Company strategy: NIO is deeply involved in the market of 0.3 million yuan or more and continues to increase its market share, and Ledao & Firefly sinks to reverse losses in the power exchange business: ① NIO NIO: anchoring the high-end market of 0.3 million yuan or more (with a pure electric market share of nearly 50% above 0.3 million yuan), improving the model product matrix, maintaining the high-end brand tone. Currently, steady monthly sales are close to 0.02 million vehicles. Follow-up service+community atmosphere continues to deepen the brand image. The vehicle platform iterates NT3.0 and end-to-end smart driving+self-developed chip launch jointly guarantee the competitiveness of products in the high-end market. ② ONVO Ledao: A shared power exchange model, focusing on the price range of 0.2 million yuan or more, and leasing electricity to the 0.15-0.2 million yuan market where the penetration rate of new energy is low. It is expected to achieve volume release with a high cost ratio, thereby increasing the capacity utilization rate of the F2 plant and helping to increase the gross margin of the vehicle. Furthermore, it is expected that the power exchange business will reduce losses by increasing the number of power exchanges per day at a single power exchange station. ③ Firefly: Share the power exchange model, target boutique cars, target Chinese and overseas markets (cars are more suitable for the European market), and undertake the task of reducing losses in the electricity exchange business.

Financial side: Adequate net cash reserves on the account, a slowdown in capital expenditure and an improvement in product sales structure have contributed to an increase in gross margin:

① Net cash on account: In September 2024, the company received a total investment of 3.3 billion yuan, including the capital of Hefei Construction. As of 24Q3, the net cash on the account was about 42 billion yuan, and the net cash reserves were sufficient. ② Capital expenditure is slowing down:

The company's capital expenditure is significantly positively correlated with the number of power exchange stations built. It is estimated that the number of power exchange stations will be around 2,860 by the end of 2024, which is a significant decrease in the year-on-year growth rate compared to 2023 (79% → 22%). ③ Increased sales and improved product structure: In the short term, gross margin is expected to improve as ET5/5T share declines and total sales volume increases. In the medium to long term, the “average number of power exchanges per station in a single quarter” trend is clearly positively correlated with the “gross profit margin of other businesses”. As subsequent releases of music and fireflies drive an increase in the number of power exchanges at a single station, the gross margin of the company's power exchange business is expected to benefit from this.

Power exchange mode: The advantages are difficult to replace and sustainable in the long run:

Advantages of power exchange: ① Fast energy replenishment: The power exchange can be completed in 3 minutes, and it still takes 12-25 minutes to overcharge (and does not charge to 100%). ② Flexible adjustment of vehicle costs: Large battery packs can meet long-distance travel, but car purchase costs are high. When exchanging electricity, rent large batteries as needed during long-distance trips, and car usage costs are low (currently 90% of NIO consumers can reverse verify the viability of this model when purchasing a small battery version). ③ Longer battery life: The 10-year battery decay rate for new energy vehicles is about 22%, and battery replacement costs are high. NIO has raised the battery life to 12 years and still 80% (the goal is to maintain 85% level for 15 years).

Power exchange is sustainable: ① Power exchange is an additional experience rather than a single route: Power exchange is an additional experience for NIO consumers. NIO is still developing high-voltage overcharging (LEDO is equipped with a 900V architecture) and is actively building charging piles (about 0.024 million units have already been built). ② Save application scenarios in virtual power plants: Power exchange stations can be viewed as distributed energy storage and controllable loads in virtual power plants, and are an important component of adjustable resources in virtual power plants (take Hefei as an example, accounting for about 70%). ③ Introducing a power generation partner: The launch of the Power Generation Partner Program is expected to continue to expand the scale of power exchange plants while controlling its own capital expenses.

Profit forecast: According to our forecast, the company's revenue for 2024-2026 was 65.59/104.43/127 billion yuan, respectively, and the corresponding PS for 2024-2026 was 1.0/0.6/0.5, respectively. We believe that the company is about to enter a major product cycle, and the volume of new products is expected to significantly help reduce losses, cover for the first time, and give it an “increase in wealth” rating.

Risk warning: There is a risk that industry growth will slow down due to the slowdown in the penetration rate of new energy sources, increased competition in the industry due to increased supply of new models, market acceptance of new models falling short of expectations, market size estimates falling short of expectations, new product sales or production capacity falling short of expectations, and delays in public data and information in the report and untimely updates.