NIO maintains a gross margin of 15%-18% for the full year, hoping monthly deliveries will quickly return to 20,000 vehicles (4Q23 Earnings Report Summary).

The following is a summary of the earnings call for NIO-SW in the fourth quarter of 2023. For an interpretation of the earnings report, please refer to " Another Loss for NIO-SW-SW! Can only rely on Middle Eastern investors to survive? "

1. Review of Key Financial Information:

2. Detailed Content of the Earnings Call

2.1. Key Points from Management's Statements:

1. Operational Highlights:

Ⅰ Product Highlights:

1. Historical Delivery Performance: In the fourth quarter of 2023, a total of 50,045 high-end smart electric vehicles were delivered, a 25% increase year-on-year; the total annual delivery volume reached 160,038, a 30.7% increase year-on-year; in January and February 2024, 18,187 vehicles were delivered.
2. Future Delivery Outlook: Starting from March 7, 2024, NIO-SW-SW will begin delivering the 2024 models, with the flagship model ET9 planned to start deliveries in the first quarter of 2025.

Ⅱ Research and Development Highlights:

1. Enhanced Computing Power: Strengthened the central computing cluster to improve computing power, enabling faster software updates and enhancing product foresight.
2. Navigation Assisted Driving: As of the end of January, the functionality covered over 1 million kilometers of Chinese roads, including 650,000 kilometers of complex open scenarios.
3. Upcoming Release: Large-scale visual models to further enhance the driving cabin experience and safety.

Ⅲ Operational Highlights:

1. Battery Swap Stations and Charging Infrastructure: Globally, there are 2,419 battery swap stations, with over 10,000 charging piles and 11,600 destination charging piles installed; plans to add 1,000 battery swap stations and 20,000 charging piles in 2024.
2. Financing Status: In December 2023, NIO-SW-SW received a $2.2 billion strategic investment.
3. Sustainability: Recognized by Corporate Knights as one of the 100 most sustainable companies globally in 2024, ranking 15th.

1. Financial Highlights:

Ⅰ Fourth Quarter Revenue:

1. Total revenue was 17.1 billion RMB, a 6.5% year-on-year increase, and a 10.3% decrease quarter-on-quarter.
2. Vehicle sales revenue was 15.4 billion RMB, accounting for 90% of total revenue, a 4.6% year-on-year increase, and an 11.3% decrease quarter-on-quarter.
3. Other sales revenue was 1.7 billion RMB, a 27.6% year-on-year increase, and a 0.4% quarter-on-quarter increase, mainly driven by increased sales of parts and power solution offerings.

II. Fourth Quarter Gross Margin:

1. The gross margin is 7.5%, showing a year-on-year increase, but a slight decrease compared to the previous quarter (Q3: 8.0%).
2. The vehicle gross margin has increased to 11.9%, with both year-on-year and quarter-on-quarter growth, mainly due to lower material costs and reduced inventory provisions.

III. Fourth Quarter Operating Expenses:

1. Research and development expenses amounted to 4 billion RMB, stable year-on-year but significantly increased quarter-on-quarter, primarily due to the rising costs of new product and technology development.
2. Sales and administrative expenses reached 4 billion RMB, showing growth both year-on-year and quarter-on-quarter.

IV. Net Loss:

The net loss is 5.4 billion RMB, showing a slight decrease year-on-year but an increase quarter-on-quarter, reflecting the company's higher short-term costs.

V. Cash Position:

By the end of 2023, the company holds 57.3 billion RMB in cash and cash equivalents, with reserves in good standing.

2.2 Q&A Analysts' Questions and Answers

Key Takeaways:

1. Capital expenditures for this year will be significantly lower than last year.
2. Maintaining a gross margin of 15%-18% for the whole year, aiming for 20% in the long term. The first quarter will see a decline due to promotional activities, gradually recovering in the second quarter.
3. Delivery volume: Mid-term goal to reach 20,000 vehicles per month.
4. New product releases: Alps will be launched in the second quarter, announced in the third quarter, and delivered in the fourth quarter. The cost of Alps will be 10% lower than Tesla Model Y's global cost. The focus will be on sales volume rather than gross margin, and a third brand will be launched in 2025, priced below 200,000 RMB.
5. Main brand: We will not sell any product cheaper than the existing ET5. We will not sacrifice profit margin or gross profit to achieve higher sales through price reduction.

