Hello, ladies and gentlemen, thank you for standing by for NIO Incorporated’s Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in listen-only mode. Today’s conference call is being recorded. I will now turn the call over to your host, Ms. Eve Tang from Capital Markets and Investor Relations. Please go ahead, Eve.

Good morning and good evening everyone. Welcome to NIO’s fourth quarter 2020 earnings conference call. The company’s financial and operating results were published in the press release earlier today and are posted at the company’s IR website. On today’s call, we have Mr. William Li, Founder, Chairman of the Board and Chief Executive Officer; Mr. Steven Feng, Chief Financial Officer; Mr. Stanley Qu, VP of Finance, and Ms. Jade Wei, AVP of Capital Markets and Investor Relations. Before we continue, please be kindly reminded that today’s discussion will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties, as such, the company’s actual results may be materially different from the views expressed today. Further information regarding risks and uncertainties is included in certain filings of the company with the U.S. Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements except as required under applicable law. Please also note that NIO’s earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. Please refer to NIO’s press release, which contains a reconciliation of the unaudited non-GAAP measures to comparable GAAP measures. With that, I will now turn the call over to our CEO, Mr. William Li. William, please go ahead.

[Foreign Language] Hello, everyone. Thank you for joining NIO’s 2020 Q4 earnings call. [Foreign Language] In the fourth quarter of 2020, NIO delivered 17,353 ES8, ES6 and EC6, representing a strong growth of 111% year-over-year and 42% quarter-over-quarter. The accumulated deliveries of 2020 reached 43,728, representing a strong growth of 113% over 2019. We achieved a historic monthly delivery of 7,225 vehicles in January 2021 and a resilient delivery of 5,578 vehicles in February 2021, representing strong 352% and 689% year-over-year growth respectively. [Foreign Language] In 2020, all three NIO models have achieved exceptional performance in the market. ES6 has been the best selling electric SUV in China for the full year of 2020. ES8 has reached number one in sales in 2020 in the premium electric SUV segment priced as of RMB 400,000 in China. EC6 has ranked at the top in the premium coupe SUV segment for three consecutive months in China starting from November 2020, backed by the top-notch product quality and service. NIO has gained growing positive recognition and feedback from users and the industry. In the China Insurance Automotive Safety Index published in January 2021, EC6 achieved the best safety rating among all models tested by C-IASI in 2020. [Foreign Language] Supported by competitive product offerings, outstanding services, and innovative business models, we have won increasing user recognition and expect the overall deliveries in the first quarter of 2021 to reach 20,000 to 20,500 vehicles. [Foreign Language] In terms of gross margin, driven by steadily increasing deliveries, stable average selling price, and improving material cost and manufacturing efficiency, our vehicle gross margin in Q4 reached 17.2%, moreover, benefited from the NIO energy credit revenue. The overall gross margin has also increased to 17.2%. [Foreign Language] NIO has continued to achieve positive cash flow from operating…

Thank you, William. I will now go over our key financial results for the fourth quarter of 2020, and to be mindful of the length of this call, I encourage listeners to refer to our earnings press release, which is posted online for additional details. Our total revenues in the fourth quarter were RMB 6.64 billion or $1.02 billion, representing an increase of 133.2% year-over-year, an increase of 46.7% quarter-over-quarter. Our total revenues consist of two parts; vehicle sales and other sales. Vehicle sales in the fourth quarter were RMB 6.17 billion or $946.2 million, accounting for 93% of total revenues in this quarter. It represented an increase of 130% year-over-year and increase of 44.7% quarter-over-quarter. The increase in vehicle sales year-over-year was primarily due to higher deliveries achieved from more product offerings and the expansion of our sales network through the continuous launch of NIO Spaces in 2020. Other sales in the fourth quarter were RMB 467 million or $71.6 million, representing an increase of 184.1% year-over-year, an increase of 80.2% quarter-over-quarter. The increase in other sales year-over-year was mainly attributed to sales of automotive regulatory credits as well as the increased revenues derived from the home chargers installed and accessories sold in line with incremental vehicle sales. Cost of sales in the fourth quarter was RMB 5.50 billion or $842.8 million, representing an increase of 77.3% year-over-year, an increase of 39.6% quarter-over-quarter. The increase in cost of sales year-over-year was mainly driven by the increase of delivery volume in the fourth quarter of 2020. Gross profit in the fourth quarter was RMB 1.14 billion or $175 million, representing an increase of RMB 1.40 billion from the fourth quarter of 2019, an increase of RMB 556.1 million from third quarter of 2020. This increase in gross profit was mainly…

Thank you. [Operator Instructions] Your first question comes from Edison Yu from Deutsche Bank. Please ask the question.

