Hello, ladies and gentlemen. Thank you for standing by for NIO Incorporated’s First Quarter 2021 Earnings Conference Call. At this time, all participants are in a 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 first quarter 2021 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 the 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 the 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 2021 Q1 earnings call. [Foreign Language] In the first quarter of 2021, NIO delivered 20,060 ES8, ES6, and EC6, representing a strong year-over-year growth of 422.7%, and a solid quarter-over-quarter growth of 15.6%. All three models have achieved outstanding results in their respective segments, especially EC6. With its comprehensive performance, streamlined silhouette, and the superior digital experience, EC6 has outperformed other peers in the coupe SUV segment and has been well received among users, especially among the younger audience. [Foreign Language] On April 7, 2021, over 100,000 production vehicle was rolled off the line. It took NIO 26 months to roll off the first 50,000 vehicles but only nine months for the second 50,000. Together with our users, NIO has set a new speed record from delivering the first vehicle to the 100,000 vehicle among the premium auto brands. [Foreign Language] Driven by the growing brand awareness, competitive product portfolio, industry-leading technologies, outstanding services, and innovative business models, NIO has gained increasing recognition and support from our users. Our order momentum remains solid, while the risk of a global chip shortage still looms large in the second quarter. Despite the challenges, we expect to deliver 20,000 to 22,000 vehicles in the second quarter. [Foreign Language] In terms of the gross margin benefited from higher deliveries and solid average selling price. Other vehicle gross margin reached 21.2%, while the overall gross margin increased to 19.5% in the first quarter. [Foreign Language] On top of the positive operating cash flow for the full year of 2020, we have continued to realize positive cash flow from operating activities in the first quarter of 2021, while steadily improving operating efficiency and overall system efficiency. We remain committed to doubling down on our investments in research…

Thank you, William. I will now go over our key financial results for the first quarter of 2021. 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 first quarter were RMB7.98 billion or US$1.22 billion, representing an increase of 481.8% year-over-year, an increase of 20.2% quarter-over-quarter. Our total revenues are made of two parts: vehicle sales and other sales. Vehicle sale in the first quarter was RMB7.41 billion or US$1.13 billion, accounting for 93% of total revenues in this quarter. It represented an increase of 489.8% year-over-year, an increase of 20% quarter-over-quarter. The increase in vehicle sales year-over-year was mainly attributed to higher deliveries achieved from more product mix offered to our users, the expansion of our sales network since 2020, and the slowdown of vehicle sales in the first quarter of 2020 due to COVID-19 pandemic in China. The increase in vehicle sales quarter-over-quarter was mainly due to higher deliveries and higher average in price. Other sales in the first quarter were RMB576.5 million or US$88 million, representing an increase of 395.3% year-over-year, an increase of 23.4% quarter-over-quarter. The increase in other sales year-over-year was in line with the incremental vehicle sales in the first quarter of 2021. The increase in other sales quarter-over-quarter was mainly due to the increased revenues derived from 100-kilowatt-hour battery permanent upgrade service provided since December 2020, partially offset by sales of automotive regulatory credits in the fourth quarter of 2020. Cost of sales in the first quarter was RMB6.43 billion or US$0.98 billion, representing an increase of 317.5% year-over-year, an increase of 16.9% quarter-over-quarter. The increase in cost of sales was in line with revenue growth, which was mainly driven…

[Operator instructions] Our first question comes from the line of Nick Lai. Please ask your question.

Yes. Good morning, William, Steven, and management team. Congratulations for the great results. My simple two questions, first one is on gross margin and second one is really on chip shortage come across by many investors. On gross margin, indeed, a very good improvement of – from 4Q last year to 1Q this year. The vehicle margin increased from roughly 17% to 21%. And of that 4 percentage point improvement, I wonder if you could help us quantify a little bit the underlying driver, how much percentage is driven by ASP volume and on the flip side, raw material, price, batteries, and so on. [Foreign Language] That’s my first question. And second question on the chip shortage, it’s a common issue. And I know this probably is very low two to three months. And at the same time, we did revise down cycling our 2Q sales volume guidance from previously, William mentioned 7,500 per month in 2Q. And right now, it’s roughly about 21,000 to 22,000 in 2Q. And on the chip shortage, do we have any visibility on the potential easing of supply? Would that happen hopefully in 3Q? [Foreign Language]

[Foreign Language]

Hi Nick, this is Stanley. Overall, our vehicle costs, including BOM and also manufacture cost, remained stable in Q1 2021. And the increase of vehicle margin are mainly driven by the increase of take rate of 100-kilowatt battery pack and also the NIO Pilot, of which 5,000 is for the 100-kilowatt battery pack, and 8,000 is for the NIO Pilot take rate. So the overall 100 battery pack take rate in Q1 is 25. And we think these trends will keep in the following quarters. So that’s the general reason of why we achieved a higher gross profit margin in Q1. Okay. William?