Q: First, I would like to know if our upcoming investment plans are still under discussion to launch and deliver the first module in the next two quarters? Second, could you share more information about our strategy in China, such as our target number of stores, store types, and the scale of our transportation network? Additionally, are there any additional quarterly reports available to help us better assess these issues?

A: In the second quarter of this year, we will launch the second brand targeting the mass market. The third quarter will see the launch of the first product of the new brand, with a large-scale release and deliveries starting from the fourth quarter of this year. In fact, the prototype of this model was already offline in the fourth quarter of last year. Sales points will have independent sales networks, but for after-sales service, we can utilize the existing service resources of the new brand. As for the charging and swapping network, we have private and public networks. The private network will mainly be exclusive to the new brand, but we will also share public network resources with other car companies.

Our fourth-generation swapping stations will be compatible with new and auxiliary products. We will start building the fourth-generation swapping stations from April this year, and by 2024, we will install an additional 1,000 swapping stations, with most of them being the fourth-generation swapping stations of the public network.Q: During the second-quarter performance conference call, the management team mentioned that the gross profit margin expectation for 2024 is between 15% and 18%, with a possible additional 0.5% margin improvement from internal production. Therefore, considering the current market environment and changes in tax accounting standards, is it necessary to adjust this year's profit margin target to maintain consistency?

A: We will maintain the profit margin target of 15% to 18% for the entire year and adjust it quarterly as needed.

There may be some fluctuations after the launch of new products. Although the gross profit margin in the first quarter may decrease due to promotional activities, we expect the vehicle profit margin to resume an upward trend starting from the second quarter with increased production and cost optimization.

We are confident in achieving the 15% to 18% profit margin target for NIO-SW brand vehicles and aim for a long-term target exceeding 20%.

Q: Will NIO-SW-SW adhere to the previously set sales target of 200,000 units?

A: Competition will remain intense this year. We will introduce products for the 2024 model year with enhanced performance, especially in terms of computing power, to improve product competitiveness. We will collaborate with Aker for external evaluations and release more information on computing capabilities. In the second quarter, we will lower the NOP Plus price to cover more NT2 users, enhancing product competitiveness. Additionally, we have introduced new features such as large language models, large visual models, and EGC. As for sales channels and networks, we already have around 500 NIO-SW homes and spaces and will expand the service network to second and third-tier cities.

Meanwhile, since last year, we have expanded the sales team, which has matured over time. By the fourth quarter, they have gained a better understanding of our products, leading to improved sales performance. We have seen the sales team starting to make an impact, especially in the B2B segment of the new energy vehicle market. Our delivery results in February were quite good, especially compared to January. This reflects the effectiveness and efficiency of our expanding sales team and channels.

Thirdly, we will continue to expand the battery swapping network, establishing public and private swapping stations in NIO-SW and four central regions. This year, our focus is on increasing sales through the battery swapping network, as we already have over 2,000 stations. We have essentially established an initial swapping service network and will now concentrate on increasing sales by installing these stations.

Overall, based on our guidance in the first quarter of this year, we expect to deliver approximately 31,000 to 33,000 vehicles in March. As the weather warms up and the market becomes more active, our inventory will increase, and we hope to restore our delivery volume to around 20,000 vehicles per month in the mid-term.

Q: What types of new product models are included?A new brand targeting the mass market will be launched in the second quarter, with the first product set to hit the market in the third quarter and large-scale deliveries in the fourth quarter.

The new product line aims to introduce competitive models tailored to different household needs and is expected to roll out multiple new cars in the coming years. Due to the relatively late launch compared to other household car brands, the company's research on user demand is expected to be more in-depth, enabling the introduction of more competitive products.

The first model is undergoing various tests and will directly compete with Tesla's best-selling Model Y in the market. Our costs will be about 10% cheaper than Tesla, providing greater flexibility in pricing.

The second model will be an SUV targeting large families, with smooth progress in research and development, already in the mold-making stage and planned for market release in 2025.

