Nio Is Gaining Traction as China Stimulus Boosts the Local Economy

Nio (NIO) stock has been in the news as the company’s strong delivery numbers for September 2024 demonstrated robust growth and margin improvements. NIO stock gained about 65% last month alone but shares have otherwise had a rough go of it. NIO has lost more than one-third of its share value over the past year.

Nio is a Chinese electric vehicle manufacturer that’s known for its smart electric sedans and SUVs. It also operates charging stations and offers battery swapping services.

I am bullish on Nio because of improving growth and margins, the company’s strategic expansion into a new category, and recent Chinese government efforts to boost the economy. Nio’s business should experience an uptick, in my opinion.

Nio’s Vehicle Deliveries are Coming in Strong

My positive outlook on Nio stock is supported by the fact that the company’s vehicle deliveries are rising at an impressive rate. The company delivered 57,373 vehicles in Q2 2024, up 144% year-over-year. Impressively, vehicle margins grew to 12.2% from 6.2% in the same period last year, while gross margin increased to 9.7% from 1%. This demonstrates that as Nio scales and delivers more vehicles, it can bring down unit costs and improve its bottom line. That’s exactly what happened during Q2, but this progress was offset by a lower average selling price per vehicle.

Nio provided favorable guidance for Q3 2024 and said that it expects to deliver anywhere between 61,000 and 63,000 vehicles during the quarter. The company released its much-awaited Q3 2024 delivery numbers on October 1 and reported delivery of 61,855 vehicles during the quarter, up 11.6% year-over-year. Clearly the business is growing and, as it scales, we could see margins improve further.

Nio’s ONVO Line Looks Promising

I like Nio’s new ONVO line of affordable vehicles and believe it can help the company advance margins further. Nio launched the first vehicle under the ONVO brand on September 19. The L60 is a mid-size family electric SUV with a starting price of 149,900 yuan ($21,000). The launch was well received as the company delivered 832 L60s in the few days after the official launch. The ONVO brand already has 105 stores in China and the company is on track to open 200 stores by the end of the year.

The ONVO line looks promising because Nio’s prior focus had been on the premium category. Pricier cars could have been a headwind for delivery growth. Management indicated that Nio held a 40% China market share for BEVs priced at over 300,000 yuan. Giving consumers a more affordable option could help Nio potentially take market share. As the company launches more affordable models that target the mass consumer, I believe that Nio can improve its sales and profitability. By the end of the year, Nio expects to reach monthly L60 capacity of 10,000..

China’s Recent Stimulus Measures Provide a Boost

The recent stimulus measures launched by the Chinese government are another reason to be optimistic on Nio. China’s economy has been struggling for quite some time, beginning with the COVID-19 pandemic and followed by a property sector crisis, unemployment, and deflation. In an attempt to revive economic growth, the Chinese government has launched stimulus measures. The most notable stimulus has been the creation of a RMB800 billion lending pool targeting China’s capital markets. The funds are to encourage share buybacks and investments in Chinese equities and that’s good news for Nio.

Moreover, China Central Bank Governor, Pan Gongsheng, has also announced plans to cut the reserve requirement ratios (RRR) by 50 basis points, which should unlock about $142 billion for lending. The measures also include a 50 basis point reduction in existing mortgage rates, along with a reduced minimum downpayment on homes to 15%. As it becomes more affordable for consumers to take out loans for the purchase of cars or other discretionary items, companies like Nio are almost certain to benefit.

Consequently, Chinese equities have attracted a lot of attention from analysts in recent weeks. Billionaires David Tepper and Michael Burry are bullish on Chinese equities right now. Goldman Sachs’ analysts have an Overweight rating on Chinese stocks and see them rising by 15% to 20%. Nio, being a prominent player in China’s thriving EV sector, is well-positioned to grow in light of the recent stimulus measures which will encourage discretionary spending as well as investments in China’s capital markets.

Do Wall Street Analysts’ Rate NIO Stock a Buy?

Based on Wall Street analyst ratings, TipRanks has assigned a Moderate Buy to NIO stock. This reflects 8 Buy ratings, 4 Hold ratings, and 1 Sell recommendation. The average NIO price target of $6.23 represents about 10% potential upside from the recent market price.

Citi analysts see material upside potential for Nio stock and expect a 40% surge from current levels. Citi analyst Jeff Chung raised his price target on the stock to HK$68.1 (USD8.77) from HK$53.7 (USD6.91)and maintained a Buy rating. Citi believes that if ONVO performs in-line with expectations, it will result in Firefly, Nio’s new budget-friendly brand slated for launch in December 2024, attracting more investors.

The Bottom Line on NIO Stock

Nio is a growth firm in an emerging market that’s been making gradual but decent progress. As the company continues to lower unit costs and launch newer and more affordable models targeted at the mass consumer, its bottom line can improve. The stimulus measures from the Chinese government can spur additional growth for the company as the region recovers from a multi-year slump. While NIO stock has rallied a lot in recent months, new positives can potentially take it to new highs.

Disclosure