Nio: 2025 sales target doubled, automotive business gross margin increased to 20% (3Q24 earnings call summary)

The following is the summary of the Q3 2024 earnings call for $NIO(NIO.US) . For the earnings report interpretation, please refer to Feeling Deflated Again! Lantu Can't Support Nio's "Fracture" .

1. Core Information Review of the Earnings Report:

2. Detailed Content of the Earnings Call

2.1 Core Information from the Call:

1. 2025 Sales Guidance and Automotive Gross Margin Target: In 2025, with the launch of new product cycles, sales are expected to achieve a 100% growth (approximately 440,000 units), and the automotive business gross margin is targeted to increase to 20%.

2. 2025 Product Planning:

① Next year, the Nio brand will gradually switch to the NT3.0 platform, with the ET9 being the first product. There will be new products launched subsequently, and some will certainly be facelifts of existing products. The transition and upgrade of all products will basically be completed over the next two years, and this will be done gradually.

② In addition to the L60 volume next year, the Lantu brand will also launch two family SUVs to complete its layout in the family market. One will be a medium to large 6-seater and 7-seater SUV, and there will also be a large 5-seater SUV. In comparison, this is equivalent to the Li Auto L8 and L7 products, and the overall cost control is also very well managed.

Currently, the price difference between the L60 and Li Auto's L6 is 40,000 yuan, and I believe these two new products will have very good price competitiveness compared to the L7/L8. Next year, the battery swap service will be expanded to every county, and strengthening the Lantu channel construction will give us great confidence in the sales growth of Lantu next year.

③ The third brand, Firefly, will be unveiled next month, similar to BMW's mini strategy.

3. Breakeven Planning Timeline: In 2025, with the doubling of sales, the improvement of gross margin, and the implementation of cost reduction and efficiency enhancement measures, losses will gradually narrow. From a profitability perspective, in 2025, with the growth in sales, improvement in gross margin, and the advancement of cost reduction and efficiency enhancement efforts, losses will gradually narrow.

In the short term, R&D spending will still maintain a relatively high level, and in terms of sales services, the battery swap service expansion and the construction of the Lantu sales system will certainly bring some short-term pressure We are still confident about the continuous narrowing of losses, and the company is working towards achieving profitability for the entire year of 2026.

4. Q4 2024 Automotive Business Gross Margin Guidance: Starting from October, the tightening of sales policies will improve gross margins, although it may temporarily affect sales volume. However, order backlogs in October and November have rebounded.

The gross margin for the automotive business in the third quarter was 13.1%, and the target for the fourth quarter remains at 15%. The motivation for continued improvement comes from the moderate tightening of promotional policies for the Nio main brand and optimization of the supply chain.

5. Lido Production Ramp-Up and Delivery Guidance: The L60 utilizes many new technologies, including 900V high-voltage technology, which affects the production of batteries, motors, and electronic architectures. Therefore, the ramp-up speed is as expected, without establishing a large inventory before the launch to significantly boost delivery volumes in the first or second month.

If we look at the complete delivery month, the L60's production capacity can reach 10,000 units in December, with a production and delivery target of 20,000 units by March next year, which is a reasonable ramp-up pace.

Recently, due to the expiration of local and national subsidy policies at the end of the year, our deliveries will be pushed to next year, which will objectively affect some user orders. About 50-60% of users have given up due to the inability to pick up their cars by the end of the year, which has a significant impact on L60 orders, as its price is around 200,000, and a subsidy of 10,000 to 20,000 is very attractive to users. The ET9 and Firefly also have their own ramp-up paces, and the company will actively build delivery centers (launch stores).

6. Do the Lido brand and NIO main brand cannibalize each other? The main users of Lido come from Model 3 users, which have little impact on NIO users. Internal data shows that only about 2% of NIO users do not purchase NIO due to Lido. In the past 1-2 months, the overall increase has been greater than the decrease, and overall, it remains a successful strategy.

7. Capex Guidance: From a capex perspective, this year's total capex investment has significantly decreased compared to last year. Currently, it is at around 80 for the whole year, and the budget for next year is still being prepared, but the target may remain at a similar level.

