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What’s Next for NIO Stock as the Chinese Stimulus Rally Fades?

Mohit Oberoi - Barchart - Wed Oct 9, 8:43AM CDT

Chinese stocks witnessed the rally of a lifetime in late September, as the country unleashed a flurry of monetary and fiscal policy stimulus. It was nothing short of China’s “whatever it takes” moment as the country tries to curtail a worsening economic slowdown.

The stimulus triggered a broad-based rally in Chinese stocks, and electric vehicle (EV) stocks were among the best performers. NIO (NIO) – once touted as the “Tesla of China” – rose 65% in the month. However, thanks to the slump in NIO stock during the first half of the year, it hasn’t yet turned positive for 2024 – just like fellow its Chinese EV peers, Xpeng (XPEV) and Li Auto (LI).

The Stimulus-Driven Rally in Chinese Stocks Has Been Fading

China's stimulus-driven rally seems to have run its course in the short term. While the country continues to announce more stimulus measures, these have been piecemeal and incremental at best, and not to the scale that markets expect. Given the country's already bloated debt pile, I believe those expecting large fiscal measures from China could be in for disappointment.

Also, on the economic reform front, it would be futile to expect major actions given the strong communist credentials of Chinese President Xi Jinping. Not much should be expected as far as China trying to mend its relations with the U.S. and other Western powers, either, as the power struggle between the two sides seems here to stay for quite some time, or worse, perhaps perennially.

That said, the country's decision to bail out its ailing housing sector is somewhat of a U-turn for Jinping, who has said multiple times that “houses are for living in, not for speculation.” The Communist Party’s politburo has shown a strong intent to support the economy and achieve its growth targets, set at 5% for this year.

NIO Has Impressed with Its Deliveries and Margins

Amid all of the noise over China’s slowdown and massive overcapacity in its industrial sector, including the EV industry, the country’s new energy vehicle (NEV) penetration – which includes both battery electric vehicles (BEVs) and plug-in hybrids (PHEVs) – has been rising, and surpassed 50% in July for the first time.

NIO has especially impressed with its deliveries, which have topped 20,000 for five consecutive months. The company’s financial performance has also improved, and vehicle gross margins rose to 12.2% in Q2, with overall gross profits rising 246% YoY to $232.4 million. While the Chinese EV company continues to post losses and burn cash, its net loss narrowed to $694.4 million in the quarter. NIO expects margins to rise further in the back half of the year, which should further help bridge its net losses.

New Brands Could Drive NIO’s Sales

NIO has already begun deliveries of its Onvo L60 model, which is priced below Tesla’s (TSLA) Model Y (for context, this was the bestselling model last year). It is looking to launch the Firefly model next year, which will be priced even lower, and expand the total addressable market for NIO - which has otherwise positioned itself as a luxury EV company.

While there are concerns over these lower-priced models taking a toll on margins, the company is optimistic about achieving a 15% vehicle margin with Onvo L60.

NIO Has a Strong Balance Sheet

While several startup EV companies went out of business when they could not raise money to fund their cash burn, NIO – which itself raised a “going concern” warning in 2020 – hasn’t faced this issue in recent years.

Back in 2020, it was the arms of the Chinese government that came forward to bail out the struggling EV company. Since then, foreign investors have been more than willing to fund NIO, with Abu Dhabi-based CYVN Holding pouring nearly $3 billion into the company.

NIO held $5.7 billion as cash and cash equivalents on its balance sheet at the end of June. Late last month, the company announced yet another investment of around $470 million from strategic investors.

Why NIO Can Still Rally Higher

Wall Street analysts are generally unimpressed when it comes to NIO, as 9 of the 15 who are covering the stock rate it as a “Hold,” and 1 calls it a “Strong Sell.” Three analysts rate NIO as a “Strong Buy,” and the remaining 2 as a “Moderate Buy.”

NIO has raced ahead of its mean target price of $6.01, while the Street-high target price of $8.90 is over 42% higher than yesterday’s closing prices. However, despite its surge over the last couple of weeks, NIO still trades at a next 12-month (NTM) price-to-sales multiple of 1.1x, which looks on the lower side. In the short term, though, the stock might remain under pressure as optimism toward China's stimulus continues to fade.

I still find NIO’s long-term risk-reward favorable, even as the company and its fellow Chinese EV peers face several challenges - most recently, in the form of tariffs in the European Union. While China’s economic stimulus is far from perfect, so are most such measures, as markets invariably want “more." Growing NEV penetration in China, coupled with the launch of new budget models, make NIO an attractive buy for investors who can stomach the short-term volatility in Chinese shares.

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On the date of publication, Mohit Oberoi had a position in: NIO, XPEV, LI, TSLA. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.