Thank you very much. So first question I wanted to ask is on NIO's focus in the premium market. It seems you're very focused on that and that's not going to change. Would you consider developing another brand to go after the mass market or more mid-tier market? Second question is about the international expansion. You’ve indicated that you’ll enter Europe later this year. I’m wondering what kind of sales volume would you expect in the longer term. And in relation to that, there is a lot of speculation from the press lately that NIO is getting much more serious about getting to the U.S. Could you share your latest thoughts about that? And I'll translate that. [Foreign Language]

[Foreign Language] Thank you, Edison for your questions. Of course, it's possible for us to enter the U.S. – to enter the mass market. The NIO brand is going to focus on the premium market. Simply speaking, NIO brand is not going to enter the mass market, but in the past few years, we have already tried different approaches to enter the mass market. For example, we established joint ventures through investments with GAC and Changan. Previously, our shareholding in those joint ventures is around – over 40% and now our shareholding has reduced to 5%. This gives us more flexibility and possibilities to try different approaches to enter the mass market. And we would like it to be more active to do this. This is going to be part of our long-term strategy. [Foreign Language] Regarding the second question of the international markets or the global market; starting from this year, we are going to enter the Europe market. We will build our own sales and service network in the European market. Right now, we have already kicked off the preparations regarding the team setup, products and the sales and the service network building, basically covering all aspects for our operations in Europe. This is going to be part of the long-term strategy for us to enter the global market. So we need to be patient. In the long run, of course, we would like to achieve significant shares in important major markets in the global arena, but it will require a lot of effort and time to do this. Starting from day one, we have our R&D operations and other operations in different regions and countries, but we understand the sales and the service is going to be more complicated if we decide to enter different regions and countries. Regarding the U.S. market question, we have already kicked off the research about the US market entry at a very early stage. We have started about the possible business models, strategies, and different approaches about how could we enter the U.S. market, but this will require lot of patience and we would like to do this step by step.

Thank you, Edison.

Your next question comes from Ming-Hsun Lee from Bank of America Securities. Please ask your question.

Thank you. Thank you, William, and the management team. So my first question is regarding the margin improvement in fourth quarter. If I adjust the contribution from the credit sales, the gross margin of the company is around 15.7% in this quarter, still improved a lot from last quarter. So could you give us some breakdown regarding margin improvement, for example, like ASP improvement in the quarter [indiscernible] improvement in this quarter? Besides, could you also elaborate more regarding on the battery supply and also the chip supply? Recently, especially we already see the company will postpone the battery upgrade for certain customers in June. So could you elaborate more on this? And the second question is also regarding, battery-related, because recently we already see the upstream cost inflation. So we are interested about the cost trend in 2021 and also probably some rough gross margin guidance for this year? Thank you.

Thank you, Ming. Stanley will answer the first question.

Yes. The vehicle gross margin increased from 14.5% in Q3 to 17.2% in Q4. It was mainly driven by more ES8 and EC6 with higher gross profit margin delivered and the material and manufacturing cost of vehicles slightly decreased. And back to numbers, I think the average selling price increase was RMB 10,000 per unit and manufacturing cost and material cost slightly decreased. And to the overall gross margin, we booked RMB 120 million EV credit sales in Q4. The overall gross profit margin contribution was 1.8%. That leads to the overall gross profit margin increase. And regarding the gross profit margin guidance in 2021, what I can say is the margin in Q1 can also be slightly improved, but the trend not so large as much as in 2020. And for the full-year guidance, I think it's too early for us to give at this moment. For the battery and chip supply, we can go back to William.

