NIO's Q2 performance exceeded expectations, and Q3 guidance exceeded expectations. The company delivered 57,373 vehicles in Q2, and sold more than 0.02 million vehicles in May-June, driving the company to achieve revenue of 17.4 billion yuan, a sharp increase of 99% over the previous year. Among them, vehicle sales/other sales revenue was 15.7/1.8 billion, respectively, up 118%/11% year over year. The gross margin exceeded expectations. The overall gross margin of the Q2 company was 9.7% (gross margin of automobile sales and other sales was 12.2%/-12.3%, respectively), up 8.7/4.8 pct year over year, mainly benefiting from lower unit material costs and improved after-sales service efficiency. Benefiting from economies of scale, the R&D expense ratio and SG&A expense ratio have both narrowed. Q2 GAAP net loss was 5.1 billion yuan, non-GAAP net loss was 4.5 billion yuan, and the net loss rate was 26%, improving 36/23 pcts year over month, exceeding expectations. Looking ahead to Q3, the company achieved monthly sales volume exceeding 0.02 million in July-August, leading to delivery of 0.061-0.063 million vehicles in Q3, an increase of 10% to 13.7% year-on-year, and revenue of 19.109-19.669 billion yuan. We used the median estimate from revenue and sales guidelines. While deliveries of the Ledao L60 in the lower price band began in Q3, the company's revenue corresponding to bicycles increased.

Ledao is about to go on sale, and the product matrix is constantly being updated. 1) NIO Brand: According to the company's public performance conference, NIO has a market share of more than 40% in the BEV market of 0.3 million yuan or more in China. Based on the current model, 25Q1 will launch and deliver the executive flagship sedan ET9 to form a more complete product portfolio. The company's long-term goals for the NIO brand are monthly sales of 0.04 million and a gross profit margin of 25%. 2) Ledao brand: On September 1, 105 Ledao stores opened at the same time. The Ledao L60 will be officially launched on September 19. The price is expected to be lower than the pre-sale price (starting at 0.2199 million yuan), and it will be officially delivered at the end of the month. In terms of sales, the company expects to deliver 0.02 million units in 2024, and the monthly delivery volume in December will reach 0.01 million units. Due to the large market size of the Ledao brand, the company believes that the brand's gross margin is also expected to reach a reasonable level of 15% or more. 3) Firefly brand: boutique cars will be released and delivered starting at 25H1. At the same time as the product is gradually being launched, the company is also actively improving production capacity. Currently, F1 and F2 will complete the construction of double shift production capacity in October to support subsequent L60 deliveries. Furthermore, the company is actively constructing a third plant, which is expected to be put into operation in 25Q3.

Accelerate international expansion, from Europe to the UAE. Geographically, the company has developed rapidly in the European market in the past. Following the strategic cooperation reached with CYVN, a Middle Eastern investment company supported by the Abu Dhabi government last year, NIO's layout in the UAE has also made significant progress this year. Recently, NIO's official UAE website and social media accounts were officially launched, and the company expects to start delivering products to the UAE market in Q4 this year. In terms of models, the company has adopted a multi-brand strategy in overseas markets. It is expected that starting next year, the Ledao and Firefly brands will have products for the world, opening up a wider market space.

Energy supplementation continues to advance, and intelligent driving welcomes new progress. 1) In terms of charging and switching, the company has always been at the leading level in China. As of September 5, NIO has 2,561 power exchange stations, provided more than 52 million power exchanges, and installed more than 0.023 million charging stations. In August, NIO announced the “Jiadian County Link” plan, which plans to cover 2,300 counties and towns in mainland China by the end of 2025, further supporting the company to open up a wider sinking market. 2) In terms of intelligence, on July 27, the company released the self-developed intelligent driving chip Shenji NX9031, the vehicle's global operating system Sky OS, and the intelligent system Banyan Rong 3.0.0. In addition, the company also showcased the world model NWM and the new intelligent driving technology architecture NAD Arch 2.0. The improvement in smart driving capabilities is worth looking forward to.

Cash is plentiful, and profitability is expected to improve. As of the end of 2024H1, cash and cash equivalents, restricted cash, short-term investments and long-term time deposits on the company's accounts were RMB 41.6 billion, which is quite abundant. In terms of profitability, the company exceeded expectations in Q2. It is expected that Q3 and Q4 will gradually increase the gross profit margin of the vehicle, and the target is to increase the gross profit margin of the vehicle to 15% in Q4. In terms of other sales, we believe that the improvement in after-sales service efficiency has already paid off. With the commencement of deliveries of vehicles such as the Ledao L60, it is expected that the profitability of other businesses such as after-sales, charging and switching will be further improved. It is expected that the gross loss ratio of other sales businesses in Q4 will narrow to single digits. In terms of costs, the company guides R&D expenses of around 3 billion yuan per quarter; the absolute value of sales expenses may have increased, but due to economies of scale brought about by rising sales, there is still hope to maintain a low cost rate level.

Investment advice: The Q2 cost reduction and profitability improvement exceeded expectations. We adjusted the profit forecast appropriately. The company is expected to sell about 0.22/0.34/0.45 million vehicles in 2024-2026, with total revenue of 68.2/92/115.9 billion yuan, and a non-GAAP net profit margin of about -26%/-14%/-9%. We gave it a target market value of about 13 billion dollars (HK$101.2 billion), corresponding to about 1X 2025e P/S. The target price remained at HK$49 for Hong Kong stocks (9866.HK) and $6.3 for US stocks (NIO.N), maintaining a “buy” rating.

Risk warning: risk of model development and sales falling short of expectations, risk of new brand promotion falling short of expectations, risk of improving profitability less than expected, risk of rapid cash consumption, risk of fluctuations in upstream parts supply.