The third model is currently in the development process, and specific details will be shared at the appropriate time; it's too early to discuss now.

Q: We would like to understand the management's priority strategy between pricing and sales volume. We noticed the company took a quite straightforward approach when facing general pricing actions in the industry. Does this mean a focus on profitability over sales volume this year, or is it just a strategy before the launch of our new mass-market brand?

A: Starting from the second half of this year, the NIO-SW-SW Group will sell two brands simultaneously. Therefore, we have differentiated the strategies for these two brands. For the new brand, we will not sell any products cheaper than the existing ET5, even for products under development. They will target the high-end market, meaning our new brand's products will have higher profit margins. We prioritize product gross profit over sales volume. Hence, we won't sacrifice profit margins or gross profit for higher sales by lowering prices.

The new mass-market brand targets the general public and household users, facing fiercer competition. However, it can leverage the existing electrification and smart technologies and infrastructure developed by NIO-SW-SW. Compared to building a brand from scratch, the second brand has certain advantages, and we will focus more on sales volume than product gross margins. This is the overall strategy for these two brands.

We believe that this combination of brand portfolios will help us achieve healthier, long-term sustainable development and operations.

Q: The recent Two Sessions discussed supporting the more proactive development of the new energy vehicle industry, regardless of profitability constraints. This seems to bring another kind of pressure to the industry, making consolidation more challenging. In terms of pricing, are we proactive enough? You mentioned prioritizing sales volume, but if the pressure persists longer, are we prepared to be more proactive in pricing?

A: Operating in China inevitably faces various competitions, including companies like Tesla, many Chinese startups, private enterprises, joint ventures, and state-owned enterprises. China's automotive market is highly open, and this competition actually benefits end-users.Despite the numerous challenges faced by automotive companies, we believe that those with strong overall capabilities and a focus on user experience will stand out from the intense competition. At the same time, we also see collaboration beyond competition, such as our partnerships with multiple automotive companies for charging and battery swapping. Overall, we excel in collaborating with peers to gain an advantage in fierce competition.

Q: Regarding the overseas market. Do you expect NIO-SW-SW to enter new countries this year? Will you collaborate with more local dealers? Will you continue the direct sales model in overseas markets? Do you have any overseas sales targets for this year?

A: Currently, we primarily focus on the Chinese market, as it is the largest and most competitive market in the global automotive industry. So far, we have entered five European countries and will continue to enhance our operations and management in these countries. This year, we plan to enter several new countries, such as the UAE, due to strategic investments from Abu Dhabi. For other countries, we are assessing conditions and strategic developments as we are about to launch a mass-market brand and plan to introduce a third brand next year with a price below 200,000 RMB. This will allow us to cover a broader market and provide more solutions. As NIO-SW-SW focuses mainly on the high-end market in China, the United States, and Europe, these three continents contribute 90% of the high-end market.

For our second and third brands, they will be more affordable, capture a larger market share, and enter more types of markets and regions. Therefore, our global market entry will also consider these three brands. Secondly, our strategy changes involve how we enter each market. Currently in China and five European countries, we adopt a direct sales model, and in China, we will continue with the direct sales model to directly engage with users. However, for other countries, we need to respect local conditions and the unique characteristics of each market. In this case, we will maintain flexibility and openness in our strategy to find the fastest way to return on investment. We do not rule out the possibility of collaborating with local partners to smoothly enter the market. Overall, we have adopted a flexible and open strategy for markets outside of China.

Q: Regarding battery technology, some automotive brands have recently introduced 800-volt charging, batteries, and systems. When do you think the NIO-SW-SW brand and possibly your second brand will start offering this fast-charging battery specification? If we introduce fast-charging battery technology, would you consider investing more in building charging stations in the future instead of battery swap stations?

A: NIO-SW-SW has been committed to researching ultra-fast charging and super-fast battery swapping technology and has been active in deploying public charging piles. So far, 80% of our electricity is used to charge new batteries for users' battery swapping business, achieving a balance of income and expenses. We will continue to deploy charging piles and will soon launch 640 kW power charging piles. At the same time, we emphasize the speed of battery swapping, which is 20 times faster than regular charging piles and provides a better user experience. In addition to rechargeable and swappable batteries, we also offer upgrade options and will soon introduce 150 kWh batteries and 5C charging speed, to be launched on the first-generation product ET9.The lifespan of batteries is equally important. Currently, the industry average warranty period is about 8 years or 100,000 kilometers, or when the battery capacity drops to 70%.

