NIO and other Chinese EV (electric vehicle) stocks are trading lower in US pre-market price action today after China imposed lockdowns in some regions following the resurgence of COVID-19 cases.
While the rest of the world has learned to live with the coronavirus, China has continued its controversial zero-COVID policy. To its credit, China has the lowest death rates from coronavirus among major countries even as the virus allegedly originated in the country. However, its strict lockdown policy is not only leading to a slowdown in its economy but also adding to global supply chain woes, given its centrality in the global supply chain.
China’s lockdowns are not only leading to production loss for NIO and other Chinese EV companies but also Tesla. In the second quarter of 2022, Tesla produced 258,580 cars and delivered 254,695. Since the first half of 2020, when COVID-19 lockdowns in China and the US, led to cutbacks in Tesla’s production, the company has been delivering a record number of cars every quarter.
The second quarter of 2022 was the first time in two years when Tesla’s production fell on a quarterly basis. However, as the lockdowns in China were lifted by June, the company posted record production in the month. However, BYD Motors, which is backed by Warren Buffett, outsold Tesla in the first half of 2022 to become the largest seller of new energy vehicles globally.
BYD’s production facilities in China were situated away from the COVID hotspots and hence its production wasn’t hit even as other companies like NIO and Xpeng Motors saw a fall in production.
NIO Delivered Record Vehicles in June, but Lockdowns Dampen Sentiments
NIO also delivered 12,961 cars in June, which was 60.3% higher than the corresponding month last year. It was the best month for NIO since it went public in 2018. In the second quarter, its deliveries rose 14.4% to 25,059. While the company’s production and deliveries took a hit in April and May, they rebounded in June.
With lockdowns back in China, markets are worried about production loss at NIO and other Chinese EV companies. Interestingly, Tesla, whose Shanghai Gigafactory is its most productive plant, is trading higher today despite the slump in Chinese EV stocks.
The anomaly looks due to Elon Musk’s announcement that he is ditching the deal to acquire Twitter. Many analysts saw Musk’s association with Twitter as a needless distraction for Tesla.
Markets would next be watching Tesla’s second-quarter earnings which are scheduled for later this month. The company’s cash flows in the quarter would be of particular interest considering the production shutdowns in China. Also, the management’s commentary on 2022 delivery guidance would be closely followed.
NIO Responds to Short-Seller Report
Last month, short-seller Grizzly Research accused NIO of accounting fraud and inflating its revenues and profits. In its report, Grizzly Research said that NIO used transactions with Wuhan Weineng, an unconsolidated related party entity, to increase its revenues. It said that the company’s net loss in the first nine months of 2021 would have been 95% higher and revenues lower by 10% if not for these related party transactions.
Initially, NIO had dismissed these findings and said, “The report is without merit and contains numerous errors, unsupported speculations and misleading conclusions and interpretations regarding information relating to the Company.”
Now, the company has announced an independent committee “consisting of independent directors Mr. Denny Ting Bun Lee, Mr. Hai Wu, and Ms. Yu Long, to oversee an independent investigation regarding the allegations made in the Short Seller Report.”
Morgan Stanley finds NIO Stock a Buy
In the past short-seller Hindenburg Research had accused Nikola and Lordstown Motors of fraud. Both these companies went public through a SPAC reverse merger and their top leadership quit shortly after Hindenburg’s allegations.
Coming back to NIO, the stock is trading lower today. While it has rebounded from its 2022 lows, it is down sharply this year amid the sell-off in growth names. Wall Street analysts are overwhelmingly bullish on the company. Last month, Morgan Stanley analyst Tim Hsiao advised buying NIO stock and called it a “tactical idea.” The brokerage is also quite bullish on Tesla and analyst Adam Jonas is the flagbearer of Tesla bulls on Wall Street. Despite its recent crash, Tesla stock has not disappointed bulls over the last three years.
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