NIO: 4Q19 earnings call analysis: Why losses are getting worse despite rising sales

On March 18, 2020, NIO officially released its fourth quarter 2019 financial report. The financial report shows that NIO's total revenue in the fourth quarter of 2019 reached 2.848 billion yuan, a month-on-month increase of 55.1%. The total revenue for the whole year of 2019 was 7.826 billion yuan, a year-on-year increase of 58%. In the fourth quarter, NIO delivered 8,224 products, setting a new annual high. Although revenue and sales increased, the company's gross profit margin was still negative (-8.9%). The loss was even more serious (an increase of 13.6% month-on-month) . 2019 can be said to be a turbulent year for NIO. The company's founder Li Bin was even called "the worst person in 2019." With NIO's release of its third quarter financial report in December 2019, showing a narrowing of losses, the market's confidence in NIO has once again increased. So how did NIO's financial report perform in the fourth quarter? What positive and negative information were revealed in the financial report and conference call? Please see below to reveal them one by one.

[ · The quarter-on-quarter net loss has intensified, and the problem of losing money on every car sold has not fundamentally changed]

According to NIO's financial report, the company's net loss in the fourth quarter of 2019 reached 2.865 billion yuan, up 13.6% from the previous quarter and down 18.2% from the previous year. Although NIO's losses narrowed in the third quarter and its financial performance improved, the company failed to maintain its good momentum in the fourth quarter and its net loss increased.

At the same time, NIO's fourth-quarter car sales revenue increased significantly month-on-month, and the loss of sales profit margin also eased month-on-month. However, the negative gross profit margin of car sales still casts a shadow on the company's development. NIO, which loses money on every car it sells, did not make any fundamental improvements in the fourth quarter. With the increase in sales, scale production has reduced the loss per car, but the loss diluted by the sharp increase in sales is limited. For specific information, see the table below.

In the fourth quarter, NIO's sales increased significantly, achieving a record high in sales. However, sales revenue fell year-on-year, and sales profit margin also fell sharply year-on-year. The official said that the main reason was that "the proportion of ES6 sold in the fourth quarter of 2019 was higher than that in the fourth quarter of 2018, and the price of ES6 was lower than that of ES8." On the other hand, the limited profit margin of ES6 is also a major factor limiting the profit margin of automobile sales.

Operating expenses are still the biggest source of losses, and layoffs have very limited effect

Finally, let's take a look at the big money burner - operating expenses, which is also the main reason why NIO's sales increased but its losses widened month-on-month . First, the R&D expenses in the third and fourth quarters of 2019 were relatively balanced and relatively stable. On the one hand, the R&D expenses of EC6 increased, and on the other hand, NIO optimized its personnel and completed the R&D investment of ES6, which offset each other and achieved a balance.

Although R&D expenses were stable, sales and administrative expenses increased by RMB 400 million (net loss increased by RMB 300 million), a 32.8% increase from the previous quarter. This also directly led to a sharp increase in NIO's operating losses in the fourth quarter. Although NIO is still laying off employees, the increase in marketing activities (such as NIO DAY) and the cost of optimizing the sales network have overshadowed the previous streamlining of the workforce.

Summary: NIO's sales performance was excellent in the fourth quarter of 2019, but making money is still a problem. The situation of losing money on every car sold is difficult to solve, operating expenses are increasing, and the effect of reducing staff is not apparent.

In addition, NIO's financial performance in the third quarter of 2019 was good, mainly supported by the dismal data of the previous quarter. As everything returned to normal, NIO's financial report data performance in the fourth quarter was indeed unsatisfactory.

[The conference call contained a lot of valuable information, and achieving double-digit gross profit margin by the end of the year became the biggest focus]

After the release of the fourth-quarter financial report, NIO quickly held another financial report conference call, where CEO Li Bin and CFO Feng Wei and other senior executives responded to relevant issues of concern to investors and the public.

· Under the epidemic, the company expects sales to decline and financing is completed. NIO is "not short of money" in the short term

Delivery: Due to the significant impact of the epidemic on China's automobile market, NIO's demand and production capacity have also been affected. On the one hand, NIO delivered a total of 2,305 vehicles from January to February 2020. On the other hand, in the past 30 days, NIO has added more than 2,100 large customers, and the average daily new orders have returned to 70% of December last year. Therefore, Li Bin judged: We expect to deliver 3,400 to 3,600 vehicles in the first quarter of 2020 .