The lifecycle of electric vehicles is about 15 years. Although most electric vehicle batteries may not reach the end of their lifespan during this period, car companies are starting to consider the overall lifespan of products, including vehicles and batteries. Therefore, the lifespan of batteries has become more important. We have already addressed issues such as battery safety, charging efficiency, and the accessibility of charging and swapping facilities.

Starting this year, we will focus on the research and development of long-life battery technology. We believe that extending battery life, especially calendar life, is beneficial for battery electric vehicles, plug-in hybrid electric vehicles, range-extended electric vehicles, and new energy vehicles. Therefore, as a car company, we need to focus on the entire lifecycle of vehicles and batteries and provide the industry with ultimate solutions.

Q: Regarding your R&D budget for 2024, how much do you plan to invest in R&D this year? If possible, could you roughly outline how much will be used for new vehicle models, how much for the third brand, and how much for autonomous driving software and key components, etc.? What about the R&D expenditure plan for 2024?

A: Overall, we expect R&D expenditure to remain basically the same as in 2023, with R&D expenditure in each quarter also around RMB 3 billion. As for how R&D expenditure will be allocated this year, we will mainly invest resources in basic technology and technology that can be shared among the three brands. We focus mainly on intelligent and electric technologies, which are already shared between NIO-SW-SW, ALPS, and Power Swap. Last September, we announced new technologies. Basically, our R&D investment will focus on these areas. In terms of personnel structure, about 70% of R&D personnel are dedicated to intelligent technology-related fields.

Q: About our ALPS costs. I remember you mentioned that costs would be about 10% lower than Tesla's. Could you provide more details, as this is actually a quite impressive figure. Given that Tesla is almost building 1 billion cars in China every year, with 700,000 already assembled, what scale are you assuming for costs? What key strategies have you adopted to lead in costs compared to the competitor Tesla?

A: In fact, Tesla has also publicly disclosed product gross margin details, which allows us to easily compare the advantages and cost structure of our ALPS. China is the world's largest automobile market and also the largest market for smart electric vehicles, with a well-established supply chain. Therefore, we have been able to fully leverage the supply chain advantages in China. Over the years, we have invested in research and development and accumulated experience, which is key to improving cost structure and reducing product BOM costs. Therefore, we have a solid foundation and do not need to achieve massive sales volumes to achieve this cost structure. In China, a monthly sales level of 10,000 vehicles is sufficient to support manufacturing facilities without the need to reach 1 million vehicle sales. By the way, the so-called cost being about 10% lower than Tesla, we are comparing with Tesla globally, not just Tesla in China.Q: Our rapid charging and battery swapping network construction is progressing smoothly, and the charging network is still the fastest in China. However, at the same time, we see many other companies accelerating their charging network construction, especially rapid charging networks. How do we maintain our personnel advantage and coordinate the relationship between rapid charging and battery swapping?

A: We are pleased to see many other car companies, including peers and third-party companies, investing more resources in installing charging piles in China. The more charging piles there are, the better our public charging experience and efficiency will be. Therefore, we are also installing a large number of charging piles. In addition, we have the most battery swapping stations, making us the single largest operator of swapping stations in the industry. We have established a very good network effect that we can further leverage.

In general, many other car companies, especially those who take battery swapping seriously or are interested in it, choose to join our battery swapping network and alliance because they can also rely on our network effect. As for the potential conflicts between charging and battery swapping, of course, charging has some unique advantages. For example, if you have a charging pile at home, you can enjoy a faster charging experience at any time; or if you are out and only need to charge 20% or 30%, you can also choose a faster charging method. But if you need to complete charging in a very short time, then battery swapping is still the best choice. During the Spring Festival, over 90% of users on highways chose battery swapping over charging.

