As promised I'm back with a new video on NIO ($NIO 蔚来) and this time I want to
share with you some of the background work that I'm currently doing.
As you know,
I'm working at the second version of my valuation sheet for NIO and some of the
work I have been doing so far,
I've already shared with my Patreons (Patreon.com/DONGXii) as blog posts,
but now I also want to do a video on the topic of regulatory credits,
because I think this is something that most of the analysts and also private
retail investors in NIO have missed so far and it could be quite important.
And if you're looking at the recent controversy about the Tesla Q3 earnings,
once again, when it comes to the regulatory credits,
we see that this can really be an important factor in valuating the company
and also judging ultimately whether or not this company is profitable,
because as discussed in my latest video,
I think Tesla had a really good Q3 earnings actually bought more shares before
But now if you look at more traditional financial media and their feedback on
the Q3 earnings, some of them are saying that,
well Tesla wanted to have to profitable quarters now,
but without regulatory credits.
So meaning that they get actually paid for the EV credits that they can
sell to other OEM makers who are not having carbon free cars
on the roads yet.
And they need to get those credits in order to avoid penalties. Then,
if Tesla wouldn't be able to sell those credits to those manufacturers,
then they wouldn't be profitable, but I fully agree here with Ross Gerber.
One of the Tesla bulls, who is saying this.
Well, I think that's sort of an unfair way to look at a company. Okay?
So here's a company that makes it EV that knows that it gets a credit
for taking this enormous risk and making a much harder vehicle.
That's better for the environment where making a gas car is easy and it is
horrible for the environment. So there's a reason why these credits exist.
So to infer that that's not part of the businesses is I think disingenuous,
I mean the bottom line is that that's real cash that Tesla gets paid
because other companies have failed at creating any sort of
EVs solution when they know they can, they just don't want to invest the money.
So it's real money.
They're getting paid this money and they're gonna get paid this money for ever
into the future while these companies can continue to deliver with their ice
I think it's part of the intrinsic business model of what Tesla is doing,
and they are profiting from it for a reason, because they are the first,
who are going all full electric and so they should be profiting from it.
And these are some valid revenues that Tesla is generating there.
And I also disagree with the fact that without them,
they would actually be not profitable - once again,
I think similar to what Amazon was facing before people are just not getting
the company and don't understand that Tesla with those high margins.
Now they could be profitable as they like.
But what they do is to invest most of the money into the fast
growth, actually, and same here with the regulatory credits,
you need to adjust them for the taxes.
So the tax rate at Tesla is paying around 33%.
If you adjusted to those taxes,
you would see that Tesla's net income would even still be positive without
those regulatory credits.
And also after effects like paying Elon Musk with his
share options here. So yes,
Tesla is profiting massively from this regulatory credits right now.
But I think the part that most people are missing here is that actually the same
thing applies to NIO.
And so far they haven't booked those regulatory credits yet,
but in the Q2 earnings call Li Bin (李斌) the CEO of NIO,
actually talked about it. So similar to Tesla,
NIO can sell those NEV credits to other car companies.
And also China has such kind of legislation.
And it has been updated actually in the last year and Li Bin mentioned during
the earnings call that in 2019,
so last year NIO got around
100,000 of NEV credits and this was actually expected to be worth
120 million RMB.
So roughly 18 million US dollars.
And this is for selling around 20,000 cars.
So this means with each cost sold NIO generates around 900
US dollars in NEV regulatory credits that they can actually
sell to other OEMs.
And Li Bin also mentioned that he is expecting that the price for those credits
is actually going to rise.
And that this year NIO is about to double actually the
regulatory credits that they are earning.
So they get around 200,000 this time,
and this would now reflect in about 40 million U dollars,
that NIO will be able to sell.
So I am assuming here in my calculation that now it would be around
950 US dollars per car and writing this forward till the year
And this is just based on my not updated chart yet regarding the NIO
sales and the estimations. And so on.
NIO could actually earn up to 500 million US dollars in
regulatory credits that are selling to others and thereby like pumping
up their own balance sheet here with those added income stream here.
And this is not too much,
it's around roughly 2% of the revenue that they do annually.
So it's not a massive amount here,
but I think it will have implications on the stock price and a positive
implications on the stock price because it will actually help to improve the
margins that NIO can report.
Because of course the nature of those credits is that NIO doesn't have to do
anything for it except for selling their cars.
So there is no additional manufacturing or work or cost going into that.
And this is just one of the benefits of being a only-EV maker,
pure play EV brand here.
And likewise as Tesla NIO will be earning this and can actually profit
from that in the future. So in my new valuation model,
I will be actually implementing this as well.
And this will probably be based on higher sales numbers and estimations,
because I still have to get the Battery as a Service (BaaS) update here
into this evaluation sheet as well. So in general,
this is good and unreported news. And I think in Q3 or Q4,
we will see the first sales of those regulatory credits and they will be
reported obviously, and in the future,
they should be more continuous as well and helping to improving the margins
And in general also thereby improving the stock price and
valuations here by analysts in general. Once again, similar to Tesla,
I think this is part of the intrinsic business model of NIO.
And therefore I don't agree that this should be downplayed or not be added to
incorporating it on the margins. Although,
Li Bin mentioned that they will not include it on the vehicle margins instead in
the overall gross margin.
So that's also a more transparent move in contrast to what Tesla is doing here -
on the other hand I don't really care in which aspect it will be included
free money that they getting because of the being first and obviously future the
faster, they can put out more cars on the road.
The more credits they will be earning,
because this also means that on the timeline,
they have now this advantage that they are first to mass producing the electric
cars and thereby they are the first to get those credits and can be selling them
into the range of other OEMs that have not had ability to sell
electric cars as fast. So hope you like this little bit of news,
enjoy your Sunday and see you in the next one.