NIO: Not Buying The Reopening Story (NYSE:NIO)

Thesis Summary

NIO, Inc (NYSE:NIO) has been making headlines as the car company has set a record for deliveries in December. From a fundamental side, the company is doing as well as can be expected. However, there are many macro challenges and even with the China re-opening narrative in play, I still believe NIO is heading lower in the near term.

Fundamentals Strong, For Now…

NIO sold 15,815 cars in December, marking a record on monthly sales and a 50% YoY increase. As I mentioned in a previous article, the company has benefited from some demand pull forward, given that China is eliminating EV subsidies in 2023.

So, while NIO did very well in December, and this shows that there is strong demand for its product, we have to understand that this will come at the expense of the next couple of quarters, something which has even been addressed by NIO’s CEO William Li.

Not only this, but in a letter to employees, Li outlined his focus on improving efficiency in the face of a busy year ahead.

In 2023, I will spend more time on efficiency improvement personally, and would like to urge every colleague to support and join the efforts from the perspective of the Company’s overall interests and would welcome all the constructive suggestions for me and the management team on efficiency improvement.

2023 is a year of significance to us. We will deliver five new vehicles based on NT2 in the first half of 2023 while the R&D of NT3 will be in full swing. All the new strategic businesses will usher in key milestones and the user deliveries and services in Europe will further accelerate.

Source: Letter to NIO employees

A very busy year indeed. NIO is delivering five new vehicles while working on the next iteration of its technological platform, the NT3.

On top of this, NIO also has some other interesting projects in the works. It is rumoured that NIO is targeting the ultra-high-end SUV market through a startup it has an interest in, Zhixing. Allegedly, the startup is building an SUV using NIO’s NT3 platform, which will be priced at 1 million RMB, roughly $150,000.

In other interesting news, Mobileye, (MBLY) has recently debuted its fleet of autonomous vehicles in Germany. That fleet, of course, being made up of NIO’s ES8.

Economic Challenges Abound

China has also been making headlines, as the country seems to have finally reopened its borders, suggesting that zero-covid policy could finally be behind them. This has lifted Chinese markets, with the Hang Seng Index (HSI), for example, up over 40% since it reached a bottom in October.

However, a lot of risks still remain in the area. The Bank of Japan shocked markets a few weeks ago when it tweaked its yield curve control policy, and though the People’s Bank of China would like to remain accommodative, it is fighting a weakening Yuan.

Furthermore, we cannot forget past concerns, such as the unresolved Taiwan conflict. In December, Biden signed the National Defense Authorization Act, which pledges $10 billion in military aid to Taiwan.

Investing in Chinese stocks still comes with a lot of risk, and I don’t think NIO is out of the woods just yet.

Technical Analysis

My current outlook for NIO’s technical chart suggests we still have one more leg down to go:

For now, NIO has found support at the 50% retracement, just under $9. Since then, we have seen a considerable rally, but it doesn’t really look impulsive to me. More likely, this is a wave iv inside of this final wave 5. My take is that NIO should break below recent lows and target the 61.8% retracement, which would take us all the way into the $5 region.

Following this correction, I’d then expect NIO to begin a multi-year rally into new highs.

Takeaway

I like NIO. This is a good company, with a solid product and a competent CEO. However, the current macroeconomic or geopolitical climate is not yet favorable. China’s reopening doesn’t change the fact that its economy is weak or that geopolitical tensions are at an all-time high. I won’t be adding more shares until this clears up or NIO shares come down.