Hello, ladies and gentlemen, thank you for standing by for NIO Incorporated’s Third Quarter 2021 Earnings Conference Call. At this time, all participants are in listen-only mode. Today’s conference call is being recorded. I would 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 Third 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 Chief Executive Officer; Mr. Steven Feng, Chief Financial Officer; and Mr. Stanley Qu, Senior Vice President of Finance. 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 recent 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 third quarter 2021 earnings call. [Foreign Language] In the third quarter of 2021, we delivered 24,439 ES8, ES6 and EC6, a new quarterly record representing a solid growth of 100.2% year-over-year. [Foreign Language] Based on the overall production planning from September 28 to October 15 to prepare for further capacity expansion and new product introduction including ET7, we implemented upgrade and restructuring of manufacturing lines at the Hefei JAC-NIO advanced manufacturing center. Affected by the upgrades and the restructuring, we delivered 3,667 vehicles in October. The plant has resumed to normal production since late October. [Foreign Language] According to the data published by China Passenger Car Association, the penetration rate of battery electric vehicles among passenger vehicles reached 17.5% in September. As the automotive industry is accelerating its transformation towards smart titration and electrification, more and more users are now choosing smart EVs over ICEs. The order momentum continues to be strong and our new orders have reached a new all-time high in October. Currently, our delivery volume is mainly constrained by supply chain volatilities. We expect that the total delivery in the fourth quarter of 2021 to be between 23,500 to 25,500 vehicles. [Foreign Language] In the third quarter, the vehicle gross margin stood at 18.0%, while the overall gross margin reached 20.3%, benefited from the sales of a regulatory credit. [Foreign Language] Next, I would like to share with you some recent operational highlights of the company. [Foreign Language] In September, the first batch of ET7 tooling trial build wrote off the production line representing that the try outs and the commissioning of the overall manufacturing process have been completed. The teams are making final preparations for the mass production of ET7. During this appropriation process, we have also…

Thank you, William. I will now go over our key financial results. For the third 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 third quarter were RMB9.81 billion or $1.52 billion, representing an increase of 116.6% year-over-year, an increase of 16.1% quarter-over-quarter. Our total revenues are made of two parts; vehicle sales and other sales. Vehicle sales in the third quarter was RMB8.64 billion or $1.34 billion, accounting for 88% of total revenues in this quarter. It represented an increase of 102.4% year-over-year, an increase of 9.2% quarter-over-quarter. The increase in vehicle sales year-over-year and quarter-over-quarter was mainly attributed to the increase of vehicle delivery volume. Other sales this third quarter were RMB1.1 billion or $181.4 million, representing an increase of 350.8% year-over-year, an increase of 117.9% quarter-over-quarter. The increase in other sales year-over-year and quarter-over-quarter was mainly due to the sales of automotive regulatory credits and the batteries upgrade service, as well as other revenues, which increased in line with incremental vehicle sales in the third quarter of 2021. Cost of sales in the third quarter was RMB10.81 billion or $1.21 billion, representing an increase of 98.3% year-over-year and an increase of 13.6% quarter-over-quarter. The increase in cost of sales was in line with revenue growth, which was mainly driven by the increase of vehicle delivery volume in the third quarter of 2021. Gross profit in the third quarter was RMB1.99 billion or $0.31 billion, representing an increase of 240.3% year-over-year, and increase of 26.6% quarter-over-quarter. Gross margin in the third quarter was 20.3%, compared with 12.9% in the same quarter of 2020, and 18.6% in the second quarter of 2021. The…

[Operator Instructions]. Your first question comes from Tim Hsiao of Morgan Stanley. Please ask your question.

Hi Will, and Steven, and team. Thanks for taking my question. It’s great to see NIO manage to navigate through the component crunch and production hiccup in first half. Just two quick questions from my side. The first one, we have seen restructuring and upgrade of the production lines, costs around two rounds of disruption to our delivery and production this year. Just wanted to confirm that, if we completed all the necessary restructuring for the three new models next year or should we expect any similar disruption sometime next year? My second question is about the details of the other sales. Could you share more information about NIO’s third quarter other sales, because it has been surging quite a lot? I think a more significant revenue increase was attributable to the sales of EV credits and the battery upgrade services. Can we have the further breakdowns regarding the contribution from both items, and what could be the scale, as well as the contribution into fourth quarter? Because if you look at the current fourth quarter revenue guidance, it seems that it just mainly reflected the contribution from the weaker sales. So should we expect a contribution from other sales to rise further? Those are my two questions. Thank you.

