NIO (NYSE: NIO; HKEX: 9866; SGX: NIO) today released its financial report for the third quarter of 2024, ending on September 30: total revenue was 18.6735 billion yuan, a year-on-year decrease of 2.1% and a quarter-on-quarter increase of 7.0%. The net loss was 5.0597 billion yuan, an increase in loss of 11.0% year-on-year and an increase in loss of 0.3% quarter-on-quarter. The adjusted net loss, not according to USA Generally Accepted Accounting Principles, was 4.4126 billion yuan, a year-on-year increase in loss of 11.6% and a quarter-on-quarter decrease in loss of 2.7%.

After the earnings report was released, NIO's founder, chairman, and CEO Li Bin, CFO Qu Yu, and other executives attended a subsequent conference call to interpret the earnings report and answer questions from analysts.

Below are some highlights from the analyst Q&A session:

Morgan Stanley analyst Tim Hsiao: My first question is about the strategic synergy between the company's different brands. This September, the sub-brand LEDAO (ONVO) L60 began deliveries. Looking at the trend, there are still differences in performance between the old brand NIO and the new brand LEDAO. My question is, from the perspectives of user demand, branding, and supply chain management, should there be concerns about potential market competition between these two brands?

Li Bin: From the data in October, NIO’s brand delivery volume did indeed decline compared to September. Overall, this decline is a result of our proactive adjustments. In previous months before September, we could achieve a monthly delivery volume of 0.02 million vehicles. However, we also realized that our gross margin pressure is very significant. Continuously improving the gross margin of the NIO brand is one of our core objectives. Therefore, in October this year, we reduced the company's promotional expenditures significantly. Compared to September, we narrowed promotional expenditures by about 15,000. This will definitely impact sales, but it's basically within our expectations.

Regarding November, what we are currently seeing is that with the stabilization of previous prices, user demand is beginning to recover. Everything seems to be proceeding as planned.

We believe that using two or three brands to cater to different users is currently a successful branding strategy. For the LEDAO brand, its main competing users are those within the same price range. For example, currently, the largest source of users for LEDAO is Tesla Model 3 users. From our internal data analysis, the impact of LEDAO on NIO users shows that it is roughly only about 20%. There will indeed be a very small portion of users choosing between NIO and LEDAO products, but based on the data we currently have, this portion of users is minimal, about 20%. Therefore, from this perspective, the user increment brought by the two brands far exceeds the reduction. Overall, we consider this a successful branding strategy.

Morgan Stanley analyst Tim Hsiao: My second question is about the ramp-up of production capacity. We have noticed that so far, the ramp-up of the LEDAO L60's production capacity is still relatively slow. What are the reasons limiting the ramp-up speed? Will this affect the backlog of orders before the end of the year? Additionally, the management mentioned earlier that next year Firefly (NIO's third sub-brand), LEDAO, and NIO will all launch more models, and the NIO ET9 will also gradually start delivering in March next year. From this perspective, how does the management plan to address the bottlenecks limiting the ramp-up of production capacity by 2025?

Li Bin: Indeed, everyone is hoping that the production capacity of the L60 can ramp up a bit faster. However, considering the latest technology it employs, such as the 900V technology, it will affect the production of the battery and the electric machine. At the same time, we have also adopted many new electronic machine architectures, such as our Coconut architecture, which is also very advanced. It can be said that there are many very new technologies in the design and production of the L60. Therefore, overall, the current ramp-up pace is within our expectations. We do not want to establish too much preliminary delivery inventory just to make it seem that the delivery volumes in the first month and second month can be higher. It can be said that our current ramp-up pace is quite normal.

If observing the complete delivery month, December is our third complete delivery month, and the monthly delivery volume can reach 0.01 million units; in March next year, our production and delivery target is 0.02 million units. This will be a relatively reasonable ramp-up pace. Overall, there are still some discrepancies between everyone's expectations and our plans.

Recently, the Chinese government has introduced a series of subsidy policies, including some local subsidy policies. The state has also launched vehicle replacement subsidies. Currently, these policies will end at the end of the year. However, since our delivery period is already scheduled for next year, this will indeed affect users' orders, and the impact is not small. We also see that 50% to 60% of users are indeed unable to pick up their cars in the near future. I think everyone can understand this, after all, for a car priced around 0.2 million, a subsidy of ten to twenty thousand yuan is a significant amount.