8. Sales Expense Guidance: From an operational expense perspective, in the third quarter, especially sales expenses have increased significantly. Part of the increased amount comes from the construction of Lido's sales network and sales preparation expenses. In the fourth quarter, this expenditure will continue to increase.

With the increase in sales volume in 2025, the goal is to increase its proportion of sales revenue to achieve efficiency improvements.

9. R&D Expenditure Guidance: The intensity of R&D is basically maintained at around 3 billion under Non-GAAP per quarter, with fluctuations based on R&D progress and intensity. The fourth quarter is expected to be higher than the third quarter. The overall scale of R&D investment in 2025 will still maintain about 3 billion Non-GAAP investment per quarter, with a research team size of about 11,000 people, which may vary with project changes

10. Q4 Cash Flow Guidance: Positive free cash flow was achieved in the third quarter, and positive operating cash flow is expected in the fourth quarter. The growth in operating cash flow can support daily operating expenses (OPEX) and capital expenditures (CAPEX).

11. Reasons for the Increase in Gross Margin of Other Businesses in Q3: The main reason is the improvement in after-sales service efficiency. At the same time, the layout of the battery swap station network has slowed down due to the slower R&D pace of the fourth-generation stations, leading to a slowdown in layout, with recent net losses narrowing. In the future, after-sales service efficiency and profitability will continue to improve, but to support ONVO sales, infrastructure will be prioritized, and the layout of battery swap stations will accelerate, aiming to enhance after-sales business to cover the losses from the early layout of battery swap stations.

12. Financing Plan: There is currently no urgent demand, and adjustments will be made based on market dynamics.

2.2 Key Information from Executive Statements:

1. Business Progress

① Performance Overview

a. Nio set a new quarterly delivery record in the third quarter of 2024, delivering 61,855 vehicles.

b. In October 2024, the company delivered 20,976 vehicles.

c. The Nio brand maintains a leading position in the segment of passenger cars priced over RMB 300,000 in China, with a market share of 48%.

d. In the third quarter, Nio's ONVO brand began delivering its first model L60, marking Nio's entry into a broader mainstream family market.

② Quarterly Outlook

a. As the ONVO brand continues to enhance production capacity, the company expects total deliveries in the fourth quarter to be between 72,000 and 75,000 vehicles.

b. The company is currently enhancing supply chain capacity, with Nio's L60 monthly production capacity expected to reach 10,000 vehicles in December and 20,000 vehicles by March next year.

③ ET9

a. Nio's flagship model ET9 is undergoing final testing and is preparing for mass production, with deliveries expected to begin in March next year.

b. The ET9 brings together Nio's leading innovations, and its delivery will strengthen Nio's high-end brand image.

c. With the launch of new models next year, the Nio brand will focus more on enhancing profitability.

④ ONVO L60

Thanks to its unique design, ultra-low energy consumption, comprehensive safety features, and convenient charging and battery swapping experience, the ONVO L60 model is favored by family users targeting the mainstream family market.

⑤ Firefly

a. Nio's third brand Firefly will make its global debut on Nio Day 2024.

b. Its first product will be delivered in the first half of next year, targeting the compact car market.

c. The Firefly brand will fully utilize the existing sales network and enrich the company's product line.

⑥ Intelligent Driving a. As of October, Nio's smart driving has over 610,000 users, who have accumulated a total driving distance of over 1.39 billion kilometers, with 78.4% of users activating Nio's Navigate on Pilot feature.

b. The smart driving services launched based on the company's long-term accumulated experience and expertise have made Nio the first brand to offer vision- and navigation-guided smart driving services in urban areas.

⑦ Sales and Service Network

a. Sales: Currently, Nio has 176 Nio Houses and 412 Nio Spaces worldwide, while the ONVO brand has 191 stores in China.

b. Service: The company has 398 service centers and 65 delivery centers.

⑧ Battery Swap Network

a. As of now, the company has 2,737 battery swap stations globally, with 887 located on highways, providing over 58 million services to Nio and ONVO users.

b. Over 24,000 charging piles and destination charging piles have been put into use.

⑨ Global Expansion

a. The first Nio center in the Middle East and North Africa (MENA) region will undergo an opening update, and sales and delivery operations have already started in the UAE.