[Foreign Language] Tim, thank you for your question. I will answer the first one and Stanley is going to answer the second one. In the previous remarks, we have also talked about the progress of our capacity expansion for the two plants. For the first half funds, just like you mentioned, starting from the end of September to the middle of October, we have some restructuring and upgrades of the manufacturing lines to further expand the production capacity and prepare for the new product introductions. Following this upgrade, we probably will do some minor restructurings and modifications of the production lines. But we believe the following restructuring is not going to have a very significant impact on the normal production of the vehicles. Secondly, regarding the new products, some of the new products will be manufactured in the second plant. Then this means that for the second plant, we will need some time to ramp up the production for the new products, but this is not going to affect the manufacturing of the existing products.

Hi, Tim. Regarding the second question, among the other revenue, RMB517 million was contributed by the EV credit sales and after deduction of this EV credit sales, our total gross margin for other revenue decreased from minus 5.6% to 12.6%, that’s because the – it’s driven by the expansion of our sales and service network in Q3. And as mentioned by William in his explanation, the construction of our sales and service network infrastructure moved earlier and faster than our sales increase, especially in this year. So, we are expecting the total revenue of other service will increase, but the gross profit margin for these products will decrease a little bit in Q4. Yes.

Okay. Great. Could you - sorry, just a quick follow-up some – could you highlight some potential contribution from the sales of credit into fourth quarter?

Yes. Almost, majority of the EV credit sales was realized in Q3. So in Q4, we don’t expect a significant revenue from this part. Yes.

Got it great. Thank you.

[Foreign Language] Yes, just like as Stanley explained, this year is a bit different from last year. We recognized the sales of the regulatory credits much earlier, compared with last year.

Thank you, Will.

Your next question comes from Nick Lai of JP Morgan. Please ask your question.

Thank you for taking my question. It’s Nick from JP Morgan. Good morning, William and Steven. My two simple question is, number one related to margin, and the second question is related to ET7, the new exciting model. First of all on the margin front, yes, vehicle margin third quarter was 18%, slightly down from 20% in 2Q. Yes, I wonder how should we think about the margin into 4Q or first half next year taking into account of two factors; the first factor is the pricing dynamic or competition from the peers and the second is improved raw material prices, especially on the battery front. That’s the first question. And I mean, I think you answered part of my question earlier on credit sales. So, second question on ET7, it’s simply a very exciting product, when should we expect the car to hit a showroom in the near term? And medium to longer term, after production is ramped up, how should we think about the volume and the possibility of ET7, relative to our current high-end product, ES8? ES8’s current monthly run rate, sales volume is monthly about 1,500. So, how should we think about the profit margin and the volume for ET7. That’s two simple questions. Thank you.

Hi, Nick. This is Stanley. About your first question regarding the gross profit margin and our 75-kilowatt hours battery start to - will start to be delivered from November. And gross profit margin will be improved a little bit, compared with the 70-kilowatt hours battery. But prices of our key materials like aluminum, copper, and also chips increase - are increasing as there will be pressures for our cost controlling. But we are confident to continuously improve our gross profit margin, which combines efforts, either from the product design or supply chain optimization. So for Q4, we are expecting that gross profit margin will keep stable and for next year, our target is to achieve 20% gross profit margin for vehicles. And along with our launch of NT2.0 products from a long run perspective, we try to achieve the higher profit margin with about 25% - yes, of vehicles.

[Foreign Language] As Stanley mentioned, yes, as Stanley mentioned, basically, for the NT2.0 product, we expect that with the economy of scales and the volume ramp up, as well as the optimizations in every aspect. We should be able to average 25% vehicle gross margin in the long run. At the beginning, of course, we will need some time to ramp up the production of the new products based on the NIO Technology Platform 2.0. According to our preliminary estimation internally, we believe the vehicle gross margin of the new product should be quite good. And for the ET7 delivery, we are going to start the delivery of ET7 in the first quarter of next year. So it means that, we will have the cars in our NIO Houses and NIO Spaces around the spring festivals time. Then afterwards, we will start deliveries to the users, because we have used many advanced chips and sensors on the ET7. So this has a put a lot of pressure on the mass production of ET7. But we believe everything is on schedule. [Foreign Language] Thank you, Nick.

