NIO: Still aiming for a balanced profit and loss in the fourth quarter of next year, with no problem achieving a steady-state gross margin of 20-25% in the long term (telephone conference minutes).

Below is the content of NIO's Q3 conference call. For financial report interpretation, please refer to "When pricing is pessimistic enough, how much impact can a failed answer sheet have?".

I. Management Report

1. NIO-SW.HK ET5: In September, ET5's intelligent electric coupe concept cars arrived at stores one after another, and the customer traffic in stores reached a historic high, with strong order growth. On September 30th, ET5 officially began deliveries, and early users showed a satisfaction level beyond our expectations.
2. Sales and Service Network: We have 399 NIO Centers and Spaces in 149 cities, with 280 service and delivery centers covering 163 cities.
3. NIO Power Network: We have deployed a total of 1,210 battery swap stations, providing over 14 million battery swaps for users, and deployed 2,055 charging stations, including 5,765 supercharging piles and 6,077 destination chargers. At the same time, our charging map has connected to over 590,000 third-party charging piles in China and over 380,000 in Europe.
4. Overseas market: To better serve European users, we are building NIO Centers and NIO Spaces in ten major European cities, including Berlin, Frankfurt, Rotterdam, Copenhagen, and Stockholm, planning to build 20 battery swap stations in Europe by the end of 2022 and 120 by the end of 2023, providing local users with home appliances that are rechargeable, swappable, and upgradable.

II. Q&A with Analysts

Q: The original target for this year was 150,000 vehicles, or 68,000 in Q4. Can we understand this guidance as a result of the impact of the epidemic and supply chain tension, which has caused a loss of more than 20,000 units of production capacity? With the tight supply of secondary frames and other components, if there were no epidemic impact in Hefei, how many cars could be produced with normal component capacity?

A:

1. First, the secondary frames have had some impact on us, and this issue has been basically resolved in November.
2. EDS factory has high automation, with about 30 workers supporting the entire factory, but crawling production has indeed affected about 2-3,000 of our output.
3. The epidemic has affected more than one week of production capacity before and after, but our production has now recovered in November.
4. EDS will add a new production line next week, and climbing uphill will be almost complete by the end of the month. So, the issue of the secondary frame has been resolved.
5. We expect ET5 to reach our expected climb in December, and ET7 and ES7 currently have no major obstacles. Q: How does the restriction on American semiconductor chips affect the company and industry? Currently, Nvidia can sell A800 chips to China. How does this compare to A100 and affect the speed of iteration for autonomous driving?

A:

1. Nvidia's chip is mainly related to our cloud-based AI training chip. Currently, we have enough A100 chips to meet our training needs for a long time.
2. Of course, we are also actively evaluating relevant dynamics, including cooperation with some cloud service providers and actively evaluating long-term plans to support the continuous iteration of autonomous driving.
3. For the time being, we believe that it will not affect our overall demand in this area.

Q: How is the order situation for ET5 compared to previous expectations? After Tesla lowered the price, has there been any impact?

A:

1. We are still focusing on production climb. During the initial delivery of all new vehicles, we pay close attention to the quality climb process.
2. The demand for ET5 is undoubtedly very strong, and it is the same as our expectations. Of course, we certainly expect more, and we don't want users to wait too long.
3. Tesla has always lowered its prices before, which is not a new thing for us. We have not seen any special fluctuations in demand for us.
4. The price difference between Model Y and Model 3 and us has always been relatively large. From the perspective of price bands, we do not strictly regard them as being in the same market segment as us.

Q: R&D and marketing expenses have increased significantly compared to the previous quarter. Is this a short-term stage issue (considering entering new markets) or will it be a structural increase? What is the expectation for future expense levels?

A:

1. The increase in sales expenses is because we entered more European markets in the third quarter and carried out more marketing and promotion activities than the second quarter.
2. In the long run, as we improve our operating efficiency, the percentage of sales expenses to sales revenue will continue to be optimized. I think that cost ratios will show a stable improvement trend in 2023 and the next few years.
3. The growth of R&D expenses in Q3 is related to the R&D rhythm, especially the investment surrounding battery, chips, and other areas including personnel and testing expenses, is part of our plan and not particularly increasing.
4. Our entire R&D layout and work are basically finalized. In the future, R&D investment intensity, including personnel costs, will be maintained at around 3 billion RMB per quarter. We will continue to improve the efficiency of the R&D system.

Q：What is the proportion of S&A expenses in Europe? A: Europe is still in a relatively early stage. The proportion of all expenses in sales and administrative expenses is not large. Our European sales and marketing team has about 500 people.

Q: What level of output can be achieved by the peak output of about two factories at the end of the year? Any expectations for production capacity next year?