As for the NIO ET9 and Firefly, they will also have their own ramp-up paces. But overall, we will more actively establish delivery inventory.

JPMorgan analyst Nick Lai: My first question is, from the company's operation strategy perspective, how does the management plan to balance profitability and sales volume? Mr. Li just mentioned that the company has narrowed its promotional expenses by around 15,000 yuan. This will indeed increase the company's policy profit margin, but at the same time, it will sacrifice a portion of product sales. In the long run, could management share with us how you consider the balance between profit margin and sales volume? In other words, in the medium to long term, has management set a specific and idealized target for vehicle profit margin? I remember management previously mentioned that the long-term vehicle profit margin set by the company is around 15%, 18%, or even 20%. Could management share with us the company's medium to long-term sales targets and profit margin strategies?

Qu Yu: Regarding the balance between sales volume and profit. Mr. Li also mentioned that after the launch of the L60, we will still maintain the high-end positioning of the NIO brand. As for how to continuously enhance the profitability of the NIO brand, this has become one of our main focuses.

Just now you mentioned that we have narrowed our sales policies since October. In the short term, this will have some impact on sales. However, we have also seen that from October to November, during this one and a half months of operation, our backlog orders have shown a rebound.

From the perspective of gross margin, our gross margin reached 13.1% in the third quarter. In the fourth quarter, our gross margin target will still be maintained at 15%. We are also quite confident that the NIO brand's gross margin level can gradually increase to 15% in the fourth quarter.

With the elevation of NIO's high-end brand positioning, by 2025, our gross margin will be based on 15%. We will continuously optimize our market strategy and supply chain. Looking ahead to 2025, for the NIO brand, our goal is to gradually increase the gross margin from 15% to 20%.

JPMorgan analyst Nick Lai: My second question is about the company's capital expenditure and operating expenditure guidance. The company will launch a series of new cars in 2025, including new models from the Firefly brand and high-end products from the NIO brand such as the ET9, etc. Could management provide insights on the company's operating expenditure and capital expenditure trends for 2025?

Qu Yu: Indeed, we just mentioned that all three brands under the company will launch new cars next year.

In terms of operating expenses, in the third quarter, our selling expenses (SG&A) have increased significantly. The increased amount mainly comes from the establishment of the sales network for the Leda brand and the associated sales preparation expenses. By the fourth quarter, this expenditure will also increase. We also just mentioned that the company currently has 190 stores, and our end-of-year goal is still to reach 300 stores. Next year, we hope to achieve a sales target of 20,000 units by March. Therefore, we will further expand store sales capacity, enlarge our sales network, and increase personnel coverage.

In the first quarter of next year, as the sales capacity of the Leda brand is basically in place, we will have a relatively good balance between overall input and output. Before this, our sales expenses as a percentage of sales will be relatively high. Starting from the first quarter of next year, this ratio will gradually return to normal. Overall, regarding the company's operating expenditures, with the gradual increase in our sales volume next year, we are still confident in achieving quarterly efficiency improvements.

From the perspective of capital expenditure, compared to last year, the overall capital expenditure this year has significantly decreased. Currently, the company's total capital expenditure for the year will be around 8 billion. Our budget for next year is still being formulated, but the overall goal should still be controlled at a similar level. We will manage the company's capital expenditure investment more carefully.

Bank of America Merrill Lynch analyst Ming Hsun Lee: My second question pertains to the gross margin of the Leda brand. Qu mentioned that in the upcoming fourth quarter, the gross margin of the NIO brand will continue to rise to 15%. Assuming the total delivery volume of the Leda brand in 2024 is about 0.02 million units, what would the gross margin level of the brand be? And as the delivery volume of the Leda brand increases, if the monthly delivery volume reaches the level of 0.02 million units, what would the gross margin level for the Leda brand vehicles be at that time?

Qu Yu: In 2024, although the Leda L60 is still in the initial stages of ramping up production and the early user rights contribute relatively little to overall gross margin, overall, there is still a positive gross margin within the 0.02 million unit sales, and the gross margin level is in the single digits.

