NIO (NYSE:NIO) was widely billed as the next Tesla story back in 2021 as the company worked feverishly to increase its EV production capacity. However, this exceptional company’s growth trajectory is now being stifled by China’s unjustifiable zero-COVID curbs under the auspices of its increasingly powerful President, Xi Jinping. Today, NIO reported that it delivered 10,059 EVs in October 2022, corresponding to a month-on-month decline of 7.5 percent. NIO has been facing serious operational disruption at both of its production plants in Heifei since mid-October. NIO had originally intended to shut down the production at its JAC-NIO F1 plant for 3 to 5 days while using existing parts inventory for muted production amid local COVID control measures. However, this planned shutdown was then extended. Similarly, NIO’s F2 plant located within the gigantic NeoPark in Heifei has been operating under a closed management system with suspended assembly lines. As a refresher, NIO now boasts of a rich product portfolio consisting of four electric SUVs – the ES8, ES6, EC6, and ES7 – along with the ET7 and the ET5 electric sedans.
How is Xi Jinping’s Shadow Affecting NIO?
Xi Jinping clinched a precedent-breaking third term in office earlier in October. The Chinese President has also installed six close associates on the Communist Party of China’s Politburo Standing Committee, bolstering the perception of a “one-man rule” in China. In fact, NIO, Alibaba, and other Chinese ADRs listed on American exchanges crashed the day after Xi was again appointed the President of the world’s second-largest economy amid fears that this development will only entail a continuation of a string of policies that have roiled China’s economic standing. Some analysts argue that China under Xi Jinping played its cards early when the country began challenging US interests even though it could not match the heft of the American economic and military power. This has now resulted in crippling sanctions on China’s semiconductor sector, with the country virtually locked out of cutting-edge sub-7nm chips. Of course, Xi Jinping’s erratic domestic policies have also roiled the sentiment in NIO, Alibaba, and other high-flying Chinese stocks. This series of unfortunate events began with a broad-based crackdown on China’s tech sector, with the disappearance of Alibaba’s Jack Ma fueling a frenzy of speculation. Then came the crackdown on China’s property sector. Now, don’t get me wrong. That sector was due a hefty dose of deflation, given the troublingly frequent reports of how Chinese developers had erected entire ghost cities, all the while binging on unsustainable levels of debt. However, with the bulk of Chinese citizens’ savings invested in the property sector, the requisite deflation should have come in small, manageable doses rather than an ICU-inducing trauma. However, none of Xi Jinping’s policies have been as damaging as his zero-COVID policies. While the rest of the world has been able to build up sufficient innate immunity to bring about normalcy, China is trapped in cyclical lockdowns as its population has not been sufficiently exposed to this disease, thereby precluding innate immunity. For much of the past decade, the world has been able to rely on China as a counter-cyclical engine of growth. When economic activity weakened in the US and EU, the slack was picked up by China and vice versa. No longer. China is now weakening much more rapidly than the rest of the world, placing a lid on crude oil prices and wrecking Chinese stocks, including NIO, to the point that some have started calling the country’s equities “uninvestable”.
The Company’s Valuation Metrics are Suffering Now
In October, the EV giant unveiled the ET7, EL7, and ET5 models for the European markets at the NIO Berlin 2022 event. However, NIO’s geographic expansion does not mean anything unless the company is able to produce those vehicles on its home turf. This ongoing intermittent production cadence, as dictated by Heifei’s local COVID-control policies, is now having a sizable impact on NIO’s valuation metrics. The snippet above indicates revenue estimates for NIO from Wall Street analysts. NIO earned $1.53 billion in revenue in Q2 2022. Notice that the low revenue estimate for Q3 2022 is $1.42 billion. This is not emblematic of a company in a hyper-growth phase, and this is why the “growth premium” on NIO shares is getting eviscerated. Of course, there is not much that the EV giant can do to rectify this situation. After all, it is China’s macroeconomic policies that are now acting as the biggest drag on growth. The above snippets detail the forward P/E ratios of NIO and its close competitor, XPeng. Notice that NIO’s forward P/E ratio for December 2022 is -16.3x vs. -5.8x for XPeng. When looking at December 2023, NIO’s forward P/E ratio declines to -43.3x while XPeng’s stays at -8.5x. Of course, given that NIO is expected to spend aggressively over the next few years to grow its European footprint by investing in CapEx-heavy battery swap stations, this regime is understandable. However, this infrastructure binge will not entail dividends unless NIO is able to produce the required EVs at scale, a herculean task amid rolling COVID-related curbs.
HK finally rebounded 3%, A-shares +1%. $EWH $KWEB $FXI $PGJ https://t.co/ZgN2EYqUzH — Hao HONG 洪灝, CFA (@HAOHONG_CFA) November 1, 2022 There is a glimmer of hope for NIO, however, as reports are emerging that China might be forced to abandon its zero-COVID approach in the near-future. Do you think NIO is still a buy at these levels? Let us know your thoughts in the comments section below.
