Nio in Consolidation Phase - Buy on Dip, Sell on Rise​

By Mihir Gupta (UCL), Ameya Joshi (UCL), Sukrith Kumar (UCL), and Filippo Palacino (ETH Zurich)

Stock Name: NIO Inc

Ticker: NYSE: NIO

Sector: Automobile, Electrical Vehicle

CMP: $45.77 (as on 25th December, 2020)

Recommendation: Buy on Dip / Sell on Rise

Target: $50.00 - $52.00

Stop Loss: $44.00

Duration: 2-3 weeks

Company Overview

  • Founded in 2014 as Nextev Inc, NIO is a pioneering Chinese player in the premium electric vehicle market. Their end to end business operating model consists of designing, jointly manufacturing, and selling smart and connected electric vehicles.

  • Their core technology competency lies in their proprietary e-propulsion system. Furthermore, their core technologies include a battery management system, electric driving system, vehicle control system, and autonomous driving. Their core technology provision includes:

  • E-Propulsion system: Their in-house developed propulsion system consists of an electric drive system, energy storage system, and a vehicle intelligence control system.

  • Digital cockpits and in-cabin technology: Each of NIO’s core automobile models use the NVIDIA DRIVETM which is an AI-driven in-car digital solution. Furthermore, their in-cabin technology is driven by an AI connected assistant NOMI.

  • Autonomous Driving: All three of NIOs automobile offerings have the ADAS system which is built for advanced processing and learning capabilities. Furthermore, they are incorporated with the NIO Pilot which consists of 23 sensors and a built-in algorithm to source driving data across the entire vehicle fleet.

  • NIO’s R&D teams are spread across China, Europe, and the US. Their main engineering R&D team is based out of Shanghai followed by Beijing. Their American headquarters are based in San Jose which also serves the capacity of their global advanced technology centre. Finally, their Munich and UK office is responsible for product, brand design and computer-aided engineering respectively.

  • As of December 1, 2020 - NIO had sold 36,721 EVs which marks an 111.1% Y-o-Y increase. Of this, the November sales counted for almost a sixth of their annual sales with 5,291 vehicles were sold in the month.

Product Offerings

NIO’s core product offerings consist of three volumes of manufactured electric vehicles and a range of power solutions which are meant to address charging needs of their users.

Manufactured Electric Vehicles: These consist of three main models which are the ES8, ES6 and EC 6. Following is a brief deep dive into their specifications:

ES8: ES8 which is a six-seven seater electric SUV, was NIO’s first volume manufactured vehicle. Key features of the model include 21 active safety features, an e-propulsion system which enables the model to accelerate from 0 - 100 kph in 4.4 seconds, a 70-Kwh liquid-cooled battery pack comprising cutting edge square cell batteries, etc. An all new E8 model with 180 product improvements was launched in December 2019.

ES6: ES6 is a five seater electric SUV which was launched in December 2018. The model offers Sporty, Performance and Premium versions at pre-subsidy starting prices. Key features a combination of permanent magnet motor and induction motor, an e-propulsion system which enables the model to accelerate from 0 - 100 kph in 4.7 seconds, ‘Lion’ i.e. a intelligent gate-way which enables data exchange and remote upgrading, etc.

EC6: EC6 is NIO’s smart premium electric coupe SUV that was launched in December 2019. The model is equipped with a 160-kW permanent magnet motor and a 240-kW induction motor. It’s e-propulsion system, like that of the ES6, allowed the vehicle to accelerate from 0 - 100 kph in 4.7 seconds.

Power Solutions: NIO’s power solutions are distributed across two segments - NIO Power Home and NIO Power Express:

NIO Power Home: Through this offering, NIO is able to install the electric charging point outside a customer's house, where feasible. The home charger is equipped with aan auto-identification function which enables a vehicle to automatically pair with the charger.

NIO Power Express: NIO’s Power Express includes a scheme of power solutions which are catered specifically for the Chinese users. These include fast charging trucks, access to public charging, battery swapping, fast charging piles, etc.

Sector and Industry Overview

Industry Analysis

We first the direction of the sector and industry NIO belongs to. The aim is to check if the stock’s movements are determined by a common sentiment for the sector and industry, or if the stock’s movements are specific to the stock itself, in which case, the stock will be susceptible to rapid trend changes. We believe the stock has more trending strength if it is moving in the same direction of the competitors.

