achieving over 20,000 units in June should be a sure thing. Yet, the guidance of less than 20,000 units for June implies a month-on-month decline from May. This decline is attributed to the underlying decrease in benefits from the BaaS model (the 5-year battery rental service with a 4+1 offer (equivalent to an 20% discount) expired on May 31, leading to a reduction in order volume). This is a major concern for the market as the short-term stimulus from the BaaS model seems temporary, and it is also bearish for stabilizing sales guidance in the second half of the year.

2) Second quarter revenue implies a unit price of only 276,000 yuan, significantly lower than expected

The company's revenue guidance for the second quarter is 16.6-17.1 billion, corresponding to a unit price of 276,000 yuan, which is much lower than the market's expectation of 301,000 yuan. The market had anticipated that the delivery of the 24 models starting in March would drive the unit price back up to the level before the price reduction of the old models, thereby boosting the gross profit margin for car sales in the second quarter.

However, Dolphin Jun's estimated unit price for the second quarter is 276,000 yuan, slightly lower than the 279,000 yuan in the first quarter. This is mainly due to: 1) the highest 1 billion yuan subsidy for oil car replacement introduced by Nio (subsidy of 10,000 yuan for choosing Nio's new car for oil car replacement), 2) the impact of the 4+1 discount on the BaaS model battery rental fee within five years (affecting the unit price by less than 6,000 yuan), 3) the increased proportion of the lower-priced ET5, which will lower the overall ASP, and 4) the possibility of more price reduction promotion policies in the future Market expectations for Nio's gross margin in the second quarter are at 13%, but with the current expected unit price of only 276,000, it is clear that the gross margin expectations for Nio in the second quarter are not favorable.

III. First-quarter delivery slightly below delivery guidance

Nio delivered 30,000 vehicles in the first quarter, a 40% decrease from the fourth quarter, slightly below Nio's previous first-quarter sales guidance of 31,000 to 33,000 vehicles.

The quarter-on-quarter decline is mainly due to 1) the first quarter being a slow season for car sales, with overall sales of new energy vehicles under pressure in the first quarter; 2) Nio's 24 new models started to be delivered in March.

However, Nio's sales quickly rebounded after March, with sales in April and May reaching 16,000 and 21,000 vehicles, mainly because Nio announced a new BaaS policy (battery rental) on March 15. When a new round of price wars among car companies began, Nio did not directly adjust the prices of its existing 24 models, but instead reduced the monthly rental price of the BaaS battery rental service. Nio's reason for this was the expected extension of the battery's lifespan, resulting in lower depreciation and amortization costs, with the cost savings passed on to customers.

Under the BaaS model, the rental price was reduced by 26%-33%, and the adoption rate of using BaaS after the rental price reduction increased from the previous 20%-30% to 60%-70%, leading to a significant increase in Nio's sales and orders.

However, after May 31, customers who purchased vehicles received a discount of one month's rent for April when paying for the BaaS monthly rent (equivalent to an 80% discount). This rollback does have a significant impact on order volume according to the sales guidance for the second quarter, which coincides with the market's greatest concern that the BaaS model only provides short-term stimulus to sales and lacks sustainability.

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

IV. Nio's revenue significantly below market expectations

Nio's overall revenue in the first quarter was 9.9 billion, a 42% decrease from the previous quarter, falling below the market's expected 10.75 billion, mainly due to the unit price of car sales being significantly lower than market expectations. At the same time, other businesses this quarter also showed a downward trend due to reduced revenue from selling used cars.

Furthermore, the gross margin for this quarter dropped to below 5%, lower than the market's expected 5.7%. This is mainly because the gross margin of the car business was lower than expected. However, other businesses in this quarter saw a narrowing of losses, with the gross margin of other businesses improving from -33.6% in the fourth quarter to -15% to -18.4% in this quarter. With the gradual expansion of Nio's "Battery Swap Alliance" cooperation, it is expected that the losses in Nio's other businesses will decrease

V. Operating leverage not released

Due to the bottoming out of sales this quarter, the operating leverage was not released. Specifically:

1. R&D expenses this quarter were 2.86 billion, slightly lower than the market's expected 3 billion.

Compared to peers, Nio's R&D investment direction is obviously too diverse: there are non-core businesses such as mobile phones (fortunately already reduced), self-developed batteries (slow progress, current business also reduced), self-developed LiDAR chips, and more.

