NIO: Gross margin can reach 18-20% by the end of the year, and lithium prices are expected to drop to 200,000 (minutes)

Below is the summary of the conference call for NIO, US. For analysis of financial reports, please visit ["With so many ideas and such poor execution, how much trust does NIO have left to squander?"](With so many ideas and such poor execution, how much trust does NIO have left to squander?)

I. Key Points from Management Statements

1. Delivery Data/Market Share

In Q4 2022, NIO-SW.HK delivered a total of 40,052 high-end smart electric vehicles, a YoY growth of 60%, achieving a record high quarterly delivery volume. Throughout 2022, NIO delivered a total of 122,486 high-end smart electric vehicles, a YoY growth of 34%.

In the Chinese market for high-end EVs above RMB 300,000,$NIO Inc. USD OV(NIO.SG) was ranked first with a market share of 54.8%. For high-end EVs above RMB 400,000, it achieved a market share of 75.8%.

In the first two months of 2023, NIO delivered 20,663 new vehicles, a YoY growth of 30.9%. We estimate total deliveries for Q1 2023 to be between 31,000 and 33,000 vehicles.

2. Product Development and Operations

Since the launch of ET5 delivery in September 2022, production has steadily increased, and overall delivery has risen. In January this year, in the market for medium-sized sedans above RMB 300,000, ET5 ranked first in delivery volume in 19 cities including Beijing, Shanghai, Guangzhou, and Shenzhen, and second in national market ranking.

On December 24, 2022, NIO held NIO Day 2022 in Hefei, and launched the SUV EC7 and the all-new ES8 flagship SUV for all-scenario intelligent electrification.

EC7 is expected to begin deliveries in May this year; ES8 will be available in two 6-seater configurations and is expected to begin deliveries in June this year.

In the area of intelligent driving, NIO has already fully distributed the beta version of NOP plus (enhanced ADAS) to users on the NT 2.0 platform. Based on the fully self-developed intelligent driving technology and closed-loop data, NOP plus beta version has significantly improved in aspects such as safety, comfort, and traffic efficiency, with usage rates doubling compared to NOP. The total mileage of usage in the past week has exceeded 1.75 million km. We will launch more functions in the first half of this year and will gradually implement highway navigation battery swaps.

We currently have 375 NIO Centers and NIO Spaces covering 141 cities, and 305 service and delivery outlets covering 148 cities.

In terms of charging and battery swapping networks, we have accumulated 1,331 swapping stations, providing users with more than 18 million swaps. We have also deployed 6,385 supercharging piles and 7,555 destination charging piles. At the same time, our charging map has connected more than 1.04 million third-party charging piles. In 2022, more than 50% of the power added by NIO users to their vehicles came from swapping stations. 2023, NIO plans to add 1000 new battery switching stations, with over 2300 stations planned by the end of 2023. Currently, the mass production of the third-generation stations is progressing smoothly, and large-scale production is expected to begin in April.

In the fourth quarter of 2022, NIO officially entered Germany, the Netherlands, Denmark and Sweden, providing European customers with NT2.0 models and full service.

On January 31, 2023, the intelligent electric mid-size SUV EL7 began to be delivered to the first batch of European users. With a more diverse product portfolio and the gradual improvement of sales and energy supplement networks, brand awareness continues to increase and we are confident in our long-term development in Europe.

In 2022, we have been firmly committed to NIO's long-term competitiveness, investing in core technology and product development, battery swapping and sales services, network layout, and global market development, among other areas, and have made significant progress, laying a solid foundation for the company's long-term development. In 2023, with the release and delivery of the full range of NT2.0 platform products, we will do our best to provide users with experiences that exceed their expectations. At the same time, we will strive to achieve comprehensive performance improvement, participating in the long-term competition in the global electric vehicle market with an agile and efficient work rhythm.

II. Analyst Q&A

Q1: What is the impact of the supply chain of components on the delivery and the expected improvement?

A1: In the fourth quarter of last year, the delivery of some of our cars was indeed affected by the supply of components, but since January of this year, the control of the epidemic in China has basically come to an end. Therefore, overall, our component supply is no longer a bottleneck. Of course, starting in the second quarter, as we deliver our new cars, we will face some challenges.

But for the whole year, if the current situation continues, we believe that the pressure on the supply side for us will be greatly reduced, and component supply will not be a blocking factor for us.

Q2: What is the relationship between gross margin and battery prices, and how does changes in the price of battery raw materials affect gross margin? What is the outlook for 23 years?

A2: The goal for the end of this year (4Q23) is to have a gross margin of 18-20%. The company's confidence comes from: product portfolio optimization, new products entering delivery in Q2, and better amortization of fixed costs; raw material & chip costs are decreasing. We have learned from upstream companies that this year's lithium battery demand will not be as much higher than expected as it was last year, and that the price of lithium carbonate is expected to drop to 200,000 yuan in Q4.

There is expected to be greater pressure on gross margin in the current quarter (1Q23):

(1) The company is in a period of sales conversion from NT1 to NT2, and the factory needs to prepare for the conversion, resulting in lower utilization of production capacity;

(2) Low gross margin ET5 is the main seller in the first quarter;

(3) The 866 model has measures such as clearing inventory for display cars, national subsidies, and financial subsidies.

