NIO (NYSE: NIO) has the potential to be a worldwide powerhouse in the EV market, but years of Covid restrictions have had an impact on near-term production figures. My investment thesis is bullish on Chinese stocks, with the economy expected to improve in 2023.
Covid Takes a Hit in Q4 Delivery
As the holiday season comes to a close, NIO announced that delivery fell short of expectations. The stock dropped 8% on the news, but the damage had already been done, with NIO failing to set a new 52-week low on the bad news.
The NIO CEO warned of a difficult first half of 2023 owing to supply chain concerns. The abrupt change in the zero-Covid policy is the reason to be positive about NIO and the Chinese sector.
On Wednesday, China revealed a plan to further open the economy, including unlimited overseas travel. The US news rattled the market that entering the nation from China would require a negative test.
Given that Covid is rapidly spreading in China and sick passengers have been placed into aircraft to Milan, the US move is perhaps prudent for a limited period of time to keep infected from traveling. However, it is apparent that the restrictions will not revert to previous lockdowns until the US has been fully reopened.
Through December 20, the communist country is projected to have infected up to 250 million Chinese, with 37 million people sick on a daily basis. At this rate, half of the country will be infected by early January, and natural immunity will begin to take effect.
The rate of Covid infections suggests that the impact within China will be minimal. NIO forecasted 38,500 to 39,500 Q4 deliveries, down from a previous projection of 43,000 to 48,000. The business expects 14,763 deliveries in December, a new record high, up from 14,178 in November.
The revised guidance actually retains significant year-over-year growth, as NIO was still struggling to recover from Covid limitations in previous periods. With or without headwinds, the EV firm should build 121,500 EVs this year, establishing an easy hurdle for 2023.
NIO is aiming for a 2023 annualized manufacturing pace of 177,000 units. Even projecting the Q4 production rate brings the corporation to roughly 160,000 units for the year, far exceeding the 2022 production despite the year’s poor end.
Along with the CEO, the business issued the following statement, underlining consumer confidence and supply chain challenges that are limiting car production:
“While our employees worked hard to ensure uninterrupted operations on all fronts, we were unable to attain our full capacity, particularly when delivery and registration procedures involving users were disrupted.”
All of these headwinds add up to a more promising 2023. Investors should keep an eye out for a difficult January delivery statistic, as Covid might infect the entire country of China beginning in December. After people recover from Covid and the skies clear in early 2023, confidence in the economy should return.
The EC7 and the All-New ES8 were unveiled at NIO Day 2022 in Hefei, China. These new SUVs will be available in May and June of 2023, respectively.
NIO continues to make strides in battery-swapping technologies and autonomous car developments. The investing story hasn’t altered, but the Covid story has been erratic and is now turning into a tailwind as the new year begins.
Analysts predict that sales will increase to $14 billion in 2023, followed by a 32% increase to $18 billion in 2024. Following a speed hiccup in 2023, investors should be confident that the inevitable full reopening will get the Chinese economy back into growth mode, potentially pushing NIO to the next level.
When NIO wasn’t even making $1 billion in quarterly sales, the stock was trading above $60. Although the company is unlikely to achieve the premium P/S multiples seen in previous periods, an investor just needs a 2x to 3x forward P/S multiple to create superior profits.
The major investor lesson is that NIO is a good buy at these levels to ride the Chinese market’s resurgence. When better times return next year, the company should record excellent growth in 2023, which, along with the reopening of the Chinese economy, could send investors flocking into the stock.
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