Nio: back to the future

Much ink has been spilled of late on why global equity markets have rallied so fast in the wake of the severe, and still frankly unknown, economic fall-out from the coronavirus.

The best answer, as if often the case, has been the simplest: markets are long-term orientated, and therefore don’t really care about two to three quarters of terrible figures. Just zero out 2020 on your discounted cash flow statement and, particularly for a high-growth loss-making company, it’s like not going to make much of a difference to your intrinsic value calculation.

It’s an answer that’s been proposed by Bloomberg’s Matt Levine and famed equity strategist Michael Mauboussin, and one, to be honest, we find quite compelling. (A rare moment of optimism from Alphaville, we know, so apologies for that.)

But little did we expect this to be reflected in the sellside. After all, if an analyst said to you “we’re now valuing this company on a multiple based on 2030 earnings” you’d probably spit your coffee out all over your computer screen. Right?

Wrong (with our emphasis):

We maintain our 7.7X target P/E (average of global OEMs) but roll forward the multiple to be 2030-based. Previously we assigned a 7.7x PE to Nio’s 2023 EPS, but we think it’s more reasonable to apply the multiple for Nio in 2030 when we expect its earnings growth rate to decelerate to 5%, comparable to traditional car OEMs who trade on single digit P/E. We discount the target price at an unchanged 11.9% WACC, based on Nio’s long-term cost of capital and capital structure, also in line with global OEM peers. This derives our new target price of US$6.4, implying c.50% upside from here. We upgrade the stock to Buy from Neutral.

That’s from Goldman Sachs analyst Fei Fang’s note this morning on Nio, the $6bn Chinese electric car marker with negative gross margins, which has recently managed to secure financing from various state-owned investment funds in China.

The sellside – like the stock market – is often criticised for being too short-term in its thinking, but a price target based on a multiple nine years into the future feels just a little too aggressive to us.

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