Edison Yu's reiterated NIO as their top pick for China electric vehicles and kept Buy rating for the stock.
NIO will report its second quarter unaudited financial results on Wednesday, September 7, before the US markets open. As usual, Deutsche Bank analyst Edison Yu's team provided their preview.
NIO's local peers XPeng Motors and Li Auto both previously reported second-quarter revenue that exceeded expectations, but their guidance for the third quarter was very weak.
In a research note sent to investors today, Yu's team said investors have generally been prepared for NIO's recent sales weakness, but they believe this may be the final reset.
"While consensus estimates for 3Q/4Q clearly need to come down, we do see this as the last reset before the product supercycle hits full stride," the team wrote.
Second-quarter earnings outlook
Previously released data has shown that NIO delivered 25,059 vehicles in the second quarter, down 2.75 percent from 25,768 in the first quarter and up 14.45 percent from 21,896 in the same period last year.
NIO's previous guidance for second-quarter deliveries was 23,000-25,000 units. Its actual deliveries in the second quarter were above the upper end of the range.
NIO's revenue guidance for the second quarter was RMB 9.34 billion-10.09 billion, representing a 10.6 percent to 19.4 percent year-on-year increase.
Yu's team expects NIO to report revenue of RMB 10.1 billion, gross margin of 12.2 percent and adjusted earnings per share of RMB -1.17 in the second quarter.
This compares with the current analyst consensus of RMB 9.91 billion, 12.2 percent and RMB -1.25, respectively, in a Bloomberg survey.
"Our revenue is slightly higher due to better ET7 mix (above avg ASP model)," the team said.
Given that battery input costs are now based on a monthly refresh of the pricing index with CATL, NIO's gross margin could be more volatile, according to the team.
Second half outlook
After weak third-quarter outlooks from Li Auto and XPeng, NIO certainly isn't immune to market dynamics, Yu's team said, adding that they think it could hold up relatively well, though.
NIO's three existing models -- the ES8, ES6 and EC6 -- have just undergone infotainment system upgrades and sales are already quite low going into August given the higher price point, the team noted.
The three models are not competing as much on price, and NIO has priced the new ES7 SUV effectively enough to create differentiation, the team said.
NIO has been experiencing a shortage of casting supply, which has held back production of the ET7 flagship sedan and limited production of the EC6. The team estimates that this has reduced July deliveries by 3,000 units and could drag down August deliveries by at least 2,000 units.
This bottleneck will disappear in September or October as suppliers address labor shortages. Notably, this will not affect the launch of the ES7 or ET5, as casting components are sourced from a different supplier, the team noted.
Yu's team expects NIO to target 29,500-31,500 units in the third quarter.
In the fourth quarter, the new ES7 SUV and ET5 sedan will increase significantly, with deliveries likely to reach 5,000 and 10,000 units per month, respectively, the team said, adding that NIO is on track to exceed 50,000 total deliveries in the quarter.
Overall, the team reduced their forecast for NIO deliveries in 2022 by 25,000 units to 135,000 units, due to lower-than-expected sales of the ES8, ES6, and EC6, as well as a shortage of casting parts.
For gross margin, they lowered their full-year forecast by 1 percentage point to 15.5 percent, reflecting lower sales volumes and higher battery input costs.
Product supercycle in full swing next year
"While this year has certainly been filled with unexpected speed bumps, we think the product supercycle is coming into view and NIO will finally reap the benefits in full next year," Yu's team wrote.
Last week, NIO's management commented that it believes the upcoming ET5 will surpass the BMW 3 Series on a month-to-month basis within a year, indicating a very strong order backlog, the team noted.
In addition to the 3 new models -- ET5, ET7 and ES7 -- selling for a full year, NIO will transform the existing 866 models next year into the new NT 2.0 platform with an upgraded sensor suite and chip, which will boost sales in the second half of 2023, according to the team.
However, the team reduced their forecast for NIO deliveries in 2023 by 30,000 to 290,000 to account for the greater volume volatility associated with the 866 model conversion.
With consensus estimates for the third and fourth quarters apparently needing to be cut, this could be the last reset before the NIO product supercycle kicks into full gear, according to the team.
"Once investors fully appreciate that, the company's other efforts may get notice," the team said.
NIO is expected to make further inroads into the European market, with management confirming a standalone NIO Day in Europe next quarter, which could help sentiment, Yu's team noted.
In addition, in Chengdu, one of the worst areas of the heat wave, many local charging facilities had been temporarily out of service due to tight power supplies.
But for NIO users who were able to charge at home, they were able to exchange their batteries with NIO credits at battery swap stations so that others who didn't have home charging could get a fully charged battery.
"While small on the surface, we believe this illustrates the robustness of NIO's energy replenishment ecosystem that no local automaker can match right now," Yu's team said.
The team continues to use the peer-leading 4.5x 2023E EV/sales multiple as its valuation framework, but lowered its price target by $6 to $39, taking into account a more conservative sales outlook for next year.
The team reiterated NIO as their top pick for China electric vehicles and kept Buy rating for the stock.
NIO closed Friday down 0.8 to $19.92, and the price target implies a 96 percent upside.
NIO says ET5 deliveries to begin Sept 30, expects to overtake gas-powered BMW 3 Series sales in China within a year