Nio recently launched its BaaS (Battery as a Service) battery rental service. Chinese investment bank CICC believes that this will improve the company's gross margin, thus injecting new momentum into its car sales and performance improvement.
In a report published on August 21 after the launch of the BaaS, CICC maintains Nio's Outperform rating. It maintained Nio's 2020 earnings forecast unchanged and raised its 2021 earnings forecast by 6.8% to -RMB 4.4 billion as the positive impact of the BaaS solution on Nio's gross margin will be gradually reflected in the long term.
CICC also said that based on the EV/Sales unit valuation methodology, it raised its valuation multiple to RMB 4.5 million EV/vehicle and raised its target price by 6.3% to $17.
Earlier this month, the investment bank raised its Nio target price by 11% to $15, reaffirming its outperform rating as the Chinese EV maker added a record number of new orders in July.
CICC said at that time that Nio's sales are expected to continue to climb, driven by the EC6 launch and capacity expansion. It raised its EV/Sales unit valuation multiple for Nio to $4 million EV per vehicle, based on Nio's strong sales, order book and operational performance.
Recently, Nio's battery asset company was incorporated as a BaaS battery asset management entity.
The new company's founding shareholders include Nio, China's largest automotive lithium-ion battery maker Contemporary Amperex Technology (CATL), Hubei Science and Technology Co. Technology Investment Group and Guotai Junan Securities International, with each of the four parties holding a 25% stake.
CICC believes that these four parties can provide strong support to the business of battery asset management companies, which is expected to form a win-win situation for all parties.
Among them, Nio is one of the most important promoters of the battery swap mode, and provides the operation carrier and user base for BaaS in the battery asset management company.
At the same time, CICC believes that the implementation of BaaS will have a positive effect on the company's car sales and performance.
CICC has calculated that BaaS can reduce the purchase cost and threshold for consumers. And, under the new car purchase plan, for most users' car term, the cost of owning a vehicle under BaaS model is not high, but it can enhance the car experience more, which should be a better choice for consumers.
CICC believes that BaaS can also benefit consumers in the following ways: you can choose to rent batteries of different capacities according to different travel needs; you don't need to worry about old batteries, you can enjoy the latest technology; and with the gradual reduction of battery costs, there is room for downward mobility in monthly rentals.
Therefore, CICC believes that users can enjoy the multiple benefits of Nio battery "rechargeable, replaceable and upgradeable" through BaaS.
According to the investment bank, BaaS to Nio can bring sales momentum, revenue and gross margin rise slightly, the revenue structure from the focus on new cars to focus on retention.
In addition, as Nio recognizes increased revenue due to reduced discounting under the new program, Nio gross margins are expected to rise accordingly, according to CICC.
As the main reason for the rapid discount and low residual value of EVs comes from the battery, the separation of the body from the battery can improve the residual value of the Nio body itself.
BaaS also separates the body from the battery technology advancement curve, which can extend the life cycle of existing models, CICC said. Manufacturers don't have to launch new models as often to match battery updates, saving development spending.
The following is a translation of the full text of the CICC report.
Nio Battery Asset Company - Wuhan Weineng Battery Asset Co., Ltd. was incorporated as a BaaS battery asset management entity.
Its founding shareholders include Nio, CATL, Hubei Science and Technology Investment Group and Guotai Junan Securities International, each with a 25% stake.
We believe that these four parties can provide strong support to the business of the battery asset management company and feed the main business, which is expected to form a win-win situation for all parties.
Nio: Realization of "separation of body and battery", bringing multiple benefits.
As a leader, Nio is one of the first companies to implement the battery swap mode for new energy vehicles, and one of the most important promoters of the battery swap mode.
Among the battery asset management companies, Nio provides the operational body and user base for BaaS.
At the same time, we believe the implementation of BaaS can lower the purchase threshold, improve the car experience, and increase Nio's gross margin, thus bringing positive effects on the company's car sales and performance.
CATL: To grasp the actual downstream data and start to realize closed-loop data.
CATL is a battery manufacturer with core technologies in battery development and manufacturing, and provides strong support for battery management.