A:

1. It is indeed difficult for us to predict the short-term fluctuations caused by epidemic prevention and control.
2. We can now meet our delivery targets for next year with the support of the entire supply chain. Vehicle production is no longer a problem.
3. As for the supply chain, there will still be some problems. For example, the delivery volume in December will be constrained by power semiconductor chips. Its maximum amount, such as the amount of our silicon carbide chip, has a total limit.
4. But we think that overall, next year should be fine. So from the perspective of the supply chain and production, without considering the impact of the epidemic, I don't think the overall production capacity will be our bottleneck.
5. Keeping both of our factories at an output of 150,000 vehicles per shift is a good rhythm for our entire production, quality, and operational efficiency.

Q: Given the large amount of early R&D investment and manufacturing costs, the expected stable gross profit margin for the intelligent electric vehicle market was between 20 and 25. Is this too optimistic? How do you view long-term profitability?

A:

1. The iteration speed of intelligent electric vehicles is relatively fast. We see that the product iteration cycle is definitely faster, and we think that about three years will be a major change.
2. We are also iterating our intelligent technology in accordance with this rhythm. Perhaps each company's strategy is slightly different.
3. Taking NIO as an example, all the software and hardware of our first-generation vehicle are on one platform, such as NT2, and all cars are the same. And our battery pack is a unified pack. Our powertrain system is actually a limited combination, and we only have some differences in appearance and design to meet the needs of different users. So overall, the R&D efficiency is still very high.
4. A gross profit margin of 20 to 25 is not really a big problem. Even considering this year's price increase in batteries, we can still maintain a good gross profit margin because although we raised the prices of our vehicles, we did not raise them as much, and we have previously achieved a gross profit margin of more than 20. If we assume that the price of the battery can drop to a rational price, we think a gross profit margin of 20 to 25 is not really a problem.
5. Of course, in the long run, with vertical integration and investment in battery chips, we still have room to increase our gross profit margin. From a long-term strategic perspective, we believe that a gross profit margin of 25 to 30 is achievable.
6. But the market challenge may be greater. If all companies are taken together, I estimate that the overall gross margin may be negative. Of course, BYD has done a very good job because of its vertical integration in batteries and many components. So I think it is very difficult to achieve a gross margin of more than 20 points without vertical integration capability.

Q: Previously you guided that the company will be profitable in the Q4 of next year. Can you clarify whether this guidance is still valid? ET5's sales volume have surpassed that of BMW 3 Series, is this guidance still valid? The gross margin guidance of this year is between 18% and 20%, is this guidance still valid?

A:

1. Overall, we still maintain the direction of achieving breakeven in Q4 next year. We have two new brands under development, as well as batteries, chips, and mobile phones. A total R&D investment of about 3 to 4 billion yuan will be made on these new businesses next year. If looking at it from the perspective of Q4 next year, it will be about 1 billion yuan per quarter. Excluding these, we are confident that we can maintain this breakeven point.
2. ET5 has surpassed BMW 3 Series. This car is much better than BMW, and we are still very confident. This is not a guidance, but our co-founder's marketing during a marketing event. But I think we have a good chance of achieving this.
3. Gross margin. If we talk about this year, there are indeed challenges mainly due to battery prices. The recent price of lithium carbonate is still at a high level and has increased by a lot. When it was at its lowest, it was more than 400,000 yuan per ton, and now it is around 600,000 yuan per ton, which has indeed affected Q4 gross margin by several points, and this is indeed beyond our control. We can't raise prices again, so there will be some pressure. However, we can maintain the stability of gross margin, and we can do it. Relatively speaking, the gross margin in Q4 will maintain a relative stability at the level of Q3.
4. Of course, I think the price of lithium is not a supply and demand issue. I don't think any electric car company in China cannot obtain supplies of batteries to affect deliveries, so overall, I do not believe it is a supply issue. So I think there is no doubt that the price of lithium should come down, but it's hard to predict when.
5. Our battery pack uses a relatively large amount of electricity, and on average, it is close to 90 degrees. So if the price of lithium carbonate remains high, it will indeed affect our gross margin. We can give you an estimate, which is that each 100,000 yuan increase in price will affect our gross margin by about two points. So if it drops from 600,000 yuan to 400,000 yuan, we can get four points of gross margin. If it drops to a reasonable level of around 10,000 yuan, we can get eight points of gross margin.

Q: It seems that ET5 has now received orders but the car won't be delivered until March, obviously it has become a hot seller and will become our future Model 3. What will our future Model Y be?

A :

1. We will launch five new models in the first half of next year, so there will definitely be one for M Y. We believe that a more efficient way to meet users' personalized needs is our overall concept.

2. In the first half of next year until June, we will have eight models available. We believe it can satisfy the diverse demands of users in the 300,000 to 500,000 price range, except for MPV users.