[Foreign Language] Overall speaking, the gross margin in the first quarter of 2021 is higher than our expectation. Just like Stanley mentioned, this is mainly driven by the higher take rate of some options by the 100-kilowatt-hour battery pack and the NIO Pilot. At the same time, the cost has also reduced to some extent. We believe the current gross margins around 20% is a very healthy situation for the company’s operations, because we don’t actually cut the price and we believe this is quite comfortable for us. But at the same time, I would like to urge everyone to manage your expectations because this kind of rapid improvement of the gross margin will be quite challenging for us. But I believe there will still be room for improvement for the gross margin, but not at this big margin. So we should not be too optimistic about the gross margin improvement. But we believe, right now is quite good for us to reach 20% of the gross margin, and it’s earlier than we expected. Still, our focus for the company is the product and the service. [Foreign Language]

[Foreign Language]

The second question is about the chip shortage. The current situation in the market is quite volatile. And we have been tracking the chip supply every day. This has been a very severe issue for the whole industry supply chain. For example, the fire incident of one factory has caused several days delays for the chip shortage. And we believe this negative impact is going to kick in around the middle of May, and this is going to affect the whole industry supply chain. We believe this kind of incident will happen from time to time. That is why we believe the challenge for the whole industry will still be quite big for the following quarters or months. At the beginning of April and at the end of March, we suspended the production of a factory for five working days, which is going to impact our delivery and production in April. For the full quarter, we believe that it will be possible, but still quite challenging for us to achieve 7,000 to 7,500 production units. We are trying our best to secure the supply and to maintain the production speed. Of course, we are quite confident, but the challenge is still quite daunting. This is a common situation for the whole industry. The common understanding in the industry is the turning point will happen around the third quarter and the overall situation is going to improve around the fourth quarter. But some pessimistic – some also believe that probably this situation is going to continue to next year. Our supply chain partners have shown very strong support to the production of NIO. Yesterday, we had our partner conference in Hefei, which was attended by hundreds of partners to show their support of NIO’s production. And we believe the situation is quite challenging. But overall speaking, overall operation is relatively okay. Thank you, Nick.

Our next question comes from the line of Bin Wang from Credit Suisse. Please ask your question.

Thank you so much. Actually, I got two questions. Number one is about – I found that you have an announcement about ESG. Can you elaborate what’s the detail and why you host another ESG maybe for the first time? That’s number one question. Sorry. The second question about the margin outlook. Actually, I found that a few factors may be impacting the second quarter. One is the NIO Pilot attach rate. Second is the – was the penetration of about the 100-kilowatt-hour pack. Number three, I found that you offer a free insurance auto finance. Number four, maybe in the semiconductor pricing hike because not just the supply, but also – on the pricing also increase. Notably, lastly, it’s about the battery price. Can you provide guidance about dilution about the margin and the other key parts and movements? Thank you.

[Foreign Language] Thanks for your questions. At this morning, we announced that we are going to organize an EGM. There are some important points in this EGM that we’re going to discuss. The first one is we are going to increase the number of the directors in the board. Right now, our board member is five people, and we would like to increase this number because we want to improve the diversity and the flexibility of the board. At the same time, another important matter is we would like to give the user trust the right to nominate directors to the board. But this is a nomination right, it’s not an appointment right. So the Board will still have the power to appoint the directors. At the IPO of the company, I have transferred one-third of my shares to establish this user trust. And the user trust focus is on environmental protection, the industry subcommittees, the social welfare, and the user care. We believe it’s quite important for us to allow the user trust to participate in the decision-making process of the company, which is a very important strategy for the company. That is why we would like to propose this in the EGM. From this proposal, we believe it’s going to be quite beneficial for the long-term development of the company and it’s going to serve the best interest of our shareholders. This also showcase our mission of building a – and the vision of building a user enterprise, which will also help us to deepen our relationship with the users for the long run. [Foreign Language]

Okay. Hi Wang Bin, as explained by William in the prior questions and 20% gross profit margin is quite healthy at the current stage for us. So we don’t expect the margin will dramatically improve in this year, like quarter-on-quarter in 2020. But the 100-kilowatt battery pack and also the NIO Pilot features are both well accepted by our users. And we expect these two like options will further bring the high profit margin for us, yes. That’s the general trend we want to explain to you, yes. Okay.

