NIO: An electric car company will rule everything
$NIO Inc(NIO.US$ Weilai Automobile (new york Stock Exchange code: NIO) is a fast-growing Chinese electric vehicle company with some unique characteristics. Although Weilai is still young and relatively small in terms of global electric vehicle sales, it seems that it may one day become one of the most relevant companies in the field of electric vehicles. Weilai is not only an electric vehicle manufacturer, but also one of the most innovative companies in this field. The revolution of charging technology and proprietary software should help Weilai build a moat, a unique selling point, and possibly create new revenue sources.
BaaS: another level of revenue
I have talked extensively about Weilai's core business in previous articles. Today, I want to pay attention to the meaning behind one of Weilai's iconic features: Battery as a Service (BaaS).
Of course, many articles have already covered this topic. However, usually, these focus on BaaS and conventional charging, or how BaaS technology makes NIO cars more attractive. However, in this section, I will focus on the impact of BaaS on NIO's revenue, which may be the case one day as a completely independent business.
Since Weilai first put forward this idea, Weilai's BaaS products have gone a long way. In April, the company reached an agreement with Sinopec Shanghai Petrochemical Co., Ltd. (new york Stock Exchange code: SHI) to create a huge network of battery replacement stations. Weilai aims to have more than 5,000 charging stations by 2024. In addition, the latest version of BaaS charging system allows car owners to replace their batteries with fully charged batteries in a few minutes without even getting off the bus. BaaS is the fastest and probably the only way to realize the convenience we have when refueling traditional gasoline vehicles.
Therefore, the question is: can Weilai monetize its BaaS, and if so, what will it look like? The short answer to this question is, yes. Ford (new york Stock Exchange code: F) has reached an agreement with Weilai to utilize Weilai's charging infrastructure.
Having said that, today's charging stations are largely unprofitable. However, these tasks are somewhat different from the BaaS system of Weilai. A big problem with conventional charging stations is that their electricity bills are much higher than those for charging cars at home at night. However, BaaS solves this problem because the replacement battery can be charged anywhere. Most importantly, what we know is that Weilai will benefit more from this business line due to government subsidies. The CPC has publicly stated that China is shifting from consumer-centered subsidies to infrastructure-based subsidies.
It is still too early, but if BaaS takes off and other manufacturers focus on this model, NIO can benefit a lot by becoming a source of infrastructure and technology. For example, Weilai can play a key role in providing the necessary charging infrastructure for Europe, which is the market it has just entered.
NIO: Monetization Knowledge
Another key area where Weilai excels is technology and knowledge, but many people may not realize this. Let's illustrate this point with some figures.
According to Tencent Technology, Weilai has 2768 patents in China, 204 patents in Europe and 193 patents in the United States. Among the patents owned in China, 1,208 are "innovation patents". This is an important fact, because the contents of "innovation patents" classified by Chinese people can be considered as "pioneering". Judging from these figures, Weilai has more patents than competitors such as LI Auto Inc (Nasdaq: Li) and XPeng Inc (new york Stock Exchange: XPEV).
By studying these patents deeply, we can see that most of these patents are related to the above battery exchange technology. Another hot research topic today is automatic driving. In this field, Weilai has 47 patents, of which 64% are still pending. Compared with Baidu Company (NASDAQ: BIDU), which owns 632 patents, this is a rather small number. Finally, I want to point out that I think one of the most successful areas of Weilai innovation is design and user interface/software. For example, Weilai ET7 has an "intelligent cockpit" powered by Weilai's artificial intelligence NOMI.
What I want to say is that maybe some people think that Weilai's weakness may be one of its greatest advantages. Many analysts seem to have doubts about the fact that Weilai does not produce automobiles, but this aspect of the automobile business is becoming increasingly irrelevant. The CEO of NVIDIA Corporation (NASDAQ: NVDA) has been quoted as saying that by 2025, cars will be sold at cost price, and software sales will provide revenue for these manufacturers.
Traditional cars seem to be taking the road of smart phones. Putting components together may be the least important value-added activity here. The most relevant is the operating system and brand value. Weilai shines brilliantly in these two fields, which may be another way that we can say that Weilai is very similar to Apple (NASDAQ: AAPL).
