NIO (NYSE:NIO) stock is a popular investment for those who believe electric vehicles (EVs) are crucial to the global energy transition. Sometimes dubbed China’s answer to Tesla, the carmaker has a leading position in the premium segment of the Chinese EV market — the largest in the world.
It’s one of many Chinese equities that have skyrocketed in the country’s recent stock market rally. So, is now the time to buy the shares? Or might the company’s share price crash back down to earth?
Here’s my take.
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A boost from Beijing
An extensive raft of stimulus measures in China is a key factor behind NIO’s recent share price rally. The EV manufacturer’s a major beneficiary since it owns an 88% controlling stake in NIO China.
The central bank has eased borrowing restrictions for institutional investors to invest in Chinese shares. It’s also established a special re-lending facility for companies to conduct share buybacks.
In addition, benchmark interest rates have been cut, special sovereign bonds will be issued, and further measures have been announced to boost merger activity. The Communist Party Politburo’s hinted that extensive fiscal support will follow.
The scale of the package is potentially unprecedented. Deutsche Bank analysts estimate the plans amount to CNY7.5trn so far — around $1.07trn at current exchange rates.
Tread carefully
Although stimulus measures have sparked investor interest in Chinese companies like NIO, it’s wise to remain cautious.
Deflationary pressures, sluggish GDP growth, a weak property market, and a crisis in consumer confidence are still plaguing the world’s second-largest economy.
Many analysts are sceptical about whether the massive government support initiatives will be enough to shake off the current malaise. A lack of accurate economic data from official sources doesn’t help either.
Share price outlook
So, the macro picture’s complicated, it’s fair to say. But let’s delve deeper into the business to see if the stock’s worth considering today.
On the bright side, the company recently secured a $470m cash injection from three strategic investors. This is an important liquidity boost considering Wall Street analysts anticipate NIO will burn through almost $2bn in cash over the next two years. The firm finished Q2 with $5.7bn in cash on its balance sheet.
NIO’s also attempting to diversify away from the premium end of the market. Launched under a new sub-brand, the ONVO L60 model’s a more affordable alternative to NIO’s existing vehicle range. Priced to undercut Tesla’s Model Y, it has the potential to capture significant market share.
Yet fundamentally, it’s an unprofitable company in a saturated sector with strong competition. NIO also faces hurdles in expanding internationally, which is a longstanding goal.
US and EU tariffs are severely hampering these efforts. The company’s founder William Li has slammed the measures as “unreasonable“, but I fear he’s spitting in the wind amid an escalating trade war between China and the West.
Overall, I feel NIO remains too closely tied to the fate of China’s economy for me to invest. The jury’s still out on whether this is the beginning of a revival for the country, or if the downturn is here to stay. I could be wrong, but my instincts tell me this is an investment opportunity I’m happy to miss.
