Bank of America upgrade Nio rating, brighter margin outlook

BofA analyst upgrade NIO to Buy given improving sales, better margin in 2H22 and attractive valuation. BofA had a Neutral earlier mainly on:

(1) Slower volume growth as NIO has not delivered any facelifts/new models during 3Q20-1Q22. and chip shortage

(2) Cost pressure, especially on battery side

(3) De-rating risk for growth stocks amid a tightening environment

The rationale for Buy:

(1) Strong model cycle and order backlog: ET7 shipment began in March; ES7 is expected to launch in June and start delivery in Aug (slightly ahead of BofA analyst previous expectation); ET5 is scheduled to be delivered in Sep; facelifts of ES6, ES8 and EC6 will be available in 2H22. ES8/ES6/EC6 waiting time is 10 weeks and ET7 6 months, showing ample orders on hand.

(2) Costs pass-through: NIO has hiked prices by RMB 10K for ES6, ES8. EC6 (after 10 May) and ET7 (23 May), which should ease margin pressure in 2H22.

(3) Supply-chain recovery: Expecting production utilization to return to normal in June, based on the production resumption pace in Shanghai.

(4) Less ADR concerns: NIO was listed on the SEHK in March, with the shares fully fungible with ADS listed on the NYSE; NIO expects to be listed on the SGX-ST on 20 May.

NIO is trading at 1.7x 1 -year forward EV/sales. 1SD below its historical average. This seems attractive given the improving outlook-NIO traded at a similar valuation only during 2H19-1Q20 when it faced sales slowdown, product recalls and financing challenges, while its current fundamental is stronger in terms of brand equity, sales growth. R&D capability, and improved cash flow.

Factoring in the latest model schedule and production recovery pace, BofA analyst lift 2022/23E sales volume by 3%/8%. BofA analyst lift their PO to USD26/HKD202, based on unchanged target EV/sales to a slightly higher 2022E sales.