Okay. Thank you, Stanley. [Foreign Language] Thank you for your questions. Regarding the chip supply and the battery supply, of course, this has a very big impact on the overall supply chain. This is also one of the constraints for us in the second quarter of this year. Of course, right now, we have sufficient chip supply to support the normal production, but it’s a changing time, so the situation will evolve gradually. For the second quarter of this year, we will still have some risks regarding the chip supply, but starting from last year, our team has already kicked off the communication and the collaboration with our supply chain partners to secure the sourcing of the chip. We even have some direct communications with the chip suppliers to make sure we have sufficient supplies of the chipsets. We believe for the second quarter, we should have the chip supply to meet our basic demand, but the risk is still quite high. Regarding the battery supply, this is another constraint for our second quarter performance. We do have some limited supplies regarding the 100 kilowatt hour battery pack and other battery packs, which is actually less than our demand because right now the market is actually quite booming. And starting from July, we believe the battery supply should go back to the normal level and meet our demand. So because of the constraints of the battery supply and the chipset supply, our production capacity will kind of be limited in the second quarter to around 7,500. [Foreign Language] For the battery cell cost, we believe the impact on us is not that big. For this year, the cost of the battery will further reduce to some extent, but we believe it’s not going to be on a large scale, but the impact on us is quite limited, because we have already locked the supply with our battery partners. We’re still very important – probably the most important customer for CATL. So we have a very good pricing with CATL's batteries.

Thank you, Ming.

Your next question comes from Bin Wang from Credit Suisse. Please ask the question.

Thank you. I have just one question [indiscernible] EV sales because actually recently, we got different picture. For example, your peer Li Auto have a pretty weak guidance. However, today's guidance seems to be a surprise on the upside, especially the March has been reached a new high for NIO. We're also facing competition from Tesla Model Y [indiscernible] what's happening in the near-term EV demand is still [indiscernible]. So seems like it's confusing. And meanwhile, you seem to be quite positive about second quarter, you guide about 7,500 per month. Is that your guidance for second quarter? Thank you.

[Foreign Language] Thank you, Bin, for your question. Normally speaking, the first quarter of the year is the low season for the EV industry because of the subsidy and other policies. [Foreign Language] Model Y has announced their pricing for the locally manufactured vehicle, but this is the normal strategy and practice of Tesla. Normally, they cut the price and then they can boost the order backlog. Our approach is quite different from Tesla because we would like to make sure we have a stable order performance instead of these ups and downs in the order backlog. For us, we don't actually want to cut the price to boost the order backlog. So it's quite different from Tesla. We would like to focus on the service and the experience improvement as well as building a positive word of mouth reputation in the market because we do not want to cut the price. Because of our strategy, we can achieve a very stable and solid pricing with our products, which will also help with our gross margin and the vehicle gross margin. Just like I mentioned, in February, the BaaS take rate among the new orders has reached 55% and is growing every month. So with our unique competitive edges and our long-term capabilities, we believe we should be able to secure a strong footing in the market instead of being affected by those short-term strategies and practices. [Foreign Language]

Your next question comes from Tim Hsiao from Morgan Stanley. Please ask the question.

Good morning, management team. Congratulations on your strong results and good guidance. So I have two questions. The first question is about the vehicle sales this year because since our next model, ET7 won't kick-start deliveries till next year, how can NIO meaningfully grow the vehicle sales in 2021? And will there be any spec upgrades or major model facelift on top of the aggressive channel expansion plan and BaaS program? My second question is about your comments on the NIO House. Because I remember, like last time you mentioned NIO House might be less cost efficient. So could you elaborate more about the key consideration when deciding to resume the deployment of NIO House? And what would be the overall investment and additional operating expenses to scale-up the coverage of the NIO House based on the current estimate? Thank you.

