Category: Research Note

Deutsche Bank on China EV sales: Jun gathering momentum

After the price cut and a series of new models, sales could reach 20,000 units per month in the third quarter, according to Edison Yu's team.

China's major electric vehicle (EV) makers recently announced their June deliveries, and Deutsche Bank analyst Edison Yu's team provided their take, as usual.

"June EV sales surprised to the upside as demand picked up, likely signaling some normalization in consumer behavior and release of pent-up demand from buyers taking advantage of low prices," the team said in a research note sent to investors today.

(NASDAQ: LI) again led the way among the upstarts, setting a new monthly record, while Nio (NYSE: NIO) saw a large improvement in monthly sales, driven by the speedy ramp-up of the ES6, the team noted.

Looking ahead, pressure will be on Nio and (NYSE: XPEV) to deliver big growth in the second half with new vehicle launches, while Li Auto works to increase its already strong order book, Yu's team said.

As a backdrop, Nio delivered 10,707 vehicles in June, up 73.96 percent from 6,155 in May, though down 17.39 percent from 12,961 a year earlier.

Xpeng delivered 8,620 vehicles in June, up 14.84 percent from May and the fifth sequential growth, despite a 43.64 percent decline from the same month last year.

Li Auto delivered a record 32,575 vehicles in June, surpassing the 30,000 mark for the first time.

delivered 10,620 vehicles in June, up 146.86 percent year-on-year and up 22.38 percent from May.

Yu's team said Nio deliveries were slightly below their forecast, though the new ES6 appears to be ramping up smoothly and should be a bigger contributor in July along with the full month of production of the ET5 Touring.

After the price cut and a slew of new models, Nio could reach 20,000 units per month in the third quarter, the team said.

The team said Xpeng deliveries exceeded their expectations and, most importantly, the initial reception to the new G6 looks increasingly positive.

Looking ahead, Xpeng is on track to hit at least 10,000 deliveries in July and 15,000 in September is doable, the team said.

Here is the full text of the team's research note.

June gathering momentum

June EV sales surprised to the upside as demand picked up, likely signaling some normalization in consumer behavior and release of pent-up demand from buyers taking advantage of low prices.

Total NEV retail sales appear to be tracking around 670k according to preliminary CPCA forecasts or +16 percent MoM (+26 percent YoY).

Li Auto once again led the way among the upstarts setting a new monthly record while Nio saw a large improvement MoM driven by speedy ramp up of ES6.

Looking ahead, the pressure will be on Nio and XPEV to deliver big growth in 2H from new launches while Li Auto strives to increase its already robust order book.

June OEM recap

Li Auto delivered 32,575 vehicles (+15 percent MoM; +150 percent YoY), easily beating our forecast. Looking ahead, management is targeting L8 and L9 to be +10,000 each and L7 at 15,000 in monthly sales for 3Q and then 40,000 total in 4Q.

To support this, we are expecting a cheaper variant of the L9 to be available later in the year.

Separately, the first BEV (Li MEGA) is set to be unveiled in 4Q, catering to the >500k RMB segment.

The company exited the month with 331 retail stores and 323 servicing centers.

Nio delivered 10,707 units (+74 percent MoM; -17 percent YoY), slightly below our forecast.

The new ES6 appears to be ramping up smoothly and should be an even bigger contributor in July along with a full month of ET5 Touring production. New ES8 deliveries also began in the last few days of June.

Following the price cut and slew of new models, we think 20,000 in monthly sales is achievable during 3Q.

Nio exited the month with ~1,500 battery swap stations.

XPeng delivered 8,620 units (+15 percent MoM; -44 percent YoY), ahead of our expectations. P7 sales increased 17 percent MoM to nearly 5,200.

Most importantly, the initial reception to the new G6 is looking increasingly positive.

Starting price will be just 210k RMB and management raised its pre-sale number to +35,000 units (vs. prior +25,000), suggesting a robust pipeline of deliveries for 3Q.

Looking ahead, we expect July can reach at least 10,000 deliveries and 15,000 in September is doable.

Zeekr delivered sales of 10,620 vehicles (+22 percent MoM; +147 percent YoY). Looking ahead, Zeekr is offering some promotions through September on the 001 (likely in response to ET5 Touring competition) including free upgrade options on exterior color, larger 100 kWh battery, dual-motor 4WD, air suspension, and/or charging credits.

