NIO Inc

Nio’s second-quarter revenue jumped 69% from last year, but missed the low end of previous guidance. Ongoing product mix optimization led to a 21% recovery in vehicle pricing and an 8-percentage-point improvement in vehicle margin, despite competition in the domestic market.

Why it matters: Margin improvement was further supported by operating leverage, with operating expenses declining 6%, resulting in an 86% reduction in net loss from a year earlier. While revenue and net loss broadly met our expectations, vehicle margin fell short due to rising input cost pressures. Nio acknowledged pressure from rising battery and memory chip prices this year. As a result, despite a product mix upshift with robust demand for the higher-priced ES8 large sport utility vehicle, Nio conservatively guided vehicle margin to stay flat at the second quarter’s level for the rest of 2026. We cut 2026-30 vehicle sales estimates by 2%-8% and revenue by 1%-6% to factor in softer volume guidance. Reflecting a lower vehicle margin forecast due to raw material price hikes, partly offset by lower research expense assumptions, we lift 2026 net loss by 5% and reduce 2027-30 net profit by 4%-10%.

The bottom line: We lower our fair value estimate to USD 6.00 per ADS (HKD 46.50 per share) from USD 6.50 (HKD 50.00), implying 0.7 times 2027 price/sales. Shares are undervalued. We see upside to our valuation if management can maintain the sales trend and improve profitability.

Between the lines: For the third quarter, management guided vehicle delivery to grow 24%-27% year on year to 108,000-111,000 units. The midpoint of guidance implies September delivery of 37,700 units, which we think falls below market expectations. Nio is confident monthly vehicle sales could reach 40,000 units in the fourth quarter, as it expects the auto market to further recover toward year-end, and guides new launches to drive 40%-50% volume growth in 2027. We believe this is too optimistic, given diminishing subsidies.

Our fair value estimate is USD 6 per ADS, based on our expectation for Nio to continue gaining market share from legacy automakers. Riding on the industry electrification trend and increasing consumer adoption for NEVs, we anticipate rising demand for the company’s NEV models and improving profitability on economies of scale over the next few years. Our fair value estimate implies a forward 2027 price/sales ratio of 0.7 times.

We expect the company’s revenue to expand at a CAGR of 17% in 2025-30, mainly driven by an expansion in vehicle delivery volume. We estimate an increasing NEV penetration rate, coupled with a demand shift to Chinese local brands, to lead to total volume growth of 14% CAGR over the next five years. Despite international and local automakers continuing to aggressively bring new NEV models to market, we believe Nio has successfully built a premium brand and will benefit from vehicle upgrade demand.

An increasing scale effect would improve the company’s profitability, in our view. We project the group’s operating margin to expand to 2.7% in 2030, from negative 16.9% in 2025. The diffusion of NEV technology and battery energy density would result in higher profitability over the longer term, reaffirming our improving margin assumptions. As a result, we anticipate the company’s net loss to narrow during 2024-26, reaching breakeven in 2027 with CNY 2.4 billion in net profit.

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: intangible assets, such as brand equity, best exemplified by Ferrari, and cost advantage. At this stage, we do not yet see either of the two 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 250,000-CNY 600,000.

The approach is similar to Tesla’s branding strategy of releasing its Roadster sports car 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.

However, as the industry becomes increasingly competitive, it is 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.

Nio has successfully built its premium brand image, which will differentiate the company from its mass-market competitors and generate extra pricing power for the company’s electric cars.

Advancing battery technology and charging solutions will ease range anxiety on electric cars. Chinese consumers’ soaring demand for EV cars will benefit NEV carmakers such as Nio.

Younger-generation car buyers place a high value on in-vehicle technology and user experience, giving Nio a competitive advantage over traditional automakers.

Intense competition in China’s auto industry will place pricing pressure on automakers. The company will need to offer promotions and discounts to consumers, which will weigh on its vehicle margin outlook.

Rising competition in the NEV market indicates legacy OEMs will defend their market share with aggressive new model launches.

The launch of mass-market brand Onvo will impair Nio's premium image and dilute the company’s focus on the premium NEV segment.