NIO Stock Could Be a Winner if Cash Burn Is Managed Wisely, Says Deutsche Bank

In an ever-evolving quest to enhance operational efficiency and reduce costs, Chinese EV maker Nio (NYSE:NIO) last month announced a 10% cut to the workforce.

That has been followed by a recent Bloomberg report stating that there may be further layoffs, with another 10%-20% of the workforce being vulnerable, although the Chinese EV maker has denied that this is about to happen.

In any case, the news came as no surprise to Deutsche Bank analyst Edison Yu, who thinks that even with the 10% reduction, NIO may need to undergo additional streamlining efforts to effectively align its cost structure.

“This could take the form of additional headcount reductions and/or strategic actions resulting in ~1.5bn RMB of incremental savings by our estimates,” says the analyst. Yu also has an idea how the company can lower costs and has identified 5 areas where that can happen.

For one, there have been reports that Nio intends to spin off its battery manufacturing unit even before the year is out, and that is a good idea. “In our view,” says the analyst, “a spin-off makes sense considering there is already a very robust supply chain locally in China with cell suppliers fighting for market share and pushing technology forward which should naturally keep costs down.”

The company might as well spin off the chip development team while they’re at it, too. This division has around 500 people (or 800 if all “smart” hardware efforts are lumped in) and Yu reckons R&D spend here reaches 500m-1bn per year. “Our view is this division could also be spun out as the true value-add to NIO’s brand appears minimal and several viable alternatives locally are gaining traction (e.g., Horizon Robotics, Black Sesame),” he explained. The segment could also be attractive to local investors, given semiconductor development is of “strategic importance” in China.

Elsewhere, by opening up the battery swap network to more strategic partners in the business such as Geely and Changan, Yu believes NIO will benefit “from sharing the capex burden” and in the future might be able to receive operator/licensing fees.

Further, to help grow its reach, it has also been reported that Nio is mulling over growing its dealer network. This could help save on opex/capex.

Lastly, there’s the Phone unit. While relatively low cost with about 200-300m RMB of opex needed per year (500 people), Yu thinks it is a distraction. “NIO is perhaps better off letting a smartphone OEM lead this operation (e.g., Porsche+Huawei phone),” he opined.

All told, Yu maintains a Buy rating on NIO shares backed by an $11 price target. Should the figure be met, investors will be pocketing returns of 43% a year from now. (To watch Yu’s track record, click here)

Where do other analysts stand on NIO? 7 Buys and 2 Holds have been issued in the last three months. Therefore, NIO gets a Moderate Buy consensus rating. Given the $11.36 average price target, shares could rise 47% from current levels. (See Nio stock forecast)

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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.