Shares of NIO Inc. charged higher Monday, after BofA Securities analyst Ming Hsun Lee turned bullish on the China-based electric vehicle maker, citing improving outlooks for volume sales and margin and an “attractive” valuation.
The stock NIO, +1.82% shot up as much as 7.8% early in the session, before paring gains to be up 1.8% in midday trading.
It has now climbed 14.6% amid a three-day win streak, since the stock closed at a 22-month low of $12.71. At that low, the stock had plummeted 60% year to date (YTD), and had plunged 80% since record close of $62.84 on Feb. 9, 2021.
“Share price has de-rated YTD,” BofA’s Lee wrote in a note to clients.
Lee believes the stock’s selloff is basically three-fold: 1) a slowdown in sales volume growth because of component supply difficulties and unfavorable model cycle; 2) cost pressures, especially on batteries, due to the inflationary environment; and 3) investors reducing risk of growth stocks due to rising interest rates, and given concerns over regulatory scrutiny of the U.S.-listed shares of China-based companies.
Read MarketWatch’s “Need to Know” column from last month, in which a BofA strategist said it still wasn’t time invest in China.
FactSet, MarketWatch
But Lee now sees the investment environment improving, starting with sales growth, after shipment of NIO’s ET7 model EV started shipping in March, and as the ET7 is expected to start delivery in August, slightly ahead of expectations, and the ET5 is slated to be delivered in September.
He also believes the delisting risk has been reduced, after reports that regulators in China had paused putting pressure on technology giants as the government looked to stimulate a slowing economy. Also, NIO said earlier this month that it planned a secondary listing of its ADRs in Singapore.
Lee raised his rating to buy from hold, and bumped up his stock price target to $26 from $25. His new target implies about 78% upside from current levels.
“Looking ahead, we expect improving volume sales, better margin and valuation recovery,” Lee wrote.
He said the current stock price implies a valuation of 1.7-times one-year forward enterprise value over sales, a valuation that was only that low during the second half of 2019 to the first half of 2020, when NIO faced subsidy cuts and lower sales, product recalls and financing difficulties.
“NIO’s current operation is way better than it was in 2H19-1Q2020, and we expect its outlook to be brighter in terms of sales growth, margin recovery and overseas development,” Lee wrote. “In our view, the current valuation is attractive for investors to revisit the stock.”
NIO’s stock has dropped 56.4% over the past 12 months, while the iShares MSCI China exchange-traded fund MCHI, -0.21% has lost 14.2% and the S&P 500 index SPX, -0.45% has slipped 3.9%.