NIO-SW: Reflection is more important than selling cars.

NIO Inc. USD OV $NIO.US.US.US released its Q1 2023 financial report before the Dolphin US stock market on June 9th Beijing time. Once again, the performance was "eye-catching". If the Q4 of last year was poor, the Q1 of this year is a "strengthened version":

1. Poor sales and revenue: $NIO.US.US-SW.HK revenue was 10 billion yuan less than the market expectation, with a total revenue of 10.7 billion yuan. The poor sales are known, but the key reason is due to the volume of discounted and old cars, and the high proportion of 75kwh entry-level models, resulting in a unit price of only 297,000 yuan, which is significantly lower than the market expectation.

2. Gross margin collapse: Due to the unit price falling below 300,000 yuan for the first time, far lower than the implied unit price of around 320,000 yuan in the previous guidance, the gross margin of the car dropped to 5% without any impairment operations, far lower than the market expectation of around 10%. Obviously, the damage caused by the clearance of old models and the low gross margin of ET5, and the damage caused by the utilization rate of production capacity during the platform replacement process, are particularly severe for NIO-SW.

3. Flat guidance: The Q2 guidance is 23,000-25,000 vehicles. Since the sales volume in April and May is known, the implied sales volume in June should finally reach 10,000 vehicles after the new NIO-SW is launched, and the implied sales volume in June should be around 11,000 vehicles. The company's goal is to achieve a monthly sales volume of 20,000 for ET5+NIO-SW. This guidance still has a significant gap from this goal.

However, the revenue guidance of $NIO.US.US Inc. USD OV.SG is 8.7-9.4 billion yuan, implying that the unit price may recover to around 320,000 yuan, and the proportion of clearance inventory cars may decrease, and the gross margin may recover.

4. NIO-SW is still a "spend, spend, spend" model: Although the gross profit has dropped to less than 20,000 yuan, NIO-SW has a lot of things to do in terms of research and development, and it still needs to maintain a "user-friendly" attitude. The investment in research and development and sales expenses has not seen a significant reduction, and the operating loss rate has reached a three-year high, reaching 48%, which is significantly higher than the market expectation.

Dolphin's overall view:

For the new forces that have a very short period of explosive growth for new cars and repeatedly fall into the period of greenness and inexperience of changing cars, Dolphin naturally puts a red label on "questionable execution". Obviously, NIO-SW is such a company at present.

Therefore, the stock price, which was previously 9 yuan, has dropped to the PS valuation level of life and death in 2019. Dolphin proposes that companies with too big dreams and too weak execution should not be taken lightly. By this financial report, the company's stock price is hovering around 7-8 yuan, and there is indeed no profit in buying the dip.

Of course, from the marginal change perspective, this performance is basically the bottom of NIO-SW's performance: because NIO-SW's two top-stream cars, NIO-SW, went on sale at the end of May, and the ET5 hunting version went on sale in June. Two cars with the hope of explosive growth will begin to contribute to full sales in the second half of the year, and all other models will basically transition to the NT2.0 platform. The sales volume and gross profit margin are unlikely to be worse, and they will only improve.

Correspondingly, with the improvement of sales volume and gross profit margin, there is also hope to slowly climb out of the bottom. But from the bottom to how much it can pull up, or whether it can return to the previous height, it depends on how much the original new force leader reflects on this wave of mistakes and how much the execution improves. Dolphin has doubts. At least we need to see a change in attitude and listen to what NIO-SW said in the conference call.

1. Stronger than drawing a pie, weaker than landing: NIO-SW, it's time to reflect

Let's first recall the two core goals of NIO-SW in delivery this year:

1. NIO-SW's goal this year is to deliver 250,000 cars;

2. Monthly sales in the fourth quarter must stabilize at 30,000: the two pillar cars ET5+NIO-SW have a monthly sales total of 20,000, and NIO-SW+ES7+NIO-SW contribute a total of 8k-10k vehicles, while the two coupes NIO and EC7 have a total monthly sales of about 2k vehicles and annual sales.

