NIO shares up 43% in a week ahead of earnings

NIO (NYSE: NIO) shares were worth $62 in mid-January last year. But last week, they had cratered by 77% to $14 apiece, battered by a supply chain crisis worsened by the Ukraine war, rocketing inflation, and rising Chinese political tensions.

But the NIO share price has now recovered to $20. And a further recovery could be imminent ahead of Thursday’s full-year earnings.

NIO share price: production predictions

NIO’s upcoming results will be closely watched as a bellwether for China’s EV sector. Chinese EV sales rose 153% in 2021, representing nearly 50% of global sales. And NIO is widely viewed as the closest competitor to EV market leader Tesla.

It delivered 24,439 vehicles in Q3, up 11.6% quarter-over-quarter and 100.2% year-over-year. At the time, CEO William Bin Li boasted of ‘another all-time high quarterly delivery…our new orders reached a new record high in October.’
Moreover, revenue doubled to $1.34 billion, while gross profit rose an astonishing 240% to $309.3 million year-over-year.

However, NIO’s growth story could be running into trouble. While Q3 gross margin was at 20.3%, geopolitical developments could see lower margins and wider losses in Q4 and beyond.

EVs use twice as many semiconductors as ICE cars, and semiconductor-critical Palladium is at a record high. Nickel, essential to EV battery production, has seen price spikes so dramatically that it’s prompted multiple trading halts in London and Shanghai.

The increased raw material costs have seen Tesla increase its US prices twice. BYD has also increased prices, unable or unwilling to absorb rising costs. But NIO has told Sina Tech that ‘for the benefit of our customers’ it will maintain price stability ‘in the near term.’ This strategy could eventually result in increased market share, but at the expense of margin now.

And NIO delivered 25,034 vehicles in Q4, an increase of only 2.4% quarter-over-quarter. Reporting only 15,783 deliveries in January and February, a fall in deliveries in Q1 2022 seems likely.

But Deutsche Bank thinks NIO could up production to 25,000 cars a month by the end of 2022, praising its battery-swapping technology as a ‘leading service infrastructure that no domestic automaker has been able to match’.

And NIO has the ambitions to match, as it launches three new models and brings a second factory online later this year.

Chinese geopolitics

37 million Chinese citizens are now back in lockdown, as the ultra-infectious Omicron variant strains the country’s ‘dynamic zero’ covid-19 pandemic policy. Hong Kong hospitals are overrun, with the city seeing 30,000 cases and 200 deaths every day.

UBS economist Arend Kapteyn believes ‘this is its highest 7-day rolling case count since the start of the pandemic, and a number of large manufacturers have already reported production suspensions.’ NIO deliveries seem likely to be hit as the pandemic re-escalates.

The situation has deteriorated so rapidly that Chinese Premier Li Keqiang has warned a more ‘scientific and targeted’ pandemic response is needed, hinting that a more flexible policy is about to be rolled out.

But there’s also fallout from the Russia-Ukraine war to contend with. China is refusing to condemn Russia, with US President Biden warning of ‘consequences’ if it provides military or economic aid to the aggressor. And Chinese Vice Foreign Minister Le Yucheng has called the sanctions placed on Russia ‘outrageous,’ blaming NATO for backing it ‘into a corner.’

This has heightened the risks for Chinese stocks listed in the US. The Securities and Exchange Commission had already been preparing to delist US-listed Chinese companies over their general refusal to hand over audit documents. NIO launched an additional listing in Hong Kong this month in anticipation of a possible delisting in the US.

However, the Chairman of China’s Financial Stability and Development Committee Liu He has attempted to calm investors, saying ‘the Chinese government supports companies from across industries to list abroad.’ As talks to resolve the stand-off continue, the Chair has promised Beijing will ‘boost the economy in the first quarter’ by introducing ‘policies that are favourable to the market.’

The key issue Beijing does not want Chinese companies to hand over audit documents that could include strategically sensitive information which could be used by the US to gain a competitive edge.

However, a compromise may be in the works, with Chinese regulators reportedly asking some companies including Alibaba, Baidu, and JD.com to disclose audits. This might be enough to satisfy the SEC, for now, striking a balance between China’s security worries and US transparency concerns.

And if a long-term deal is reached, the NIO share price could soar.

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