Executive Summary

We are not experts in the auto industry so we will not go into the details. But with our common sense, we believe NIO (NYSE:NIO) is at an outrageous valuation and the fad will soon fade away. At Friday closing $9.9 per share, NIO has a market cap of $10bn, compared with Tesla of $50bn. Back in 2013, Tesla was only a $5bn company when its model S sales surpassed 10,000 units ---- we think NIO should not be valued anywhere more than $5bn since it has only delivered less than 2,000 ES8 at below production costs so far. We wouldn’t be surprised if NIO’s share price drops even further to below $2, since the company 1) has no moat at all: no track record, no brand equity, no core technology, no funding advantage; 2) faces fierce competition in China; 3) sells its only model at negative gross margin; 4) burns $1bn a year on R&D and SG&A.

NIO Snapshot

NIO is a high profile Chinese EV maker established in November 2014 in Shanghai by founder William Li (founder and Chairman of Bitauto), with the support of founders of Tencent, JD.com, and Autohome.com, among others. NIO positions itself as the “Tesla of China”, and mimics Tesla to start from the very high-end to mid-end in its products roadmap. The company’s first mass-produced ES8 SUV is a cheaper version of Tesla Model X (about half the price, since Tesla has to pay tons of taxes and tariffs to enter China).

As of August 31, 2018, NIO had delivered 1,602 ES8 SUV and had 15,778 unfulfilled reservations (6,201 with non- refundable RMB45k deposits and 9,577 refundable of RMB5k deposit). NIO has no production capacity and is currently working with JAC, a second-tier OEM in China. NIO has experienced capacity / production issues which caused several rounds of delivery delays.

NIO was listed on NYSE on September 12, 2018 by offering 160m shares at $6.26 per share (priced at the lower end and cut down the offering size), its share price closed on September 14 at $9.9.

Competition in China

NIO wants everyone to believe that they are the Tesla of China, but in reality, it faces far more competition than Tesla. Long story short, in the US, Tesla’s fleet line-up ranges from mid-range Model 3 to premium Model S and Model X, without much competition in the EV world; and Tesla in China is purely being viewed as premium. But NIO is stuck with mid-range segment since the low, mid-low, and premium segments are already very crowded (can refer to their own charts in NIO prospectus).

Unlike the US, China has many EV players and especially many EV startups with significant amount of money raised:

1.      Chinese traditional OEMs with proven EV track record: BYD, SAIC Roewe, Geely, Changan, Cherry, JAC, etc. ---- most of them had sold far more EVs than NIO

2.      Chinese EV startups: WM Motor (raised $2bn), Xiaopeng Moters (raised $1bn), Singulato (raised $1bn), Byton (Raised $700m), among others. Most of the EV startups will start to roll out their mass productions in next 3-12 months

3.      Tesla in China: Tesla will continue to dominate the premium EV market in China, until global tier 1 enters the game

 NIO vs. Tesla

Burn-rate and Sustainability

Accounting for the $1bn cash raised from IPO, NIO has raised $3.6bn to date, with approximately $1.6bn left to burn. NIO’s gross margin is far from breakeven, and in 1H 2018, its R&D burned $220m and SG&A burned $260m. So, we should expect NIO to launch secondary offerings a year from now or even sooner.

Will NIO’s battery swapping service make a difference?

I can’t comment on this and I don’t want to. On top of my head I recall Better Place went bankrupt and Tesla dropped the battery swapping project back in 2015. If anything, I would be very worried about NIO ES8’s safety issues, let’s wait and see.

Risks

1.      High short interest rate

2.      High volatility