[Foreign Language] Thank you, Tim, for your question. We will start the delivery of the ET7 from the first quarter of 2022. This means we will have a lot of preparations to do before the actual launch, especially in terms of autonomous driving technologies. We will need to do sufficient testing and development work for the autonomous driving technologies. Starting from now to the delivery of ET7, we will mainly rely on three current products, including ES8, ES6 and EC6 for the sales performance. Regarding the EC6, it’s actually launched around September 2020 and for the all-new ES8 is launched around March 2020. So for the ES6, it started the delivery from the second half of 2019. So in terms of the product life cycle, we believe all the three models are quite competitive in the market compared with the gasoline cars and other EVs. We believe before the launch of the NT 2.0, we do not need to have significant changes and facelift to our current three products. But on the other hand, we would like to further expand our sales and service network. China is a very big market. So we will still have a lot of opportunities. If we can further improve our infrastructure building, this can also help us to improve our sales performance. Starting from this year to next year, before the launch of the NT 2.0, we will mainly focus on the sales and service network and experience improvement to improve our sales performance. So we are quite confident this should be able to help us to achieve our sales target. At the same time, we also have battery-as-a-service and the 100 kilowatt battery pack delivery. This is going to contribute to the conversion from ICE to the EVs. We’re witnessing the trend is accelerating from this conversion. We believe our main competitors are the gasoline cars at the same pricing level that is around RMB 300,000 to RMB 400,000. So in 2022, as you can see, Audi, BMW and Mercedes have achieved sales new highs. So it means that this is actually a very big market. We believe our products are actually much better than their products. So it means that we have a lot of opportunities. We also do not have a very aggressive sales target because we’re not going to sell hundreds of thousand vehicles in one year. So we believe with our current sales target, we should have the confidence to achieve the objective. [Foreign Language]

Hi, Tim. I would like to elaborate the reasons why we bring NIO House back and the cost efficiency of our NIO House. I would like to remind you on the three key functions of the NIO House. First, it help us to convert leads to orders and speed-up the deployment, will enhance the brand awareness, increase our user touch points. And second, NIO House also represents a very strong brand presence; increased investment into brand communication will be conducive to the long-term benefits of our brand. Third, NIO House is also very important for our user system and for our user community. And also, on other hand, we have accumulated rich experience in operating offline stores and better control the [indiscernible] planning and cost, which significantly lowers the investment and operating cost per store. To give you a rough number, the average store investment is just 40% of the original and the average rent and operating cost is just half of the original.

Thank you, Tim.

Thank you, William.

Your next question comes from Nick Lai from JPMorgan. Please ask your question.

Yes. Hi, good morning. It's Nick from JPMorgan. Great results. Congratulations indeed. So two simple questions. First on NIO autonomous driving solution. Yes, you mentioned that for the NIO ET7 model, which will be equipped with Adam supercomputing solution and Aquila Super Sensing capability, I wonder whether these two solutions will be used for other existing models such as EC – ES6, EC6 and ES8? And if so, how soon can we see this happening in the future? And related to this question is, yeah, is it fair to say that will broaden our monetization strategy beyond basic battery-as-a-service and to a more and more AD-as-a-service in the future? And the second question is related to volume. You just mentioned that 2Q monthly capacity or potential volume will be somewhere above 7,500, but at the same time, you also mentioned that JAC is expanding capacity to 150,000 unit capacity on a single-shift basis. So as we move into second half of the year and hopefully the supply bottleneck on battery and chip can be solved, and how should we think about capacity – or monthly production increase into second half? And also related to volume question, you just mentioned the ET7 backlog order is beyond – is well above expectation. What does that mean? Does that mean 20,000, 30,000 units or anything – any guidance would be appreciated? Thanks.

[Foreign Language] Thank you, Nick, for your question. ET7 is the first model built on top of the NT 2.0. Of course, all future models will be developed based on the new technology platform 2.0, but we’re not going to kick-off this work as soon as possible, but it’s already in the pipeline. For other products and the future models, we will leverage the latest technologies and we will share with – more information with everyone regarding the product planning and the product portfolio at the right time. [Foreign Language] For the AD-as-a-service, we believe this is the right direction because we believe in the future or the AD as a Service should be provided through the subscription model, because it's going to benefit the users. And from the technology point of view, it's also quite reasonable and feasible compared with the ADaaS business model, the AD as a Service business model is based on the installed base. So in these studies when users' life cycle is 15 years then within these 15 years, we should be able to generate the revenue based on the AD as a Service business model. In this regard, we believe the AD as a Service business model is much better than the traditional ADaaS business model. If you look at the cloud service business like Amazon, Google, Microsoft, and other domestic players in China, we believe that this AD as a service subscription model is going to be a very good revenue stream, but that is why we are going to be quite decisive to promote this business model and the subscription model. And from the Battery as a Service, we have already learned a lot of experience and competence, and we believe this means that users should be quite acceptable regarding the AD…

Thank you William.