Thank you. Next question.

Our next question comes from the line of Tim Hsiao from Morgan Stanley. Please ask your question.

Thanks for taking my questions and congratulations on the result. So two questions from my side. The first question is about competition because as you may notice that a lot of traditional players launched their models during Auto Show this year. So if you look at the product pricing channel strategy, I think they are quick learners and catching up rapidly. Meanwhile, several tech names or smartphone makers also announced their EV plans. So I think William has shared a lot of initiatives during the quarters now. But what will really make NIO to be, say, differentiated in the following years? Are we going to change our pricing or product strategy in mid to long-term? So that’s my first question. And second question is about the launch of ET7 because as William just mentioned, I think the supply dynamics stay tight and might stay challenged throughout the whole year. Considering like the more back-loaded second half, do you see any risk that the launch of ET7 might be delayed or face any production bottleneck, especially I think ET7 carries quite a lot of new hardware and software features? Where could be the potential bottleneck in your view? So, thank you.

[Foreign Language] In this year’s Shanghai Auto Show, we have witnessed the vitality of the China smart EV industry. If you have ever visited the Shanghai Auto Show this year, you should have seen this by yourself. That is we have a lot of innovations in the smart electric vehicle industry in China. [Foreign Language] Okay. In terms of the overall competitiveness, NIO is still quite confident in our specific market segments. In the premium market, we haven’t seen any brand with this kind of competitiveness yet in terms of the product, the service, technology, user experience, and user community. [Foreign Language] For the traditional brands, yes, there has been some highlights for their premium brands and premium products. But still, I believe they’re still lagging behind in terms of the digital experience and the autonomous driving capabilities. So it will be quite important for them to be more decisive and determined to transform themselves into this new era of smart electric vehicle. [Foreign Language] Of course, there have been many domestic players following NIO in terms of the technology adoption, user community contact, and direct services to users. They have been moving very fast as followers. But I believe it will be quite challenging and difficult for them to build a premium brand, and they will face significant pressure in terms of their pricing. Of course, the auto market is not a winner-takes-all market. But our focus at this moment is still in the premium market. In this market, we can see that the EV still accounts a small share compared with that of the gasoline cars. Although in March, the EV penetration has reached 10%, but the majority of the vehicles in the market are still gasoline cars. So it means that we still have a lot of…

Our next question comes from the line of Ming-Hsun Lee from BofA Securities. Please ask your question.

Thank you. Thank you, William and team, and congrats for the good results. So my first question is regarding the details of NeoPark. So from the announcement that we saw that NeoPark, ultimately, it will reach 1 million-unit capacity. So I want to understand that – probably your near-term plan for this NeoPark. Is 1 million capacity all for NIO? Or probably will have other EV companies? And also, for this NeoPark cooperation, will the current cooperation method continue? JAC built a plant and hire laborers, but NIO will purchase the equipment and the mold, et cetera. So that’s my question. And the second question is regarding the battery form factor. So we are seeing more and more auto companies start to apply LFP battery to further control the cost, lower the selling price, and to increase the penetration rate. From the recent media, we also saw that NIO will probably consider to use LFP battery by the end of the year. So could you give us more update regarding the potential plan? Thank you, William and management.

[Foreign Language] Thank you for your question, Ming. Yesterday is quite important because Hefei government has kicked off the building of the NeoPark. But over here, I would like to emphasize the spelling of this park is N-E-O, it’s not N-I-O. The Chinese name of this industrial park is Xinqiao or the literal translation is new bridge. This bears the same name with the Hefei Airport. This is a very big park, occupies a huge area. [Foreign Language] It is around 11.3 kilometer – square meters. [Foreign Language] This industrial park will be a massive project including manufacturing facilities, R&D and residential areas, as well as culture areas. NIO is going to be a very important company in this park. But according to the planning of the Hefei government, they will also have probably hundreds of other companies joining this NeoPark. [Foreign Language] For the planning of the Hefei government regarding the NeoPark, NIO is not going to invest on the infrastructure building of the park. Hefei government is going to make this investment. But NIO is going to be a very important company using this park. Just now you asked about the capacity of the 1 million units and the 100-gigawatt hour whether this is only for NIO or whether this is going to be available for other companies. Of course, if NIO is going to develop in a very fast speed, then I believe that the Hefei government is not going to make this matter very complicated for NIO and themselves. Then it means that NIO should be able to use all the resources and the capacities, and all the infrastructure built by the Hefei government in the NeoPark. But this is the planning of the NeoPark, which may be different from the actual execution in the future,…