3. The total amount of production will meet our expectations. We do not expect any model to reach tens of thousands of units sold per month. For example, ET5 can sell slightly above 10,000 units per month, but not too much. I would not be fond of selling 30,000 units in a month either.

4. Of course, the goals for the mass market are different. For one car, we hope it can sell 50,000 units per month. Different segments of the market should prioritize the interests of different users.

Q: Regarding the target for the fourth quarter, if we use the minimum value of 43,000 units, and we assume linear growth month over month by 37%, that means we can reach a peak of approximately 18,000 units by December. Is this linear climb realistic? Or is it possible to put more weight on December, such as exceeding 20,000 units in that month?

A:

1. We do have a gradual climb process in November. From the perspective of ET5, including EDS, there is a natural climb process.

2. We believe that in December, excluding the impact of silicon carbide chips, we should exceed the amount you mentioned.

3. Overall, we will definitely produce more in December than November. We hope to exceed the goal of 20,000 units for December.

Q: Considering uncertain factors such as a decrease in market demand and intensified competition, as well as changes in capital expenditures in the next two years, how many years can we be supported by our cash reserves?

A: We are aware that there is currently much uncertainty in the market. We believe that with our current cash reserves, coupled with reasonable funding support from banks, we have sufficient confidence in our company's financial discipline. We will always be strict in this aspect.

Q: Any progress to share regarding car chips?

A:

1. For the car-side chips, we are the first to launch Nvidia's chips globally, six months earlier than our peers.

2. On the other hand, we have been actively researching and developing self-driving chips since last year, and we have a team of 500 working on this project. Progress is going smoothly.

3. The relationship between self-driving chips and algorithms is quite high. If we define this chip from the perspective of our smart driving algorithm, efficiency will be much higher. Of course, we can also significantly improve our gross profit. Overall, progress is relatively satisfactory.

Q: In terms of the entire vehicle production phase, will we consider switching from the current model of contract manufacturing to self-built production capacity in the future, such as obtaining production qualifications? What are the potential difficulties we might encounter? Would this transition optimize our new car production and manufacturing costs?

Output: Q:

A:

1. The factory of F2 is still cooperating with JAC, and the current cooperation is pretty good. At present, we don't think the whole vehicle production is our bottleneck. As we mentioned before, we already have the capacity for a single shift of 300,000. That is 150,000 for each of the two factories. Just imagine, if it's a double shift, it can support our whole-vehicle production in a visible period of time.
2. Indeed, there are some problems in the supply chain, which is not only our company's problem, but the entire industry is facing pressure and volatility. Of course, with the increasing production volume, we should have the ability to resist winds and waves.

Q:

A: Of course, we will have our own boundaries. The cash we have on hand for R&D investment will basically maintain an investment of around 3 billion yuan per quarter, which includes all of our R&D investments. Of course, we will also be more proactive in improving the efficiency and pace of this investment. Therefore, overall, our financial management boundaries are still very strict.

Q:

A: In the short term, we don't have plans to launch an MPV model. Of course, in the long run, we will pay more attention to this special market. I have also noticed that this market is very hot. On the supply side, several Chinese brands have already launched high-end MPV models. But from the demand side, at least for now, the MPV segment is still a niche market.

Q:

A:

1. Automatic driving as a service to improve gross profit margin will indeed take some time.
2. Some are due to the development time of the function, but also need to wait for the regulations to further mature. When we see that China's MIIT and MPS have recently launched some pilots, this is certainly a positive signal.
3. We think it may still take another year or two for the regulations in this area and the relevant technology to further mature. It is unlikely to contribute too much gross profit in the short term. Q: The inventory in the balance sheet of the third quarter has reached 6.7 billion, which is the highest in recent quarters and has almost doubled compared to the second quarter. Does this mean that there are about 10,000 more vehicle inventories on the asset side than in the second quarter?

A: I think there are mainly two reasons for the increase in Q3 inventory.

1. One is the normal increase in our inventory in the third quarter. Our production was negatively affected by the sub-frame issue in the third quarter, so we increased production of older models such as ES8 and ES6.
2. Secondly, due to the increase in component inventory to ensure production for the next few months, we stored more key materials such as chips and other raw materials in the third quarter. All of these factors have led to an increase in our inventory.

Q: Regarding ET5, many consumers have mentioned that energy consumption is a serious issue. What actions will we take in response to this feedback from consumers?

A:

1. Different tires have a significant impact on energy consumption for ET5.
2. Some users may not pay particular attention to this issue. If you choose a high-performance tire, the difference between that and a low rolling resistance tire is quite large because we offer a wide range of tire choices.
3. If you want to pursue more range, you have to choose the long-range tires. Therefore, this is probably more of a misunderstanding or a matter of value habit.

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