Deutsche Bank said in its latest report that Chinese electric vehicle (EV) maker Nio (NYSE: NIO) could become the next "iconic auto brand", pushing the shares of the Chinese EV maker up more than 10 percent.
The analyst, Edison Yu, said in a note Tuesday that customers increasingly see Nio as the premium brand with the best technology and service in its class. At the same time, Nio has a 62% referral rate in a recent study of preference for major electric vehicle brands, he said. The study shows that customer preference for Nio is as high as that of BMW and Mercedes Benz.
Yu said that as BEV penetration and word of mouth increases, consumers will become more aware of Nio's products and services and believe Nio can capture a higher share of the premium market.
According to the report, Nio is expected to achieve record deliveries in the third and fourth quarters, driven by its SUV EC6.
Yu said investors also expressed concerns about Nio's autonomous-car technology, where local competitor Xpeng "appears to be taking a lead."
"We expect Nio to officially unveil its all-electric sedan later this year (EE7) with a revamped hardware sensor suite that will enable L4 autonomy by 2022, which should alleviate concerns about the R&D roadmap," Yu said.
Yu said that the "main pushback" on that bullish view was that Nio's brand "does not create the same level of excitement and loyalty" in China as Tesla and German luxury auto makers.
On Monday, BofA Securities analyst Ming Hsun Lee maintained a Buy rating and $23 price target following the unveiling of Nio's new advanced driver assistance system and other use enhancement strategies at the Beijing Auto Show over the weekend.
Deutsche Bank maintained its 'Buy' rating and $24 price target on Nio.
As of writing, Nio is up more than 10% at $20.7.
Here is the full report:
Becoming the next iconic auto brand?
Following up our initiation earlier this month, we provide our latest thoughts in response to investor feedback.
The main pushback we received on our bullish view is Nio's brand does not create the same level of excitement and loyalty in China that Tesla or the German luxury automakers command.
While there is some truth to that given Nio is an upstart, we continue to see compelling evidence that Nio is increasingly perceived by customers as a high-quality premium brand with best-in- class technology and service.
Previously, we highlighted Nio's referral rate of 62%; since then, two studies have been published with one illustrating Nio's favorability among customers as higher than both BMW and Mercedes Benz and another showing Nio as the most reliable BEV across all segments based on number of problems (even ahead of Tesla).
Investors also expressed concerns about the technology roadmap in ADAS/AD where local rival Xpeng appears to be taking a lead. We expect Nio to officially unveil its all-electric sedan later this year (EE7) with a revamped hardware sensor suite that will enable L4 autonomy by 2022, which should alleviate concerns about the R&D roadmap.
Looking ahead, as BEV adoption increases and word of mouth spreads, we believe Nio can take material share in the premium segment as consumers begin to understand the value proposition and quality of its products and services.
Near term, we continue to expect record 3Q/4Q deliveries and margin, boosted by the newly launched EC6 SUV coupe (deliveries began on Friday), 100 kWh battery pack option, and BaaS roll-out. We reiterate our Buy rating and $24 price target based on 7.5x our 2021E EV/sales.
Is the Nio brand resonating with customers?
The main pushback we received from investors on our bullish view (see initiation here) is Nio's brand does not create the same level of excitement and loyalty in China that Tesla or the German luxury automakers command.
Broadly speaking, we believe there is some truth to this given Nio is a very new brand and volumes are still relatively low.
However, we continue to see compelling evidence that Nio is increasingly perceived by customers as a high-quality premium brand with best-in- class technology and service.
We note the meaning of Nio's Chinese name ("weilai") translates into "Blue Sky" whereas Xpeng is actually just the name of the founder.
In our initiation, we highlighted Nio's average customer referral rate of 62% in 1H20 (up from 2019's 52%). Since then, two studies have been published showing Nio is clearly delivering industry-leading customer favorability and reliability.