Your next question comes from Lei Wang from CICC. Please ask the question.

Good morning. This is Wang Lei speaking from CICC. I would say that's a very strong earnings report and a very strong first quarter guidance. I have one follow-up question about the joint venture of BaaS. William just mentioned 55% of the take rate. Could you please inform what is the capital status of the joint venture and how many batteries this company can support theoretically? Thanks.

[Foreign Language] Thank you, Lei, for your question. Regarding the battery assets management company, we have already finished two rounds of for financing. Right now, we have eight shareholders including NIO. We have already raised around RMB 4.4 billion. Right now, many new investors have approached to me and asked whether it's possible for them to invest in the battery assets management company. At the same time, we also secured sufficient credit facilities from the bank for the battery asset management company. As a very important player or a very important role in the Battery as a Service business model, the battery asset company has already procured a sufficient cash to support this business model operation. [Foreign Language] But in terms of the penetration rates of the batteries, amount of Battery as a Service users, the delivery is going to be later compare with the orders because we have a make-to-order business models. So, first, we have a penetration rate in the order backlog, and then this will be gradually reflected in the delivery of the batteries through the vehicle - to the users. [Foreign Language]

Thanks, William.

The next question comes from Paul Gong from UBS. Please ask the question.

Yes, thanks for taking my question. I have two questions. The first one is relative to on the near-term sales. Do you foresee the lower tier cities are increasingly to be the key focus for your expansion? And how do you think about your expansion of network and your ideal mix of the sales into tier one, tier two versus tier three cities? And do you foresee to gradually moving from tier one focused into lower tier cities in the next 12 months? The second question is regarding the autonomous driving system development for the ET7 obviously you have put a value redundant a very powerful hardware on the vehicle. And for those who choose not to subscribe the AD system will still put the same hardware on the vehicle, or will you choose to upgrade for the later stage when they choose to subscribe to that. And if you put such kind of redundant hardware does that mean the costs tend to be higher and your strategic sector lower margin on the car sales than try to monetize it through the subscription, the later surveys in the later life of the stage of the whole vehicle. Thank you.

[Foreign Language] Thank you, Paul, for your question. In fact we have always been quite aggressive in building and expanding our sales networks. Just like I mentioned, we have already got NIO houses and NIO spaces in around the 12 cities. And starting from last year, we have accelerated the expansion of the NIO spaces. In 2021, we're going to do new 20 NIO houses and 120 new NIO spaces. Our basic strategy of principle is to build our point of sales in those cities that has dealerships of the BMW, Audi and Mercedes or Lexus. Based on this principle, we haven't achieved full coverage yet in those cities, but we believe with our average this year we should be able to achieve a full coverage. And for our existing NIO houses and NIO spaces, we already got some in the tier three and tier four cities. [Foreign Language] We do not have any specific tactics regarding where should we have the NIO houses or NIO spaces. It's more driven by the sales performance. For example, in the Yangtze River delta region the sales performance is quite good. That is why we decided to do the NIO houses and the NIO spaces in this region. So overall speaking, we would like to expense our sales network coverage in more cities and in more areas. [Foreign Language] But we would like to build more charging and swapping network in the remote places or remote cities, especially including the supercharger network and the destination chargers. For example we would like to deploy our charging and swapping network in Inner Mongolia and Heilongjiang and other remote cities. In those other cities, they do not have very good infrastructure for the EV. Starting from this year, we're going to ramp up our infrastructure in those places. Our principle and our vision has always been that the EV users can go everywhere with a very good user experience. So we would like to focus on those cities because right now the cities do not have a very high EV penetration. That is why no third parties would like to build the infrastructure in those cities, but we would like to start this work first. [Foreign Language] Regarding the AD as a Service and ET7, the hardware including NIO Aquila Super Sensing and NIO Adam Super Computing, all come as a standard that ET7, but we're not going to lower our vehicle gross margin just because we are now using the AD as a Service subscription model. We would like to still keep a reasonable vehicle gross margin at the time of the sales. Previously, we have already said that around 20% is a reasonable vehicle gross margin target, so we are not going to lower this target. For the NAD, we believe that this is going to make a long-term contribution to our overall gross margin and the vehicle gross margin. Thank you, Paul.