In the past, CATL's data accumulation has been focused on preliminary experiments and accelerated testing; however, through the battery asset company, CATL expects to start acquiring rich data and cases of actual battery usage, which will help its business development of power battery stepwise utilization.
Hubei Science and Technology Investment Group: Support the development of battery swap mode.
China's recent review of the safety requirements for electric vehicles at the point of interchange also demonstrates support for battery swap mode.
We believe that the participation of local state-owned capital will increase Nio's credit for the company. At the same time, it will help the local industry synergy and development in Hubei.
Guotai Junan Securities International: Providing financial services.
The presence of financial service providers can provide financial services such as subsequent refinancing through appropriate leverage and obtain corresponding business opportunities.
Impact of BaaS on users: "Separation of body and battery", bringing multiple benefits.
Nio also officially announced the BaaS battery rental service architecture and pricing plan. The "separation of body and battery" has also been formalized, i.e., the car and the battery are separated into two separate property rights and can be purchased or financed separately.
And when BaaS is on the ground, there are several options for purchasing a car, and it is believed that BaaS can bring multiple benefits to users.
Benefit 1: "Buy the car, rent the battery" lowers the cost and barriers to purchase for consumers
Due to the inability to separate the ownership of the car and battery, the original "battery rental" is essentially an interest-free loan financial incentives.
Under the new BaaS program, consumers can choose financial solutions for the car and battery separately, so it is more flexible.
We calculate that BaaS can reduce the purchase cost and threshold for consumers. In the case of the ES6 Sports Edition base configuration, for example, without considering the residual value of the battery, the total payment for the new plan is RMB 337,300 without the additional loan. This is a reduction of RMB 6,340 from the original option and still a reduction of RMB 3,051 after discounting.
If the additional loan is used and the 15% down payment is set, the total payment is RMB 13,000 less than the original plan, which is still RMB 12,000 less than the original plan.
Benefit 2: User experience improves, BaaS should be the better choice.
After the official implementation of BaaS, the original "Buy the car, rent the battery" and financial programs will be canceled, and replaced by three new programs: full payment to buy a car + battery, full payment to buy a car + battery choice BaaS, loan to buy a car + choose BaaS.
Is it better to lease a battery or buy one?
If the user uses the car for 6 years, then the cost paid is comparable, but the experience improves during that period.
Excluding the battery residual value, discounting the cash flow at 4%, we find that the cost of using the car for about 6 years reaches parity between the option to buy the battery and the option to lease the battery from BaaS.
We believe that 6 years can cover the duration of car usage for most Nio users. At the same time, in the car period, BaaS users do not need to worry about battery quality problems, and have the battery capacity to choose, and with the battery technology upgrade and update the rights of the battery, the overall car experience to improve more.
Is it better to rent a battery or buy one? The key is to judge the residual value of the battery, and the trade-off between the car experience.
The ownership of the battery is not the same with a purchased battery or a BaaS leased battery. Therefore, the user who buys the battery has the benefit of the final disposal of the battery.
The residual value of the battery becomes an important selection criterion in the middle. The improvement in car experience for BaaS users is harder to quantify, which also affects the choice of different users.
Comparing the three purchase options from a consumer perspective, we believe that the BaaS model has a manageable TCO (Total Cost of Ownership) for most of the vehicle term, but it is the better choice because it enhances the car experience more.
Benefit 3: On-demand battery rental to improve user convenience
Going forward, we believe that BaaS can also benefit consumers in the following ways in practice.
Customers can choose to rent batteries of different capacities according to their different travel needs.
Users' travel demand on working days is mainly for commuting, with a small average travel radius, and more than 50% of the weekend trips within the city have cross-district travel demand.
Users can choose different capacity batteries for each battery rental according to their own travel needs, which gives them a high degree of freedom and enables them to achieve a high degree of resource matching and effective utilization.
The cost of purchasing a large-capacity battery is 50,000 to 60,000 RMB more than that of a small-capacity battery, while the difference between the monthly rent of a large-capacity battery and a small-capacity battery is only 100 RMB, reducing the cost of choice for consumers.