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

Thank you. Good morning. William, Steven, and Stanley. So my question is regarding your supply chain. So, right now, actually, we are hearing some of the auto company expect the chip shortage situation will not be fully resolved by the mid of next year. So, right now, I want to hear your latest view regarding your chip supply situation and also the large size battery pack supply situation. And also, right now for your consumers, if they place orders to you, I think at the waiting time is more than two months already. So, how will you retain long-term consumers? And also, next year, we expect the EV purchase subsidy to be cut further. So, in this case, if the consumer priced older before year-end, but they need to - we need to deliver a car after, I think next year. So will we continue to give them a similar subsidy amount, so we absorb at the subsidy cut? That is my question. Thank you.

[Foreign Language] Thank you, Ming for the question. Regarding the chip shortage situation, we believe right now it’s much better than the situation in Q3. But the challenge is still quite big, because it’s very difficult to forecast what is going to happen for the chip supply. I think everyone knows about the STMicro’s situation in Malaysia and the situation basically is improving right now. The good thing is our teams have learned to adapt to the situation and face the challenges head-on and we have always been able to find a solution to all those challenges. On the other hand, our volume compared to the material OEMs is still relatively small. So the challenge is for us is smaller compared to the mature OEMs. [Foreign Language] I would like to specifically mention that because the many domain controllers in our vehicles are actually developed by ourselves in-house. So if there is a shortage of certain chips in the domain controllers, our teams have the capability to quickly find the alternative and do the rapid validation and faster production of the vehicles and the chips. So, because of these capabilities, we have already resolved some chip shortage situations happened to our vehicles. For the 75-kilowatt hour battery pack, we announced this in September that we will gradually start the delivery of the 75-kilowatt hour battery pack in late November. We also need some time to ramp up of the production of the new battery pack and we believe that the production is going to reach a reasonable level to the first quarter of next year. The battery is actually a very big constraint for us. CATL is our partner on the battery side, they have invested a lot to help us and support our vehicle production. But we believe the battery is still the main constraint on the overall production and supply capacity. [Foreign Language] Yes. As I mentioned, if you place the order, right now, you will need to wait for some time to get the cars delivered. But recently, we have also announced some policies regarding the subsidy reduction for the next year to keep our customers and also keep our customers during this long waiting time. For example, we will provide a NIO credit or NIO points to the users during this waiting time and these kind of incentives have helped us in the past. For example, starting from 2018, we have already got those policies in place and we believe that this is not going to affect the users regarding the waiting time. [Foreign Language] Regarding the EV subsidy, we believe this is not going to have a significant impact on us, because our average selling pricing is actually quite high regarding our product. So even considering the subsidy is not going to be a very big amount, comparing to the selling price of the vehicles. [Foreign Language] Thank you.

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

Thank you for taking my question. I got two ones. On the first one about application IPO, because one of the key constraint is that NIO seems to be the only one still just in the U.S. and also some of the media report is because of the NIO User Trust. Can you explain a little bit why NIO User Trust could be one of the reason when you come back to IPO? That is the first question. And second thing is about gross margin. Actually, you mentioned one of the reasons, because auto finance, due to the margin decline. However, if you have seen the demand has been very good and short on supply. I mean, I am just curious, why we in a very tight supply will still increase the auto finance, due to the falling margin. Theoretically, should reduce the auto finance line. And also I told some of my friends coming at you actually may remove or reduce the auto price in the number four quarter. Can I confirm if this is the case, can I assume the gross margin we have increase in the number four quarter, compared to number three, because you don’t provide auto finance anymore. And the average ASP also increased, because auto finance seems to be one of the reason for ASP decline in the number three quarter, compared to the second quarter. Thank you. A –Steven Feng : Bin, this is Steven. Thank you for your questions. I would like – with regard to your first question, I have two comments. First, we’re open minded. We are closely monitoring the market and we’ll make the right choice in the best interest of our shareholders. Second, we actually explore the possibilities to get listed in Hong Kong market and we are indeed doing what’s necessary to evaluate and communicate.