2.3 Q&A Analyst Q&A

Q: Since the launch of the L60, it seems that the sales of the Nio brand and Le Dao are conflicting. Is there any brand erosion and impact between them?

A: The decline in Nio brand deliveries in October is a result of proactive adjustments, as the monthly delivery volume had previously reached 20,000 units, but mainly due to promotional activities, there was significant pressure on gross margins. Therefore, in October, promotional spending was reduced by about 15,000 RMB, which will certainly affect sales, but this was anticipated, and demand has already recovered in November.

Currently, Nio's brand strategy uses two or three brands to target different users. Le Dao's main users come from Model 3 users, which have little impact on Nio users. Internal data shows that only about 2% of Nio users chose not to purchase Nio due to Le Dao. In the past 1-2 months, the overall increase has been greater than the decrease, and overall, it remains a successful strategy.

Q: What is the reason for the slow production ramp-up of the L60, and what is the impact on year-end order backlog? What are the production ramp-up plans for models like ET9 and Firefly?

A: The L60 utilizes many new technologies, including 900V high-voltage technology, which affects the production of batteries, motors, and electronic architectures. Therefore, the ramp-up speed is as expected, and significant inventory was not built up before the launch to allow for a significantly higher delivery volume in the first or second month.

Looking at the complete delivery month, the L60's production capacity can reach 10,000 units in December, with a production and delivery target of 20,000 units by March next year, which is a reasonable ramp-up pace Recently, due to the expiration of local and national subsidy policies at the end of the year, our deliveries will be postponed until next year, which will objectively affect some user orders. About 50-60% of users will give up due to the inability to pick up their cars by the end of the year, which significantly impacts L60 orders, as its price is around 200,000, and a subsidy of 10,000 to 20,000 has great appeal to users. ET9 and Firefly also have their own ramp-up rhythms, and the company will actively build delivery centers (launch stores).

Q: How to find a balance between sales and gross profit? It was just mentioned that the subsidy will be reduced by 15,000, which will obviously support the gross profit margin of the automotive business at the end of the year, but at the cost of sacrificing sales. In the long term, what is the expected vehicle gross profit margin? Can you share the medium- to long-term sales and gross profit strategy?

A: Nio insists on a high-end positioning. Starting in October, the sales policy has been narrowed to improve gross profit margins, which may impact sales in the short term, but the order backlog for October and November has rebounded.

The gross profit margin for the automotive business in the third quarter was 13.1%, and the target gross profit margin for the automotive business in the fourth quarter remains at 15%. By 2025, the automotive gross profit margin is based on 15%, with the goal of increasing the automotive business gross profit margin to 20% through optimizing market strategies and supply chains.

Q: With the launch of the Firefly and the ultra-high-end flagship brand ET9 in 2025, can you provide guidance on operating expenses (opex) and capital expenditures (capex)?

A: Next year, there will be new models launched and the introduction of three brands. From the perspective of operating expenses, in the third quarter, especially sales expenses have increased significantly, part of this increase comes from the construction of the sales network and preparation expenses for LeDao. By the fourth quarter, this expenditure will continue to increase.

Currently, LeDao has 190 stores, and the goal is to reach 300 stores by the end of the year. To achieve the target of 20,000 units in March next year, we will gradually further expand the sales network and sales personnel. Therefore, after the sales capacity is in place in the first quarter of next year, the overall input-output ratio will be relatively good, but before that, the proportion of sales expenses to sales will be higher, and it will gradually return to normal starting in the first quarter of next year.

Overall, OPEX will achieve a quarterly improvement in cost-effectiveness with the increase in sales. From the capex perspective, this year's overall capex investment has significantly decreased compared to last year. Currently, it is at around 80, and the budget for next year is still being prepared, but the target may be at a similar level.

Q: After the increase in EU tariffs, what is Nio's pricing strategy in Europe and its impact on demand? What is the situation regarding the ONVO brand's gross profit margin, and what is the potential gross profit margin when monthly deliveries reach 20,000 units?