Valuation
I believe the above two points highlight Weilai's potential beyond automobile production. Having said that, it is difficult to quantify how these innovations will change Weilai's future revenue and profitability. What I propose here is a kind of valuation. We value Weilai at the most basic level through the income obtained from automobile sales. However, in view of the above reasons, I will defend that the P/S multiple will still be much higher than that of its peers.
Now, let's start with revenue and sales. At the core level, we can predict NIO's revenue by looking at how many cars will be produced in the next few years, and we know exactly what this might be. Recently, Weilai renewed its manufacturing agreement with Jianghuai Automobile Group [JAC]. It is said that at least before May 2024, the company's production capacity will double to about 240,000 vehicles per year.
Therefore, based on this simple production fact, we can make a very simple forecast of Weilai's income. In the next three years, Weilai will have the capacity of 720,000 new cars. Can they sell them all? In 2020, Weilai Automobile sold 43,728 vehicles. It is estimated that Weilai's revenue will double in the coming year, assuming that all revenue comes from automobile sales and the price remains unchanged, which means that 87,456 vehicles will be sold. If we reduce the growth rate in 2022 and 2023 to about 80% and 50% respectively, our sales volume will be 157,420 and 236,132 respectively. This growth is close to the current estimate, and is very in line with NIO's plan, because it seems that by the end of this period, NIO will be nearly sold at full capacity when the manufacturing agreement ends. An important point I want to make here is that in view of the recent transaction, investors should not worry about the production restrictions of Weilai. In addition, Weilai doesn't seem to struggle with demand, especially when it plans to enter the European electric vehicle market.
Now, the second point that I will argue in this valuation is that in view of the changes in the development mode of the electric vehicle industry, we should not apply industry multiples to stocks like Weilai. In my previous article about the company, I did this and predicted that the price in 2030 would be as high as $400/share. However, it can be said that Weilai should get a valuation premium. This is because literally, the company does not manufacture cars. On the contrary, it is developing a brand, proprietary technology and changing our view of charging.
Manufacturing batteries for automobiles is a business in itself. A successful company in this field is Contemporary Ampere Technology [CATL]. According to Market Screener data, the company's operating profit margin is 13%, and its revenue increased by 250% last year, with a price-earnings ratio of 114 and a price-earnings ratio of about 25.
On the other hand, as automakers begin to focus on providing cars with integrated operating systems and software, we may see companies like Weilai trading at a valuation multiple closer to SaaS companies. Companies that sell software, such as adob e Inc. (Nasdaq: ADBE) or Salesforce.com (new york stock exchange: CRM), have a price-earnings ratio of 15-20.
If Weilai Automobile sells 236,132 vehicles at an average price of US$ 57,000 between 2023 and 2024, it will bring in revenue of US$ 13.44 billion. Assuming no dilution, this means about $10.25 in revenue/share. Since Weilai can also start monetizing its BaaS products, and the company can even license its software and technology to other players, I think today's P/S should be kept at 17, if not expanded. Growth may slow down, but we must value the assets owned by Weilai in the form of patents and technologies.
All in all, by the end of 2023, my target price for Weilai is $174 per share.
Risk
Having said that, the company faces some potential risks in today's environment. First of all, although I think this is mainly an advantage, having no own manufacturing facilities is also regarded as a disadvantage. If it is imminent, JAC may refuse to fulfill their manufacturing contract, although I believe it will be very expensive.
On the other hand, it is not clear how widely BaaS technology is adopted. Traditional charging stations are becoming more and more advanced, and due to renewable energy such as solar energy, these charging stations will soon provide more competitive charging rates. Obviously, Weilai must cooperate with other manufacturers to make BaaS a global reality.
Finally, it is worth mentioning that, despite the rapid growth and increasing profitability, further shareholder dilution is likely to occur, which has not been taken into account in the above valuation.