Comparison of goals vs. reality:

1. By the end of the first half of this year, the delivery was about 55,000 vehicles, barely achieving more than 20% of the annual goal. In June, when it just climbed over 10,000, it means that the hope of achieving the goal of 250,000 for the whole year is very slim.

2. Monthly sales target of 30,000 vs. reality of 6,000 in May: In May, due to NIO-SW's two top-stream car models-NIO-SW's new model and the hunting version of ET5 are yet to be released, and the new NIO-SW will be launched in June, and NIO will be launched in July. The new EC7 was originally relatively niche, and it did not contribute much to sales when it was just launched. In addition, the market demand for NIO-SW and ES7, which are not in the replacement period, is weak. The final result is that NIO-SW's sales in May were only 6,155 vehicles, even lower than in April.

On the list of new car makers in May, the original leader has almost slipped to the bottom.

Fortunately, looking ahead, it should be the most difficult time for NIO-SW now. The models to be launched in the following months should have a higher degree of certainty. Judging from the release schedule of the models, the two models with the potential to contribute to large sales, ET5 and NIO-SW, are as follows:

1.) NIO-SW: As the best-selling SUV in the NIO-SW model matrix, on May 24th this year, NIO-SW released an updated version of ES 6 (competitors mainly include Model Y, L7, etc.), which began to be delivered that night.

According to market research information, within 72 hours of the release of NIO-SW, the average intention order per store was 90, and the pre-order was 20. ES 6 contributed 60-70% of the in-store traffic, and the preliminary data seems to be good.

2.) ET5 Hunting Edition: Released on June 15th and delivered in the same month, the Hunting Edition will optimize the rear space of the current ET5, and is expected to convert some of the potential customers who were originally watching ET5.

After these two top models of NIO-SW are all launched in June, it is a reasonable expectation for the monthly sales to exceed 10,000. Therefore, the sales guidance given by NIO-SW for the second quarter of this quarter, 23,000-25,000 vehicles, is only within expectations.

Due to sales of 6.7k in April and 6.2k in May, this guidance implies that sales in June are around 11,000 vehicles, which is basically consistent with the market's expectation of reaching 10,000 vehicles in June, without further surprises, but obviously not a surprise.

Overall, in this wave of car replacement cycle, NIO-SW has not been able to achieve a real surge in volume from new cars such as ET5 to now. Compared with the ideal replacement cycle, the replacement time of NT2.0 models has been delayed too long, and the problem is still obvious, as Dolphin said before:

When the automobile market has long entered the era of demand-oriented, NIO-SW wants too much, and its execution is still in the era of "supply-oriented", which cannot keep up with the crazy internal competition.

Finally, judging from the actual delivery volume in the first quarter, only 31,000 vehicles were delivered, barely reaching the lower limit of the originally planned 31,000-33,000 vehicles.

2. Fatal Expectation Gap: Gross Margin Revisits the Lower Limit

Behind the poor sales performance, the gross margin has once again fallen sharply, and the severity exceeds that of the first quarter, which had a one-time impairment of 1 billion yuan due to "inventory impairment provision, accelerated depreciation of production equipment, and losses from the purchase agreement of old 866 models".

In the first quarter of this year, the gross margin of NIO-SW's car sales was only 5.1%, while the gross margin of cars in the previous quarter, excluding the one-time factor of 1 billion yuan, was still 13.5%. The market's expectation for the gross margin of car sales in the first quarter was mostly in double digits, ranging from 10% to 12%.

Let's take a closer look at the economics of individual vehicles:

1. In the first quarter, the revenue per vehicle hit a historic low, dropping below 300,000 yuan for the first time to only 297,000 yuan, and the cost per vehicle fell by more than 70,000 yuan on a MoM basis.

Of course, the reasons are also obvious. During the period of new car replacement, the old 866 model had to be cleared from inventory, and there were subsidies from the government and financial institutions. The new ET5 model itself has a lower unit price and lower gross margin than the previous models, so it is normal for the average price to decline sharply.