Let's start our Top-Down industry analysis by having a very brief look at the performances of the stock market sectors in three different time ranges. We aim to identify winning sectors and losing sectors in the medium-short term by examining the returns in the last 6 months, 3 months and 1 month.

Graph 1: S&P 500 Sectoral Performances for the last 6 months ( as on 27/12/2020)

Graph 2: S&P 500 Sectoral Performances for the last 3 months ( as on 27/12/2020)

Graph 3:S&P 500 Sectoral Performances for the last 1 month ( as on 27/12/2020)

As we can see in the upper pictures, the last 6 months have been particularly bullish for every sector. In particular, we want to zoom in the performance of the consumer discretionary sector, which is the one where NIO lies. Its performances in the three-time ranges in consideration have been +24.6%, +8.09%, and +2.67%. We can conclude that this sector was mostly aligned with the general market conditions without positioning itself neither in the top performing, nor in the worst performing. Let’s have a look at this chart:

Graph 4: S&P 500 Consumer Discretionary Technical chart ( as on 30/12/2020)

In the upper chart we plotted the S&P 500 consumer discretionary index, which we believe to be a significant indicator of how the sector is doing worldwide. The stock trended upwards for the entire summer, but had a correction with the beginning of September that lasted until almost the end of the month. After that, the stock rose again, but found some resistance at 1300.00. After hitting that level, the price bounced downwards at 1162.38 on 2nd November. From that point, the price began a shy uptrend, which we can see from the price being over the 50 days Moving Average. Right now, the price seems to be headed upwards, but the signals are not strong enough.

Now, let’s have a look at which industries are pushing the price higher, and which are pushing it lower, in order to separate once again the winners from the losers and see where NIO’s industry, which is vehicles manufacturers, lies. We think that every time an index doesn’t show strong signals in either direction, looking at the industries inside the sector is even more valuable. Particularly, we want to see if there are opposing trending industries that try to move the sector in two different directions simultaneously, or if all of them are achieving neutral or soft returns.

Graph 5: Sector and Industry performance compared to the S&P 500 Index (eresearch.fideliy as of 30/12/2020)

For our Industry Overview, we decided to track the performance of several industries and sectors over the past year and compare it to the S&P 500 Index, which is used as a benchmark for the overall market.

We have used the Independent Power and Renewable Electricity Producers and Automobile industries as proxies for Electric Vehicles and have compared this to the broader Energy sector to determine how are these industries performing relative to it.

As Figure 5 shows, the Energy sector has performed the worst out of all the indicators that we have chosen. It has fallen by 38% over the year and has not recovered from the COVID-19 crash in March that saw markets worldwide plummet. However, the Renewable Energy industry is driving growth in the Energy sector, having grown by 17% in the past year. Renewable Energy and Automobiles, as shown by the yellow and dark blue lines, have been following the S&P 500 Index through its boom and bust phases over the past year. This is expected, as COVID-19 forced factories to shut and global demand to drop. As demand is now growing, we expect these industries to track the market. Furthermore, due to the growth seen in renewables (as shown in previous reports), we believe Renewable Energy to possibly beat the market over the coming years.

However, it is important to consider what particular companies are driving the growth in Automobiles and Renewable Energy to recognise how the performance of these industries will be reflected in NIO’s stock performance.

Graph 6: Tesla and NIO market capitalisation ( as of 30/12/2020)

Tesla is currently NIO’s biggest competitor in terms of valuation, market capitalisation, and hype. As shown in Figure 6, Tesla’s growth over the past year has been the most dominant out of all Electric Vehicle companies. We attribute this to Tesla being the pioneer of innovating and remarketing the Electric Vehicle space. NIO cannot lay claim to either, making the comparison between NIO and Tesla unfair for forecasting NIO’s growth. However, despite Tesla dominating the Electric Vehicle scene in China, several domestic competitors are rising up.

China is currently the world’s biggest EV market and has set the target that by 2025, over 20% of auto sales must be Electric Vehicles. As a result, fellow Chinese Electric Vehicle companies such as Geely Automobile, XPeng, and Li Auto are primed for rapid growth. Currently, NIO has a debt to capital ratio of 5.96 against the industry average of 0.29 and is not vertically integrated unlike competitors such as XPeng. If NIO does not reformulate its supply chains in the near future, it could potentially miss out on growth in China’s Electric Vehicle space.

However, we will conclude this section by stating that NIO is currently following industry and sector trends from a macro perspective. Once NIO begins to improve on its fundamentals, we will be more confident of its position as a market leader.

