Feeling discouraged again! LeDao cannot support the "fractured" Nio

$NIO(NIO.US) On November 20th, before the US stock market opened and after the Hong Kong stock market closed, Nio released its third-quarter financial report for 2024. Let's take a detailed look:

1. Automotive gross margin barely meets expectations, mainly due to cost reductions: In the third quarter, Nio's automotive business gross margin increased by 0.9 percentage points quarter-on-quarter, barely meeting market expectations, driven by cost reductions. The reduction in costs is partly due to the continued decline in lithium carbonate prices and the further decrease in battery costs in the third quarter, while sales volume increased by 8% quarter-on-quarter, releasing some scale effects.

2. However, the selling price of cars continues to decline: Contrary to market expectations of a quarter-on-quarter increase in selling price this quarter, the selling price continued to decline despite mainly selling the 2024 new models, with the low-priced L60 delivered at the end of September having little impact on the average selling price for the third quarter, and a slight improvement in sales structure (the proportion of low-priced ET5 decreased by 2%). The reason behind this is that Nio further increased promotional efforts in September.

The selling price of 270,000 yuan this quarter is lower than the market expectation of 276,000 yuan and the previously guided implied price of 282,000 yuan, indicating that the decline in order volume for the Nio main brand in the third quarter was beyond the company's expectations, forcing it to continue with price reductions and promotions.

3. Fourth-quarter sales guidance is below expectations: The fourth-quarter sales guidance is 72,000 to 75,000 vehicles, also lower than the market expectation of 78,000 vehicles, implying an average monthly sales of 25,500 to 27,000 vehicles in November and December. Considering that the average monthly contribution from the Le Dao model is about 8,000 vehicles over the next two months, this implies that the monthly sales of the Nio main brand will decline from the previous steady state of 20,000 vehicles to around 17,500 to 19,000 vehicles.

4. However, even more disappointing is the implied automotive selling price in the revenue guidance: The fourth-quarter revenue guidance implies that the automotive selling price will continue to decline by 28,000 yuan to 240,000 yuan, still lower than the market expectation of 258,000 yuan. In terms of model structure, the impact of the low-priced Le Dao model starting to ramp up in the fourth quarter has already been factored into the market, but the selling price guidance remains below expectations, reflecting Nio's increased promotional efforts for the main brand Nio, consistent with the increased promotional intensity learned from Dolphin Jun in November.

Despite Nio's increased promotional efforts for the Nio main brand, combined with the implied decline in monthly sales guidance for the Nio main brand, such performance during the traditional peak sales season in November and December is clearly below expectations. On one hand, it reflects a decrease in the order volume for the Nio main brand, and on the other hand, it indicates that price reductions still do not lead to an increase in sales for the main brand.

5. Sales expenses continue to grow significantly, leading to losses that are still higher than market expectations: Although Nio had previously communicated that due to the increase in store openings for Le Dao and increased marketing investments, sales and management expenses would continue to rise in the third quarter, the 4.1 billion yuan in sales and management expenses was still about 200 million yuan higher than market expectations, resulting in operating losses that were still higher than market expectations, with operating losses exceeding 5 billion yuan this quarter

6. Free cash flow turns positive, mainly due to increased upstream supplier payables: Nio's free cash flow turned positive this quarter mainly due to changes in working capital - the increase in upstream accounts payable (an increase of 5.6 billion compared to the previous quarter) also boosted the company's cash and cash-equivalent assets to 42.2 billion, an increase of 600 million compared to the previous quarter.

Dolphin Investment Research Opinion:

From both the third-quarter performance and the fourth-quarter guidance, Nio's performance has fallen short of expectations.

The underperformance reflects the sluggish sales growth of Nio's main brand NIO, which requires continuous enhancement of promotional policies to drive sales growth. Nio also attempted to reduce discounts on its main brand in early October, but this led to a decline in October NIO main brand sales from a steady 20,000 units to 17,000 units. In November, they had to increase discounts again, indicating that high-end pure electric brands are struggling to escape the growth dilemma.