First, based on a Bitauto (leading automotive web portal in China) study tracking the Net Promoter Score (measurement of how likely a customer is to refer a brand to others) of car brands in the first eight months of 2020, Nio was both the highest-ranking premium brand and overall brand (54%), coming in ahead of Tesla (52%) and BMW (42%).
In fact, several traditional luxury competitors such as Audi (-5%) and Cadillac (-13%) garnered a negative score. The study suggested this could be due to aggressive promotional activity and customers putting more value on post-purchase service, which is an area we believe Nio thrives in. See Figure 1 and 5.
Secondly, J.D. Power released its 2020 China New Energy Vehicle (NEV) Experience Index Study, ranking Nio as the top brand in the BEV segment (even ahead of Tesla), based on problems per 100 vehicles (e.g., ES6 ranked No. 1 in the midsize BEV segment).
J.D. Power commented that younger buyers are much more open to emerging brands, and the proportion of NEV owners born in 1990s has increased to 37% from 24% in 2019. Moreover, 78% of NEV owners are open to purchasing any NEV brand, suggesting the next generation of drivers is increasingly willing to break away from traditional incumbent automakers. See Figure 3.
Has Nio fallen behind on ADAS/AD?
Since 4Q18, Nio has cut its R&D-related headcount by >30%, driven by the autos/ NEV downturn in 2019. This has led to some investors believing Nio may be falling behind local competitors such as Xpeng, whose latest XPILOT offering has been well received by the market.
For example, Nio's Navigation on Pilot feature has been slow to market this year. Looking ahead, we believe Nio is in the process of boosting hiring materially, especially in ADAS/autonomous development and will showcase its next-gen autonomy platform in December at Nio Day.
Specifically, we expect Nio to launch its all-electric sedan (EE7) with a revamped hardware sensor suite that will enable L4 autonomy by 2022. This vehicle will also have 5G-V2X capabilities and likely enter production in late 2021 (built at the current JAC plant with max capacity of 150k).
While the workforce cuts likely caused some disruption in the technological roadmap, Nio should have the resources (both talent and capital) to quickly catch up, leveraging its partnership with Mobileye.
3Q20 deliveries and update on Nio China
Nio's deliveries are tracking 7.5k through two months, and we expect September to come in at >4k, taking 3Q volume to >11.5k (above the high end of guidance and a quarterly record).
As a reminder, Nio recently boosted its monthly production capacity to 5k vs. August's 4k (it essentially sold out all monthly production in August).
The first batch of deliveries of the newly launched EC6 SUV coupe began on Friday; we estimate Nio could deliver up to 500 in the quarter. Nio will also provide 100m RMB in subsidies to future charging partners to boost the number of DC piles available (~1k per year per pile in exchange for free charging for Nio owners).
Separately, Nio provided an update on its plan to buy back the government's stake; Nio will redeem 8.6% of Nio China for 512m RMB ($75m) and another ~2% for 4.1bn RMB ($600m) via two different agreements (the first redemption involves transferring a future 2bn RMB cash infusion in Nio China from the partner to Nio).
These redemptions are at a large discount to the current market value of the company, as previewed.
Reiterate Buy and $24 price target
We continue to see an emerging class of Chinese automakers backed by large, well- capitalized tech titans and ambitious local governments looking to disrupt the auto industry: Nio, Xpeng, Li Auto, and WM Motor.
We refer to them as the “Fab Four” and see Nio as the leader of the pack given its stronger brand perception, higher sales volume, focus on the premium SUV segment, and battle-tested operational track record, but broadly think all four can coexist with Tesla as there is still plenty of runway to capture market share from traditional ICE automakers.
With the China EV market already the world's largest and now inflecting upward after the recent downturn, we believe Nio is well positioned to take share in the premium segment, having put major emphasis on post-purchase customer service, alleviating charging anxiety, and developing a robust software/AI-centric vehicle ecosystem.
We reiterate our Buy rating and $24 price target based on 7.5x our 2021E EV/sales, in line with other pure EV comps such as Tesla, CATL, and Li Auto.
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