JP Morgan dismantles Short-seller report, remains positive on NIO

Written by Cláudio Afonso | | LinkedIn | Twitter

JP Morgan analyst Nick Lai issued a note on Wednesday about NIO after the short seller report released by Grizzly Research on Tuesday. The analyst explained that this system used by NIO and Weineng is similar to the one used by OEMs when it comes to vehicle financing and that “every battery held by Wuhan Weineng has a corresponding underlying subscriber”.

The firm remains positive on NIO believing that the company’s vehicle margin will “hit a trough of ~15.5% in Q2 2022 but rebound strongly to ~18-19%” in the second half of 2022.

JP Morgan Comment

“Following several investor queries, we see two areas meriting comment:
1 — We view NIO as a manufacturer whose revenue and profitability is based on production and distribution of the cars it sells, plus potential monetization of its software business in the future.

However, we do distinguish between the business models. We view Wuhan Weineng (19.8% owned by Nio; other shareholders include CATL 10.9% and other state-owned or private investors, on the other hand, as an asset management company who owns the underlying asset (i.e. the battery) and whose revenue and earnings are based on monthly subscription fees (paid by the car buyers over seven years of the leasing term) and also residual value beyond the seven year lease term. We do see analogues to OEMs and vehicle financing. An OEM books all the revenue when it sells the cars to customers while the AFC (whose underlying asset or collateral is the car) recognizes monthly mortgage fees paid by customers.


2 — We also note questions as to whether Nio has oversold an excess of batteries to the battery asset management company, boosting NIO‘s revenue or profitability. NIO‘s latest HK IPO prospectus has detailed disclosure and discussion on its BaaS business. Specifically, those
19.000 units of batteries were only part of the total underlying assets (40,053 units of
batteries) when Wuhan Weineng issued ABS in September 2021. Wuhan Weineng can continue to issue more ABS to expand its portfolio in the future with either remaining batteries or future batteries (from new BaaS subscribers) as underlying assets. This disclosure also indicates that every battery held by Wuhan Weineng has a corresponding underlying subscriber.

We remain positive on NIO Following the company’s recent Q1 2022 result call and comment on the 2022 outlook, we believe the company’s vehicle margin will hit a trough of ~15.5% in Q2 2022 but rebound strongly to ~18-19% in 2H 2022. Likewise, we project Nio to deliver ~70-80% QQ sales growth in Q3 2022 and another ~30% in Q4 2022″, the analyst concluded.

Earlier today, the EV maker reacted to the report saying it is “without merit and contains numerous errors, unsupported speculations, and misleading conclusions and interpretations”.


NIO Statement

“The report is without merit and contains numerous errors, unsupported speculations and misleading conclusions and interpretations regarding information relating to the Company. The Company’s board of directors, including the audit committee, is reviewing the allegations and considering the appropriate course of action to protect the interests of all shareholders. The Company will make additional disclosures in due course consistent with the requirements of applicable rules and regulations of the Securities and Exchange Commission, the New York Stock Exchange, The Stock Exchange of Hong Kong Limited (the “SEHK”) and the Singapore Exchange Securities Trading Limited (the “SGX-ST”)”, NIO wrote.

“The Company emphasizes its continued and unwavering commitment to maintaining high standards of corporate governance and internal control, as well as transparent and timely disclosure in compliance with applicable rules and regulations”, the company concluded.

During a Twitter Space held after the release of the report, the research firm CEO Siegfried Eggert was answering some questions from investors and enthusiasts of the electric vehicles sector. When the CEO of Grizzly Research was asked about how many vehicles NIO has on the roads as of today and replied “100,000 vehicles”.

Although we don’t know the exact number of vehicles that NIO has delivered as of June 28, it is certainly much more than the 100,000 mentioned by Grizzly Research. On April 7, 2021, the company announced the production of the 100,000th vehicle. Six weeks ago (May 15) NIO delivered its 200,000th vehicle and ended the month with cumulative deliveries of 204,936 vehicles — after delivering 7,024 units in May 2022.

In fact, the number mentioned by Grizzly Research was achieved 14 months ago (April 2021) and the EV maker should have around 215,000 – 217,500 vehicles on the road, 115,000 more than the number indicated by the author of the report.

Written by Cláudio Afonso | | LinkedIn | Twitter