[Foreign Language] Thank you, Bin for your question. Yes, so we will make the decisions to best serve the interest of our investors and we will be open-minded to different choices. Regarding the impact of the auto financing on the margin, if you get to know about our business operations you will know that we will need to take some measures such as balance of the supply and the product considerations, as well as the user demands. For example, with the 75-kilowatt hour battery pack, we announced this battery pack in September. Many users would like it to wait for this 75-kilowatt hour battery pack. But just like I mentioned, we will start the delivery of this battery pack in late November and even at that time, we will still need some time to ramp up the production of the battery pack to a reasonable level. That is why, we will need to take some measures to balance this demand among the users and the product configuration, as well as the battery supply and we encourage the users to choose the 100-kilowatt hour battery pack in that case. We believe the right approach for this not to reduce the price of our product or offer discount to our users on the vehicle price. And so, that is why, we would like to take those measures to balance the demand and supply. But this is not going to be the long-term measures we take. This is only a short-term measure for us to balance the supply and the demand situation. Once the supply gets to a reasonable level in the long run, then we believe the big - the overall gross margin and the vehicle gross margin is going to improve. [Foreign Language]

Thank you.

Your next question comes from Edison Yu of Deutsche Bank. Please ask your question.

Hi, everyone. And thank you for taking our questions. First question is on the ET7 ADAS capabilities. Could you maybe discuss what kind of features we could expect at launch? And if you can’t reveal that right now, would you expect to do any sort of demonstrations on the road in the coming months, similar to what other competitors have done? And then, second question, more longer-term, last year at NIO Day, you kind of teased a solid state battery or a hybrid solid state battery coming to the vehicles, I believe at the end of next year. Is there any update on this? Is this still on track? Any details you could provide there, that’d be great. Thank you

[Foreign Language] Actually, I believe a lot of people are working on the demos. So, we don’t actually want the teams to focus their energy on the demo. We would like to have the teams to be fully dedicated to the mass production of the technology and offer new product like the ET7. Regarding the ET7 NAD, we will need some time to gradually release those advanced features to the users and we believe for all of the features, and of course it will be based on our in-house full stack technology. Previously, I have also explained that the NAD features will be released to the users based on the subscription like the ADS service. So this innovative business model has offered us some flexibilities in terms of how should we provide and when should we provide all those services and features to the users. We will need to strike a balance between different factors including the regulations, safety, and reliability. Then after we strike the perfect balance or find a sweet spot, then we can start to provide those services to the users. I believe right now, there are hundreds of companies working on those kind of demos, so we don’t want to waste our energy on that. Regarding the 150-kilowatt hour battery pack, we are now working together with our partners and everything is basically on track. Previously, we mentioned that we will start the delivery of this battery pack in the fourth quarter of next year and we believe we should be able to meet this schedule.

Thank you.

Thank you, Edison.

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

Hey. Hi, William, Steven. I got three questions. Number one, what kind of annualized total volume production from the NT2.0 platform should lead to the 25% GP margin according to your guidance? Secondly - second question is, apart from the three brand new products launching in 2022, how likely are we going to launch the facelift version of the existing product, the ES8, ES6 and EC6? So, how likely we are going to launch six new products next year instead of three brand new products? And finally, is the EV credit, so could you guide us how many points we sold in the third quarter? So - and from which we can estimate the ASP and the credit compared with previous quarters? Thank you, William. Thank you, Steven.

Jeff, with regard to your first question about GP margin, our 25% GP margin for NP2.0 platform is based on the annual production volume of 300,000 units per year.

[Foreign Language] Just like Steven mentioned that, our plan is, if we can achieve annual production of 300,000 units, we should be able to reach 25% vehicle gross margin on the NIO Technology Platform 2.0. We are very confident to achieve this target. For the existing product, of course, we have a plan to upgrade over product to the NIO Technology Platform 2.0. And we believe that this is very important for the company and we will need to focus manage the schedule for the product upgrades in specific details. Internally, we have already kicked off the development to work on this regard and we have started, how should we upgrade the different products to the NIO Technology Platform 2.0.

Yes. About the EV credits, totally around 200,000 points were sold in Q3. And what I want to remind is the price volatility for EV credit is also high, along with China’s EV penetration increase recently. So I hope this helps you to build the expectation for our futures - NIO credit revenue. Yes.

[Foreign Language] This year, basically, we believe the number of the credits we receive will increase. But this year, the penetration rate of the EV has increased very rapidly. This probably is going to change the situation for next year regarding the regulatory credit sales. According to my personal estimation, I think considering all those factors, the price of the EV credit is going to be different or probably going to be lower, compared with this year’s price. [Foreign Language]

Your next question comes from Paul Gong of UBS. Please ask your question.