With continued increases in discounts for the main brand in the fourth quarter and a rising proportion of the low-priced L60, the implied unit price guidance for the fourth quarter has decreased by 28,000! Although there is a contribution from economies of scale (the implied sales guidance indicates a 16%-21% quarter-on-quarter recovery in sales driven by the ramp-up of L60 production capacity), Dolphin believes that Nio's car sales business gross margin pressure remains significant, with losses in selling and administrative expenses difficult to reduce, and under pressure on gross margins, losses may continue to increase.

Dolphin previously mentioned in Nio's in-depth article "Is Nio Still Worth Loving with 'Lice' Under Its Luxury Coat?" that Nio, due to its asset-heavy model built on "high-end services" + "battery swap mode," requires higher sales than similarly positioned high-end peers to dilute initial capital investments and release leverage on expenses.

From the current performance of Nio's second brand "Leda," due to its low starting price + large space + BaaS model + unique energy replenishment advantages and the momentum of high-end brand penetration, it has indeed successfully created a hot-selling model, with cumulative pre-orders possibly exceeding 40,000 units, and a relatively sufficient order backlog. Although this provides some support for next year's sales (Dolphin estimates L60 will contribute 110,000 units in 2025), if Nio's high-margin main brand sales cannot stabilize or continue to decline, relying solely on Leda or even the third brand Firefly's explosive sales will still struggle to help Nio achieve breakeven Nio expects a 100% increase in sales next year (to 450,000 units) during the conference call, while the market currently estimates its 2025 sales at only 345,000 units. The models for next year will include:

Facelift: Nio's main brand will switch to NT3.0, and the flagship model ET9 will be launched (the high-priced ET9 is expected to have low sales);

Ledo: The L60 is expected to have guaranteed volume, and next year will also launch a 6-7 seat mid-large SUV and a large five-seat SUV, competing with Li Auto's L7 and L8;

Firefly will be released next month and is expected to be launched in the first half of next year, with a starting price previously rumored to be around 140,000-150,000 yuan.

However, given that Nio's guidance has historically not been very reliable, whether the market will be willing to believe and price this is another matter.

Nio's current stock price corresponds to a 2025 P/S ratio of about 0.8 times (based on the sales expectation of 345,000 units in 2025). Although the valuation is not high compared to other new forces (XPeng at 1.2 times, Li Auto at 0.86 times), the main brand's sales may struggle to stabilize, the gross margin may continue to decline due to discounts, and the breakeven point under the heavy asset model is later than that of other new forces. Dolphin remains cautious about Nio.

The following is a detailed analysis:

I. Automotive gross margin barely meets expectations under cost reduction, but the selling price continues to decline!

As the most critical indicator during each earnings report, let's first look at Nio's car selling profitability.

Due to the low-priced Lido L60 being delivered only at the end of September, it had no significant impact on the average selling price for the third quarter, and the market's expectation is that the sequential rebound in sales prices will drive an increase in gross margin this quarter:

① The proportion of relatively low-priced ET5 has declined, and only the 2024 models were sold in the third quarter. It is expected that the recovery of sales discounts will also boost the average selling price (in the second quarter, new and old models were sold together, with discounts on old models ranging from 24,000 to 32,000 yuan).

② Sales volume rebounded sequentially, and scale effects were released.

However, from the actual performance, the average selling price this quarter, despite only selling the 2024 new cars, still declined sequentially to 270,000 yuan, lower than the market expectation of 276,000 yuan and the implied average selling price of 282,000 yuan in Nio's previous revenue guidance.

The automotive gross margin this quarter, driven by cost reduction effects, increased by 0.9 percentage points to 13.1%, barely meeting market expectations.

From the perspective of single vehicle economics:

1) In the second quarter, Nio's average vehicle price was 270,000 yuan, with increased discounts driving the average vehicle price down further.

The contribution of the Lido L60 in the second quarter was minimal, and its impact on the average selling price can be largely ignored.

With a slight improvement in sales structure (the relatively low-priced ET5's proportion in the sales structure declined by 2% sequentially), and with only the 2024 new cars sold in the third quarter, the average selling price continued to decline. This is due to Nio increasing promotional efforts for its main brand models in September.

