After an earnings release to forget, Chinese automaker NIO (NIO) is facing more challenges.
The company was forced to recall about 5,000 ES8 vehicles, as batteries are reportedly catching fire. NIO said it will need to replace the batteries on the vehicles and it will take about two months to complete. This shouldn’t come as a total surprise to investors, as the company only began delivering vehicles to customers last year — industry behemoths with 100+ year track records still face recalls on nearly an annual basis. The same issue has happened to Tesla in the US, but while Tesla could produce upwards of one million cars per year, NIO has delivered only 17,000 vehicles total. So while other automakers have the experience to fix the issues, it remains to be seen how NIO will overcome the obstacle.
That said, Deutsche Bank analyst Vincent Ha believes the company will be just fine, as he reiterates a Buy rating on NIO stock, with a $6.30 price target. (To watch Ha’s track record, click here)
Ha says, “improper arrangement of the voltage sampling wire harness within the battery module may lead to the wearing out of the insulation material…[which] under extreme circumstances [could result in] fire.” The only vehicles affected were those built between April and October 2018, and represent the first vehicles the company delivered.
The company will face expenses relates to the battery pack logistics, labor and the total volume of vehicles that need to be recalled. Overall, Ha believes “the worst-case earnings hit to NIO” of 500-600 million RMB could come in the second quarter. But the analyst believes “the ultimate impact would be lower,” as he expects the battery supplies to eat some of the expense.
The good news, according to Ha, is that “the recall can help to put behind the overhang on the cause of previous fire incidents, not to mention that the battery replacement process should be simple, given the swappable battery design and that NIO’s equipped batteries after October 2018 have not been found to have any issues.” After the recall process is complete, the company should be able to “refocus on restoring consumer confidence and growing ES6 pre-orders.” So while the analyst would not be surprised to see selling pressure on NIO’s shares due to the recall, he remains optimistic that sales will continue to grow.
All in all, after getting off to a strong 2019, NIO stock has collapsed since the beginning of March. Shares are down about 75% since then, but Wall Street is remains cautiously optimistic. A 12-month TipRanks analysis of six analyst ratings shows a consensus Moderate Buy rating, with four analysts recommending Buy, one suggesting Hold, and one saying Sell. (See NIO’s price targets and analyst ratings on TipRanks)