Take away
Weilai's success in the past few years will eventually become the key to the company's future success. Weilai has found a method of innovation in left, right and middle. It changed the concept of charging through BaaS. It also achieved this innovation by building a very fast battery replacement station. It has made innovations in software and style, and I don't doubt that the company will continue to do so in the future. In the final analysis, Weilai is not only an electric vehicle manufacturer, so it should be taken seriously. $Dow Jones Industrial Average(.DJI.US$ $Niu Technologies(NIU.US$ $SGX(S68.SG$ $Baidu(BIDU.US$
BaaS: another level of revenue
I have talked extensively about Weilai's core business in previous articles. Today, I want to pay attention to the meaning behind one of Weilai's iconic features: Battery as a Service (BaaS).
Of course, many articles have already covered this topic. However, usually, these focus on BaaS and conventional charging, or how BaaS technology makes NIO cars more attractive. However, in this section, I will focus on the impact of BaaS on NIO's revenue, which may be the case one day as a completely independent business.
Since Weilai first put forward this idea, Weilai's BaaS products have gone a long way. In April, the company reached an agreement with Sinopec Shanghai Petrochemical Co., Ltd. (new york Stock Exchange code: SHI) to create a huge network of battery replacement stations. Weilai aims to have more than 5,000 charging stations by 2024. In addition, the latest version of BaaS charging system allows car owners to replace their batteries with fully charged batteries in a few minutes without even getting off the bus. BaaS is the fastest and probably the only way to realize the convenience we have when refueling traditional gasoline vehicles.
Therefore, the question is: can Weilai monetize its BaaS, and if so, what will it look like? The short answer to this question is, yes. Ford (new york Stock Exchange code: F) has reached an agreement with Weilai to utilize Weilai's charging infrastructure.
Having said that, today's charging stations are largely unprofitable. However, these tasks are somewhat different from the BaaS system of Weilai. A big problem with conventional charging stations is that their electricity bills are much higher than those for charging cars at home at night. However, BaaS solves this problem because the replacement battery can be charged anywhere. Most importantly, what we know is that Weilai will benefit more from this business line due to government subsidies. The CPC has publicly stated that China is shifting from consumer-centered subsidies to infrastructure-based subsidies.
It is still too early, but if BaaS takes off and other manufacturers focus on this model, NIO can benefit a lot by becoming a source of infrastructure and technology. For example, Weilai can play a key role in providing the necessary charging infrastructure for Europe, which is the market it has just entered.
NIO: Monetization Knowledge
Another key area where Weilai excels is technology and knowledge, but many people may not realize this. Let's illustrate this point with some figures.
According to Tencent Technology, Weilai has 2768 patents in China, 204 patents in Europe and 193 patents in the United States. Among the patents owned in China, 1,208 are "innovation patents". This is an important fact, because the contents of "innovation patents" classified by Chinese people can be considered as "pioneering". Judging from these figures, Weilai has more patents than competitors such as LI Auto Inc (Nasdaq: Li) and XPeng Inc (new york Stock Exchange: XPEV).
By studying these patents deeply, we can see that most of these patents are related to the above battery exchange technology. Another hot research topic today is automatic driving. In this field, Weilai has 47 patents, of which 64% are still pending. Compared with Baidu Company (NASDAQ: BIDU), which owns 632 patents, this is a rather small number. Finally, I want to point out that I think one of the most successful areas of Weilai innovation is design and user interface/software. For example, Weilai ET7 has an "intelligent cockpit" powered by Weilai's artificial intelligence NOMI.
What I want to say is that maybe some people think that Weilai's weakness may be one of its greatest advantages. Many analysts seem to have doubts about the fact that Weilai does not produce automobiles, but this aspect of the automobile business is becoming increasingly irrelevant. The CEO of NVIDIA Corporation (NASDAQ: NVDA) has been quoted as saying that by 2025, cars will be sold at cost price, and software sales will provide revenue for these manufacturers.
Traditional cars seem to be taking the road of smart phones. Putting components together may be the least important value-added activity here. The most relevant is the operating system and brand value. Weilai shines brilliantly in these two fields, which may be another way that we can say that Weilai is very similar to Apple (NASDAQ: AAPL).
Valuation
I believe the above two points highlight Weilai's potential beyond automobile production. Having said that, it is difficult to quantify how these innovations will change Weilai's future revenue and profitability. What I propose here is a kind of valuation. We value Weilai at the most basic level through the income obtained from automobile sales. However, in view of the above reasons, I will defend that the P/S multiple will still be much higher than that of its peers.