Looking ahead to 2025, as production capacity and deliveries gradually increase, our overall gross margin benchmark target for the Ledao brand is set at 10%. With the continuous optimization of the product cost structure and the successive introduction of new products from Ledao, our overall gross margin target for the Ledao brand next year is gradually set to achieve 15%.

Deutsche Bank analyst Bin Wang: My question concerns the NIO brand's plans for the second half of 2025. Management previously mentioned that it will deliver the NIO ET9 in the first half of 2025. What plans does the company have for the second half of 2025? Does management plan to iterate and upgrade existing models of the NIO brand? For example, will there be upgraded versions of the NIO ET5, ET5 Touring, ES6, and ES8 coming to us in the second half of next year?

Li Bin: Indeed, next year the NIO brand products will gradually switch to the new generation platform, and we will enter a new product cycle.

The first product we will launch will be the NIO ET9, followed by the successive introduction of new products. Of course, some new products will be facelifts of existing models. Approximately by next year and the year after, we will complete the switch and upgrade of all products within two years. We will complete this step by step.

From the perspective of the Ledao brand, next year, in addition to the Ledao L60 ramping up production, we will also launch two family SUVs in the market. The development of these two products has been in progress for some time, and we are currently making the final preparations before mass production. Next year, we will complete the layout of family SUVs for the Ledao brand targeting the family market. The next two products will be a mid-large six-seat and seven-seat SUV, along with a large five-seat SUV. In comparison, these two products are equivalent to the Li Auto L8 and Li Auto L7. The launch time for these two models will be a bit later; they will be very competitive and the overall cost control of the vehicles is also quite good. Currently, the price difference between the Ledao L60 and the Li Auto L6 is around 0.04 million yuan. We believe that these two new products will also have very competitive pricing compared to the Li Auto L8 and L7.

Looking ahead to next year, with our "county-to-county electric supply", "county-to-county charging", and "county-to-county battery swapping" layouts, we will also strengthen the channel and network construction for the Ledao brand. In summary, we have great confidence in the sales growth of the Ledao brand next year.

Regarding the Firefly brand, next year we will deliver the brand's first product to the market. Firefly's product name is also its brand name, and our strategy will be similar to that of MINI. Firefly will serve as both the brand name and the product name. At the NIO Day on the 21st of next month, which is one month from now, the new product from Firefly will be unveiled. At that time, the brand will be announced and the product will be showcased.

In general, next year NIO will enter a new product cycle, which is also the foundation for our growth next year. We are still confident in achieving a 100% increase in sales next year.

Deutsche Bank analyst Bin Wang: My second question concerns the gross margin of the company's service business. I see that Nio's gross margin for its Wufu business in the third quarter has improved to approximately -8.8%. Could management break down for us the reasons behind the gross margin improvement? Looking ahead to 2025, what is management's expectation for the gross margin of the service business? Will it remain in negative single digits?

Qu Yu: The main drivers for the gross margin improvement in the third quarter are twofold.

Firstly, there is the continuous optimization of our component costs, including battery costs and the costs of other components, which have seen significant improvements compared to previous quarters.

Secondly, as sales have increased, production has reached a new height. With the increase in production, our entire factory's manufacturing efficiency and allocation have also improved. Therefore, our overall gross margin has increased from 12.2% in the second quarter to 13.1% in the third quarter.

Looking forward to the fourth quarter, for the Nio brand, the motivation to continue improving gross margin is likely coming from two aspects. Firstly, as previously mentioned, we need to build the Nio brand as a premium brand. From the perspective of premium brand positioning, we will focus on enhancing the profitability of the Nio brand, so our promotional policies will be moderately tightened. Secondly, we will continue to optimize the supply chain. These two factors combined give us confidence to further increase the Nio brand's gross margin to 15% in the fourth quarter.

Looking ahead to 2025, the drivers for the overall gross margin improvement will also include several aspects. Firstly, the continuous improvement of the overall supply chain. We will launch a series of important iterations of smart hardware next year, which will bring significant optimization to our costs. Additionally, Nio brand products will undergo iterations next year. As these products are iterated, we will also introduce more competitively priced and product-competitive options into the Nio brand's product portfolio. These combined factors will elevate the Nio brand's gross margin to 20% in 2025.

