Chinese investment bank CICC raised its price target on Nio by 206% to $52, maintaining its Outperform rating, after introducing software and services considerations into its valuation of Nio.

According to CICC, the US stock market has recently continued to show high enthusiasm for China's new energy vehicle target, which implies that the market expects Nio to maintain its leadership in intelligent driving and services, and to generate revenue and profitability with low marginal costs and fleet size.

CICC expects Nio to sell nearly 400,000 vehicles by 2025 due to Nio's improving product portfolio and increasing penetration of new energy and luxury vehicles.

The following is a translation of the full CICC report.

Nio: Business Performance Continues to Improve; Valuation Introduces Software and Services

Nio's third-quarter results exceeded market expectations.

Nio's third-quarter revenue was RMB 4.53 billion, up 146% year-over-year and 22% sequentially.

Its net loss attributable to the parent company was RMB 1.19 billion, down RMB 1.37 billion from the same period last year and down RMB 0.02 billion from the previous quarter.

The results exceeded market expectations, as gross margin continued to improve at a faster pace and strong expense control performance was achieved.

Nio's operating performance continued to improve with faster gross margin improvement, improved expense control, and good cash flow.

In the third quarter, the company's operating indicators continued to improve.

The vehicle gross margin increased by 4.8ppt to 14.8%, which is a good level among local Chinese auto companies. We believe it is mainly due to the decrease in manufacturing cost caused by battery price reduction and scale effect.

At the same time, the operating expense ratio dropped another 5.8ppt q-o-q, reflecting the improvement in operating efficiency.

The company also recorded positive operating cash flow for the second consecutive quarter.

At the end of the third quarter, the company's cash on hand reached RMB 22.2 billion, up RMB 11.1 billion from the end of the second quarter, thanks to positive operating cash flow and a US$1.73 billion issuance increase.

The company also has a strong cash position, having received an RMB 10 billion bank credit facility in July this year.

Nio's cash flow and productivity guidance exceeded expectations, and the penetration of BaaS and other services is increasing rapidly.

During the conference call, the company explained that Nio will turn full-year operating cash flow positive in the fourth quarter, while capacity will be ramped up to 7,500 vehicles per month by January of next year, exceeding market expectations.

In addition to profitability from vehicle sales, the company has introduced a wide range of software and service options, including Nio Pilot and BaaS battery rental, to enhance the customer experience and diversify the company's profitability.

The NOP Pilot assisted loading rate is currently at 50%, and BaaS penetration has rapidly increased to 35% of new orders.

Introduce software and service valuation using segment valuation methods.

The US stock market has recently continued to show high enthusiasm for China's new energy vehicle target, and the stock price has climbed rapidly.

In our view, this implies the market's expectation that the company will remain a leader in smart driving and services, continue to advance, and generate revenue and earnings with low marginal costs and fleet size.

Therefore, in our valuation methodology, we look at the long term 2025 on the one hand and use a segmental approach on the other.

We expect Nio to sell nearly 400,000 vehicles in 2025 as a result of the company's improving product portfolio and increasing penetration of new energy and luxury vehicles.

We also expect the penetration of Nio Pilot Select and All-Inclusive packages to reach 40%, 50%, and 90%, respectively, in 2025.

We use P/E and P/S methodologies to value the hardware (vehicles), software (smart driving), and services (service hassle-free package). We assign 25x P/E, 60x P/E, and 20x P/S to 2025, corresponding to a target market capitalization of RMB 633.8 billion in 2025 and a target price of $52 in 2021, respectively.

Earnings Forecast and Valuation

Due to the rapid improvement in production and sales, and the effect of cost control and cost reduction, we lower our forecast for Nio's 2020 net loss by RMB 2 billion to RMB 3.6 billion, and lower our forecast for its 2021 net loss by RMB 0.9 billion to RMB 3.5 billion.

Due to the switch in valuation methodology, we raise our target price by 206% to $52 based on the new segment valuation method. We maintain an Outperform industry rating with 12% upside potential in the target price.

Risks

Subsequent sales were less than expected, and the development of intelligent driving was less than expected.