By Sam Boughedda
Morgan Stanley analyst Tim Hsiao maintained an Overweight rating and $31 price target on Chinese electric vehicle company NIO (NYSE:NIO) Monday, despite stating near-term margin pain is "inevitable."
Speaking on his first-quarter NDR takeaways, Hsiao said in a note to clients that while the margin pain is inevitable, it is most likely transitional, with supply dynamics remaining fluid and NIO reaffirming its view that the worst has passed.
"NIO reaffirmed its outlook for a sales uptrend from June onwards... Doubling the aggregate output capacity to 30k/month towards the end of 2H will give NIO's new models and upgraded SUVs full market opportunity from 3Q onwards. Factory 1 could run at full rate sometime in 3Q; factory 2 would give extra impetus in 4Q. There's no surefire way to guarantee supply of all components, but NIO has made adequate preparation with multi-sourcing, additional strategic stock, enhanced architecture, etc.," said Morgan Stanley’s Hsiao. "The company expects a notable volume ramp from ET5, which is likely to hit 10k units per month 3-4 months after launch, On top of that, NIO expects aggregate monthly deliveries of ES8, ES6, and EC6 with upgraded intelligent hardware (e.g., more powerful smart cockpit, surround view camera, and 5G connectivity) will remain steady at the 9-10k mark, backed by competitive product proposition in the midsize to large SUV market."
"The aforementioned models in the pipeline should lay a favorable foundation for vehicle delivery to double sequentially in 2H22," the analyst added.
However, he acknowledged that 2Q margin pressure is the key concern.
"NIO shed some light on its margin trajectory against a tough industry backdrop. It expects that vehicle gross margin is likely to drop 3-4ppt QoQ in 2Q, owing to unfavorable scale and battery/chip costs, as highlighted during the 1Q earnings call."
Hsiao added: "However, it is looking for improving model mix, price hikes, and scale benefits to enable gross margin to recover to 1Q's level in 3Q or 4Q if raw material prices level off. In addition, margin of services & others should improve in 2H."