Forecast Analysis

Graph 7: NIO ARIMA Forecast (RStudio as of 30/12/2020)

For this report, we have decided to compare our usual ARIMA forecasting model with TOGGLE.AI’s forecasting methods.

As shown in Figure 7, our customised model indicates a strong bullish run over the next 15 days, as depicted by the blue line. The dark grey area shows the 90% confidence interval, and the light grey shows the 80% confidence interval, while the x-axis represents time in days, and the y-axis depicts the stock price. The Mean Absolute Percentage Error is 5.05%, indicating a high accuracy for our forecast.

Our ARIMA model works by differencing the stock’s price by an order of 1, and then fitting the data using autoregressive algorithms and moving averages. In comparison, TOGGLE.AI’s forecasting methods use AI to identify activity in the stock’s historic price action which mirrors the current movement of the stock.

Graph 8: NIO Forecast for the next month ( as of 30/12/2020)

Graph 9: NIO Forecast for the next year ( as of 30/12/2020)

Using TOGGLE.AI’s forecasting methods, we can see a similar bullish run for the stock over the course of the month as shown in Figure 8. The forecasts look different as both use different scales for the y-axis, but the forecast is the same. Through projecting the stock price over the coming year, as shown in Figure 9, we can see that NIO looks to be preparing for a strong bullish run.

Technical Outlook for the Stock

Momentum Analysis

Graph 10: Momentum Chart for NIO Inc. ( as on 25/12/2020)

Momentum refers to the velocity or the price change in a security’s price. It is meant to show the rate of change in the price movement over a specific period of time highlighting the strength of the trend. Resultantly, NIO’s momentum statistics seem to suggest that while the short term momentum is slightly lagged, the medium to long term momentum for the equity is still intact. In fact, on comparing the 1M vs 3M momentum numbers, we conclude that the medium to long term momentum embedded in the stock has capacity enough to drive the share.

Nonetheless, we believe that the short term laggedness is partially because of the exponential growth, the equity price of NIO has witnessed over the past three to four months because of which it is being followed by a period of consolidation because of which buying on dip and selling would be the best strategy to employ to scalp profits.

Support and Resistance Analysis

Graph 11: Support and Resistance Levels for NIO Inc. ( as on 25/12/2020)

As on 25th December 2020, NIO’s share price closed at $45.77. While the stock witnessed quite a muted growth trajectory at the tip of the pandemic crash as well as a few months after, the share price surged between the beginning and mid-November. Nonetheless, the share price stood the test of time and corrected by approximately 30%, part of which we believe can be best explained using tools of Technical Analysis. We believe that this momentous drive in sentiment may be attributed to a number of fundamental catalysts at play, including the better than expected November delivery numbers, and the additional investment the company attracted from the provincial governments of Hefei and Anhaui, worth 7 billion Chinese Yuan.

Graph 12: Fibonacci Levels for NIO Inc. ( as on 25/12/2020)

Currently, we believe that the immediate support and resistance levels for NIO’s stock are $44.17 and $50.00 respectively. Furthermore we believe that some of the other crucial levels other than the immediate support and resistance are $54.38 on the upside and $42.09 and $38.8 on the downside. In fact the strength of these levels is further complemented by plotting the Fibonacci Levels for the stock, on an upward basis. We observe that indeed 44.7 and 49.3 are the 0.786 and 0.5 retracement levels respectively that the $40 level has been a crucial level since 15th November (part of which we think is to do with the round number psychology).

Trend and Pattern Analysis

Graph 13: Trend Analysis for NIO Inc ( as on 30/12/2020)

Having bottomed out due to the pandemic in March, the stock entered a parallel channel characterised by a strong support of 2.30 and resistance of 3.82 (as highlighted by blue lines in Graph 13), however this was broken in early June by bullish sentiment, reflected through the formation of three white soldiers from 1-3 June (as highlighted by the purple box in Graph 13). A month later, the stock price demonstrated another large gap up on 1 July 2020, shown by a consecutive bullish spinning top and bullish hammer (as highlighted by the orange box in Graph 13), with the stock then entering a rising channel between July and November. This channel was characterised by a higher-high higher-low formation across the four-month period and although there were some corrections, this trendline was not broken until November.