Thank you everyone.

Your next question comes from Jeff Chung from Citi. Please ask your question.

[Foreign Language] So I’ve got three questions. And what is the NOP and BaaS attach rate in the past, right now and in the future? And how sensitivity does it relate to the GP margin and earnings? The second question is a range estimate of full year’s sales volume target. Thank you.

[Foreign Language] Thank you, Jeff, for your question. Just like we mentioned before, the take rate of BaaS among the NIO orders in February is around 55%. Regarding the NIO Pilot, we have two different packages. One is the full package and another one is the selected package. So the blended take rate of the NIO Pilot with these two packages is around 50%. We believe for some users, they would like to choose to install or activate the NIO Pilot after the vehicle purchase. So this is also going to help us to increase the take rate of the NIO Pilot, but different people have different preferences. We think this is going to increase to some extent, but it’s not going to be a very significant jump. For the Battery-as-a-Service, this is not going to have a significant impact of our gross margin, so the impact, I think, is going to be quite minimum. The NOP is going to contribute to our gross margin and it's going to be beneficial to the overall gross margin. If the take rate increase of the NOP is one of the reasons that we have improved our gross margin, the full package of the NOP is priced RMB 39,000. So this is going to be a very good contribution to the gross margin. Starting from this year, we're going to focus on expanding to the installed base because right now we have already got 88,000 users, so half of them haven’t opted for NOP yet. So we would like to provide some innovative models, plans for those users. For example, we have tried some financing models for the NOP or NIO Pilot to the users and received a very good result. For the after-sales installation of the NOP or activation of the NOP, this is going to contribute to the overall gross margin instead of the vehicle gross margin. Another question is about the overall supply chain. For the first half of this year, we would like to be more conservative and prepare our production based on the 7,500 units, like I mentioned, but for the second half of this year, we are quite confident about the demand, but we do not have the full visibility yet. We will further expand our sales and service network as well as our charging and swapping network. We believe that this can help us to improve the sales performance and this is going to help us to achieve a much higher sales in the coming second half of this year. Thank you, Jeff.

Our final question comes from Fei Fang from Goldman Sachs. Please ask your question.

Yes. Thanks for the opportunity. Congratulations on the strong performance. Just a quick question about your power swap station build-out. How do you strategize your footprint? How do you choose location? How often do you assume consumers will be using the infrastructure on a per vehicle basis? And then long-term, how do you think about sort of the right size for your power swap network given the strong BaaS adoption? Thank you.

[Foreign Language] Thank you, Fei, for your question. Regarding the power swap, we actually provide services directly to the users and we can have the information regarding the users with – whether they can install the home chargers or what should be their routine routes, what is the distribution of our user base. So based on all those information and our make-to-order business model, we should be able to have a very good planning for the battery swap locations. Based on the location information of the users, we can make the optimal choices regarding where should we deploy the power swap stations. We can also have the information regarding how – what should be the highways that are frequently visited by our users, so we can deploy the power swap stations in those highways. Overall speaking, the efficiency of our battery swapping stations and the planning accuracy of the battery swap stations have significantly improved compared with the past. After the deployment of the battery swap stations, we have also accelerated the speed of the service providing or the service offering to the users and achieved a very good performance. For example, during the peak hours, the battery swap stations can achieve around 10,000 battery swaps. Right now in China, we believe the long-term trend is many users will not be able to install the home chargers. Although our installation rate of the home chargers is already quite high among the peers, but as our user base grows, we can see that this trend is going to gradually go down. So it means that we would like to provide a more holistic power solution to the users, including the home chargers, the power swap stations and other services and the battery swapping shows that it can better support this part of the users’ demand. Together with our Battery-as-a-Service, the battery swapping technology, battery swap stations and the third-party charging infrastructures, we believe we can provide the best holistic battery – best holistic power solutions and experiences to the users. Thank you, Fang Fei.

As there are no further questions, now I’d like to turn the call back over to the company for closing remarks.

Thank you once again for joining us today. If you have further questions, please feel free to contact NIO’s Investor Relations team through the contact information provided on our website. This concludes the conference call. You may now disconnect your lines. Thank you.

Thank you everyone. Bye.