Yes, hi. Thanks guys. I have two questions. The first one is regarding the – our Norway operation and obviously, it has been more than one month. And you just briefly mentioned 92% of the users chose us, and the order has been exceeding your expectation. Can you give us more color like how the achievement if it was there? And what challenges over there? Obviously, it’s a rich country, but the labor cost might also be much higher than in China. What can you share with us? And after Norway, what is your next destination for the overseas operation? The second question is regarding your expense spending. It seems that for this quarter, the increase in SG&A has been a bit faster than expected, while the R&D increase has been a little bit slower than you expected. What is the key rationale behind it and key reasons behind? Again, you have so many orders and deliveries because of the supply chain disruption, where you can see the slowdown a little bit of the SG&A and instead to put more budget into the R&D in the following one or two quarters. [Foreign Language]

[Foreign Language] Thank you for your question. Regarding our operations in Norway, we believe the basic operations have a mix of expectations in all aspects. After the NIO House opened on September 30, I would like to share with you some data. After the test drive, one-fourth of the users have placed orders for our products. We believe this is very impressive and this shows to me that basically the efficiency is much higher, compared with that of here in China. This is on the delivery side. On the services side, so, we do need a lot of work to do. Our swap stations in Norway have just started the operation, because previously we need to send people over to work on the installation and on the commissioning of the swap stations. And then, for the after-sales we also encountered some challenges brought forward by the COVID situation. But the order momentum is quite strong. We have done some trial delivery at the end of September and in October and we believe the delivery in November is going to improve significantly. There is a lot of order backlog. But we would like to control our pace of delivery a little bit at the beginning, because internally we set the target of ourselves, especially on the user satisfaction rate. We have a kind of VAU, it’s Vision Action Upgrade designed in the company and the basically we use the VAU to set the target for ourselves. My personal VAU is to make sure we can achieve high user satisfaction rates. And right now, according to the feedback we got from the ground in Norway, we understand that the word of mouth reputation has been quite good. And one of my friend actually sent a video to me to show that there…

Thank you very much.

Your next question comes from Chang Liu of CICC. Please ask your question.

Yes. Thank you for taking my questions. My first question is regarding the capacity expansion. So could you give us a guidance on next year’s sales volume, especially for the new three models and also our current three models? So can our capacity needs meet in next year. And considering the strong EV demand on our new – more new models in 2023, do we have a plan in constructing more new plants. My second question is regarding the upgrade of smart hardware, because we are expecting a really fast upgrade in the smart hardware in next years. So how do we keep our competitiveness of our next models and to keep our users satisfied? Also, I have a follow-up question for our globalization. So in longer term, do we have a guidance for the proportion of overseas sales accounted for the overall sales? Thank you.

[Foreign Language] Thank you, Liu Chang, for your questions. Right now, we have basically two plants. The first plant, like I mentioned that we have upgraded the manufacturing lines to further expand the production capacity. For the new plant, we are going to start the production in the third quarter of next year. So, for our product and operations, we believe these two new plants - these two plants should be able to support our demand for the short-term. If we combine these two plants together, the maximum production capacity we can support is up to 600,000 annual production capacity based on double shifts. So we believe this maximum production capacity should be able to satisfy our demand in the short-term. [Foreign Language] For the NIO Technology Platform 1.0 smart hardware upgrades, we previously communicated with our users that we will study some plants to upgrade the hardware on the NIO Technology Platform 1.0 based on our design. On the NIO Technology Platform 2.0, we plan to probably provide its services starting from next year, and we will provide some more details and updates on this regard at a more suitable time. Of course, this smart hardware upgrade on the NIO Technology platform 1.0 is not going to be the same as the same kind of experience of the NIO Technology Platform 2.0, but we believe the digital carpet of the existing product is going to significantly improve. We have already considered all those flexibilities and the possibilities of the hardware and software upgrades in our product design. And for example, just now, I mentioned about the hardware upgrades and then for the software aspects we have been continuously upgrading our software. We launched and released our Aspen 3.0 to our users of the existing products and received great reviews and feedback from all those users. And we will continue to upgrade our software and iterate our software to make sure we can provide much better services and experiences to our users. [Foreign Language] Regarding the previous Aspen 3.0, we also believe that this provides a solid foundation for our global market entry and if we go back to your question about the global market entry and the target for the global markets, NIO has always aspired to build a global brand. If we look at the global market, we can see that China is still the biggest auto market and the biggest premium market. So, China will still be the most important market for us. But regarding our aspiration for the global markets, I cannot provide very specific targets for the global market at this moment. But I believe for the markets outside of China in the long-term they should account for around 50% of all sales of our product.

Yes. Thank you. William.

[Foreign Language]

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.