Our next question comes from the line of Lei Wang from CICC. Please ask your question.

Good morning. This is Wang, Lei speaking. I would say this is beyond our expectation to see the vehicle margin above 20%, so definitely congratulations to the team. I think most of my question has been properly answered. I only have one follow-up question regarding the collaborations with Sinopec group on swap stations. So will Sinopec burden some of the CapEx investments in the second-generation service stations? Or will Sinopec share some of the revenues as well? So I’ll translate my question. [Foreign Language]

[Foreign Language] Thank you for your question. Of course, in the future, we’re going to deepen the cooperation with Sinopec. But for now, our cooperation is quite simple. Basically, we utilize their sites and the location resources. In the gas stations, of course, they will need to have a service personnel, so we believe this is also an opportunity for us to work together to share the service resources. But at this moment, we do not have any revenue-sharing mechanisms between NIO and the Sinopec. Next question.

Our next question comes from the line of Edison Yu from Deutsche Bank. Please ask your question.

Thank you and congratulations on the quarter. Two questions from the competitive angle, sort of. First, coming out of the Shanghai Auto Show, we obviously saw a lot of product, a lot of developments. Has this influenced or sped up your target about bringing in a mass-market brand into the market – I’m sorry, non-NIO brand? Is that effort kind of been accelerated? Or any sort of change to those kind of plans for going forward? And then second question, it seems like a lot of automakers now also potentially considering doing chips themselves. I think it’s reported that NIO has considered doing that as well. What’s your latest thinking on kind of moving away from NVIDIA and doing the chips yourself as well or designing the chips yourself? Thank you.

[Foreign Language] So thank you for your question, Edison. From the competition perspective, I checked out all the possible competitors and their new models. So to be honest, the most impressive one is from Wuling Hongguang, they’re a sub-brand in Beijing. They have a model called PV EV. For the mass market, we believe there are many new companies launching their new products. Just like I mentioned, in the China smart EV industry, the innovation capability has been quite strong. So we are quite confident about the popularization and the adoption of the smart EVs in the future. But in the premium sector right now, we don’t actually see any strong competitors. [Foreign Language] The second question is about the research and development of the chipset. In the smart electric vehicle industry, we believe that the industry chain is going to move toward chipset software and other smart technologies. For the long-term, the top leaders is going to deepen their investments in research and development of the smart powers, I believe this is the common outstanding of the industry. At this moment, we do not have any specific plans that we can disclose to the public or share with the public. But I believe it is quite obvious to everyone that NIO has always been very decisive in investing in the research and development of new technologies. We are determined to build our full-stack capabilities surrounding the smart electric vehicle technologies, including autonomous driving, and we believe that this is going to build the long-term competitiveness of the company. Thank you. Next question.

Our next question comes from the line of Paul Gong from UBS. Please ask your question.

Yeah. Thanks, William, and thanks, everyone. Two questions. The first one is on the R&D and second one, a bit of a follow-up on the gross margin. On the R&D, I see in this quarter, it’s actually a pretty moderate even sequentially declined from the 4Q at less than CNY700 million. I recall last time you said you’re going to double down on the R&D activity in 2021 and significantly increase on the budget. So can you give us a little bit like an update on this strategy? And more importantly, which key areas is going to be the focus for the R&D? Any rough breakdown how much percentage goes to the vehicle development? What percentage goes to the maybe autonomous driving, et cetera? This is my first question. My second question is a little bit follow-up on the gross margin. Obviously, this is pretty decent gross margin for a relatively young company like NIO. But in between of this margin versus market share, is it – I think it’s like overly focused on the margin and a little bit like under-focused on the market share. Do you think – will you strategically choose to – either adding higher specs or kind of making the vehicle more competitive in the market to balance in between of this margin versus market share? And also, how do you think about, say, rising material cost impacts in the next few quarters? Because some battery makers have indeed mentioned that it’s possible for the battery price to go up. I think I caught your comments just now that the 100-kilowatt hours of the battery take about 25% in Q1. What was the NIO Pilot take rate in Q1, please? Thank you.