Now, let's start with revenue and sales. At the core level, we can predict NIO's revenue by looking at how many cars will be produced in the next few years, and we know exactly what this might be. Recently, Weilai renewed its manufacturing agreement with Jianghuai Automobile Group [JAC]. It is said that at least before May 2024, the company's production capacity will double to about 240,000 vehicles per year.
Therefore, based on this simple production fact, we can make a very simple forecast of Weilai's income. In the next three years, Weilai will have the capacity of 720,000 new cars. Can they sell them all? In 2020, Weilai Automobile sold 43,728 vehicles. It is estimated that Weilai's revenue will double in the coming year, assuming that all revenue comes from automobile sales and the price remains unchanged, which means that 87,456 vehicles will be sold. If we reduce the growth rate in 2022 and 2023 to about 80% and 50% respectively, our sales volume will be 157,420 and 236,132 respectively. This growth is close to the current estimate, and is very in line with NIO's plan, because it seems that by the end of this period, NIO will be nearly sold at full capacity when the manufacturing agreement ends. An important point I want to make here is that in view of the recent transaction, investors should not worry about the production restrictions of Weilai. In addition, Weilai doesn't seem to struggle with demand, especially when it plans to enter the European electric vehicle market.
Now, the second point that I will argue in this valuation is that in view of the changes in the development mode of the electric vehicle industry, we should not apply industry multiples to stocks like Weilai. In my previous article about the company, I did this and predicted that the price in 2030 would be as high as $400/share. However, it can be said that Weilai should get a valuation premium. This is because literally, the company does not manufacture cars. On the contrary, it is developing a brand, proprietary technology and changing our view of charging.
Manufacturing batteries for automobiles is a business in itself. A successful company in this field is Contemporary Ampere Technology [CATL]. According to Market Screener data, the company's operating profit margin is 13%, and its revenue increased by 250% last year, with a price-earnings ratio of 114 and a price-earnings ratio of about 25.
On the other hand, as automakers begin to focus on providing cars with integrated operating systems and software, we may see companies like Weilai trading at a valuation multiple closer to SaaS companies. Companies that sell software, such as adob e Inc. (Nasdaq: ADBE) or Salesforce.com (new york stock exchange: CRM), have a price-earnings ratio of 15-20.
If Weilai Automobile sells 236,132 vehicles at an average price of US$ 57,000 between 2023 and 2024, it will bring in revenue of US$ 13.44 billion. Assuming no dilution, this means about $10.25 in revenue/share. Since Weilai can also start monetizing its BaaS products, and the company can even license its software and technology to other players, I think today's P/S should be kept at 17, if not expanded. Growth may slow down, but we must value the assets owned by Weilai in the form of patents and technologies.
All in all, by the end of 2023, my target price for Weilai is $174 per share.
Risk
Having said that, the company faces some potential risks in today's environment. First of all, although I think this is mainly an advantage, having no own manufacturing facilities is also regarded as a disadvantage. If it is imminent, JAC may refuse to fulfill their manufacturing contract, although I believe it will be very expensive.
On the other hand, it is not clear how widely BaaS technology is adopted. Traditional charging stations are becoming more and more advanced, and due to renewable energy such as solar energy, these charging stations will soon provide more competitive charging rates. Obviously, Weilai must cooperate with other manufacturers to make BaaS a global reality.
Finally, it is worth mentioning that, despite the rapid growth and increasing profitability, further shareholder dilution is likely to occur, which has not been taken into account in the above valuation.
Take away
Weilai's success in the past few years will eventually become the key to the company's future success. Weilai has found a method of innovation in left, right and middle. It changed the concept of charging through BaaS. It also achieved this innovation by building a very fast battery replacement station. It has made innovations in software and style, and I don't doubt that the company will continue to do so in the future. In the final analysis, Weilai is not only an electric vehicle manufacturer, so it should be taken seriously. $Dow Jones Industrial Average(.DJI.US$ $Niu Technologies(NIU.US$ $SGX(S68.SG$ $Baidu(BIDU.US$
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