In addition, the company is providing special financing offers on all models.

Recall, Zeekr is targeting 140,000 in total unit sales this year (<43,000 through 6 months so far).

Nio deliveries rebound to 10,707 units in Jun as new models bring relief

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China’s extended tax breaks should facilitate steady EV sector growth, Fitch says

PHEVs get the same tax exemption as BEVs, and the extension of the tax break will attract more automakers to the market, Fitch said.

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China last week extended tax incentives for new energy vehicles (NEVs) for four years, a move that in the view of international credit rating agency Fitch Ratings could help renew electrification momentum.

China's extension of tax breaks for electric vehicle (EV) purchases should facilitate steady growth in the sector, while the continued coverage of subsidies for plug-in hybrid electric vehicles (PHEVs) reinforces Fitch's view that such vehicles will be a key catalyst for China's transition to EVs, analyst Jing Yang's team said in a June 28 research note.

On June 21, China's Ministry of Finance announced that NEVs with a purchase date between January 1, 2024, and December 31, 2025, will continue to be exempt from vehicle purchase tax, but the exemption will not exceed RMB 30,000 yuan ($4,340) per vehicle.

For NEVs with a purchase date between January 1, 2026 and December 31, 2027, the vehicle purchase tax will be levied at half the normal rate, with a tax reduction of no more than RMB 15,000 per vehicle.

"We believe the renewal of tax waivers for consumers purchasing EVs until end-2025 aligns with market expectations. Purchase taxes will be halved in 2026-2027 and then return to normal levels," Fitch said.

Sales of PHEVs, including extended-range electric vehicles (EREVs), will continue to grow rapidly under the updated policy, with these vehicles receiving the same tax exemption as battery electric vehicles (BEVs), the note said.

PHEVs are a close substitutes to traditional internal combustion engine vehicles because drivers do not suffer from mileage anxiety or charging inconvenience, and are therefore widely seen as a transitional product before the market shifts completely to BEVs, Fitch said.

PHEVs' share of China's EV market soars from 17 percent in 2021 to 28 percent in January-May 2023, Fitch said.

Competition in the PHEVs segment has intensified, and the extension of tax breaks will attract more automakers to the market, according to the note.

Plug-in hybrids are an easier sub-segment for traditional automakers to compete in than BEVs, with Great Wall Motor, and Changan Automobile all launching competitively priced plug-in hybrids this year, Fitch said.

Joint venture brands, despite having a firmer foothold in the market, have been slowed due to their global parent companies' focus on BEVs and less attractive pricing, the note said.

Tax breaks for high-end EVs will remain in place, which could ease local automakers' concerns about upgrading to premium EV brands, did not expect the waivers to be renewed, and should incentivize traditional luxury carmakers to transition faster toward EVs, Fitch said.

The latest program exempts consumers who buy battery swap-enabled EVs from the battery tax for the first time, Fitch noted, saying it expects this to benefit EV brands selling high-end BEVs with battery swap capability and to encourage automakers to adopt the model.

Overall, Fitch believes the subsidy extension will have little impact on EV sales in China in 2023 and continues to forecast EV deliveries to grow by more than 30 percent during the year and EV market penetration to reach 35 percent.

However, the extension could reduce front-loaded purchases in the fourth quarter of 2023, as consumers will no longer be eager to take advantage of expiring tax breaks, Fitch said.

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China's Ministry of Finance explains in detail how consumers will enjoy NEV tax breaks in 2024-2027

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Chinese brands expected to contribute 9% of NEV sales in Western Europe in 2023, says TrendForce

Western Europe is a traditional stronghold for international carmakers, and it's difficult for Chinese brands to stand out, TrendForce said.

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Chinese brands are expected to increase their share of the Western European new energy vehicle (NEV) market to 9 percent in 2023, up from 6 percent in 2022, market research firm TrendForce said in a report today.

SAIC's MG is the dominant Chinese brand in the Western European NEV market, according to the report.

Chinese exports of NEVs are primarily aimed at Western European countries with clear timetables for phasing out fuel vehicles, as well as Southeast Asia, especially Thailand, where penetration of such vehicles is low, TrendForce noted.

Western Europe is the home base of traditional international car manufacturers, and it is difficult for Chinese brands to stand out, the report said.

