Deutsche Bank cuts estimates on NIO, but maintains buy rating ahead of 1Q release

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Deutsche Bank reiterated a Buy rating on Nio Inc (NYSE:NIO) and cut their 12-month price target on the stock to $13.00 (from $19.00) ahead of the electric vehicle maker’s 1Q23 earnings release. NIO is scheduled to report 1Q earnings this Friday before U.S. markets open.

Analysts are expecting weak results from NIO after the company reported April and May delivery results for a combined 12,813 units, bringing the company's 1Q deliveries to 31,041 (low-end of 31,000-33,000 guidance).

During the quarter, NIO aggressively cleared out their older 866 inventory as they prepared to revamp their entire SUV lineup. This required them to increase promotional activities, which ended up hurting their profit margins. According to Deutsche Bank's estimates, NIO is projected to achieve 10.9 billion RMB (RMB 1 = $0.1407) in revenue, with a gross margin of 2.5% and an adjusted EPS of (3.07). In comparison, the consensus figures anticipate 11.7B RMB in revenue, a gross margin of 7.4%, and an adjusted EPS of (2.66).

The analysts wrote in a note, “While production and supply-chain issues appear to be resolved, the underlying demand for its premium BEVs has been disappointing with customers opting for BBA gasoline models and Li Auto EREVs. We attribute this underperformance to a combination of factors: high pricing, customer preferences, and ineffective marketing efforts. Looking ahead, the new ES6 and ET5 Touring should boost volumes, further supported by 3 additional new models (EC6, EC7, ES8) that will fill any remaining gaps in the SUV line-up.”

June is expected to experience a significant boost in sales due to the full month of new ES6 deliveries, which historically has been NIO's best-selling SUV model, as well as the partial contribution from the ET5 Touring. According to CarFans' survey data, NIO received an average of 90 pre-orders per store for the ES6, with 20 of them confirmed by deposit within the first 72 hours after the official launch.

Regarding vehicle margin, Deutsche Bank predicts only minimal improvement for the second quarter. While lower battery input costs and the phasing out of aggressive promotional activities on the first-gen 866 models are expected to contribute to a sequential improvement of 1-2%, this positive effect will be partially offset by the lack of overhead absorption and higher depreciation and amortization costs. This is due to the overall volume in the second quarter being significantly lower compared to the first quarter.

Putting it all together, Deutsche Bank cut 2023 volume forecast by 55k to 155k units, representing a year-on-year increase of 27%. The adjustment translates to an estimated 57B RMB in revenue, which takes gross margin down 340bps to 9.2% (vehicle margin of ~13%).

Despite these revisions, Deutsche Bank maintains its Buy rating on NIO. Analysts believe that the stock is “already embedding in a very negative path forward,” and they reiterate their confidence in NIO's long-term strategy of having multiple brands.

Shares of NIO are up 2.98% in mid-day trading on Monday.