Edison Yu's team sees the narrative for Nio shifting from supply constraints to a product super cycle, reiterating that the company is their top pick in the Chinese EV industry this year.

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Nio's deliveries have stagnated over the past few quarters, but that is expected to change this year, shifting the narrative from supply constraints to a product supercycle, Deutsche Bank's Edison Yu's team said in a research note sent to investors today.

"Following 4Q earnings last week and an investor meeting with management yesterday, we come away with increased conviction Nio is embarking on the most important product cycle in the company's history," the team wrote.

Critically, Nio's ET7 and ET5 are set to be the most desired cars in the Chinese market this year, potentially becoming category-defining products in what many see as an increasingly competitive market, the team said.

Nio's management has also materially improved the resilience of its supply chain and is investing aggressively to ensure that its ecosystem delivers a top-notch premium experience even as the automotive market grows rapidly.

Yu's team forecasts Nio sales of 170,000 units in 2022 and 320,000 units in 2023, with upside if new models grow faster than expected.

The team reiterates that Nio is their top pick in China's electric vehicle (EV) industry this year with a $50 price target.

Nio (NYSE: NIO, HKG: 9866) closed at $22.17 on Wednesday, and that price target implies about 126 percent upside.

"Looking ahead, we can envision the stock being choppy until late 2Q when ET7 deliveries start picking up, paving the way for the stock to outperform for the rest of the year on a relative basis," the team wrote.

As of press time, Nio was down 3.5 percent in the US, likely due to new delisting concerns.

This year will be a pivotal one for Nio strategically and financially, with deliveries of its three new models set to begin, starting with the ET7 flagship sedan just this week, the team noted.

Nio has been largely stuck at a peak of 10,000-11,000 deliveries per month since last September, but that will change in the second quarter, when the run-rate is expected to increase to at least 13,000, Yu's team said.

Nio's management aims to maintain sales of the current model at around 10,000 units and then gradually increase ET7 sales each month, including 1,000 in April, 2,000 in May and 3,000 in June, Yu's team said, adding that this implies second-quarter sales of about 36,000 units.

But given the impact of the Covid lockdown in Shanghai, Yu's team trimmed that number somewhat to a forecast of 35,000 units. This means that in the third quarter, ET7 should reach 4,000-5,000 units per month.

In addition to the ET7, Nio will start delivering two other models of the NT2.0 platform - the ES7 and ET5 - this year.

The Nio ES7 SUV will be built at Nio's existing Hefei plant and deliveries could start in August and then increase to 4,000-5,000 deliveries by the end of the year, Yu's team said.

The mid-size sedan ET5 is being built at NeoPark's new plant and should begin deliveries in September, with a goal of reaching 10,000 units per month within 3-4 months of launch, the team noted.

To support this expected growth, Nio's management has made additional efforts to improve supply chain resiliency.

This includes securing four additional dedicated battery lines from CATL, bringing it to seven in 2022, placing orders directly with high-value chip suppliers (GPU, LIDAR), and multi-sourcing low-value chipsets, according to the team.

"This gives us confidence Nio will have much more robust supply chain management ability with the new NT2.0 platform," the team wrote.

Even if there is some cannibalization of sales of Nio's first-generation NT1.0 platform-based SUVs, its total monthly run rate could reach 25,000/month in December and then increase further to 30,000 in the first half of 2023, according to the team.

"Overall, we tweak up our deliveries forecast from 167,000 to 170,000, with potential upside should new models ramp faster/earlier than anticipated. The new NeoPark plant will also be used to accommodate 3 new models in 2023," the team said.