Battery swapping has its unique advantages. The swapping station itself is a natural energy storage system, and users do not need to get out of the car during the swapping process, which is fully automated. In addition, we also provide battery upgrade services, allowing users to upgrade their batteries through the swappable nature of the batteries.

For example, 8% of users choose the 100 kWh long-range battery pack. But before we established so many battery swapping stations in China, 50% of users actually chose the 100 kWh battery pack, and more users chose the standard range battery pack. The benefit is that if you only commute daily in Shanghai, a 75 kWh battery pack is sufficient for your needs. However, if you need to travel long distances, such as during the peak holiday season like the Spring Festival, you can use the flexible battery upgrade service to upgrade to the 100 kWh battery pack. For example, during the Spring Festival, many users chose battery upgrades. Our service is very flexible, and soon we will introduce a 150 kWh battery pack, which will meet the needs of very few use cases, possibly only 1% to 2% of users who need to travel longer distances.

Another benefit of battery swapping is how it helps manage battery life. Overcharging can damage battery life, similarly, frequent rapid charging can also shorten battery life, but through battery swapping, we can balance the battery life. In addition, we can further enhance battery life through other operational methods and mechanisms.In general, we believe that battery swapping and charging are not conflicting but complementary.

Q: When it comes to the market in cities below the second tier, the market share has increased slightly. Our market share, especially in cities below the second tier, is still less than 20%, while compared to brands like BMW, their market share may have exceeded 40%. Do we have some breakthrough assets in marketing and other aspects to further expand into cities below the second tier?

A: We are pleased to see many other car companies, including peers and third-party companies, investing more resources in installing charging stations in China. The more charging stations there are, the better our public charging experience and efficiency will be. Therefore, we are also installing a large number of charging stations. In addition, we have the most battery swapping stations, becoming the largest single operator in the industry. We have established a very good network effect, which we can further leverage.

Indeed, we need to address the issue of expanding market share and increasing sales in cities below the second tier. We have already started taking action in the second half of 2023 to expand our coverage in these cities. Sales distribution shows that the Yangtze River Delta region contributes to about 150% of sales, with first-tier cities accounting for over 70% of sales. Therefore, entering cities below the second tier and expanding channels is crucial for us. Charging and swapping facilities also play an important role in driving sales growth in these cities. This year, we will focus on installing more charging stations and swapping stations in third or fourth-tier cities to enhance user experience and competitiveness. This is an opportunity and a challenge that requires finding effective ways to increase sales in these regions.

Q: Regarding this year's sales network and sales team expansion plans. I would like to know about the number of new stores expected to be opened for the NIO-SW-SW brand and ALPS brand this year? How many new sales personnel do you expect to recruit for each brand?

A: For the NIO-SW-SW brand, we will not focus on opening more stores but will optimize the efficiency of existing sales points. We may close some inefficient locations and replace them with more efficient stores. Currently, our sales team has over 5000 people, and we will focus on improving overall operational efficiency rather than expanding the team size.

As for the new brand, we have secured some locations and resources, planning to open no fewer than 200 sales points when the brand is launched. In terms of personnel, we will prepare the team using the existing training system. For the ALPS brand, they will start with one product, making sales efficiency relatively easy to manage and improve. This is also based on the advantages of existing resources and the NIO-SW-SW network.

Q: Will the store locations for ALPS be similar to those of NIO-SW-SW?

A: The store locations and network development of the ALPS brand will be different from those of NIO-SW-SW because the target audience, pricing, and range of models are different. They will choose store locations based on their own needs and lay out the network according to their principles and logic. Additionally, the sales network of the ALPS brand will be more efficient and will not require a complete self-operated store like the NIO-SW-SW House.Therefore, its sales points will focus more on efficiency, similar to Tesla's company-owned stores.

Q: Can you provide us with some guidance on the capital expenditure (CapEx) for 2024, and break it down into vehicle capital expenditure and capital expenditure for charging and swapping infrastructure?

A: We will control capital expenditures, avoiding projects with a payback period of two to three years. This year's capital expenditures are expected to be significantly lower than last year. As for the deployment of our swapping station network, we will leverage the resources of commercial partners for expansion, meaning we will rely on our own resources to build the network. The security of the swapping network will mainly depend on everyone's cooperation.

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