According to Dolphin's understanding, in September, Nio offered discounts of 8,000 to 10,000 yuan on existing NIO vehicles, but the actual subsidies for existing vehicles had reached nearly 30,000 yuan (through partner purchase channels), and the subsidies for display vehicles had also reached 36,000 yuan, with promotional efforts further intensified. Additionally, the optional fund increased from 8,000 yuan per vehicle in August to 20,000 yuan per vehicle in September

Data Source: JD Power

2) In the second quarter, the cost per vehicle was 235,000, and cost reduction led to a rebound in automotive gross margin

In the second quarter, the cost per vehicle was 235,000, continuing to decrease by 5,000 compared to the previous quarter, which led to a rebound in automotive gross margin.

The continued decline in the cost per vehicle this quarter was mainly influenced by two factors:

① Decline in raw material costs (mainly batteries): In the third quarter, due to the continued decline in lithium carbonate costs, battery costs decreased.

② Release of scale effects: In the third quarter, Nio sold 62,000 vehicles, an increase of 8% compared to the previous quarter, which released scale effects and reduced the per vehicle amortized cost.

3) Gross margin per vehicle rebounded by 2,000

The vehicle price decreased by 3,000 compared to the previous quarter, but the cost per vehicle saved 5,000 compared to the previous quarter. As a result, in the second quarter, Nio earned a gross profit of 35,000 for each vehicle sold, an increase of 2,000 compared to the previous quarter.

II. Fourth quarter guidance below expectations, further increase in promotional discounts for the main brand NIO

1) Fourth quarter sales guidance of 72,000 to 75,000, lower than market expectations of 78,000

From the third quarter guidance, the sales guidance is 72,000 to 75,000, which is also lower than the market expectation of 78,000, implying an average monthly sales of 25,500 to 27,000 in November and December. Given that Le Dao is expected to contribute an average monthly sales of about 8,000 in the next two months (management previously guided that Le Dao would contribute 20,000 in sales in the fourth quarter), it implies that NIO's main brand monthly sales have declined from the previous stable 20,000 to around 17,500 to 19,000.

In October, Nio also attempted to retract some promotional activities, such as canceling exhibition vehicle discounts, but orders dropped significantly in the first half of the month. Therefore, in late October, they increased promotional efforts again. However, the main brand sales in October, affected by the partial retraction of promotions in early October, fell from 20,000 in September to 16,700 in October, below market expectations.

2) Fourth quarter revenue guidance implies a unit price of 242,000, a significant decline of 28,000

However, compared to the sales guidance being below expectations, even more disappointing is the revenue guidance for the next quarter, which implies that the average sales price of vehicles will continue to decline by 28,000 to 242,000, still below the market expectation of 258,000.

In terms of model structure: the impact of the low-priced Le Dao starting to ramp up in the fourth quarter has already been factored into the market (expected to account for 27% of the model structure, an increase compared to the previous quarter), but the price guidance is still below expectations, reflecting that Nio has further increased promotional efforts for the main brand NIO, consistent with the increased promotional efforts learned from Dolphin in November However, although Nio has increased promotional efforts for the NIO main brand, the implied decline in monthly sales guidance for the NIO main brand indicates that such performance during the traditional peak sales season in November and December is clearly below expectations. On one hand, this reflects a decrease in the order volume for the NIO main brand, and on the other hand, it shows that price reductions still do not lead to an increase in sales for the main brand.

Previously, Nio had guided that the gross margin for its automotive business in the fourth quarter would rise sequentially to 15%. However, with further increases in promotional discounts for the main brand and the continued rise in the proportion of the low-margin L60 model in the fourth quarter, although there is a contribution from economies of scale (the implied sales guidance indicates a sequential increase of 16%-21% in sales driven by the ramp-up of L60 production capacity), Dolphin Jun believes that the pressure on the gross margin from car sales in the fourth quarter remains significant.