1. Now that NT1.0 is being converted to NT2.0, the utilization rate of intermediate production capacity is very low, which will also drag down the gross margin. The cost per vehicle cannot be reduced in sync with the vehicle price, and the gross profit per vehicle in the fourth quarter was reduced by a further 3,000 yuan, directly pulling the gross margin down from 6.8% to 5.1%. The standard gross margin for car manufacturing should be around 20%, so the gap is too large.

Fortunately, from a forward-looking perspective, NIO-SW cannot get any worse:

The company's guidance for second-quarter revenue is between 8.74 billion yuan and 9.37 billion yuan. Dolphin estimates that the revenue per vehicle should be around 325,000-330,000 yuan, and by the end of the second quarter, almost all of NIO-SW's models will have been converted to the NT2.0 platform.

In addition, although the overall price of lithium carbonate has risen from 190,000 yuan to around 300,000 yuan, it is still trending downward compared to the previous price of over 500,000 yuan, and the decline in battery costs will also help NIO-SW alleviate cost pressures.

Of course, under NIO-SW's brand tone of "no price cuts", the real upward trend in gross margin still depends on whether NIO-SW can truly achieve its goal of selling 30,000 vehicles per month and increase its utilization rate. On this point, Dolphin remains skeptical:

1) Based on the current trend, the market penetration rate of luxury cars priced above 300,000 yuan in China seems to be slower for gasoline-powered cars, which is still less than 20%, lower than the overall penetration rate of pure electric cars.

2) Without sufficient facilities such as fast charging and battery swapping, there seems to be no ideal extended-range mode that can better meet the needs of users as pure electric luxury cars further penetrate into lower-tier markets beyond first-tier cities such as Shanghai.

3. Poor Revenue and Sales Results

In Q1, NIO-SW's revenue was 10.7 billion, only an 8% YoY increase, significantly lower than the market's expected 11.6 billion, with low unit prices due to inventory clearance being the core issue.

The only bright spot this quarter was the revenue from sources other than car sales, which reached 1.45 billion, significantly more than the market's expected 1.1-1.2 billion.

NIO-SW's other revenue sources mainly include sales revenue from energy and service packages, as well as revenue generated by embedded products and services such as charging piles and in-car internet connection services, which are sold together with vehicle sales.

The company has always maintained a high-end strategic positioning, hoping to bring better services and experiences to car owners through better brand management and user communities with a good gross profit margin.

Data source: Company financial report, Dolphin Investment Research

Data source: Company official website, Dolphin Investment Research

In addition, at NIO-SW's Berlin launch event last October, the company mainly used fixed leases and floating subscriptions to charge for overseas models. For example, the rental time provided by fixed leases is generally 1-5 years, and fixed monthly rentals are used. Short-term flexible car use can be subscribed on a monthly basis, and short-term subscriptions can be cancelled at any time two weeks in advance, with the ability to change vehicles at will, and monthly fees will decrease as the vehicle ages.

The additional growth in other revenue this quarter is estimated to be related to NIO-SW's overseas sales growth: from January to April, NIO-SW sold more than 150 cars in Germany and more than 184 cars in Norway, for a total of more than 450 cars sold globally, which should contribute to this part of the revenue.

However, the problem here is that because these markets are all in the development stage, they are mostly in the early stages of losses when they contribute revenue. Therefore, although the revenue from other businesses in this quarter has increased, the losses are also severe: with revenue of less than 1.5 billion in Q1, costs have already exceeded 1.8 billion, with a gross loss rate of 21%.

IV. Gross profit almost "zero"

If the gross profit of NIO-SW was terrible in the fourth quarter, it was even worse in the first quarter. Other income resulted in a direct gross loss, and the car sales business sold cars worth 9.2 billion yuan, with a gross profit of less than 500 million yuan. The overall group gross profit was only 160 million yuan, which is not much to boast about.

V. Investment "not a penny less"

Although it only made a gross profit of more than 100 million yuan after deducting external costs, the expenditure was not small: R&D expenses were 3.1 billion yuan, basically within the normal range of the company's quarterly guidance of 3-3.5 billion yuan; sales and administrative expenses were 2.45 billion yuan, slightly less than the market's expected 2.7 billion yuan.

