Forget ISIS and the Taliban – China is now America’s #1 enemy, if you listen to and believe Western media. Once an undisputed title held by the Russians, China has become America’s new favourite communist state to villainise. This wildly inaccurate and politicised narrative has perpetuated fear towards China, and its market has suffered.
To make matters worse, China hasn’t exactly helped itself by destabilising its own market. Over USD 800 billion was wiped out in Beijing’s brutal approach to tackling monopolies. As a result, there are no longer any Chinese companies in the world’s top 10 companies in terms of market cap.
Beijing’s relentless crackdown has been used in the West to demonstrate the “dangers” of investing in China. Reporters and Western governments alike relished China’s self-infliction and reiterated the narrative that socialism and communism are bad, but democracy and capitalism are good. In response, both foreign and domestic investors have fled from China markets.
However, one Chinese company seems to have been granted a free pass with domestic and foreign investors alike: Nio [
Often spoken in the same breath as Tesla, Nio has been praised for its potential to steer the electric vehicle (EV) industry in a revolutionary direction. But as a Chinese company, why have investors exempted Nio from their Sinophobia?
More Than Just A Meme Stock
Gamestop and AMC are synonymous with the “meme stock” syndrome, but Nio is also another name that bounces off the walls of the WallStreetBets Reddit echo chamber. Whilst Gamestop’s and AMC’s rather questionable businesses will have difficulty in shaking off the meme stock, Nio has the benefit of a cult following whilst actually being a decent company.
Whether it’s Redditors sharing excessive call option gains or its users sharing declaring that they’re all in, the $NIO Gang is strong. With some expecting Nio to reach USD 70 and others expecting it to surge 200%, the rallying power of WallStreetBets in pumping the Chinese EV maker is formidable.
Much like Gamestop, the WallStreetBets crowd is also taking the David vs. Goliath approach to Nio. Representing Goliath, Citron Research was historically defeated as WallStreetBets Davids forced the giant to close its shorts position in Gamestop after Wall Street egregiously dragged the stock down. Just prior to the Gamestop scandal, Citron had executed short positions in Nio, which also triggered the WallStreetBets army.
In one thread, the WallStreetBets crowd ridiculed Citron for shorting Nio upon its meteoric rise. Galvanising to takedown Citron – or any investment firm they chose – is a powerful weapon that shouldn’t be underestimated. “They tried to take out NIO too 🚀🚀🚀🚀🚀”, wrote one commenter on a separate thread.
Nio has become a pawn in the war between institutions and retail investors but it’s one that the WallStreetBets crowd holds dearly.
Furthermore, it appears WallStreetBets is even carrying out due diligence in Nio and showing appreciation for its fundamentals.
Comments such as “undervalued. Deliveries coming up 10-12k and NIO day. Expect a HugE 2022 for NIO”, “Well 65b market cap, it deserve at least 100b with such a large market” and “Still waiting for the $50 mark when the ET7 goes on sale and it spreads to Norway” suggest the WSB crowd are not just nefariously pumping the stock.
WallStreetBets hasn’t been kind to China either. One WallStreetBets Redditor even pledged to short China on Labor Day in an effort to “save the world”. The community also mocked BlackRock for advising to triple down on China stocks.
But yet, their love for NIO supersedes their distaste for China stocks, suggesting the Chinese EV maker is competing in a race of its own.
Nio might be a meme stock but it’s also a bankable stock in its own right.
The Tesla Situation
Let’s address the elephant in the room – Tesla. The world’s leading EV maker has simultaneously cornered the EV market whilst brutishly disrupting the internal combustible engine (ICE) market.
However, Nio’s approach and vision for the EV framework is entirely different from Elon’s. Instead of relying on charging EVs, which currently takes hours, Nio is focusing on battery swapping.
As we explained in a prior article, Nio’s battery swapping system allows users to change their entire battery in under 5 minutes. Tesla’s superchargers can take 40+ minutes to fully charge its cars.
One Nio battery swap costs around CNY 180 (USD 27). A full charge at a Tesla supercharger costs USD 15–20. What’s more, users can subscribe to Nio’s on-demand battery subscription for CNY 980 per month, which allows customers to lease the battery from the company.
Nio’s Battery-as-a-Service (BaaS) ensures that customers won’t need to worry about the longevity of their batteries, whilst ensuring their customers’ vehicles remain fully charged efficiently and conveniently.
However, the EV space need not be binary. Tesla’s and Nio’s contrasting approaches in EV battery power is a result of healthy competition. Tesla and Nio can co-exist and inspire each other’s innovation. After all, Mercedes-Benz, BMW and Audi all co-exist and car enthusiasts are ultimately appreciative of it.
In our prior article regarding Tesla and China, we conceded that their fleeting relationship is unsustainable. Once China establishes its own dominance in the EV space, its need for Tesla will lessen. Furthermore, Tesla’s self-driving-data-harvesting mantra won’t be welcomed by Beijing. Although Nio will need to tread cautiously in its autonomous driving tech and data collection (to avoid the same fate of Didi), China will continue to reserve a place for it if/when it dispenses with Tesla.