However, it is worth noting that Chinese NEVs emphasize high cost-efficiency and intelligence, and affordable electric vehicles can meet demand against the backdrop of high inflation facing Western Europe, TrendForce said.

In Southeast Asia, where Chinese brands entered early, the number of NEVs here is small, in the tens of thousands range, but the share of Chinese brands is high, the report said.

In 2023, the market share of Chinese brands in the Southeast Asian NEV market is expected to rise to 63 percent from 52 percent in 2022, TrendForce said.

This is a major concern for Japanese brands, which have long had a high market share in the Southeast Asian auto market, the report said.

Entering new markets requires a significant investment of resources, including the establishment of showrooms, after-sales maintenance service systems, charging infrastructure and compliance with local regulations.

Therefore, how to maintain price advantages while adding additional costs will be key to the success of Chinese auto brands overseas, according to TrendForce.

China's NEV industry developed early and has advantages in supply chain, productivity, cost-effective lithium iron phosphate (LFP) battery technology and production capacity, the high report also noted.

Chinese battery makers have layout in global upstream lithium resources, so their cost control and component supply stability are higher, becoming an advantage for Chinese car manufacturers when expanding overseas markets, the report said.

NEVs accounted for more than 25 percent of China's auto exports in the first quarter of 2023, and NEVs will be the focus of future expansion into overseas markets, TrendForce said.

Tesla contributes half of all NEV exports from China in H1

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NIO ET5 Touring pricing ‘a pleasant surprise,’ says Morgan Stanley

While touring cars might be relatively niche compared to sedans, some comparable offerings in the market can still deliver monthly sales of about 10,000 units on a consistent basis, Tim Hsiao's team said.

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(NYSE: NIO) officially launched the ET5 Touring yesterday, and its pricing looks competitive to analysts.

"Pricing of ET5 Touring is more competitive than we thought -- on par with the incumbent ET5 sedan at Rmb 298k+," Morgan Stanley analyst Tim Hsiao's team said in a research note sent to investors yesterday.

While the segment could be relatively niche, NIO management believes the ET5 Touring is likely to outsell its sedan version, the team noted.

In China, the available versions and pricing of the ET5 Touring are identical to those of the regular ET5 sedan.

Including the battery, the 75-kWh version starts at RMB 298,000 ($41,890) and the 100-kWh version at RMB 356,000.

Chinese consumers who choose to purchase the model using the BaaS (battery as a service) service will see the prices start at RMB 228,000 for both versions, with monthly battery rental costs of RMB 980 and RMB 1,680 respectively.

Compared to the regular ET5, the ET5 Touring has more rear-seat headroom, and more vertical space in the trunk, while it also has a lower driving position, and the option for electrochromic sunroofs, Hsiao's team noted.

"Such retrofits will help increase the TAM of the ET5 family by attracting users who attach greater value to the in-car space," the team said.

It's worth noting that in China, derivatives of sedans are a niche market.

However, the unexpected success of the 001, the first model of 's Zeekr brand, has made such models increasingly popular.

For the full year 2022, Zeekr delivered 71,941 Zeekr 001s, reaching its goal of delivering 70,000 vehicles for the year.

While touring cars might be relatively niche compared to sedans, some comparable products in the market still manage to deliver monthly sales of about 10,000 units on a consistent basis, according to Hsiao's team.

In China, the competitive landscape in the touring market is relatively benign, with the main comparables coming mainly from foreign brands such as the Audi S4, Mercedes-Benz CLA and Volvo V60, according to the team.

Whether NIO can successfully ramp up sales of the ET5 Touring in the coming months to meet its goal of reaching 20,000 units per month in the second half of the year remains to be seen, the team said, adding that the company's management expects the ET5 family to contribute about 30 percent of sales.

The ET5 sedan, ET5 Touring and the new ES6 will dominate NIO's sales, Hsiao's team said.

NIO launched the new ES6, the most important model in its history, in China on May 24, with deliveries starting on launch night.

As with the new ES6, NIO produced some ET5 Touring vehicles in advance based on a combination of designer-recommended configurations, and its deliveries officially began today.

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NIO launches ET5 Touring in China with same pricing as regular ET5

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NIO’s urgency to capture volume and cut expenses finally here, says Deutsche Bank

With 's broad price cuts and the rapid rollout of new NT 2.0 models, it could see a considerabe sales rebound in the second half of the year, according to Edison Yu's team.