No need to worry about the battery getting old and enjoying the latest technology. Since the ownership of the battery belongs to the company, both new and old customers are equipped with similar old battery, when the battery is renewed, all customers can enjoy the new battery technology.
As the cost of batteries gradually decreases, there is room for monthly rent to go down. As battery technology evolves and economies of scale increase, there is room for battery prices to go down and monthly rentals to go down as well.
BaaS to Nio can generate sales momentum, revenues and gross margins slightly higher, and the earnings structure shifts from new cars to retention.
Under the static scenario, Nio's revenue will increase, not decrease, and gross margin will improve.
Under the new proposal, we recognize that revenue will increase due to a decrease in Nio's discount (in the original "battery rental" proposal, we calculated that Nio would receive a discount of RMB 9,200 per vehicle at 4% of the cost of capital). As a result, we believe that Nio's gross margin is also expected to rise accordingly.
We also believe that the battery revenue will remain in Nio's revenue, i.e. Nio will buy the battery and sell it to Battery Assets for RMB70,000 (including tax), thus not affecting the overall operating income. The profit from the battery asset company will be included in Nio in the form of investment income.
Dynamically, BaaS brings sales stimulus and shifts the profit structure from new cars to retention.
The implementation of BaaS can reduce the purchase cost and threshold of consumers, on-demand rental mode to improve the consumer's car experience, and ultimately achieve "can be charged, can be replaced, can be upgraded" battery service system.
We believe that the low-cost, good experience, multiple choice BaaS system enhances Nio's overall competitiveness, and will also bring stimulus to sales.
At the same time, the revenue brought by the battery asset company will also shift the company's earnings structure from new vehicles to retention, making precision farming more stable and healthy.
Raise the residual value of used cars to maintain Nio's high-end brand tone.
In the past, batteries were the main reason for the rapid discounting of electric vehicles. When we compare the residual value rates of mainstream electric and gasoline models, we can see that the residual value rates of electric vehicles are significantly lower than gasoline vehicles.
For example, the Roewe Ei5 and Qin EV have a residual value of about 40% after one year of use, while their fuel-efficient counterparts have a one-year residual value of about 75%.
In the mid- to large-size SUV market, EV residual value curves are also at the lower end of the range. We believe that the main reason for the rapid discounting and low residual value rates of EVs comes from the batteries.
Battery technology is rapidly iterating, driving the rapid discounting of older electric models.
In the past three years, battery technology has been rapidly upgraded, and the energy density of the power battery has increased rapidly through the upgrade of the cell materials, leading to a faster increase in the range of the vehicle.
The range is one of the electric vehicle parameters consumers are most concerned about, leading to a significant reduction in the competitiveness of older models and a significant discount on used cars.
Battery life does not match the life of the whole vehicle, and the high cost of electric vehicle life cycle brings down the residual value of the whole vehicle.
The service life of a traditional fuel-efficient vehicle can easily exceed 10 years, while the life of a power battery is difficult to maintain a high level of remaining charge and mileage during this period.
At the same time, the high replacement cost and low residual value of the battery also increase the lifetime cost of an electric vehicle.
We believe that separating the body from the battery can effectively avoid the above-mentioned drawbacks, improve the residual value of the new energy vehicle, and help reduce consumers' worries when making a purchase decision.
In addition, as Nio is a premium brand, we believe that a higher residual value of used cars will help maintain the brand's tone.
Separate the vehicle and battery technology advancement curve to extend the life cycle of existing models.
Compared to fuel vehicles, Nios are replaced more frequently, mainly because of the faster battery technology innovation, and the bundled sales of body and battery lead OEMs to develop new models frequently in order to match the new battery.
Taking BYD e5, Yuan EV and F3 trunk as examples, the sales of new energy vehicles e5 and Yuan EV dropped from peak to 50% in 4 and 5 months respectively, while the sales of fuel vehicle F3 dropped from peak to 50% in 10 months.
Under the model of separating body and battery sales, we believe that the consumption pattern of keeping the original model and constantly replacing it with a new battery becomes possible, resolving the conflict between the need for frequent battery replacements and the relatively slow replacement of models. Manufacturers do not need to launch new models frequently to match the battery renewal, thus saving development expenses.