Data Source: JD Power

Looking at Nio's overall situation:

III. Nio's revenue is below market expectations, while gross margin is slightly above expectations due to reduced losses in other businesses

Nio's total revenue in the third quarter was 18.7 billion, below the market expectation of 19 billion, mainly due to a continued decline in the average price of automotive business, which was lower than market expectations.

Revenue from other businesses this quarter was 1.98 billion, slightly exceeding market expectations of 1.92 billion, mainly due to increased sales of parts and accessories driven by the continued growth in vehicle ownership, as well as increased revenue from vehicle after-sales services and charging and battery swapping.

The overall gross margin for this quarter was 10.7%, slightly exceeding market expectations of 10.5%. The automotive gross margin was basically in line with expectations due to cost reductions, while losses in other businesses continued to narrow, mainly due to the dilution effect of increased delivery volumes on other business costs and improved profitability from higher battery swapping station utilization. Management previously expected that the gross margin for other businesses would continue to improve to close to -10% in the next few quarters, continuing to achieve reduced losses.

With other business gross margins all above market expectations, the gross margin for other businesses this quarter was -12.3%, a sequential increase of 6.4%. The losses in other businesses continued to narrow, mainly due to higher battery swapping station utilization (the cooperation of the "Battery Swapping Alliance" has begun) and enhanced profitability from after-sales services. Management previously expected that the gross margin for other businesses might continue to improve in the next few quarters, achieving reduced losses.

IV. The increase in operating expenses is mainly due to high sales and management expenses

This quarter, the three expenses reached nearly 7.4 billion, an increase of about 450 million compared to the previous quarter, consistent with the trend of the previous quarter, with the largest increase still being in sales expenses. Specifically: 1) R&D expenses this quarter are 3.32 billion, slightly exceeding market expectations of 3.28 billion

R&D expenses this quarter are relatively well-controlled, with only a month-on-month increase of 10,000 yuan, mainly expected to be used for intelligent driving and new model development (ET9, sub-brand Firefly). Nio had previously guided that the Non-GAAP R&D expenses would be around 3 billion each quarter, and this quarter remains within that guidance.

2) Sales and administrative expenses this quarter are 4.11 billion, exceeding market expectations of 3.9 billion

Since Nio had previously communicated that due to the launch and delivery of the L60, sales and administrative expenses would continue to increase, the market expected a month-on-month increase of 150 million to 3.91 billion this quarter. However, the actual sales and administrative expenses for this quarter were 4.11 billion, still exceeding market expectations by 200 million.

The sales and administrative expenses this quarter were mainly used for:

Due to the launch of the L60, as the L60 and Nio's main brand use different channels, there is a need to continue increasing sales personnel and store deployment (approximately 100+ stores were opened in the third quarter, and it is expected that the number of stores will reach 200 by the end of the year);

This quarter, with the launch of the L60, marketing expenses for the new model have also increased.

The gross margin this quarter is basically in line with market expectations, but due to high investment in sales expenses, the operating loss for this quarter is still -5.2 billion, remaining in a deep loss state, resulting in the operating loss being higher than market expectations.

Nio's free cash flow turned positive this quarter, mainly due to changes in working capital - an increase in accounts payable upstream (an increase of 5.6 billion month-on-month), which also boosted the company's cash and cash-equivalent assets to 42.2 billion, an increase of 600 million compared to the previous quarter.

For more in-depth research and follow-up comments on Nio by Dolphin Jun, please click:

Financial Report:

On September 5, 2024, financial report interpretation《 Nio: Rarely not collapsing, can Lido support the future? 》

September 6, 2024, Conference Call Summary: Expected Lido L60 December delivery volume to exceed 10,000, with a gross margin of 15% in Q4 ****

June 7, 2024, Financial Report Interpretation: Sales rebound but stock price collapses, how can Nio save itself? ****

June 7, 2024, Conference Call Summary: Expected Q2 vehicle sales gross margin to return to double digits ****

March 15, 2024, Financial Report Interpretation: Another huge loss! Can Nio only rely on Middle Eastern investors for survival? ****

March 6, 2024, Conference Call Summary: Still maintaining an annual gross margin of 15%-18%, hoping monthly deliveries will quickly return to 20,000 units ****

On December 5, 2023, Financial Report Interpretation: Repeated "Bounce" Life-and-Death Line, What Does Nio Rely on to Restore Its Reputation?