NIO (NYSE: NIO) management expressed a rare cautious approach to future spending during last week's earnings call, and this week let the purchase threshold for the entire lineup drop. To Deutsche Bank, this series of moves suggests that NIO is finally starting to show real urgency.

"Our main takeaway following 1Q earnings and hosting NIO management (CFO in person in NYC this week) is that the urgency to capture volume and cut back spending is finally here," analyst Edison Yu's team said in a research note sent to investors today.

With NIO's broad price cut and the rapid rollout of the new NT 2.0 model, its sales can rebound considerably in the second half of the year, paving the way for 20,000 units per month, the team said.

In addition, as NIO reduces spending on non-core initiatives, its operating expenses and capital expenditures should be much more controlled, the team added.

NIO reported weaker-than-expected first-quarter results on June 9, with gross margins falling to just 1.5 percent due to promotional activities.

The company's management said during the earnings call that NIO will manage its cash flow carefully, postpone some of its fixed asset investments and focus on the countries it has already entered in Europe.

NIO is confident that it will see sales of more than 20,000 units per month in the second half of the year, William Li, the company's founder, chairman and CEO, said at the time.

On June 12, NIO lowered the starting prices of its entire new model lineup by RMB 30,000 yuan ($4,200), but the previously free battery swap service several times a month became a paid option.

Yu's team said in the research note today that they applaud the move as demand for NIO's existing models, particularly sedans, has been struggling in recent months.

"In our view, pricing is an issue for getting incremental buyers considering premium BEVs in general have sold poorly this year," the team wrote.

Despite the ongoing platform changeover for NIO's three first-generation SUVs, combined sales of the Avatr 11, IM LS7 and G9 averaged only about 4,500 units per month this year, about half of what the Audi Q5 sells locally in China, the team noted.

NIO's pricing is the highest among the upstart brands. In addition to price adjustments, the company must effectively compete with internal combustion engine vehicle makers, and extended-range electric vehicle (EREV) makers, and enhance its brand appeal, Yu's team said.

The electrification of China's premium car market appears to be proceeding more slowly, which may be counterintuitive to those outside of China, the team said.

They explained further:

Based on our analysis of the premium SUV market (>300k RMB), the BEV mix is only 12% YTD, compared with PHEV (includes EREV) at 18%, leaving 70% for ICE.

This compares with the overall market that is 21% BEV and 10% PHEV, showing customer preferences are quite different depending on the sub-segment.

The team's interpretation of this is that the EREV value proposition is resonating with a broader audience than expected, and has done a very effective job at maximizing.

In addition, Yu's team believes that NIO's brand appeal has hit a wall of sorts as it struggles to gain momentum outside of Shanghai and surrounding provinces and outside of financial and tech social circles.

The performance of NIO's best-selling ET5 is a case in point. Nearly 40 percent of the model's sales come from Shanghai and surrounding provinces, and while the ET5 theoretically has the broadest appeal among NIO's offerings, sales in the south have been quite poor, the team said.

"Moreover, based on our channel checks, affluent older customers simply are not buying into the brand (yet) and still prefer traditional BBA cars (i.e., greater loyalty)," the team said.

For investors, they are shifting to a less negative view as NIO's sales and cash burn trajectory appears to be reversing, the team said.

Depending on how the second half of the year plays out, NIO's stock price could remain volatile until there is a clear upward trajectory in sales, according to the team.

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BREAKING: NIO cuts starting prices by $4,200 for all models and makes battery swap benefits optional

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Analysts expect 16% of heavy trucks sold in China to be electric by 2025

At present, 89 percent of the new energy heavy trucks are pure electric models, and half of them support battery swap.

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China's electrification transition involves not only regular passenger cars, but heavy trucks as well.

By 2025, sales of electric heavy trucks in China are expected to reach 190,000 units, with a penetration rate of about 16 percent, said CITIC Securities analyst Yuan Jiancong's team in a research note today.

In China, the singularity for accelerated penetration of electric heavy trucks has arrived, with penetration expected to reach 35 percent by 2030, the team said.

The acceleration of new energy heavy truck penetration in China from 2021 onward was largely driven by China's restrictions on carbon emissions from high-emitting companies, according to the team.