A: European tariffs affect pricing, and Nio adopts a cost-plus global uniform pricing strategy, resulting in increased vehicle prices. Currently, the strategic focus in Europe is to establish a sales and service system to enhance user satisfaction, prioritizing long-term investment over sales volume. The Norwegian market is not affected by tariffs, while several other countries are indeed impacted, but the overall operational impact on the company is minimal.

In 2024, the LeDao L60 is in the initial ramp-up stage, with a relatively low gross profit margin, but it has a positive gross profit, which is in single digits. By 2025, as production capacity and delivery volume gradually increase, the benchmark target for the ONVO brand's gross profit margin is 10%, with an overall target of gradually reaching 15% next year Q: What are the plans for new products in the second half of the year, especially regarding updates to the existing product line?

A: 1. Next year, the Nio brand will gradually switch to the NT3.0 platform, with the ET9 being the first product. There will be new products launched subsequently, and of course, some will also be updates to existing products. The transition and upgrade of all products will basically be completed over the next two years, and this is being done gradually.

For the Ladao brand, in addition to the L60 volume production next year, we will also launch two family SUVs to complete Ladao's layout for the family market. One will be a medium to large 6-seater and 7-seater SUV, and there will also be a large 5-seater SUV. In comparison, this is equivalent to the Li Auto L8 and L7 products, and the overall cost control is also very good. Currently, the price difference between the L60 and Li Auto's L6 is 40,000 yuan, and we believe these two new products will have very good price competitiveness compared to the L7/L8. Next year, we will have battery swapping available in every county, while also strengthening Ladao's channel construction, so we are very confident in the sales growth of Ladao next year.

The third brand, Firefly, will be unveiled next month, similar to BMW's Mini strategy.

Next year, Nio will enter a new product cycle, and we are confident in achieving a doubling of sales (100% - approximately 440,000 units) next year.

Q: What are the reasons for the increase in service gross margin in the third quarter, and what are the guidance for service gross margin in the fourth quarter and 2025?

A: The increase in gross margin in Q3 was driven by two factors. The improvement in automotive gross margin came from the optimization of component costs, including battery costs and other component costs, which saw significant improvement compared to previous quarters. Secondly, it came from the increase in sales and the improvement in manufacturing efficiency at the entire factory, leading to an increase in fixed cost allocation. Therefore, the automotive business gross margin rose from 12.2% in Q2 to 13.1% in Q3.

Looking at Q4, the continued upward momentum comes from two aspects: one is the moderate tightening of promotional policies for the Nio main brand, and the other is the optimization of the supply chain. We are confident that the automotive business gross margin in Q4 can be further increased to 15%.

By 2025, the improvement in gross margin will come from two aspects: one is the continuous improvement of the supply chain, including the iteration of smart hardware, which will lead to cost optimization, while also introducing products with competitive pricing and costs into the Nio portfolio. It is expected that the NIO brand's automotive gross margin can continue to increase by 20% by 2025.

Q: What are the key milestones, challenges, and capabilities of NIO regarding intelligent driving?

A: At the end of July, we released the intelligent driving world model and end-to-end solution, which has been used in the mass-produced vehicle Pioneer Navigation Team testing, achieving end-to-end active safety functions, and performing well in urban navigation assistance functions. We are also the first to achieve urban navigation assistance functions using full vision. In the coming months, new features will be released, with ongoing investment in R&D based on computing power, data loops, and models, adhering to the priority of autonomous driving safety, addressing usability issues, and enhancing user experience. The goal is to reduce the accident rate of shared driving compared to solo driving by ten times next year.

Q: What are the funding needs, profitability timeline, and capital raising plans for next year?

A: We achieved positive free cash flow in the third quarter and expect to achieve positive operating cash flow in the fourth quarter. The growth in operating cash flow can support daily operating expenses (OPEX) and capital expenditures (CAPEX). From a financing perspective, there is currently no urgent need, and adjustments will be made based on market dynamics In 2025, with the doubling of sales, the improvement of gross profit margin, and the implementation of cost reduction and efficiency enhancement measures, losses will gradually narrow. From a profitability perspective, in 2025, as sales grow, gross profit improves, and cost reduction and efficiency enhancement efforts progress, losses will gradually narrow.

