Q3 Gross margin increased further. The company delivered 61,855 vehicles in Q3, of which 61023/832 were the NIO and Ledao brands respectively. Revenue decreased 2.1% year over year and increased 7% to 18.67 billion yuan, while automobile sales and other sales increased 6.5%/11.9% month-on-month to 16.7/2 billion yuan, respectively. Gross margin increased by 2.8 pct/1.1 pct yoy to 10.7%, in line with expectations. Among them, automobile gross margin increased 2.0pct/month-on-month to 13.1%, mainly due to a decrease in unit BOM costs; the gross loss ratio of other businesses improved by 15 pct/3.5 pct to 8.8% yoy, mainly due to improved profitability of parts and accessories sales and automobile after-sales service. The revenue growth associated with operating expenses also showed a certain increase, and the R&D and SG&A expenses rates were basically the same from month to month. Q3 net loss to mother was 5.1 billion yuan, non-GAAP net loss to mother was 4.4 billion yuan, and the non-GAAP net loss ratio narrowed 2.4 pct to 23.6% month-on-month.

The sales volume of NIO's main brand is expected to be weak in Q4, and Ledao will drive growth. The company delivered 20,976 vehicles in October, of which the NIO and Ledao brands sold 16657/4319 vehicles respectively. Sales of the NIO brand declined month-on-month, and the company indicated that it was mainly due to the narrowing of promotional policies. Looking ahead to Q4, the company indicates Q4 sales volume of 0.072-0.075 million, and indicates that the Ledao brand's production volume can climb to 0.01 million in December. Currently, there are plenty of orders in hand, and we expect all production capacity to be converted into sales volume. As a result, the NIO brand's sales volume may be relatively weak in Q4, and the Ledao brand will be the main driving force for sales growth. At the revenue level, the company's Q4 revenue was approximately 19.676-20.383 billion yuan, an increase of 15% to 19.2% over the previous year.

The product matrix continues to improve, and sales guidance for 2025 is strong. 1) NIO brand: The ET9, the first model on the NT3.0 platform, is expected to be officially launched on December 21 and delivery will begin in March 2025. The pre-sale price of this model is 0.8 million yuan, which is the crystallization of NIO's previous technology. In addition, other models of the NIO brand will be launched one after another. 2) Ledao brand:

Currently, the L60 is rapidly climbing. The company expects production capacity to rise to 0.02 million vehicles in March 2025. In addition, it will soon launch a large 5-seater SUV and a 6-seater/7-seater SUV model in 2025, making the entire Ledao brand a strong driving force for the company's sales growth in 2025. 3) Firefly brand: On December 21, the Firefly brand will debut globally and position itself in the premium compact car market. Its first model is expected to be delivered on 2025H1. Based on an increasingly broad market segment layout, the company aims to double its sales volume in 2025 from this year's level.

It is expected that the energy supplementation network will continue to be expanded next year to lay the foundation for automobile sales. In the first three quarters of this year, the NIO brand steadily ranked first in sales in the pure electric market of 0.3 million yuan or more in China, accounting for more than 40% of the market share, and its leading position in the high-end pure electric market in China. Excellent market position is inseparable from the company's unique energy replenishment method and BaaS car purchase plan. As of November 20, the company had 2,737 power exchange stations, 24,282 overcharged piles and grid charging piles worldwide. Since NIO's ability to exchange electricity is one of NIO's most attractive advantages for consumers, the company will still adhere to the infrastructure-first strategy and accelerate the layout of power exchange stations next year to achieve the goal of “adding electricity to counties and counties” and support the competitiveness of the company's various brands of cars throughout the country.

Investment advice: Considering the strength of the company's new products, we have appropriately raised our sales volume and revenue forecasts. We expect to sell about 0.22/0.4/0.49 million vehicles in 2024-2026, with total revenue reaching 66.1/102.8/122.1 billion yuan. Thanks to economies of scale, the company's loss ratio is expected to gradually narrow in the next few years, but we expect the absolute value of losses to increase as we raise our revenue forecasts. We expect the non-GAAP net profit margin to be around -27%/-13%/-11%. We gave it a target market value of approximately $12.8 billion (HK$99.4 billion), corresponding to approximately 0.9X 2025e P/S, target prices of HK$47.9 for Hong Kong stocks (9866.HK) and $6.2 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.