Deutsche Bank analyst Bin Wang: My question concerns the Nio brand's plans for the second half of 2025. Management previously mentioned that Nio ET9 will be delivered in the first half of 2025. So what plans does the company have for the second half of 2025? Does management plan to iterate and upgrade the existing Nio models? For example, will there be upgraded versions of the Nio ET5, ET5 Touring, ES6, and ES8 available to us in the second half of next year?

Li Bin: Indeed, next year, Nio brand products will successively switch to the new generation platform, entering a new product cycle.

The first product we are launching will be the NIO ET9, and subsequently, new products will be introduced gradually. Of course, some new products will be updates to existing ones. In about a year or two, we will complete the transition and upgrades for all products within these two years. We will accomplish this step by step.

From the perspective of the Le Dao brand, in addition to the Le Dao L60 increasing production next year, we will also launch two home SUV models into the market. The R&D for these two products has been underway for some time, and they are now in the final preparation stage before mass production. Next year, we will complete the layout of the Le Dao brand's home SUVs for the family market. The next two products include a medium to large six or seven-seater SUV and a large five-seater SUV. In comparison, these two products are comparable to the Ideal L8 and Ideal L7. The launch time for these two vehicles will be slightly later, but they will be highly competitive, with very favorable overall cost control. Currently, the price difference between the Le Dao L60 and the Ideal L6 is about 0.04 million yuan. We believe that these two new products will also have very competitive prices compared to the Ideal L8 and L7.

Looking ahead to next year, with our layout of 'charging county by county', 'charging networks county by county', and 'battery swapping county by county', we will also strengthen the channel and network construction of the Le Dao brand. In summary, we are very confident about the sales growth of the Le Dao brand next year.

Regarding the Firefly brand, next year we will deliver the brand's first product to the market. The product name of Firefly will also be its brand name, and our strategy will be somewhat similar to the strategy of MINI. Firefly will serve both as the brand name and the product name. On the 21st of next month, at the NIO Day, which will be one month from now, Firefly's new product will be presented to everyone. At that time, the brand will be officially launched, and the product will be showcased.

Overall, next year, NIO will enter a new product cycle, which is also the foundation of our growth for next year. We are confident in achieving a 100% increase in sales volume next year.

Deutsche Bank analyst Bin Wang: My second question is about the company's service business gross margin. I see that NIO's gross margin for the five prosperity business improved in the third quarter, roughly at -8.8%. Could management break down the reasons behind the gross margin improvement for us? Looking ahead to 2025, what is management's expectation for the service business gross margin? Will it remain at a negative single-digit level?

Qu Yu: The driving factors for the gross margin improvement in the third quarter are mainly two aspects.

Firstly, the continuous optimization of our component costs, including battery costs and the costs of other parts, has seen significant improvements compared to previous quarters.

Secondly, with the increase in sales, production has also reached a new height. After the production increase, the manufacturing efficiency and allocation of our entire factory have improved. Therefore, our overall gross margin increased from 12.2% in the second quarter to 13.1% in the third quarter.

Looking ahead to the fourth quarter, for the NIO brand, the motivation to continue improving gross margin likely comes from two aspects. First, as mentioned earlier, we still want to build the NIO brand into a high-end brand. From the perspective of high-end brand positioning, we will focus on improving the profitability of the NIO brand, so our promotional policies will be moderately tightened. Second, we will continue to optimize the supply chain. With these two factors combined, we are confident that in the fourth quarter, we can continue to improve the NIO brand's gross margin to 15%.

Looking ahead to 2025, the drivers for overall gross margin improvement will also include several aspects. First, the continued enhancement of the overall supply chain. We will launch a series of important iterations of smart hardware next year, which will lead to significant optimization in our costs. Additionally, next year, products of the NIO brand will undergo iterations. With these product iterations, we will also introduce more competitive products in terms of both product positioning and cost competitiveness into the NIO brand's product portfolio. These factors together will push up the NIO brand's gross margin to 20% in 2025.

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