Published On: Fri, Sep 14th, 2018

Nio’s Share Surge Takes It From Carmaker to Tech Star

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Electric-car maker Nio shifted quickly into a new gear. On the second day of trading after its initial public offering on the New York Stock Exchange, its shares zoomed up 76 percent. That transformed China’s answer to Tesla from a carmaker into a tech star.

Some deserved skepticism forced Nio to sell its stock at the low end of the indicated price range. For a fleeting moment, its valuation — nearly $7 billion at Wednesday’s close — just about suited the sector in which it operates. Applying rival Geely’s net profit margin of nearly 12 percent and its valuation of seven times its forecasted earnings implied a bottom line of just over $1 billion for Nio. That would conceivably be within reach if it could run its manufacturing partner’s factory at full capacity and then sell every single one of the 120,000 vehicles produced.

With a valuation of $13 billion, much higher expectations kick in. Nio would have to churn out more than twice as many vehicles as current capacity allows and find buyers for all of them. As of August, Nio had delivered just about 1,600 cars, generating $7 million in revenue at a big loss.

Chinese tech hype may explain the enthusiasm. Nio touted connected cars serviced by a dedicated app and partnerships with Tencent and JD.com for music streaming and e-commerce. These kinds of services resonate with investors. Shares of market debutants from China on the N.Y.S.E. and Nasdaq, excluding Nio, have averaged 64 percent increase this year, according to Dealogic. For all new listings in the Big Apple, the rise is a more muted 28 percent.

Tesla, too, trades at over 100 times estimated earnings for 2019. Nio may have belatedly captured some of that exuberance. It is nevertheless an unexpected, and implausible, U-turn.

Katrina Hamlin is a columnist for Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.

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