In the short term, R&D spending has generally remained at a relatively high level. In terms of sales services, the construction of the battery swap network and the sales system of LeDao will definitely bring some short-term pressure. However, there is confidence that losses will continue to narrow, and the company is working towards achieving profitability for the entire year of 2026.

Q: How to respond to competition in the European market and expand market share, especially in conjunction with the launch of the new Firefly model?

A: Nio's performance in the European market has not met expectations, but we are advancing according to long-term plans. ONVO and Firefly will play a greater role in global market expansion. Nio positions itself as a high-end brand in Europe, but the market size is limited due to tariffs, and prices are similar to those of Porsche, so the market size is constrained, but we will still maintain long-term investments.

We will prioritize the entry of LeDao and Firefly into global markets, expanding into more countries and regions. In the Chinese market, LeDao shares the battery swap network established by the NIO main brand, but in the global market, LeDao is a model focused on volume, providing strong support for establishing the battery swap network. Therefore, overseas, the NIO main brand will rely more on LeDao's charging and battery swap system.

Q: What are the reasons for the narrowing of gross losses in other businesses and future trends?

A: The narrowing of losses and the improvement of gross profit in other businesses in Q2 and Q3 are mainly due to the improvement in after-sales service efficiency. At the same time, the layout of the battery swap station network has slowed down due to the slower development pace of the fourth-generation stations, leading to a recent reduction in net losses. In the future, after-sales service efficiency and profitability will continue to improve, but to support ONVO sales, we will insist on infrastructure first, accelerating the layout of battery swap stations, with the goal of enhancing after-sales business to cover the losses from the early layout of battery swap stations.

Q: Regarding the visibility of ONVO L60 delivery volume, how to achieve the goal of delivering 20,000 vehicles in March during the off-season?

A: Although the recent demand for L60 has been affected by long delivery wait times and the expiration of subsidies, compared to September, this demand is indeed not as strong. However, the recent test drive conversion rate is high, and the product and price competitiveness are strong. Currently, the main task is to improve the coverage of the sales and service network. The number of existing stores is relatively small, and there is a gap compared to Tesla and Li Auto. We will open more stores in the future to enhance sales capabilities. It is expected that after the impact of subsidies is eliminated in January, based on product strength, improved sales capabilities, and subsidy factors, we are confident in the demand for L60.

Q: What are the technical directions of the next-generation platform NT3 in terms of autonomous driving computing power, battery, motor power, integration, and electronic architecture?

A: ET9 is the first model on Nio's new platform, featuring significant upgrades in high-voltage architecture, EE architecture, operating systems, autonomous driving computing power (using self-developed chips), and sensors. Subsequent products will gradually apply these technologies for iteration, representing a phased achievement of Nio's technological investments over the past decade and serving as an important foundation for future product iterations Q: What are the expected levels of R&D expenses and selling, general and administrative expenses (SG&A) for the fourth quarter and 2025? With new products launching next year and continued investment in ADAS intelligent driving technology, what is the guidance for R&D expenses next year? Given that four new products will be launched next year, will selling expenses continue to grow?

A: The R&D intensity will basically maintain a quarterly Non-GAAP investment of around 3 billion, with fluctuations based on R&D progress and intensity, and the fourth quarter is expected to be higher than the third quarter. The overall R&D investment scale for 2025 will still maintain about 3 billion Non-GAAP investment per quarter, with a R&D team size of about 11,000 people, which may increase or decrease with project changes. Regarding selling and administrative expenses, as sales volume increases, the goal is to enhance its proportion of sales revenue to achieve efficiency improvements.

Q: What are the reasons for the increase in equity investment losses over the past three quarters and what is the future trend?

A: The increase in equity investment losses in the third quarter is due to the company's investments in upstream and downstream enterprises within its industry, with the invested companies experiencing losses, which is relatively normal in a highly competitive industry. Taking Nio Energy as an example, although equity investment losses increased in the third quarter, Nio Energy's business scale has grown this year, and its profitability has improved significantly compared to last year. The penetration rate has also risen rapidly after the BaaS price adjustment, which will not lead to an increase in losses for the company.

Risk disclosure and statement of this article: Dolphin Investment Research Disclaimer and General Disclosure