In 2022, retail sales of new energy heavy trucks in China were 25,000 units, up 142 percent year-on-year, with a penetration rate of about 5 percent, CITIC Securities said, citing data from China Automotive Technology and Research Center (CATARC).

At present, 89 percent of new energy heavy trucks are pure electric models, and half of them support battery swap, according to the team.

Heavy-duty trucks have larger batteries and take longer to recharge at the same charging rate, and battery swap meets the efficiency requirements of these models, the team said.

From 2021 to 2022, the percentage of battery swap-enabled heavy-duty trucks ramped up, the team said, adding that they expect such electric heavy-duty trucks to become the industry's dominant product form in the near term.

On June 12, CATL unveiled Qiji Energy, a battery swap solution for heavy-duty trucks. Similar to the Chinese power battery giant's EVOGO solution for passenger cars released last year, Qiji Energy supports flexible use of the number of batteries.

With a capacity of 171 kWh in a single battery block, heavy trucks can choose to use 1-3 blocks, and the entire battery replacement process takes only a few minutes, CATL said.

In the vehicle-battery separation model, a heavy truck can save RMB 30,000 ($4,190) to RMB 60,000 in annual costs, CATL said.

CATL's move is expected to further boost the electrification of heavy trucks, CITIC Securities said in the research note today.

The penetration of electric heavy trucks is expected to accelerate in areas with higher requirements for range and economy, the team said.

The note also said that 's first electric heavy truck, the Semi, which began deliveries on December 2, 2022, has a range of 800 km at 37 tons fully loaded and has met the criteria for wide-scale commercial operation.

Electric heavy-duty trucks have shown good economic performance in both the US and China, and the Tesla Semi could help the industry grow more rapidly in the US, the team said.

In China, electric heavy-duty trucks will be adopted preferentially in the short term in scenarios including coal industrial parks, steel industrial parks, and sanitation trucks, driven by policy.

By 2025-2030, market forces will drive more growth in the sector as electric heavy trucks improve in economy and range, according to the team.

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CATL launches battery swap solution Qiji Energy for heavy-duty trucks

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NIO Q1 earnings: Deutsche Bank’s first look

reported weak first-quarter underlying results but showed surprising Opex discipline to start the year and also presented a better-than-feared outlook for second-quarter sales, Edison Yu's team said.

NIO (NYSE: NIO) today reported weaker-than-expected first-quarter earnings, but emphasized on the analyst call that more prudent cash management will follow, as well as expressing confidence in delivering 20,000 vehicles per month in the coming months.

As usual, Deutsche Bank analyst Edison Yu's team provided their first impressions of the earnings report.

Here's what the team had to say.

1Q23 Earnings First Look

NIO reported soft underlying 1Q results, largely as previewed but showed surprising opex discipline to start the year, and also initiated a better than feared 2Q volume outlook.

Deliveries for the first quarter were already reported at 31,041 units, leading to revenue of 10.7bn RMB, vs. our/consensus 10.9bn/11.7bn forecasts, hurt by lower ASP.

Gross margin of 1.5% was below our 2.5% forecast (consensus >7%), driven by downside in vehicle margin (5.1% vs. our 6.5%), partially offset by better "other" margin (-21.0% or +870bps QoQ).

Opex of 5.5bn was materially below our expectations, both on R&D and SG&A.

All together, adjusted EPS of (2.51) came in better than our/consensus estimates.

Management provided a stronger than expected outlook for 2Q23, calling for 23,000-25,000 deliveries. This compares to our 23,000 unit forecast and suggests June will be up materially QoQ (~11,000 at mid-point vs. just 6,155 in May) as the new ES6 ramps up quickly.

We suspect there were concerns June may see some supply chain constraints that don't appear to be materializing. This translates into 8.7-9.4bn RMB in revenue, vs. our 9.0bn forecast.

Looking beyond, management is targeting >20,000 deliveries per month in 2H including 10,000 of new ES6 in July. This will likely be difficult to achieve (sustain at least), in our view, given underperformance of the sedans (ET5, ET7) and we don't think management will get credit for this.

On vehicle margin, 2Q will still be under pressure with 3Q recovering back to double digits and 4Q >15%.

R&D is expected to still trend around 3-3.5bn (non-GAAP basis) per quarter and SG&A will step up sequentially in 2Q although the CEO's tone suggested certain incremental spend could potentially get pushed out at least until the performance of core NIO stabilizes.