Data from the China Passenger Car Association shows that NIO ranked sixth in sales in February 2020

Many new energy vehicle companies have exaggerated their sales targets for 2019, but some have only achieved 1/10 of their targets. NIO has relatively stably completed its sales plan at the beginning of the year with 31,913 vehicles. Many car companies have been affected by the epidemic, but in the sales rankings released by the China Passenger Car Association in February 2020, NIO ranked sixth in the new energy vehicle market. The reduction in corporate purchases in the market during the epidemic also indirectly proves NIO's 2C (for individual consumers) attributes.

Financial aspect: The company's $450 million non-affiliated convertible bond project has been completed. This also means that NIO's hematopoietic plan in 2020 has been basically completed, but compared with the previous situation when it received a total of $650 million in convertible bonds led by Tencent and Hillhouse Capital in 2019, it still seems a bit bleak.

Improving gross profit margin has become a new direction for enterprises. Senior executives have been "challenged" many times in conference calls.

Li Bin stated directly in the conference call: The company's operating efficiency has been initially improved in 2019, and improving gross profit margin is one of NIO's core goals in 2020. The gross profit margin will reach double digits by the end of 2020. However, the company also frequently encountered "question challenges" during the conference call regarding this plan. Questioners from Wolf Research, Credit Suisse and other companies questioned the possibility of achieving double-digit gross profit margins.

In response to the doubts, NIO officially responded: In 2020, NIO will achieve a double-digit gross profit margin by the end of the year by producing 4,000 units per month, making up for the manufacturing losses of the JAC NIO factory (cost reduction of about 30%), reducing the cost of suppliers' parts (cost reduction of about 10%), and reducing the cost of battery packs by 20% per kilowatt-hour and related management optimization.

Although NIO has provided a relatively feasible solution, it is still difficult to say whether the product demand can reach the expected 4,000 units per month. If larger-scale production cannot be achieved, NIO will continue to sell one car and lose money on it. Operational optimization has been ongoing since the beginning of 2019, but until the fourth quarter, we still found that although the company has streamlined more than 10,000 people to less than 7,000 people, operating expenses and sales expenses in that quarter still increased significantly year-on-year. It seems that NIO still has a lot of room for improvement in "controlling expenses."

In terms of management, combined with relevant reports on NIO’s internal affairs such as “Young People Leaving NIO”, we also noticed that there are certain problems with the company’s management, which will also slow down the company’s development.

EC6 price is affected by Model Y, with pricing in July and delivery in September

At NIO DAY in December 2019, NIO released a new coupe SUV EC6. This sister model of ES6 has attracted a lot of attention. Regarding the progress plan of EC6, Li Bin said: We will set our price based on market conditions, especially based on the delivery of Model Y. The final price will be released around July and the product will be delivered in September.

EC6 was not included in NIO's initial product planning. The fact that NIO launched the EC6, which is not much different from the ES6, shows that the company is indeed under great financial pressure. As a sister model of the ES8, the EC6 can reduce spending on platforms, parts, modules, etc. Li Bin also said in the conference call: The company's capital expenditures in 2020 will mainly include some new models put into production and mold-related expenses. Overall, it will be less than 200 million US dollars, not particularly much. This is also one of Li Bin's ways of "saving money." In addition, the new ES8 will also begin to be delivered in April. It is exciting to see how this brand-new medium-to-large pure electric SUV will win the market in front of its cheaper little brother ES6, which has a better reputation in the past.

· The company is becoming an increasingly important customer of CATL with the launch of 100-degree battery pack at the end of the year

During the conference call, both Merrill Lynch and Morgan Stanley raised questions about NIO's plans for batteries and battery swaps. In response to the questions, Li Bin said: The company will launch a 100-degree battery pack in the fourth quarter, and the size of the battery pack will not change from the previous battery pack, and it can still be used in old models. Battery packs equipped with CTP technology will also be released, and the cost per watt-hour will be reduced by 20% compared to Q4 last year.

Regarding the relationship with CATL, Li Bin said that our cars are sold to individual users, not operating vehicles, and there is not much sales pressure after the subsidy reduction. We have become an increasingly important customer of CATL . This gives NIO a better bargaining advantage than last year (last year, the payment for the year had to be made at the beginning of the year).