Nio previously stated that it would control R&D expenses, giving a Non-GAAP R&D expense guidance of around 3 billion each quarter this year, which was in line with this quarter's performance.

Nio's R&D focus this year still lies in intelligent driving and new vehicle development. In terms of personnel structure, approximately 70% of R&D personnel are dedicated to intelligent technology fields. Currently, the NOP+ urban area autonomous driving was fully delivered to the NT2 platform models on April 30th, covering cities with a population of up to 726, gradually catching up with the first-tier intelligent driving companies such as Huawei and XPeng in terms of city deployment progress.

1. Sales and administrative expenses this quarter were 3 billion, higher than the market's expected 2.74 billion.

The higher-than-expected sales and administrative expenses may be mainly due to: 1) Nio's increase in sales personnel deployment in the third quarter of last year, with sales and market service personnel reaching 17,000 by the end of 2023, accounting for 52% of Nio's total employees, making it the new energy company with the largest sales force. It is difficult to reduce sales expenses in the short term; 2) This quarter saw the concentrated launch of new models in 2024, with sales expenses invested in the marketing of Nio's new models.

Due to the bottoming out of sales this quarter and the unreleased operating leverage, sales expenses are difficult to reduce in the short term due to the deployment of sales personnel, resulting in a high operating expense ratio. Finally, this quarter's operating loss was -5.4 billion, higher than the market's expected -5.1 billion, with an operating loss rate of -54.4%.

VI. Sales volume expectations for 2024 mainly rely on "LeDao" The company's cash and cash-like assets on the books this quarter amount to 45.3 billion, a significant decrease of 12 billion compared to the fourth quarter of last year, with net cash on the books in the first quarter also only at 22.4 billion, mainly due to a 5.6 billion decrease in accounts payable (concentrated repayment to suppliers) and a 4.9 billion loss adjustment in SBC this quarter, consuming approximately 10.6 billion in cash.

Nio received a 1.5 billion strategic investment from Wuhan State-owned Assets in the second quarter (currently received 1 billion in cash), slightly easing some cash flow pressure. However, if sales do not pick up and considering the current pace of losses, Nio only has 1-2 years left.

Looking at the Nio main brand, the sales guidance implied by the second quarter has seen a slight decline in the stimulus to sales and orders from the BaaS model, indicating that the stimulus of the BaaS model on sales is short-term. It is difficult to sustain the trend of monthly sales of 20,000 for the Nio main brand this year. Dolphin Jun predicts that the main brand models can only contribute to sales of 160,000-180,000 for the whole year of 2024.

The market's current sales expectations for Nio in 2024 are still around 200,000 vehicles, which means that achieving sales expectations will mainly depend on the incremental volume brought by Nio's second brand, LeDao, in the second half of the year.

In May, Nio officially launched the LeDao brand, entering the mainstream family user market. The first SUV, LeDao L60, has a pre-sale price of 219,900 yuan and will start delivery in September. LeDao's main advantages are:

1. Spacious: Compared to the Tesla Model Y, LeDao has size advantages, with larger interior space and longer wheelbase than the Tesla Model Y.
2. Long Range: Compared to the Tesla Model Y, LeDao's CLTC pure electric range can reach 555km/730km/1000km, significantly ahead of the Model Y in range.
3. Price Advantage: The starting price of LeDao L60 is 219,900 yuan, 30,000 yuan lower than the entry-level Model Y. At the same time, under the BaaS model, LeDao's price is expected to drop to 150,000-200,000 yuan, forming core competitiveness. Although Nio has not yet announced the pricing of the BaaS scheme, Dolphin Jun predicts that the pricing of the BaaS scheme will have a significant impact on sales.
4. Charging Advantage: LeDao L60 supports 900V high-voltage fast charging and battery swapping, which can be used in over 1,000 battery swap stations nationwide and over 25,000 Nio-owned charging piles. The charging and battery swapping experience of 900V high-voltage fast charging is a differentiated highlight of LeDao L60 within the 200,000 yuan price range.

The market is generally optimistic about the sales of this model, with steady-state monthly sales expectations for LeDao mostly around 10,000-20,000 units.