Lastly, NIO is officially pushing out its operating profit breakeven target by a year (or less), which is long overdue based on our latest modeling.

NIO Q1 earnings miss expectations, gross margin drops to 1.5%

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CATL shares plunge after Morgan Stanley downgrades rating to underweight

Second-tier battery makers may adopt a more aggressive pricing strategy to gain market share in the second half of the year, and could face increasing risks to its market share and margins in the domestic market, Morgan Stanley said.

Morgan Stanley downgraded its rating on CATL, citing market share risks, sending shares of the Chinese power battery giant tumbling in morning trading.

"We downgrade CATL to UW as we think second-tier battery makers may adopt more aggressive pricing strategies to gain market share in 2H23," analyst Jack Lu's team said in a research note sent to investors earlier today.

As of press time, CATL shares traded in Shenzhen were down about 6 percent to near their lowest point of the year.

Earlier this year, Morgan Stanley upgraded CATL to equal weight, while being bearish on most battery material makers, as it believes CATL is better able to respond to slowing demand and leverage its cost advantages and bargaining power across the broader value chain.

Now, Lu's team believes that the dual-sourcing battery strategy of local EV companies may help the Tier 2 battery makers achieve their goals, while CATL may face increasing risks in terms of market share and margins in the domestic market.

In February, CATL launched a lithium rebate program to trade cheap lithium resources for market share. However, the subsequent plunge in lithium prices to below RMB 200,000 per ton has led to significant uncertainty about the program, the team said, adding that they have not received any further news about the program.

Meanwhile, battery makers have been offering fairly significant price cuts against the backdrop of falling lithium prices in the second quarter, the team noted.

"Our checks with tier-two battery makers indicate that the price cuts could be in the range of 10-20% during the quarter, with some battery makers likely offering more aggressive cuts than others," the team wrote.

Such actions could threaten CATL's market share in its domestic market, and market share potential is an important stock price driver, the team said.

CATL's power battery installed base in China was 10.26 GWh in April, ranking first with a 40.83 percent share, but down from 44.95 percent in March, China Automotive Battery Innovation Alliance (CABIA) data from last month showed. Data for May is Expected to be available in a few days.

(NYSE: NIO) and (NASDAQ: LI) are bringing in new battery suppliers instead of making CATL their sole supplier, Lu's team noted.

"With many new models being launched in the domestic EV market, we think CATL's domestic market share could come under pressure," the team said.

As background, since late last year, regulatory filings for NIO's new NT 2.0-based models have shown battery suppliers that include the smaller CALB in addition to CATL.

Last month, NIO filed to use semi-solid-state batteries from Beijing WeLion New Energy Technology in its models.

On February 8, Li Auto officially launched its first five-seat SUV, the Li L7, and announced the introduction of Sunwoda Electric Vehicle Battery and Svolt Energy as new battery suppliers.

More and more Tier 2 companies are adopting increasingly aggressive pricing strategies, and CATL may have to do the same, according to Lu's team.

Despite a short-term recovery in value chain orders, there will still be excess battery capacity in the short term and price competition is inevitable, the team said.

In addition to the market share pressure it faces domestically, Lu's team believes CATL's overseas path is increasingly uncertain.

"Some investors have argued that CATL's market share overseas is yet to see signs of decline; however, in our view CATL's overseas market is under increasing scrutiny and becoming more and uncertain, limiting visibility," the team wrote.

CATL has tried to penetrate overseas markets through exports and localization of production, but both pathways are increasingly at risk due to geopolitical tensions, particularly in the US, the team said.

Notably, Lu's team stressed that if the cost of battery materials and minerals continues to fall, this could give car companies more room to pursue new technologies and other battery performance metrics.

"If this is the case, CATL could regain any lost market share and continue to dominate the global battery market, leveraging its strong R&D capabilities and bargaining power over the supply chain. Our bull case scenario assumes 60% global market share in the long term," the team wrote.

Global EV battery market share in Jan-April: CATL 35.9%, BYD 16.1%

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NIO’s new order intake hits year-to-date high with launch of new ES6, Morgan Stanley says

Confirmed orders for the ES6 accounted for 35-40 percent of new orders in May, meaning inflows since the model's launch in the last week of May have been quite meaningful, Morgan Stanley said.  |  US | NIO HK | NIO SG

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The new ES6 is critical for NIO (NYSE: NIO) to turn around its weak sales performance. So what has the model contributed to NIO since its launch? A new research note from Morgan Stanley provides a good reference.

