Nio has no new models in the first three quarters of 2024, sales growth is likely to be low, and it may need to offer price discounts for its existing models amid stiff competition, BofA said.

BofA Securities downgraded its rating on Nio (NYSE: NIO) to Neutral from Buy, saying that competition in China's electric vehicle (EV) sector will become fiercer and that Nio's sales growth may be lower as it has no new models in the first three quarters of 2024.

Analyst Ming Hsun Lee's team cut their price target on Nio to $9 from $11 in a January 9 research note sent to investors, implying limited upside of 14 percent.

The team also noted that on the positive side, they still like Nio due to a brighter outlook for sales from the fourth quarter of 2024 through 2025 and improving financial position with CYVN investment.

Specifically, the team provided two reasons for the rating downgrade:

(1) Nio does not have new models for 1Q-3Q24, therefore its volume sales growth could be lower;

(2) Nio (and likely all of China EV peers) may need to provide price discount on its existing models, and may spend more on marketing campaigns and sales networks to facilitate the launch of its second and third brands, leading to a higher OPEX than previously expected.

There are 130 new models launched or to be launched between late 2023 and 2024, Lee's team said, citing their channel check.

Competition is not only in the mass-market segment, but also in the high-end and premium EV segments, including Huawei alliance, BYD Denza, BYD Fang Cheng Bao, Li Auto (NASDAQ: LI), and Xpeng (NYSE: XPEV), according to the team.

Against this backdrop, price competition will become more intense in 2024, as evidenced by Li Auto's recent price cuts of RMB 30,000 on the Li L7, Li L8, and Li L9, and the Xpeng X9's official price was lowered by RMB 29,000 from its pre-sale price, the team said.

Nio will revamp and upgrade its existing models in 2024, but the number of new models is lower than its peers, with only one new model under the second brand to be delivered in the fourth quarter the team noted.

Nio's management has previously said that the main Nio brand will not launch new models in 2024, but will have regular annual facelifts.

The first model for Nio's sub-brand codenamed Alps is an SUV, which is scheduled to be launched and begin deliveries in the second half of the year, local media outlet LatePost reported yesterday.

In the second half of the year, Nio will launch a second brand for the mass market, which will bring new growth to the company while serving more users, William Li, the company's founder, chairman and CEO, said in a recent employee letter.

Given the intense competition, new EV models in China typically face declining sales after 3-6 months on the market, which could have a negative impact on Nio's sales, BofA said.

The team lowered their 2024 sales forecast for the Nio to 195,000 units from 210,000 units previously.

To increase sales, Nio may need to maintain a competitive pricing strategy on its current models. This will be partly offset by better cost control, price cuts towards parts suppliers and greater scale, the team said.

Meanwhile, to facilitate the launch of its second and third brands, Nio is likely to invest more in marketing campaigns and sales network, according to the team.

The team expects Nio's sales growth to pick up from the fourth quarter of 2024 as it starts delivering its first model under its second brand and the Nio ET9 in in the first quarter of 2025.

Lee's team expects Nio's sales to reach 350,000 units in 2025, a 79 percent year-on-year increase.

In addition, Nio received two investments from Abu Dhabi investor CYVN in the second half of 2023, which could help improve Nio's cash position, according to the team.

"Nio's cash burn in 1Q-3Q23 was around RMB17.5bn ($2.5bn), according to our estimate. As a result, CYVN's $2.2bn investment will support Nio's operation and cash flow for at least a few more quarters, easing investors' concerns on Nio's cash position on hand," the team wrote.

BofA maintained its Buy rating on Xpeng and Li Auto, but lowered its price targets on them.

The team lowered their price target on Xpeng to $18 from $24, implying 42 percent upside. They lowered their price target on Li Auto from $62 to $55, implying a 62 percent upside.

Full text: Nio CEO William Li's 1st letter to employees in 2024