From a cost perspective, Nio previously stated that the L60 would cost about 10% less than the Tesla Model Y, and currently, the starting price of LeDao is about 12% lower than the Model Y. Referring to Tesla's first-quarter car sales gross margin of 17%, considering that the actual selling price generally continues to decrease compared to the pre-sale price, Nio's L60 is expected to achieve a steady-state car gross margin of 10%-15% Nio's current stock price corresponds to a P/S ratio of 1.4-1.6 times in 2024 (considering only the car sales business). The valuation is already not low, as it already includes sales expectations for Nio's sub-brand, LeDao. If LeDao's launch fails to meet market expectations, Nio's stock price still faces further downward pressure.

For more in-depth research and tracking comments on Nio by Dolphin Jun, you can click on:

Financial Reports:

• March 15, 2024, Financial Report Analysis "Another Loss! Nio Can Only Rely on Middle Eastern Investors to Survive?"
• March 6, 2024, Conference Call Summary "Maintaining a Gross Margin of 15%-18% for the Whole Year, Hoping Monthly Deliveries Will Quickly Return to 20,000 Vehicles"
• December 5, 2023, Financial Report Analysis "Repeatedly Teetering on the Brink, How Can 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, Financial Report Analysis "Nio: A Single Quarter Loss of 6 Billion? Don't Lose Hope, the Future Is Not That Far Away" On August 29, 2023, the minutes of the conference call "Achieving low double-digit gross margin in the third quarter, with first-quarter gross margin increasing to 15% (Nio minutes)" were released. Link

On June 9, 2023, financial report interpretation "Nio: Reflection is more important than selling cars"

On June 9, 2023, the minutes of the conference call "Nio minutes: ES6 to exceed tens of thousands in July, gross margin to return to double digits in the second half of the year"

On March 2, 2023, financial report interpretation "With many ideas and poor execution, how much trust can Nio still erode?"

On March 2, 2023, the minutes of the conference call "Nio: Gross margin expected to reach 18-20% by the end of the year, lithium prices may drop to 200,000"

On November 11, 2022, financial report interpretation "Nio: When pricing is pessimistic enough, how much impact can a collapsed answer sheet still have?"

On November 11, 2022, the minutes of the conference call "Nio: Breakeven in the first quarter of next year, no problem with long-term stable gross margin of 20-25%" September 7, 2022, Financial Report Interpretation "Don't be scared by the explosion of losses, Nio is approaching good times"

September 7, 2022, Conference Call Summary "Production capacity is the bottleneck, monthly sales set new records in the first quarter"

June 29, 2022, Hot Review "This report shorting Nio can be more heartfelt"

June 16, 2022, New Car Launch Summary "Swift release, swift delivery, Nio has hope in the second half of the year"

June 9, 2022, First Quarter Financial Report Interpretation "Nio is still weak, can only rely on new cars for confidence?"

June 9, 2022, First Quarter Financial Report Conference Call "Gross margin will be worse in the second quarter, Nio's turnaround depends on the second half of the year"

March 25, 2022, 2021 Annual Report Review "Nio: Under pressure, will the future continue to be dark or welcome the dawn?"

March 35, 2021, 2021 Annual Report Meeting Summary "2022 is a year of comprehensive acceleration for Nio"

November 10, 2021, 2021 Third Quarter Report Review "Nio: After the 'ankle cut', will there be a deep squat jump in the first half of next year?" On November 10, 2021, the minutes of the third quarter report meeting in 2021 "Nio: No Need to Worry About Temporary Delivery Slowdown and Pressure on Gross Margin (Meeting Minutes)"

On August 12, 2021, the review of the second quarter report in 2021 "Saying Goodbye to the Explosive Period, What Does Nio Rely on for the Future?"

On August 15, 2021, update on the viewpoints of the second quarter report in 2021 "Nio: High Valuation vs Low Deliveries, Be Cautious of the 'Future' in Front of You"

Research

On June 13, 2023, hot topic on Nio "Nio: Finally Doing Subtraction"

On December 21, 2021, research on Nio Day "The 'Hot Model' ET5 Debuts, Nio Aims to Reignite the 'Future'"

In-depth

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

On June 23, 2021, Three Idiots Comparative Study - Part II "New Forces in Car Manufacturing (Part II): With the Market Enthusiasm Diminishing, What Does Three Idiots Rely on to Consolidate Their Position?"

On June 30, 2021, Three Idiots Comparative Study - Part III "New Forces in Car Manufacturing (Part III): Doubling in Fifty Days, Can Three Idiots Continue to Run Wild"

Risk disclosure and statement of this article: "Dolphin Research Disclaimer and General Disclosure"