Graph 14: Morning Star, Dark Cloud Cover and Black Crows Patterns ( as on 30/12/2020)

Following the doji candlestick on 4 November, there was another large gap up, which echoed the bullish sentiment present in the market, which saw the stock price rise from 35.32 to 42.39 over the course of one day. Since this movement, the price action of the stock entered a parallel channel within which the stock has been somewhat volatile, demonstrating both higher-high higher-low formations (as in early November) as well as lower-high lower-low formations (as in early December). This parallel channel has been characterized by a strong support of 40.00 and a resistance of 48.38, although this resistance was broken on 21 December and quickly corrected.

In December, the stock has seen a mostly bullish sentiment, likely due to the positive outlook from consumers approaching Christmas. This can be seen in the three white soldiers trend, following the morning star pattern between 13th and 15th December (as highlighted in blue in Graph 14), which saw the stock price rise from 40.00 to 48.96. Going forward, however, with uncertainty in the global markets following the Brexit trade deal and COVID-19 cases rising, the stock could witness a bearish trend. The dark cloud cover displayed on 22nd December indicates a potentially bearish outlook for the future. This is further shown by the 3 black crows pattern formed, following the dark cloud cover (as highlighted in orange in Graph 14), with the stock price dropping from 49.67 on 22nd December to closing at 45.77 at the end of 24th December. One can anticipate that the stock price will likely remain in the parallel channel that it has stayed in over the last few months, because of which we advise a buy on the dip, sell on rise strategy.

Moving Average and MACD Analysis

Graph 15: 55-days, 21-days, and 9-days Exponential Moving Average and MACD Analysis of NIO ( as on 30/12/2020)

Once again, we use Moving Average analysis to spot the trend of a stock, as well as the potential entry and exit points. Here, we use three Exponential Moving Averages of length 9, 21, and 55 days. We consider the stock to have a negative outlook when the 9 days Exponential Moving Average is under the 21 days Exponential Moving Average, which is itself under the long term EMA. Conversely, we consider the stock to have a bullish outlook when the opposite appears, i.e. 9 days over 21 days, altogether over 55 days. The first scenario is what we are seeing as of the 30th of December when looking at NIO’s chart. However, the situation is not as clear as we would like it to be; in fact, the fast EMA. and the medium term EMA crossed themselves on multiple occasions during the last couple of weeks, resulting in the price entering a phase of consolidation. Since these two EMAs are still very close to each other, we can’t pronounce ourselves in favor of any short- or medium-term future direction of the price.

As for the MACD, the red oscillator confirms what we have just said. The difference between the fast Moving Average and the slow Moving Average, as we can see in the upper chart, is almost nonexistent, resulting in a situation that doesn’t give a clue for either direction. We believe it’s best to wait for further price developments.

Bollinger Band Analysis

Graph 16: Bollinger Band Analysis for NIO Inc ( as on 25/10/2020)

The Bollinger Band analysis for NIO seems to indicate a phase of minor consolidation after the rally. As seen in Graph 16, the price action has been extremely sticky to the 20dMA and has been embedded within the +(-) 2 SD bounds of the Bollinger Band. Additionally, we observe that both the upper (as shown by the horizontal blue line), as well as the lower bound, have been acting as a straight resistance and support respectively. Hence, we conclude that unless these bounds are convincingly broken and the price action dismantles the ‘squeeze’ - minor movements within the band are likely to continue because of which traders could employ a buy on the dip, sell on rise strategy.

RSI and Stochastic Analysis

Graph 17: RSI and Stochastic Analysis for NIO ( as on 25/10/2020)

We would like to end this report with a note on some crucial observations from the movement witnessed in the RSI and Stochastic Oscillator for NIO. In terms of the RSI, we observe that the 56.6 level has taken the form of a support-turn resistance. Furthermore, we observe that the extensive selling pressure at the start of December coincided with a negative divergence in the RSI.

As far as the movements in the Stochastic Oscillator are concerned, we first observe that there were clear signals of the share price movement to have been extended as the Oscillator continued to hover in the overbought zone. Most recently, we witness that it has tested the overbought threshold and deflected, thereby signaling a brief moment of correction of muted movement in the share price. Nonetheless, we expect that till the Oscillator remains in the neutral zone, that would be fertile ground for the stock to attract a move on the upside within the parallel channel as highlighted earlier.

News Box

  • NIO entered a manufacturing cooperating agreement with JAC to manufacture EC6.

  • NIO entered a definitive agreement for investments with Hefei City Construction and Investment Holding (Group) Co., Ltd and Anhui Provincial Emerging Industry Investment Co., Ltd. in April 2020.

  • An investment of RMB7 billion in cash into NIO Anhui was decided upon into the legal entity of NIO China.

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