[Foreign Language] Thank you for your question, Paul. Regarding the R&D expenses, yes, the R&D expenses in the first quarter is not that high. But this follows the normal pace and the development stages of a vehicle. For example, right now, our ET7 is still under research and development. Then, it means that starting from the second quarter, we’re going to see an increase in R&D expenses related with the testing cost and the ETD cost together with our suppliers. The ET7 R&D expenses will increase gradually as they get closer to the mass production. At the same time, we’re also developing multiple products in our pipeline because we would like to make sure we can apply the NG 2.0 Technology to more products in different segments in faster speeds. So starting from the first – second quarter, we are going to see some ramp-up of the R&D expenses. This will be mainly driven by the research and development of other products in the pipeline. Just like you mentioned, we are determined to develop the autonomous driving full-stack capabilities, the software capabilities, and the smart electric vehicle technologies. We will accelerate the development of the NIO Technology Platform 2.0 and the NIO Technology Platform 3.0. At the same time, we’re also ramping up of R&D personnel. In the past first quarter, the R&D personnel in the company has significantly increased, and we believe this will continue to increase in the following quarters. We have also increased our investments in terms of the R&D resources in the platform technologies, including EDS or the electric powertrain. In this year, it will be quite challenging for us to efficiently and effectively spend the RMB5 billion for the R&D expenses, but we are quite confident that we can achieve our objective and improve our…

Our next question comes from the line of Evelyn Zhang from Daiwa. Please ask your question.

Hello. Actually, it’s Kelvin from Daiwa. So I have two questions about company. So first of all, I want to know, I noticed that you have kind of a Norway – launching in Norway conference next week. So I want to know would there be any other overseas expansion plan that you can share with us? This is the first question. The second question is that can I know how – because what we know is that the raw material costs and also auto trip costs are all increasing. Do we expect like a month-on-month or even week-on-week increase affecting your component price? What’s the trend? Or how fast is this accelerated? Thank you.

Kelvin, this is Steven. Sure. First, Norway is our first stop for our long-term globalization strategy. But for the May 6 conference call, we will still focus on the Norwegian market. Just for information, actually, in March, we already set up our national sales company in Norway, and we also have already built up a local team, who will take charge of our local operation and service. And in end, actually, we already selected the location for our NIO House in Oslo. And for more details about the Norwegian market, please do join our May 6 media conference to get more details. Thank you.

The raw materials, we expect there will be some increase in the coming quarters. But compared with the overall selling price, I think the cost can be well controlled and also have a big impact to our gross profit margin, yes.

[Foreign Language] On one hand, we have some routine cost reductions. On the other hand, there are some cost increases, especially in terms of the chipset recently. But overall speaking, the saving is bigger than the cost increases. So we believe that the bill for material cost will continue to go down. Next question.

Our next question comes from the line of Vijay Rakesh from Mizuho. Please ask your question.

Hi, William and Steven. Good quarter and guide year. I just had a question on the longer term. When you look on your partnership with Sinopec, how do you expect them to roll out their stations? I know you have a 500-battery swap station target, but any thoughts on how Sinopec would be rolling out their 5,000 battery swap stations? Thanks.

[Foreign Language] Thank you, Vijay, for your questions. Yes, Sinopec announced that they will build 5,000 swap and charging facilities in their gas stations. But NIO is not the only partner working together with Sinopec. And they are not just only going to build the swap stations in the gas stations, they will also do the charging facilities. Of course, we hope to deploy more charging and the swapping facilities from NIO in the gas stations. But at the same time, we also have many other partners, both locally and nationally. So we believe the site resources will not be a big issue for us.

And also, on the solid-state battery road map – on your own solid-state battery road map, can you give us an update when do you see that in production or tests? That’s it. Thank you.

[Foreign Language] Overall speaking, the current process and the testing and the production of the solid-state battery is on track.

Thank you.

Moderator, we need to conclude our conference call today. It has been attended. And big thanks for all the great questions asked by the analysts. Operator?

Operator, we would like to conclude today’s conference call.

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

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

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.