On December 6, 2023, Conference Call Minutes: Continuing to Increase Investment in Sales Network and Personnel (Nio 3Q Conference Call Minutes)

On August 29, 2023, Financial Report Interpretation: Nio: Quarterly Loss of 6 Billion? Don't Panic, Hope Isn't Far Away

On August 29, 2023, Conference Call Minutes: Achieving Low Double-Digit Gross Margin in Q3, Gross Margin Increased to 15% in Q2 (Nio Minutes)

On June 9, 2023, Financial Report Interpretation: Nio: Reflection is More Important than Selling Cars

On June 9, 2023, Conference Call Minutes: Nio Minutes: ES6 Over 10,000 Units in July, Gross Margin Returns to Double Digits in the Second Half of the Year

On March 2, 2023, Financial Report Interpretation: [Many Ideas, Poor Execution, How Much Trust Can Nio Still Wear Away?]

March 2, 2023, Conference Call Summary “Nio: Gross margin can reach 18-20% by the end of the year, lithium prices are expected to drop to 200,000”

On November 11, 2022, Financial Report Interpretation “Nio: When pricing is pessimistic enough, how much damage can the collapse of the answer sheet cause?”

On November 11, 2022, Conference Call Summary “Nio: Breakeven in the second quarter next year, long-term stable gross margin of 20-25% is not a problem”

On September 7, 2022, Financial Report Interpretation “Don’t be scared by the huge loss, Nio is approaching good days”

On September 7, 2022, Conference Call Summary “Capacity is the bottleneck, second quarter sales set record every month”

On June 29, 2022, Hot Comment “This short report on Nio could be more heartfelt”

On June 16, 2022, New Car Release Summary “Rapid release, rapid delivery, Nio has hope in the second half of the year”

On June 9, 2022, Second Quarter Financial Report Interpretation [“Nio is still soft, can confidence only rely on new cars?

On June 9, 2022, the second quarter earnings call “The gross margin will be worse in the second quarter, Nio's turnaround depends on the second half of the year”

On March 25, 2022, the 2021 fourth quarter report review “Nio: Under pressure, is the future a continued dark night or the dawn?”

On March 35, 2021, the 2021 fourth quarter report meeting minutes “2022 is a year of comprehensive acceleration for Nio”

On November 10, 2021, the 2021 third quarter report review “Nio: After the 'ankle chop', will there be a deep squat jump in the first half of next year?”

On November 10, 2021, the 2021 third quarter report meeting minutes “Nio: No need to overly worry about the temporary delivery slowdown and pressure on gross margin (meeting minutes)”

On August 12, 2021, the 2021 second quarter report review “Saying goodbye to the explosive period, what will Nio rely on for the future?”

On August 15, 2021, the 2021 second quarter report viewpoint update “Nio: High valuation vs low delivery, beware of the 'future' in front of you”

Research

On June 13, 2023, Nio hot topic “Nio: Finally doing subtraction”

On December 21, 2021, Nio NIO DAY research “The 'explosive model' ET5 debuts, Nio wants to reignite the 'future'”

In-depth

**On September 5, 2024, in-depth [“Nio: Rarely not collapsing, can LeDao support the future?”]

On June 9, 2021, Three Idiots Comparative Study - Part One: New Car Manufacturing Forces (Part 1): Choosing the Right People, Doing the Right Things, Analyzing the People and Events of New Forces

On June 23, 2021, Three Idiots Comparative Study - Part Two: New Car Manufacturing Forces (Part 2): As Market Enthusiasm Diminishes, What Can the Three Idiots Rely on to Solidify Their Position?

On June 30, 2021, Three Idiots Comparative Study - Part Three: New Car Manufacturing Forces (Part 3): Doubling in Fifty Days, Can the Three Idiots Continue to Charge Forward?

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