China/Asia TMT

Shawn Yang

China growth and global non-US Internet equities

Blue Lotus Research Institute

Blue Lotus Research is a Hong Kong Type 4 Licensed investment advisory firm focusing on Chinese growth equities and global non-US Internet equities

Thematic (Sector/Industry)

<ul>
<li>Even though we are long-term optimistic on the rise of Chinese consumer brands, we believe short-term optimism is misplaced. </li>
<li>Two themes: (1) structural changes led by China’s transition to an older and more affluent society, (2) substitution and globalization that can break the ceiling for valuation;</li>
<li>Our TOP PICKS are Li Auto, Atour, Luckin, FUTU, BEKE and Miniso</li>
</ul>


Even though we are long-term optimistic on the rise of Chinese consumer brands, we believe short-term optimism is misplaced. 
Two themes: (1) structural changes led by China’s transition to an older and more affluent society, (2) substitution and globalization that can break the ceiling for valuation;
Our TOP PICKS are Li Auto, Atour, Luckin, FUTU, BEKE and Miniso


[Consumer Brands Deep Dive]:Structural and Substitution Drive Chinese Consumer

External broker reports(aggregated public sources), CMB International

CMB International

External broker reports(aggregated public sources)

Incorporated in Hong Kong, supported by the mainland and targeting in global market, CMB International Capital Corporation Limited (“CMBI”) is an integrated financial institution providing comprehensive and professional services. As a wholly-owned subsidiary of China Merchants Bank ("CMB"), by leveraging on the Group’s synergy and coordination in domestic and overseas markets, as well as CMB’s strong resources and outstanding social reputation, CMBI and its subsidiaries have been actively implementing diversified business strategies and set up an overall layout of main business segments including Corporate Finance, Asset Management, Wealth Management, Global Markets and Structured Finance, etc. Adhering to the philosophy of “being clients oriented and increasing our own values by the way of creating value for clients”, CMBI endeavors to provide quality and integrated financial services to institutional, corporate and individual customers both domestic and overseas including Hong Kong IPO sponsorship and underwriting, share placement and rights issue for listed companies, financial advisors, bonds issuance services, asset management, direct investment, wealth management, equity sales and trading, etc.

<ul><li>China’s passenger-vehicle (PV) retail sales volume rose 11% YoY in Feb 2023, 4% lower than our prior forecast.</li><li>Wholesale volume also rose 11% YoY last month, 13% higher than our prior projection, again largely due to inventory restocking and higher export volume.</li><li>PV exports surged 86% YoY to about 271,000 units in Feb 2023. Automakers in China added about 131,000 units of inventories into their dealers in Feb 2023 based on our calculations, which has led to 2.2 months of inventories based on our projected retail sales volume for Mar and Apr 2023. </li></ul>Content is external broker report sourced from online content aggregator through publicly available sources and is displayed below for general informational purposes only. Refer full disclaimer below.

China’s passenger-vehicle (PV) retail sales volume rose 11% YoY in Feb 2023, 4% lower than our prior forecast.Wholesale volume also rose 11% YoY last month, 13% higher than our prior projection, again largely due to inventory restocking and higher export volume.PV exports surged 86% YoY to about 271,000 units in Feb 2023. Automakers in China added about 131,000 units of inventories into their dealers in Feb 2023 based on our calculations, which has led to 2.2 months of inventories based on our projected retail sales volume for Mar and Apr 2023. Content is external broker report sourced from online content aggregator through publicly available sources and is displayed below for general informational purposes only. Refer full disclaimer below.

China Auto Sector – A trough in the short term?

Equity Bottom-Up

<ul>
<li>We expect NIO to see a share loss in 2023 due to 1) late delivery of its key models; 2) conservative channel expansion plan; 3) uncompetitive pricing. </li>
<li>We see headwinds for NIO’s 2023 GPM, including 1) ~10% discount on its legacy models in Q1; 2) weaker product mix toward low-price ET5 into Q3.</li>
<li>3) limited expansion of scale economy due to diminished momentum. ● DG to SELL for weak momentum and ongoing margin pressure into 3Q22.</li>
</ul>


We expect NIO to see a share loss in 2023 due to 1) late delivery of its key models; 2) conservative channel expansion plan; 3) uncompetitive pricing. 
We see headwinds for NIO’s 2023 GPM, including 1) ~10% discount on its legacy models in Q1; 2) weaker product mix toward low-price ET5 into Q3.
3) limited expansion of scale economy due to diminished momentum. ● DG to SELL for weak momentum and ongoing margin pressure into 3Q22.


