Leading Premium NEV Manufacturer Benefiting From Consumption Upgrade Trend

Equity Analyst

Vincent Sun

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Nio is a leading electric vehicle, or EV, manufacturer in China, targeting the premium segment. Its current model portfolio’s retail prices range from CNY 328,000-CNY 656,000, with 450-700 km driving range. For new models, Nio started delivery of the midsize ET5 sedan in third-quarter 2022, priced at CNY 328,000-CNY 386,000, as well as the mid-to-large five-seater SUV ES7. The company also upgraded its first-generation SUV models ES8, ES6 and EC6 in the second quarter of 2023. It also plans to launch a new mass-market brand in 2024 to seize the robust demand while retaining Nio’s premium image.

Nio successfully established a premium brand in the EV market. It also pioneered battery swap technology as a supplement to charging. The launch of the battery-as-a-service solution separates the battery pack from the vehicle, which cuts upfront purchase cost by 15%-30%. It targets to build over 4,000 swap stations worldwide by 2025, about 1,000 of which to be outside China.

We see rapid new energy vehicle, or NEV, adoption in China, stimulated by regulatory push and improving charging infrastructure, among others. By 2025, we expect passenger NEVs to account for more than 40% of total passenger car sales. Riding on the vehicle electrification tailwind, we forecast Nio’s vehicle delivery to reach close to 300,000 units in 2025 from 122,486 units in 2022, taking 3% share in China’s passenger NEV market. While it is still loss-making, we forecast improved outlook for vehicle sales profit due to increased vehicle deliveries. Our positive long-term profitability outlook in the vehicle segment leads to the first profitable year in 2026.

Nio contract manufactures its vehicles at Jianghuai Automobile Group, or JAC’s, plants in Hefei. Under the renewed agreement, it pays JAC a fee on each vehicle produced plus a fixed total cost, which we estimate at a low-single-digit percent of Nio’s average selling price. Capacity expanded from 120,000 units to 240,000 units in the third quarter of 2022. Also, its new production base for the ET5 sedan at NeoPark in Hefei started production in the second half of 2022, with designed annual capacity of 120,000 units.

Business Strategy & Outlook

While we applaud Nio’s success so far in establishing a premium brand in China, we think it is too early to determine whether brand loyalty will be maintained over at least a 10-year period. As such, we think Nio has no moat. Generally, we see two moat sources in the auto sector from intangible assets such as brand equity, best exemplified by Ferrari, and from cost advantage. At this stage we do not yet see either moat sources to be retained by Nio in anticipation of intensifying competition within the next 10 years. 

So far Nio has successfully established a premium brand image from the ground up in China’s midrange to high-end EV market. It has invested heavily in marketing since the company’s inception in 2014. Nio adopted a sophisticated branding strategy through competing in the ABB FIA Formula E Championship electric racing series. The Nio 333 FE team secured the inaugural FIA Formula E Drivers’ Championship in 2015. Following the successful sponsorship, Nio launched the electric supercar EP9 in 2016, which further evokes the brand’s premium positioning. The EP9 delivered an unprecedented performance level and broke the then existing world electric vehicle record as the fastest electric car at the “Green Hell” track in Germany in 2017.

Riding on the luxury and high-performance brand image through Formula E sponsorship and EP9 launch, Nio released its first mass-production model ES8, a seven-seater electric SUV priced above CNY 450,000, in December 2017 and began deliveries in June 2018. The company subsequently expanded its presence by launching other popular EV models including the ES6, EC6, and ET7, and recorded significant sales growth and market share gain in China’s premium NEV market at a price range of around CNY 350,000-CNY 600,000.

The approach is similar to Tesla’s branding strategy of releasing its Roadster sportscar first, then expanding from high-end to the entry-level premium market. Given Nio’s premium positioning and price ranges of major models, we think the Nio brand is perceived by car owners as equivalent to the premium image of BMW and Mercedes-Benz in the internal combustion engine, or ICE, market.

The luxury branding leads to strong pricing power. Presently, Nio cars are priced at a higher range compared with its peers. The premium pricing enables Nio to ramp up its vehicle sales margin to a level close to Li Auto. The latter’s extended-range electric SUV Li One is equipped with a 40.5 kWh battery versus the 75-100 kWh battery size for Nio’s major models.

However, as the industry becomes increasingly competitive, it is still uncertain whether the premium branding that Nio has will be retained over the long run to underpin a moat. We expect significant competition coming from global established premium original equipment manufacturers, or OEMs, which have strong brands. Legacy ICE manufacturing is highly competitive and capital intensive. We expect the same in the NEV market over time. In addition, the company is still burning cash—we expect it is likely to do so for at least a couple more years—and the risk for the need to raise additional capital for capital intensive investment is high, in our view.

None

Economic Moat

NIO, Inc. is a holding company which engages in the design, manufacture, and sale of electric vehicles. Its products include the EP9 supercar and ES8 7-seater SUV. It provides users with home charging, power express valet services, and other power solutions including access to public charging, access to power mobile charging trucks, and battery swapping. It also offers other value-added services such as service package, battery payment arrangement, and vehicle financing and license plate registration. The company was founded by Bin Li and Li Hong Qin on November 28, 2014 and is headquartered in Jiading, China.

Earnings data Q4 2023

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