NIO: Abu Dhabi Deal Might Be A Sport-Changer (NYSE:NIO)

NIO (NYSE:NIO) discovered a brand new anchor investor final week when it secured a $738.5M funding from the Abu Dhabi authorities. The funding deal follows NIO’s first-quarter earnings launch that confirmed declining car margins and a weak supply forecast for the second-quarter, and led to renewing strain on NIO’s valuation. Nevertheless, the funding of Abu Dhabi is a possible game-changer for NIO because it not solely provides extra sources at a time of spiraling losses, but additionally opens up a path, probably, for an Abu Dhabi-based manufacturing hub for NIO’s electrical automobiles down the highway.

I imagine Abu Dhabi is following into the footsteps of Saudi Arabia which is spending billions of {dollars} to create home EV manufacturing capability and NIO may probably use Abu Dhabi as a springboard into the Center Jap electrical car market!

Implications of the most recent financing deal

A few days in the past NIO knowledgeable the market that it acquired a strategic equity investment from CYVN Holdings, an funding agency majority-owned by the Abu Dhabi authorities, that can see the corporate make investments $738.5M into newly issued Class A shares of NIO at a purchase order value of $8.72 per share. NIO additionally said {that a} CYVN Holdings entered right into a share buy settlement with an affiliate of Chinese language mega-company Tencent (OTCPK:TCEHY) which is able to buy 40,137,614 Class A shares of NIO from CYVN Holdings. After the transaction closes, Abi Dhabi’s funding fund goes to personal roughly 7% of NIO’s excellent shares.

Tencent is a big participant within the autonomous driving market and each NIO and Tencent signed a strategic agreement within the fourth-quarter of final yr that lays out cooperation phrases within the fields of cloud-supported driving know-how, clever driving maps and R&D effectivity.

The $740M funding cope with Abu Dhabi comes at a time of increasing losses for the Chinese language electrical car producer, which has seen a steep decline in its car margins within the first-quarter. It additionally helps enhance NIO’s money reserves simply because it retains launching new fashions such because the ES6, which got here to market on Might 24, 2023. The ramp of NIO’s sedan fashions, particularly, has weighed on NIO’s money balances and Abu Dhabi’s funding will make sure that the corporate will be capable to ramp its sedan line, together with the ET5 and the brand new ET7.

My expectations relating to NIO’s funding settlement with Abu Dhabi

However in addition to making monetary sense for NIO, the deal makes strategic sense for the electrical car producer as properly. It’s because Abu Dhabi is beginning to emerge as an area challenger of Saudi Arabia which, via one in all its associates, Ayar Third Funding, has a 60% funding stake in electrical car producer Lucid Group (LCID). Ayar Third Funding additionally participated in Lucid’s newest fairness providing.

Lucid signed an settlement with Saudi Arabia’s authorities in 2022 that requires the supply of as much as 100 thousand electrical automobiles by 2030. Lucid is additional solidifying its connection to Saudi Arabia by constructing its AMP-2 manufacturing plant within the nation, with an anticipated annual capability of 155,000 electrical automobiles. The dominion additionally signed another deal with Chinese EV start-up Enovate to construct an EV manufacturing plant in Saudi Arabia as properly.

NIO may now be set to strike the same cope with Abu Dhabi. Whereas there isn’t any announcement (but) that NIO will ship electrical automobiles to the Abu Dhabi authorities, competitors between the United Arab Emirates and Saudi Arabia may very properly lead to a “Lucid-like” deal between NIO and the federal government of Abu Dhabi. NIO is dealing with stiff competitors in its Chinese language house market, however has entered different markets in Northern Europe in a bid to develop much less depending on China.

Abu Dhabi is an rising participant within the electrical car trade. Consulting firm Arthur D. Little named the United Arab Emirates in its “Global Electric Mobility Readiness Index 2022” because the eighth most promising EV market on the planet, and the corporate’s consultants estimate that the UAE electrical car market may develop 30% yearly between FY 2022 and FY 2028. For NIO, a market entry into the United Arab Emirates, probably via the institution of a producing plant, might be the following logical step. A strategic transfer into the UAE/Center East, which is seeing accelerating EV adoption charges, may additionally ultimately result in a re-acceleration of NIO’s supply progress.

NIO’s valuation signifies that shares stay deeply undervalued

I take into account NIO to be deeply undervalued, each in relation to its rivals in addition to to its historic common. NIO is presently buying and selling at a P/S ratio of 1.05X, which is about half of its 1-year common P/S ratio. Though income estimates have trended down recently, on account of slowing client demand in China, NIO remains to be projected to attain practically 50% year-over-year prime line progress subsequent yr. I’ve beforehand mentioned that NIO’s valuation may double, and I proceed to face by this.

In contrast in opposition to NIO’s EV rivals, each within the U.S. and overseas, NIO seems to be undervalued as properly. NIO has the bottom price-to-revenue ratio within the trade group, with U.S.-based EV corporations buying and selling on the highest valuation multipliers.

Dangers with NIO

NIO’s margins have come underneath strain within the first-quarter which is the mainly the results of pricing strain, stronger competitors in China’s home EV market that’s seeing rising electrical car portfolios and waning client demand. As I mentioned earlier than, what would change my thoughts about NIO is that if the corporate did not ramp up its sedan portfolio quickly and continued to see even weaker car margins within the coming quarters.

Ultimate ideas

NIO’s funding partnership with Abu Dhabi might be a game-changer for each Abu Dhabi and NIO. The funding deal not solely helps NIO financially and boosts its money sources at a time it launches new fashions and ramps up its sedan deliveries, but it surely may additionally create a pathway for the Chinese language firm to enter a really engaging, rising EV market within the Center East. If I had been to take a position, I’d say that Abu Dhabi isn’t solely in search of funding upside within the EV sector, however that it finally needs to encourage home EV manufacturing, partly as a result of Saudi Arabia, a key rival to the UAE, is spending billions of {dollars} to create home EV manufacturing capability. NIO is subsequently not solely gaining an anchor investor with Abu Dhabi’s $740M funding — which additionally boosts confidence in NIO’s long run progress prospects — but it surely additionally probably creates a springboard into the rising Center Jap EV market.