[NIO Inc. (NIO US) Rating Change]: DG for Weak Momentum and Margin Pressure into Q3

<ul><li>NIO’s 4Q22 earnings missed our prior forecast on inventory provision, R&amp;D and SG&amp;A.</li><li>We are of the view that NIO’s 1Q23E sales and margin weakness should be largely priced in.</li><li>Sales in 2H23E could be crucial as supply chain constraints should no longer be an excuse for sales miss. </li></ul>Content is external broker report sourced from online content aggregator through publicly available sources and is displayed below for general informational purposes only. Refer full disclaimer below.

NIO’s 4Q22 earnings missed our prior forecast on inventory provision, R&amp;D and SG&amp;A.We are of the view that NIO’s 1Q23E sales and margin weakness should be largely priced in.Sales in 2H23E could be crucial as supply chain constraints should no longer be an excuse for sales miss. Content is external broker report sourced from online content aggregator through publicly available sources and is displayed below for general informational purposes only. Refer full disclaimer below.

NIO Inc. (NIO US) – 4Q22 miss; 5 new models in the next 5 months

<ul>
<li>We expect NIO to report 4Q22 top line of RMB 16.7bn and GPM of 13.2%, missing consensus by (4%)/(0.8ppt), primarily due to COVID-related supply-chain issues and lower ASP. </li>
<li>We cut TP to US$ 13, due to weak momentum and the ongoing margin pressure in 1H23. We maintain BUY, as 1) intact model cycle starting from 2H23;</li>
<li>2) the upcoming ET5 station wagon in 2H23 and the mass-market/low-end brands in 2024 will expand its scale economy, which in turn will justify the sustainability of its business model.</li>
</ul>


We expect NIO to report 4Q22 top line of RMB 16.7bn and GPM of 13.2%, missing consensus by (4%)/(0.8ppt), primarily due to COVID-related supply-chain issues and lower ASP. 
We cut TP to US$ 13, due to weak momentum and the ongoing margin pressure in 1H23. We maintain BUY, as 1) intact model cycle starting from 2H23;
2) the upcoming ET5 station wagon in 2H23 and the mass-market/low-end brands in 2024 will expand its scale economy, which in turn will justify the sustainability of its business model.


[NIO (NIO US, BUY, TP US$13) Target Price Change]: Late Delivery of Key Models Hurts 1H23 Momentum

China

NIO Inc. manufactures and sells automobiles. The Company offers electric vehicles and parts, as well as provides battery charging services. NIO serves customers worldwide.

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NIO (NIO US)

[Consumer Brands Deep Dive]:Structural and Substitution Drive Chinese Consumer

Chinese underconsumption is only half true. It only occurs in categories associated with development stages; Our TOP PICKS are Li Auto, Atour,...

Blue Lotus Research Institute

China Auto Sector – A trough in the short term?

Wholesale volume also rose 11% YoY last month, 13% higher than our prior projection, again largely due to inventory restocking and higher export...

CMB International

[NIO Inc. (NIO US) Rating Change]: DG for Weak Momentum and Margin Pressure into Q3

We expect NIO to see a share loss in 2023 due to 1) late delivery of its key models; 2) conservative channel expansion plan; 3) uncompetitive pricing.

Blue Lotus Research Institute

NIO Inc. (NIO US) – 4Q22 miss; 5 new models in the next 5 months

NIO’s 4Q22 earnings missed our prior forecast on inventory provision, R&D and SG&A. We are of the view that NIO’s 1Q23E sales and margin weakness...

CMB International

[NIO (NIO US, BUY, TP US$13) Target Price Change]: Late Delivery of Key Models Hurts 1H23 Momentum

We expect NIO to report 4Q22 top line of RMB 16.7bn and GPM of 13.2%, missing consensus by (4%)/(0.8ppt), primarily due to COVID-related...

Blue Lotus Research Institute

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