Overall, in terms of R&D, NIO-SW wants to do too much and has too big of a dream, so the possibility of reducing R&D costs is very small. Currently, it has not seen it publicly reflect on reducing costs and increasing efficiency like Xiaopeng.

In terms of sales system, NIO-SW has always been the first to "warm up users", and there is currently no clear control trend in sales.

VI. NIO-SW has survived another crisis

The same style as the fourth quarter, but even more tragic: delivery lags, revenue lags, gross profit margin lags, and costs and investment are rigid, with operating profit being eye-watering:

A single quarter operating loss of 5.1 billion yuan; operating loss rate of 48%, reaching a new high in nearly three years.

Conclusion:

In Dolphin's opinion, for NIO-SW's current situation, internal reflection and rapid adjustment may be more important than praising and describing grand blueprints for 5-10 years.

About Dolphin's in-depth research and tracking comments on NIO-SW, please click:

Financial Report:

March 2, 2023, Financial Report Interpretation "Many ideas, poor execution, how much trust can NIO-SW lose?"

March 2, 2023, Telephone Conference Summary "NIO-SW: Year-end gross profit margin can reach 18-20%, and lithium prices may fall to 200,000 yuan" app_id=longbridge&channel=t4333638&invite-code=276530)

On November 11, 2022, financial report interpretation "NIO-SW: When the pricing is pessimistic enough, how much damage can be done if the answer sheet collapses?"

On November 11, 2022, telephone conference summary "NIO-SW: Break-even in the fourth quarter of next year, no problem with long-term steady-state gross margin of 20-25%"

On September 7, 2022, financial report interpretation "Don't be scared by the explosion of losses, NIO-SW is approaching good times"

On September 7, 2022, telephone conference summary "Capacity is the bottleneck, monthly sales in the fourth quarter set a record"

On June 29, 2022, hot topic review "This report on shorting NIO-SW can be more heartfelt"

On June 16, 2022, new car release summary "Quick release, quick delivery, NIO-SW has hope in the second half of the year"

On June 9, 2022, Q1 financial report interpretation "NIO-SW is still soft, can only rely on new cars for confidence?"

On June 9, 2022, Q1 financial report telephone conference "The gross margin in Q2 will be worse, NIO-SW's comeback depends on the second half of the year" On March 25, 2022, the review of the 2021 Q4 report: "NIO-SW: Under Pressure, Will the Future Bring Darkness or Dawn?"

On March 35, 2021, the minutes of the 2021 Q4 report meeting: "2022 is the Year of NIO-SW's Comprehensive Acceleration"

On November 10, 2021, the review of the 2021 Q3 report: "NIO-SW: After the Ankle Cut, Will the First Half of Next Year See a Deep Squat and Jump?"

On November 10, 2021, the minutes of the 2021 Q3 report meeting: "NIO-SW: No Need to Worry Too Much About the Temporary Delivery Slowdown and Gross Margin Pressure (Meeting Minutes)"

On August 12, 2021, the review of the 2021 Q2 report: "Saying Goodbye to the Outbreak Period, What is NIO-SW's Future?"

On August 15, 2021, the update of the 2021 Q2 report: "NIO-SW: High Valuation vs. Low Delivery, Beware of the "Future" in Front of You"

Research

On December 21, 2021, NIO-SW NIO DAY research: "The "Popular Body" ET5 is Here, NIO-SW Wants to Reignite the "Future""

In-depth

On June 9, 2021, the Three Idiots Comparative Study - Part 1: "New Forces in Car Manufacturing (Part 1): Investing in the Right People and Doing the Right Things, Analyzing the People and Events of the New Forces"

On June 23, 2021, the Three Idiots Comparative Study - Part 2: "New Forces in Car Manufacturing (Part 2): As Market Enthusiasm Wanes, What Will the Three Idiots Rely on to Consolidate Their Position?"

On June 30, 2021, the Three Idiots Comparative Study - Part 3: "New Forces in Car Manufacturing (Part 3): Fifty Days to Double, Can the Three Idiots Continue to Run Wild?" Risk Disclosure and Statement of this Article: Dolphin Disclaimer and General Disclosure