China Loves Nio Too, But There’s Still A Catch
As China looks to amend its carbon notoriety, Beijing is looking favourably to domestic EV makers, as it pledges to be carbon neutral by 2060.
One initiative has been to supercharge the EV industry, with over USD 60 billion handed out as China aims to phase out conventional gas-burning cars – known as ICE vehicles – by 2035.
China’s newfound love for renewables explains why EV makers such as Nio are not regarded as vulnerable to Beijing’s scrutiny that other domestic tech companies fell victim to.
After spending decades playing catchup in the ICE space, often resorting to imitating their German counterparts, China now wants to lead the world in the EV sphere. If China wants to win the EV race, it cannot afford to jeopardise domestic producers in the space.
Consequently, Nio has received around USD 1 billion in government funding so far. And it partners state-owned Jianghuai Automobile Group to manufacture its EVs in China.
The Chinese EV maker has also enjoyed robust demand from the domestic market too. In its 3Q 2021 report, Nio reported a 102.4% YoY in revenue to USD 1.34 billion generated from vehicle sales.
However, Beijing’s kindness towards the EV space has not gone unnoticed by savvy entrepreneurs in China. EV competition is heating up in the Middle Kingdom and Nio is constantly being put to the test.
Whilst Nio impressively doubled EV sales in 3Q, rivals Li Auto and Xpeng tripled their sales. Worse still, in October, Nio’s EV sales fell 27.5% but Li Auto and Xpeng triple-digit YoY growth.
The Chinese EV environment is both Nio’s strength in terms of government support but also its weakness; healthy competition can spark innovation but an oversaturated market leaves little breathing space for the company.
Nio Is Still Better
Nio’s sales figures might be weaker than its Chinese rivals, but its target consumer base is different too. Xpeng, Li Auto, BYD and even Tesla are battling to make EV vehicles accessible to your average Joe. Meanwhile, with an average selling price of USD 68,600, Nio is targeting the luxury car market. Its September average sales price was RMB 47,500 higher than the average price of high-end brands. Nio’s pricing was even RMB 41,600 higher than BMW’s RMB 399,700.
If Nio cracks the luxury EV car sector, it can reinforce the theory that the Chinese EV maker can share the EV space with Tesla.
Financially, Nio is showing promising signs despite “weaker” sales. Vehicle margin reported in 3Q was 18% compared to the year’s prior of 14.5%. Gross margin was 20.3% vs last year’s 12.9%. Rapidly increasing margins suggest that Nio could be approaching profitability sooner rather than later.
Nio has also begun expansion out of China. Last month, the company opened the doors of Nio House Oslo – its first European showroom. Norway’s relatively lower costs (compared to the likes of the UK and Germany) and vast geographical space will prove to be the testing ground for Nio’s European entry. Just last week, Nio installed its first battery swap station in Norway.
Much like Tesla, Nio is taking the direct-to-consumer approach in selling its vehicles, harvesting a close relationship with its buyers. Referral and loyalty schemes that have proven popular will be tested in Europe, and will undoubtedly catch on. Currently Nio has the highest customer referral rates in the history of the auto world at 69%. If all goes to plan, Nio hopes to expand into Germany next year.
Nio Day 2021
Nio’s highly anticipated annual event – Nio Day – is set to take place on 18 December 2021 in Suzhou. In its 2Q report, CEO William Li revealed that the company will deliver three new products based on Nio’s exciting Platform 2.0 in 2022, including flagship premium smart electric sedan ET7.
Nio’s second vehicle is predicted to be the mid-sized sedan ET5. Priced below the ET7, the ET5 will serve as a direct competitor to BMW’s 3 Series and Audi’s A4.
The third vehicle is rumoured to be a luxury MPV or a high-performance sports coupe called the EF9.
Li also teased a potential sub-brand that could accommodate cheaper cars in a relationship that mirrors Lexus-Toyota or Audi-VW.
If Nio does indeed present the rumoured vehicles at Nio Day, it will demonstrate its capacity to reach each echelon of the car industry; luxury cars, sports cars, family cars and potentially more affordable options.
Beijing’s tech crackdown and data concerns have raised red flags for investors evaluating China’s market. However, China’s interest in blossoming their EV sector gives genuine credence to those considering planting their money in the Middle Kingdom.
China’s EV scene offers a wealth of growth opportunities for investors, but Nio is winning the race as it stands.
Nio’s competitive advantage in infiltrating the luxury car market, coupled with its remarkable battery swapping technology is being propelled by the company’s aggressive western expansion plans.
Tesla might appear to be the enemy but competition from the US giant will be healthy in the long run as the EV firms share the space.
From an investor’s standpoint, Nio’s growth potential is alluring and at a stock price in the low USD 40 range, it’s worth adding to your portfolio for EV exposure. That said, be cautious about allocating too much of your portfolio to Nio – at the end of the day backing any horse in the EV race still relies heavily on speculation. Nio is still worth a punt nonetheless.
Disclosure: At the time of writing, the author of this article owned shares in Nio (NIO:US).