NIO's overall new order intake hit a year-to-date high, boosted by the launch of the new ES6, analyst Tim Hsiao's team said in a research note sent to investors on June 5.

The team said they have been tracking some feedback from startups' major sales channels in major Chinese cities since early last year to better understand the latest market dynamics.

The team shared their key findings in their research note while noting the limitations of their sampling methodology.

Confirmed orders for the ES6 accounted for 35-40 percent of new orders in May, implying quite a meaningful inflow since the model hit the market in the last week of May, the team said.

As background, NIO officially launched the new ES6 on May 24 and delivered it to its first owners the same night, the fastest from launch to delivery in the company's history.

Including the battery, the new ES6 has a starting price of RMB 368,000 ($51,680), making it NIO's least expensive SUV.

NIO saw overall traffic at its flagship stores in Tier 1 cities increase 30-40 percent month-on-month in May and continued that momentum in early June after the company brought the new ES6 to market, Hsiao's team said, citing their latest checks.

"Overall store traffic at the stores we track is back to the level seen this February but still 20% below last September's level, when the company rolled out ET5," the team said.

NIO stores' retail conversion rate -- the ratio of orders to traffic -- remained largely steady at 5 percent in May, the team said, adding that consumers need more time to get a closer and deeper look at the new model and they expect conversion rates to climb gradually with broader test drives.

Hsiao's team believes the starting price for the new ES6 looks a bit conservative, but their checks last week at major NIO flagship stores in Tier 1 cities suggest that order momentum has been picking up.

"Certain stores we talked to further suggest that NIO's orders as a whole exceeded 9k units in May. Within this, ES6 basically dominated order inflow after taking confirmed orders from last week of May," the team said.

On a full-month basis, the new ES6 accounted for more than 35 percent of total orders, which suggests a quite meaningful turnaround at the end of the month, the team said.

Orders for NIO look a bit overly concentrated at the moment, Hsiao's team said, adding that some salespeople they interviewed suspended order intake for the ES8 and EC6 during the model changeover.

NIO's sedan models, such as the ET7, saw orders drop by about 20 percent in May from a year earlier, according to the team.

"ET5 and the all-new ES6 contribute about 80% of new orders, implying likely greater volatility if other high-margin models fail to catch up," the team said.

Notably, NIO is still in the process of getting the new ES6 capacity to climb, and the model contributed very little to deliveries last month.

The EV maker delivered 6,155 vehicles in May, down 7.55 percent from April and down 12.37 percent year-on-year, according to data released June 1.

The deliveries included 2,396 SUVs and 3,759 sedans, NIO said.

NIO will complete the capacity ramp for the new ES6 in June to deliver vehicles as soon as possible, Jim Wei, the company's senior vice president of customer operations, said in a June 1 announcement of May delivery figures on the NIO App.

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NIO Q1 earnings preview: Struggling along for another quarter

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NIO Q1 earnings preview: Struggling along for another quarter

Deutsche Bank expects to report soft results for the first quarter, with downside risk to margins, though some relief in on the way.

NIO (NYSE: NIO) will report first-quarter unaudited financial results on Friday, June 9, before the US markets open. As usual, Deutsche Bank analyst Edison Yu's team provided their preview.

"NIO is suffering from weaker-than-expected demand and is facing its greatest adversity since nearly going bankrupt in 2020," the team said in a research note sent to investors today titled "Struggling along for another quarter."

The team expects NIO to report soft results in the first quarter, with downside risk to margins, and a very weak outlook for sales, and margins in the second quarter.

First quarter earnings

Previous data showed that NIO delivered 31,041 vehicles in the first quarter, slightly above the lower end of the guidance range of 31,000 to 33,000 vehicles.

NIO's previous revenue guidance for the first quarter was between RMB 10.93 billion and RMB 11.54 billion, implying year-on-year growth of about 10.2 percent to 16.5 percent.

Yu's team expects NIO to report revenue of RMB 10.9 billion in the first quarter, with a gross margin of 2.5 percent and adjusted earnings per share of RMB -3.07.

