Chinese electric vehicle maker Nio on Tuesday reported third-quarter revenue that beat Wall Street expectations alongside record delivery volumes and double-digit profit margin, though share prices fell 3.3% by market close on Wednesday.
The China’s most valuable EV maker earned revenue of RMB 4.5 billion ($666.6 million) in the third quarter, up 146% from the same period a year earlier and higher than the consensus estimate of $663.2 million compiled by Bloomberg.
Gross margin improved sequentially to 12.9% from 8.4%, though rival Li Auto outperformed with an impressive 19.8% margin during the same period. Quarterly losses narrowed 11% quarter-on-quarter to RMB 1.05 billion, lower than the RMB 1.15 billion posted by its peer, Xpeng Motors.
Nio in Q3 nearly tripled on an annual basis the number of vehicles delivered to 12,206 units, and forecasted a new high for Q4 of 17,000 cars. Its output growth rate exceeds its peers. However, challenges loom as the company fights for market share amid growing competition from both domestic and international rivals in the crowded Chinese EV market.
Nio improves margin
During its Tuesday earnings call, Nio attributed gross margin improvement mainly to an increase of RMB 10,000 per unit in average selling price for the quarter as sales for the higher-priced ES8 crossovers rose in Q3. Deliveries of Nio’s first model recovered by September when it sold 1,482 units following the launch of a revamped model after hitting bottom in February at just 36 units.
Significantly cheaper material costs including battery packs boosted margin, vice president of finance Stanley Qu said during the earnings call. A top client of Chinese battery supplier CATL, Nio in March said that it expected battery costs to decrease more than 20% year on year in the fourth quarter.
The Shanghai-based EV maker aims to further drive sales and boost gross profit. It is forming ambitious volume and service expansion plans for the coming months, setting a monthly production target of 7,500 vehicles in January, up 50% from September.
Another initiative for next year is constructing 300 newly designed battery swap stations across the country. The company’s recharging network numbered 158 battery replacement facilities as of September. Each of its swap stations cost RMB 2 million on average to set up, but that number will be decline by half next year thanks to design improvements, CEO William Li Bin told Chinese media earlier this year.
Currently the best-financed Chinese EV startup, Nio’s cash on hand almost doubled to RMB 22.2 billion in Q3. It expects to maintain cash burn at a modest rate looking ahead, Qu said during the call, pledging to ensure service network expansion is well planned and executed. Most of the capital expenditure for capacity expansion will be covered by its manufacturing partner JAC Motors, according to Nio financial chief Steven Feng.
With gross margin shy of double digits, Nio’s may continue to struggle for profits amid internal issues such as production delays. Supply chain partners continue to weigh on production capacity.
Currently, Nio customers have to wait for up to six weeks for deliveries as demand rises and parts remain in limited supply. Nio hopes to reduce that time length to three to four weeks, according to Li. Li said Nio would reach its target capacity of 7,500 units in January, while acknowledging it would not immediately be able to shorten delivery times.
Xpeng faces the same issue, with CEO He Xiaopeng last week acknowledging to analysts that the company was encountering “a temporary bottleneck” in battery supply, which would probably continue for a few months. Still, He said supply chain partners would expand their capacity to meet Xpeng’s needs in the next six to 12 months.
Faced with growing competition from both automakers at home and abroad, both Nio and Li Auto are expected to accelerate spending on research and development to gain an edge in self-driving technologies. Nio’s Li during the call said the firm’s second-generation technology platform, called NT 2.0, equipped with “the most advanced chipset in the industry” and enhanced artificial intelligence capabilities, would be deployed on its first sedan scheduled for release early next year.
The EV maker, backed by Chinese internet giant Tencent, recently released its advanced driver assistance function, Navigate on Pilot, in head-to-head competition with Tesla and Alibaba-backed Xpeng. Li Auto plans to catch up by tripling the size of its self-driving team to 200 scientists and engineers by June, and launching a similar function as early as 2021.
Competition heats up
US-listed Chinese EV makers have collectively delivered 70,399 vehicles as of October this year, lagging Tesla’s nearly 100,000 China-made sedans during the same period, according to figures from China Passenger Car Association.
Concerns linger about the company’s profitability after short seller Citron Research last week warned that Nio’s valuation was too high to be justified by market share, along with a possible sales hit by the upcoming launch of Tesla’s locally built Model Y early next year.
Li maintained during the call that Nio targets a more premium consumer segment than Tesla with a higher average selling price. With deliveries in October more than double on an annual basis, it is clearly not affected by Tesla’s most recent price cuts, he said. October deliveries for Xpeng, whose P7 model directly competes with the Model 3, declined 14.4% from a month earlier.
Nio’s share price has surged over 1,000% since January, indicating that a correction may be due along with near-term pressure from Tesla. Still, around 63% of analysts covering Nio have rated its shares “buy.” Bank of America, Deutsche Bank, and JP Morgan on Wednesday raising their price targets on the stock, according to a CNBC report.
“We believe Nio will continue to take share in the premium segment from traditional ICE incumbents, …ultimately emerging a major winner in the China auto market by the middle of the decade,” Deutsche Bank analysts led by Edison Yu wrote in report on Wednesday.