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Electric Vehicles

Nio 2Q22 earnings disappoint but management believes turnaround is in sight

07 Sep 2022

NIO's 2Q22 losses were wider than expected, but management expects margins to improve in 3Q22 and deliveries to accelerate in 4Q22

NIO ET5

TL;DR

  • NIO’s reported 2Q22 losses were wider than expected, as vehicle gross margins declined further on higher battery costs. Encouragingly, management expects margins to improve slightly in 3Q22.
  • NIO delivered 25,059 vehicles in 2Q22, a decline from the previous quarter. Deliveries in 3Q22 is expected to remain fairly weak at 31,000 to 33,000 vehicles due to supply chain hiccups. 
  • On a more positive note, NIO has maintained its guidance for 100,000 vehicles to be delivered in 2H22, suggesting deliveries will “break record every month”  in 4Q22. This is driven by an easing of supply chain constraints as well as ramp up of ET5 production. 
  • To achieve that NIO would have to ensure that there are no further unexpected production disruptions for the rest of the year. Investors looking at the long-term potential of the Chinese EV market can also look at a diversified ETF.

What happened?

As one of the largest Chinese electric vehicle (EV) companies, the earnings of NIO is always closely watched by investors.

This is especially so after Warren Buffett’s Berkshire Hathaway recently reduced its stake in BYD, leading to concerns about the health of the Chinese EV sector. 

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NIO reported a net loss of RMB 2.745 billion in the second quarter of 2022, widening from a loss of RMB 1.825 billion in the previous quarter. 

The losses incurred were larger than what investors were expecting, which led to an initial negative reaction to the share price. 

Are NIO’s 2Q22 results as bad as what the headlines suggest? Let’s take a deeper look

What we learnt from the 2Q22 results

#1 – Margins under pressure but expected to improve in 3Q22

One of the things that disappointed investors was the further decline in NIO’s vehicle gross margins in 2Q22. 

Gross margin fell to 16.7% in 2Q22 from 18.1% in 1Q22 and 20.3% in 2Q21.

In explaining the decrease in the margins, management of NIO said that this was due to high battery cost per unit.

We discussed the higher battery costs in our previous article “Would we buy NIO as it lists in Singapore”, and noted that battery costs make up about 30% of the cost of producing an EV.

The good news is that management of NIO expects a “slight increase of vehicle margin in Q3” as the company has taken multiple measures to improve margins. 

NIO has raised the prices of certain vehicles and most of the positive impacted will be seen in 3Q. 

Also, most of its higher-priced ES7 model will start to be delivered in 3Q, which is also expected to help improve NIO’s margins. 

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#2 – Production impacted by Covid-19 related lockdowns in 2Q22

Earlier, NIO had announced that it delivered a total of 25,059 EVs in 2Q22, a decline from 25,768 units in 1Q22. 

The slowdown was due to COVID-19 lockdowns in China, extreme weather conditions as well as supply chain uncertainties. 

With 10,052 vehicles delivered in July and 10,677 vehicles delivered in August 2022, NIO is projecting that total deliveries will reach 31,000 to 33,000 vehicles in 3Q22. 

This will imply that deliveries will still remain fairly weak in September 10,271 to 12,271 units. 

Management noted that they have seen some supply chain hiccups in July and August, and the COVID-19 resurgence in some parts of China in September has also affected its supply chain. 

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#3 – Management optimistic on 4Q22 deliveries

On a more positive note, NIO still expects to meet its delivery target of 100,000 units in the second half of 2022.

Based on the 3Q delivery guidance, it would suggest that volumes in the 4Q could reach a record of 68,000 units. 

How will NIO achieve this? 

Firstly, it is encouraging to note that NIO believes the bottleneck is not about demand, as NIO has seen continued demand growth for electric vehicles. 

For example, NIO has seen more orders for the ES7 model compared to its initial expectations. 

Rather, management believes that the key constraint lies in the production capacity of the supply chain and its own production capacity. 

NIO has started making preparations to ramp up on its deliveries, including running two factories to meet the increase in production. 

This will involve starting mass production on its ET5 electric vehicle model at a large scale in its second factory. Management believes that production of the ET5 will surpass 10,000 units in one month. 

Management believes that the supply chain bottleneck for the ES7 and ET7 will be resolved in October, just as the production of ET5 is expected to ramp up. 

This is expected to allow NIO to “break record every month” on its deliveries. 

What would Beansprout do?

For those expecting NIO to show a quick turnaround, it seems like the company’s production targets for 3Q22 is not too encouraging.

However, 4Q22 is when deliveries are expected to increase significantly as supply chain issues get resolved and production of the ET5 model ramps up. 

We’d continue to keep a lookout for the COVID-19 situation in China to determine if it would lead to further unexpected production disruptions for the rest of the year. 

If you are interested to invest in the long term structural growth of the Chinese EV sector without having to analyse NIO’s quarterly delivery and margins, it might be worth looking at a Chinese EV exchange traded fund (ETF) which provides diversified exposure. 

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