This compares to the current analyst consensus estimates of RMB 11.7 billion, 7.4 percent, and RMB -2.66, respectively, in a Bloomberg survey.

Looking ahead, Yu's team expects NIO to deliver 21,000-23,000 units in the second quarter.

NIO delivered only 12,813 units in April and May combined due to very low demand for the ET7 and ES7, the team noted.

The EV maker delivered 6,155 vehicles in May, down 7.55 percent from 6,658 in April, according to data released on June 1.

Why the weak sales?

While production and supply chain issues appear to be resolved, underlying demand for NIO's premium BEVs has been disappointing as customers opt for gasoline models from German luxury carmakers BMW, Mercedes-Benz, Audi and EREVs, Yu's team said.

The team attributed NIO's recent weak sales to 3 main factors. The following is from their research note:

1. NIO's pricing is the highest amongst the start-ups and premium BEV demand has been generally weak across the board.

2. The premium segment appears to be electrifying more slowly which may be counter-intuitive to those outside China. Based on our analysis of the premium SUV market (>300k RMB), the BEV mix is only 12% YTD, compared with PHEV (includes EREV) at 18%, leaving 70% for ICE.

This compares with the overall market that is 21% BEV and 10% PHEV, showing customer preferences are quite different depending on the sub-segment.

Our read is the EREV value position is resonating with a much broader audience than anticipated which Li Auto has done a very effective job at maximizing.

3. We believe NIO's brand appeal has hit a wall of sorts as it is struggling to get momentum outside of Shanghai (and surrounding provinces) and also beyond finance/tech social circles.

To illustrate this, we look at the performance of NIO's best-selling ET5. Nearly 40% of sales mix comes from this region and ET5 sells quite poorly in the south despite in theory having the broadest appeal amongst NIO's offerings.

Moreover, based on our channel checks, affluent older customers simply are not buying into the brand (yet) and still prefer traditional BBA cars.

Management will need to figure out ways to augment the appeal of its unique services such as battery swapping. For existing customers, the usage is actually quite high, having set records during recent holiday (69k swaps in one day or ~20% of car parc).

Some relief on the way

NIO officially launched the new ES6 -- the best-selling NIO SUV in history -- in China on May 24, and deliveries began the same night.

In addition to the new ES6, NIO will also begin deliveries of the new ES8 and the ET5 Touring, a derivative of the ET5 sedan, this month.

NIO's deliveries in June will get a boost from a full month of new ES6 deliveries and partial contributions from the ET5 Touring, Yu's team said.

The new ES6 starts at RMB 368,000, higher than expected, as many potential buyers are comparing it to the Li Auto Li L7, which starts at RMB 319,800, the team said.

(Image credit: CnEVPost)

For the ET5 Touring, the team expects pricing to be at RMB 335,000 - RMB 345,000, slightly higher than the regular ET5.

NIO management aims to capitalize on the success of the 001, which proves there is a sizable local market for luxury sport EV wagons, the team said.

Yu's team expects NIO to see only a minimal improvement on vehicle margins in the second quarter.

"While lower battery input costs should help by at least 1-2% sequentially along with phasing out of aggressive promotional activity on first-gen 866 models, this will be partially offset by lack of overhead absorption/higher D&A as overall volume in 2Q will be down materially compared with 1Q," the team wrote .

As sales improve in the second half of the year, auto margins should return to double digits, the team said.

On the operating cost side, with sales under so much pressure, Yu's team suspects NIO management may be forced to show some level of restraint.

"We are skeptical NIO can achieve 'core' breakeven in 4Q23 and overall breakeven in 2024," the team wrote.

Also, cash burn will intensify due to declining deliveries, similar to what XPeng is experiencing, the team said, adding that they suspect NIO management will roll back its previous RMB 10 billion capex outlook.

Notably, the team remains bullish on the company's prospects, despite many investors have lost patience after multiple sales and margin disappointments.

"We think the stock is already embedding in a very negative path forward and we reiterate NIO's longer-term strategy of having multiple brands, holistic charging infrastructure, and an aspirational ecosystem can still ultimately win out once the dust settles on the EV wars," The team wrote.

NIO's local peers react to launch of new ES6

The post NIO Q1 earnings preview: Struggling along for another quarter appeared first on CnEVPost.

For more articles, please visit CnEVPost.

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