A deal can completely change the narrative for a company. This just might be the case for NIO (NIO), so says Morgan Stanley analyst Tim Hsiao.
Back in April, the Chinese electric vehicle company inked a deal with the city of Hefei in which it secured a $1 billion investment from several state-owned companies in the city. As per the terms of the agreement, NIO set up its headquarters in Hefei. It should be noted that the company’s factory, which it operates along with Anhui Jianghuai Automobile Group, is already in Hefei.
Weighing in on the implications, Hsiao stated, “Hefei government's recent funding injection into NIO and its improving credit access make NIO much more financially competitive vs. EV/ICE peers. This should underpin NIO's value proposition of being a domestic luxury EV brand, with superior brand loyalty.”
That being said, several factors have caused Hsiao to view NIO in a different light, telling investors he “underestimated the upside potential from scale benefit, synergies from extended industry collaboration and the stock's self-reinforcing momentum.”
What are these factors? For starters, based on NIO’s Q2 vehicle margin beat driven by a favorable mix of high-margin ES8, Hsiao estimates total vehicle margin could increase from 11% in 2020E to 23% in 2022E. This will likely be “powered by significant scale benefit that will expand vehicle margins and enhance working capital via more efficient supply chain management.”
Additionally, the Battery-as-a-Service (BaaS) program carries significant volume potential. Hsiao argues that by offering lower usage costs, NIO will see 10-36% incremental vehicle sales in 2021-2030. He added, “More importantly, with closer engagement with government and major players via BaaS, NIO can strengthen its position in the EV ecosystem by defining industry standards.”
There’s something else that comes into play here. “Stock performance, funding access and industry franchise together create self-reinforcing momentum and make NIO an even stronger player to grow its operations and investment value. Despite performing more like a trading stock nowadays with significant volatility, it's also a growth stock with long-term value unfolding amid recent operational progress,” Hsiao explained.
Summing it all up, the Morgan Stanley analyst commented, “Supported by a well-thought long-term growth strategy, underpinned by more substantial mid-term profitability/cash flow improvement with surge in scale, we believe NIO deserves a further valuation re-rating.”
Based on all of the above, Hsiao joined the bulls, upgrading his rating from Equal-weight to Overweight. The price target also gets a boost, with it moving from $12 to $20.50. Should his thesis play out, a minor potential twelve-month gain of 3% could be in the cards.
Other analysts are more cautious. 3 Buy ratings, 3 Holds and 2 Sells have been assigned in the last three months. The $13.83 average price target implies 30% downside potential. (See NIO stock analysis on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
This article was originally posted on TipRanks.