Q3: Considering the market competition environment and the delivery of our products, how does the company break down its goal of selling 250,000 units per year? A3: After the delivery of new products, we are very confident in the market demand and achieving sales targets, which comes from three aspects:

(1) This year we have 5 new products based on the NT2 platform. All products will switch to the new platform to avoid a significant drop in our frontline efficiency caused by simultaneous sales of two generations of products. This situation is different from Q4 last year and Q1 this year -- after the product switch, our main selling models can cover 80% of BBA's sales share. Moreover, from a product perspective, we have overwhelming advantages in various segmented markets.

(2) The second is our charging and swapping system -- we will add 1,000 battery swapping stations this year, which is conducive to our exploration of third- and fourth-tier cities. So far, more than 50% of our users are in the three provinces of Shanghai, Jiangsu, and Zhejiang, indicating that we still have a huge space for developing low-tier cities. The 1,000 battery swapping stations this year are not only to optimize the charging experience for existing users but also to support the penetration of low-tier markets.

(3) The third growth driver comes from the release of the NT2 platform software features. In the past week, our NOP Plus's cumulative mileage exceeded 1.75 million kilometers. Because computing power and sensors are standard equipment for all vehicles, the advantages of data closed-loop are enormous. The experience of the cabin and audio on our NT2 platform is gradually improving, and we believe this can greatly increase the competitiveness of our products. Because many peers choose standard equipment strategies, the competitiveness of our products will be greatly increased this year with the release of more features. Overall, we are confident in the full-year delivery volume.

Q4: Regarding the R&D costs mentioned last quarter of around RMB 3 billion per quarter, are there any new guidelines now?

A4: Our R&D costs still apply to this guideline, with RMB 3-3.5 billion per quarter; we will increase efficiency and expect sales and management expense ratios to decrease rapidly -- current sales and management expenses will include Europe, and the European market has just begun to develop, so the efficiency will appear to be lower.

Q5: The specific delivery time for EC6/ES6? Is there a small renovation/upgrade for ES7/ET7 this year? This year's new product plan?

A5: As planned, four models will be delivered in Q2, including the most important ES6 model. The fifth model will be delivered in July, one month later than originally planned. Iterative improvements to products will continue and be reported to the market. Next year's product structure plan is still early in planning, and we are still mainly focused on the five models to be delivered this year. Future brand and product planning will always be promoted in accordance with rigorous plans.

Q6: Can you give us a split by vehicle model for the sales target?

A6: NT2.0 products are divided into three categories:

1. ET5+ET5 hunting version+ES6, totaling 20,000 units per month. 2. Each model of ES8/ET7/ES7 contributes 2000-4000, totaling 10,000.

3. EC6/EC7 mainly reflects the pursuit of individuality, with an expected monthly sales volume of 1000-2000 units.

Currently, the product portfolio can support a monthly sales volume of over 30,000 units.

Q7: What are the sales prospects for ES7/ET7?

A7: In the first two months of this year, we saw some impact from the Spring Festival holiday and the national subsidy decline, which also put some pressure on our sales volume. However, starting from February, the company has seen demand growth every week, and we still have confidence in ES7/ET7 in the market where it is located in the long term.

Q8: How does the company consider improving efficiency and productivity?

A8: Improving efficiency is our focus this year. Many projects started investment last year, and this year we need to increase the output with higher efficiency under the condition of unchanged manpower. We need to re-evaluate the priorities of the projects and assess the priority of time and investment. This is an important direction for our rhythm adjustment.

Q9: Will there be any adjustments to the procurement contract with Ningde later? What is the progress of the development of the solid-state battery?

A9: In March, the battery pack we co-operated with Zhongchuang Innovation Aviation will be launched; the strategic cooperation with Ningde will continue, but the battery company should also realize that it needs to share the price fluctuations of raw materials with the (automotive company). Efforts are being made to mass produce solid-state batteries, which will take a few more months, and we have also sent out our own battery team to collaborate with partners.

Q10: What is the approximate guidance for capex of new businesses? When is the company's overall profitability expected?

A10: The capex of new businesses for the whole year of 2023 is around 4-5 billion. We hope the company can achieve a balance of profits and losses next year.

Q11: How is the feedback from European users?

A11: The overall satisfaction of the delivered products is very high and meets expectations. However, the construction progress of supporting facilities is behind schedule. Currently, there are only 11 battery swap stations, which is lower than planned, and the opening progress of NIO houses is also slower than expected.

The annual sales target in Europe has not exceeded 10,000 units. Customer satisfaction is still the primary goal, and we have long-term confidence.

Q12: Is there a plan to adjust pricing strategy?

A12: We have always wanted to create competitive models, and there is currently no plan to reduce specifications on the NIO platform.

Q13: If we expand to lower-tier cities, what marketing strategy adjustments will be made?

A13: Generally speaking, we may not choose to open stores in lower-tier markets. We have concluded that using battery swap stations is an effective way, as seen in small towns in Shandong, where we have over 500 users among a population of 50,000, mainly due to the installation of battery swap stations. We realize that battery swap stations can increase the number of users in third- and fourth-tier cities, so we will use this method this year, which is very efficient.

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