We have reaffirmed NIO's “buy” rating and lowered the target price of NIO (NIO.US) /NIO NIO-SW (9866.HK) to HK$5.5/HK$42.6, corresponding to a potential increase of 18%/17%.

Reiterating NIO's “buy” rating: First, NIO will enter a big year of new product sales next year. Among them, the second brand, ONVO (ONVO), in addition to the L60, also has two new SUVs to lay out the demand market for home users; the third brand Firefly (Firefly) products will be delivered in the first half of next year. While enriching the product matrix, the new brand brings a wider price range coverage.

Second, NIO focused on the high-end brand positioning of its main brand, NIO, and recovered some of its promotional efforts in October to increase profit margins. We expect the gross margin of NIO brand vehicles to continue to increase next year.

Finally, next year, the company's operating leverage will be reflected quarterly, and operating losses and net losses will continue to narrow.

NIO's current market-sales ratio is 0.7x. The valuation is attractive and reaffirms the “buy” rating.

The gross margin of the automobile business increased steadily: In the third quarter of this year, NIO Auto's gross margin reached 13.1%, up 2 percentage points year on year and 0.9 percentage points month on month, better than our expectations, mainly due to continuous optimization of parts costs and improvements in factory manufacturing efficiency brought about by increased sales.

Driven by tighter promotions and supply chain optimization, NIO's gross margin is expected to continue improving in the fourth quarter.

The company's expense ratio increased year-on-year in the third quarter and declined slightly month-on-month. The Ledao brand is in the early stages of channel construction, and the return on the revenue side of the cost investment will be quickly realized. The company expects the fee rate to drop quarterly next year. NIO's operating losses and net losses for the third quarter were roughly the same month on month. We have adjusted our revenue and profit forecasts for 2024 and 2025 based on our third-quarter results and outlook.

Highlights and prospects of the performance meeting: 1) The company aims to double its automobile sales next year. Among them, the production capacity of the Ledao L60 will climb to 0.02 million units/month in March next year. 2) The gross margin target of the main brand NIO reached 15% in the fourth quarter of this year and gradually increased to 20% next year. The Ledao brand's gross margin benchmark target is 10%. 3) The company expects capital expenditure to be generally stable at the level of RMB 8 billion this year and next. 4) As Ledao's sales increase next year, the company's expense ratio is expected to decline quarterly.

Valuation: We used the division summation method to value NIO, and gave NIO a market sales ratio of 0.8x for both car sales and other sales in 2025. We got the target price of NIO US stock of 5.5 US dollars, corresponding to the target market sales ratio of 0.8x. At the same time, it received its target price of HK$42.6 for Hong Kong stocks.

Investment risks: Demand growth in the NEV industry fell short of expectations, slowing down sales growth; Ledao's new model delivery performance fell short of expectations; new brand models launched and delivered slower than planned; low-tier city sales channel expansion and power exchange station installation fell short of expectations; industry competition intensified, price pressure increased, hampering profit performance; and autonomous driving was slow to be implemented.