Although the sales volume of 30,000 units a year is not a small number, compared with large customers with annual sales of more than 100,000 units, NIO is still not so "strong". CATL's batteries have been in short supply for a long time, and it is hard to say what level of bargaining power NIO can achieve. As for the emergence of 100-degree battery packs, it is sure to give NIO stronger competitiveness in the market where battery life is king, but the results will not be seen until the end of 2020. However, whether such a high-energy battery pack is environmentally friendly is another question.

· The battery swap system will cost at least another 100 million yuan, but the business model has not yet taken off

The 100-degree battery pack mentioned above will also have the opportunity to enter the battery replacement system. Li Bin said: NIO will accelerate the promotion of battery as a service in 2020. This service strategy will also become one of the company's strategies to increase sales. In the field of turnover batteries, the company is preparing to invest another 100 million yuan.

Buying NIO = buying the future, the battery swap system created by NIO is becoming the focus of its publicity. The battery pack has more upgrade possibilities, and the efficient battery swap model also creates the company's differentiated competition. The free battery swap service provided by NIO to the first car owner also enhances user stickiness. The investment required to configure sufficient batteries in a battery swap station is not small, and when this free battery swap lunch can start to make a profit is also a focus of investors' attention. If the free battery swap is stopped, it is hard to say whether NIO will return to the situation where few people are interested in the battery swap station before - NIO has launched battery swap, but has not yet implemented the business model of battery swap .

· Cooperation with Hefei Municipal Government will not be listed and will be used to attract RMB investors

Previously, NIO signed a framework agreement with the Hefei Municipal Government, NIO will establish its China headquarters in Hefei, and Hefei will provide resources and financial support for the operation and development of NIO China. As the final agreement is expected to be signed before the end of April, NIO did not disclose much relevant information on the relevant issues.

We note that NIO's business in China will become an independent entity to attract RMB investors, and the Hefei government will also provide investment support. However, this is not financing at the level of a listed company. From another perspective, NIO China's financing may not be disclosed to the public. We need to wait for both parties to sign a final agreement before we can learn more.

The decline in crude oil prices has made it more difficult for NIO to grab market share in the high-end fuel vehicle market

During the conference call, the questioner from JPMorgan Chase mentioned the issue of oil prices and the development of electric vehicles. Li Bin still maintained confidence in the development of electric vehicles. He also mentioned the advantages of electric vehicles in terms of ADAS technology combinations and the policy support of the Chinese government. However, he did not mention how NIO would deal with the challenges of fuel vehicles.

I still remember that when NIO released its value preservation plan in the fourth quarter of last year, Qin Lihong, president of NIO, said: NIO’s competitors have never been Xiaopeng and WM Motor, but high-end brands such as Tesla, and most of NIO’s users are converted from owners of brands such as Mercedes-Benz, BMW, and Porsche. And every time at a media conference, NIO would compare the insurance numbers of fuel vehicles of the same price, and concluded that NIO is very popular in the market in this field. Although it is an electric car, NIO seems to have always regarded luxury fuel vehicles as competitors. With the decline in oil prices, NIO’s "customer acquisition opportunities" in the field of fuel vehicles have obviously decreased.

Summary: The valuable topics and content of the conference call are basically as mentioned above. In this conference call, Li Bin and other senior executives made relatively frank statements about the current situation and future development of NIO. However, sensitive content such as the Hefei signing, Geely investment, senior executive resignation, and battery cooperation were only mentioned briefly. Many "puzzles" still need time to be solved.

As 2019 draws to a close, NIO will continue to control costs, focus on improving gross profit margins, promote battery swapping technology, and ensure the launch of new cars in 2020. However, 2020 is no better than 2019. Although the products are more mature, it is still a question whether the two less popular products, the coupe SUV EC6 and the new ES8, can bring Li Bin the expected demand of 4,000 units per month, thereby achieving scale production balance.

Summary : NIO's financial report in the fourth quarter of 2019 was average. Although sales hit a new high, losses increased month-on-month. Operating expenses are the core problem of its cost increase. In 2020, NIO will focus on improving gross profit margins, and the new ES8, new EC6, and 100-degree battery pack will also be unveiled.

Although this new car-making company, which still loses money on every car it sells, has become the leader of new car-making forces in China, its annual loss of 10 billion yuan has not changed, and the time for shareholders to make a profit is far away. The new energy vehicle market is surging, and the localized Tesla has taken the top spot in sales. Domestic brands are preparing for battle, and joint venture imported brands are eyeing them. There is not much time and opportunity left for this "five-year-old child".

via Sohu Auto