{UAH} NIO: Strong Competitor In Booming EV Space

Sep. 10, 2020 2:34 AMNIO Limited (NIO)TSLA, XPEV

Summary

• NIO has a relatively unique business model in an increasingly competitive industry.
• NIO's strong standing with the Chinese government should give it an advantage in the massive Chinese market.
• NIO faces a great deal of competition from Tesla and other Chinese EV companies.

NIO (NIO) is one of the most promising electric vehicle companies in the auto industry. This Chinese electric-vehicle maker is looking to cement a strong long-term foothold in the rapidly growing EV market. The recent success of Tesla (TSLA) has only benefited NIO by putting a greater spotlight on the company. With the EV mania reaching all-time highs, investors should take a closer look at NIO.

NIO is well-positioned in the rapidly growing EV industry.

Source: NIO

Major Growth Opportunity

At this point, it is clear that EVs will play a major role in the auto industry moving forward. Although Tesla is currently dominating the space, NIO is making a convincing case as a strong second-place competitor. NIO is taking full advantage of the major growth opportunities in the EV market, especially in China. In fact, the company delivered 10,331 vehicles in Q2 2020 compared to the 3,553 vehicles delivered in Q2 of 2019.

The EV market is expected to reach ~$800 billion by 2027, which would translate into a CAGR of 22%. Much of this growth will come from the Asia-Pacific region, which is where NIO primarily operates in. The advancements being made in EV are rapidly changing the auto landscape and threatening the dominance of ICE vehicles.

Highly Innovative

NIO is forging its own path in the EV industry. While most EV companies look to Tesla as a source of inspiration, some companies appear to be outright copying Tesla, from Tesla's car design to its general business model. Tesla has even accused major EV company Xpeng (XPEV) of stealing its autopilot source code.

NIO clearly has a mind of its own when it comes to EVs. The company's EC6, ES8, and ES6 models are all well-designed EVs that do not appear to mimic Tesla models. NIO is also building an EV ecosystem and community unlike that of any other company through the use of its NIO Houses and NIO Spaces.

NIO is also notably relying on battery swap technology to build out a comprehensive EV infrastructure. The company recently rolled out its BaaS (Battery as a Service), which would let users swap out batteries in a matter of minutes. This saves far more time than battery charging and could be ideal in high density populations like China.

NIO is building out a large battery swapping infrastructure, which stands in contrast to the more traditional battery charging infrastructure.

Source: NIO

Government Backing

A Chinese EV company will likely own a sizable piece of the market over the long-term. The Chinese government has shown a willingness to heavily support its domestic companies, especially in high-tech industries. The sheer size of the Chinese market will also help bolster Chinese EV companies.

NIO currently appears to be the Chinese government's favored pick in the EV space. The government is a big reason why NIO is even competitive in the EV market today. In fact, NIO uses state-owned automobile manufacturer JAC Motors as its contract manufacturer. Moreover, NIO secured a $1 billion loan from state investors, which essentially provided the company a financial lifeline. Government support of NIO will continue to give the company far more room for error moving forward.

NIO currently uses state-owned JAC Motors as a contract manufacturer. NIO's close ties to the government gives the company an obvious advantage.

Source: Jiang Sheng/China Daily

Challenges Moving Forward

Despite NIO's strong position in the Chinese market, the company still faces a great deal of competition from other Chinese EV companies and of course Tesla itself. Moreover, the Chinese government could easily shift its support away from NIO if other companies prove to be more capable over time.

Realistically, the Chinese government will likely support all of its major EV makers to varying degrees. However, NIO will still have to remain relatively competitive in order to keep its favored status. In an industry that could rapidly become one of the most competitive in modern times, NIO is still a very risky investment.

Conclusion

NIO appears to be relatively expensive at its current market capitalization of ~$23 billion and P/S ratio of ~13. However, NIO also has a great deal of upside potential in a booming industry. The company is currently one of the best bets to dominate the massive Chinese EV market in the long-term. While NIO is still in its early stages, the company has shown a great deal of potential so far.

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