蔚來 (NIO) 2021 Q3 法說會逐字稿

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 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 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 US 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 US 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.

(interpreted) Hello, everyone.

Thank you for joining NIO's third quarter 2021 earnings call.

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.

Based on the overall production planning, from September 28 to October 15, to prepare for further capacity expansion and new products introduction, including ET7, we implemented upgrades and restructuring of manufacturing lines at the Hefei JAC-NIO Advanced Manufacturing Center.

Affected by the upgrades and restructuring, we delivered 3,667 vehicles in October.

The plant has resumed normal production since late October.

According to the data published by China Passenger Car Association, the penetration rate of the battery electric vehicles among passenger vehicles reached 17.5% in September.

As the automotive industry is accelerating its transformation towards smartization and electrification, more and more users are now choosing smart EVs over ICEs.

The order momentum continues to be strong and new orders have reached a new all-time high in October.

Currently our delivery volume is mainly constrained by supply chain volatilities.

We expect the total delivery in the fourth quarter of 2021 to be between 23,500 to 25,000 vehicles.

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 regulatory credits.

Next, I would like to share with you some recent operational highlights of the Company.

In September, the first batch of ET7 tooling trial builds rolled off the production line representing that the tryout and commissioning of the overall manufacturing process has been completed.

The teams are making final preparations for the mass production of ET7.

During this preparation process, we have also made various product optimizations on ET7.

For example, the drag coefficient of ET7 was improved from 0.23 to 0.208.

We are very confident about the final product competitiveness and the market performance of the ET7.

The software and hardware development of NAD are also pressing ahead on schedule.

The development of the other two new products on NIO Technology Platform 2.0 are also moving forward smoothly and the delivery to users is expected to start in the second half of next year.

We will share more product details at NIO day 2021.

In September, we launched the 75-kilowatt-hour standard range battery pack with LFP/NCM hybrid cells, which has further enhanced the competitiveness of NIO's battery system, empowered by the industry-first LFP/NCM cell layout and advanced software and hardware systems of thermal management and SOC estimation.

NIO's battery system team worked closely with our partners in overcoming the disadvantages of the LFP cells in aspect of low temperature performance and SoC estimation.

On top of that, the 75-kilowatt-hour hybrid battery pack has also achieved higher energy density and a longer drive range and a lower cost compared with the 70-kilowatt-hour NCM battery pack.

In terms of production capacity, besides the upgrades and the restructuring of the manufacturing lines in JAC-NIO Advanced Manufacturing Center, the second manufacturing site at Neo Park in Hefei is also under construction.

After the kickoff on April 29, we completed the main structure construction on August 26 and will start the equipment installation at end of this month.

In the third quarter of 2022, we will begin production officially.

On the supply side, due to global COVID-19 pandemic, extreme weather events and other factors, the overall supply chain remains challenging.

Our supply chain team, R&D team and the partners have adopted a series of measures to support the record-high quarterly delivery in the third quarter and will continue to secure the supply for the delivery in the fourth quarter and upcoming new product production.

With regards to the sales and service network, we now have 32 NIO Houses and 285 NIO Spaces in 132 cities in China.

We will continue to expand and optimize our NIO House and NIO Space coverage to effectively penetrate into more tier 2 and tier 3 cities.

As of now, we have 43 NIO Service Centers and 181 Authorized Service Centers in 141 cities.

We'll build more service centers to ensure high quality services to the rapidly growing user base.

Up until now, we have deployed 608 battery swap stations in 153 cities in China, and completed over 4.74 million swaps.

In addition, we have built over 460 Power Charger stations and 3,155 destination chargers across China.

As we speed up the deployment of the swapping and the charging infrastructure, the superior experience and value brought forward by battery swapping technology and battery as a service have made BaaS the go-to choice for more and more users.

Regarding the global market, we opened our NIO house in Norway on 30 September, which has attracted wide attention from both the public and the media.

On the same day, we started to deliver ES8 and provide services to our users in Norway.

Besides achieving Euro NCAP five-star safety rating, the ES8 has also received rave reviews on its performance and the product experience from the local users and media.

The order intake has exceeded our expectations.

More importantly among all the orders, 92% of the users have chosen BaaS.

NIO's products, services and innovative business model not only have been well received in China but also present unique value and strengths in the global market.

In 2022, we will further step-up our efforts in entering more global markets.

Users have always been the foundation of NIO.

A diversified user community brings a greater vitality to NIO and drives NIO to become better.

In October, NIO and NIO Users Trust joined hands with Sanjiangyuan Ecological Protection Foundation to build a green ecosystem in the Sanjiangyuan National Park.

With much anticipation, we have announced that NIO Day 2021 will be held in Suzhou, on 18 December this year.

NIO User advisors and NIO Day organizing committee are working closely on the final preparations.

Please stay tuned for the coming NIO Day organized together by NIO and our users.

In 2021, NIO has doubled down on investment in product development, capacity expansion, charging and swapping network, as well as sales and service network.

In 2022, we will continue to make a decisive investment to further enhance of the long-term competitiveness and provide better products and services to users.

As always, thank you for your support.

With that, I will now turn the call over to Steven to provide you the financial details for the quarter.

Steven, please go ahead.

Thank you Eve.

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 earlier press release which is posted online for additional details.

Our total revenues in third quarter were RMB9.81 billion or USD1.52 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 were RMB8.64 billion RMB or USD1.34 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 in third quarter were [RMB1.17 billion] (corrected by company after the call) or USD181.4 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 battery 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 of 2021 was RMB7.81 billion or USD1.21 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 USD0.31 billion, representing an increase of 240.3% year-over-year and an increase of 26.6% quarter-over-quarter.

Gross margin in the third quarter was 20.3%, compared with 12.9% in same quarter of 2020 and 18.6% in the second quarter of 2021.

The increase of gross margin year-over-year was mainly driven by the increase of vehicle margins and the sales of automotive regulatory credits.

The increase of gross margin quarter-over-quarter was mainly due to the sales of automotive regulatory credits.

More specifically, vehicle margins third quarter was 18.0%, compared with 14.5% in the same quarter of 2020 and 20.3% in the second quarter of 2021.

The increase of vehicle margin year-over-year was mainly driven by the higher average selling price, as well as lower material cost.

The decrease of vehicle margin quarter-over-quarter was mainly due to the increased financing at subsidized rates for vehicle purchases which resulted in a deduction of vehicle revenue and an increase in tooling depreciation cost.

R&D expenses in third quarter were RMB1.19 billion or USD185.2 million, representing an increase of 101.9% year-over-year and an increase of 35.0% quarter-over-quarter.

The increase of R&D expenses year-over-year and quarter-over-quarter was mainly attributed to increased personnel costs in research and development functions as well as incremental design and development costs for new products and technologies.

SG&A expenses in the third quarter were RMB1.82 billion or USD0.28 billion, representing an increase of 94.1% year-over-year and an increase of 21.8% quarter-over-quarter.

The increase in SG&A expenses year-over-year and quarter-over-quarter was primarily due to the increase of personnel costs in sales and service functions and costs related to sales and service network expansion.

Loss from operations in the third quarter was RMB0.99 billion or USD153.9 million, representing an increase of 4.9% year-over-year and an increase of 29.9% quarter-over-quarter.

Share-based compensation expenses in the third quarter were RMB265.6 million or USD41.2 million, representing an increase of 439.8% year-over-year and an increase of 5.6% quarter-over-quarter.

The increase in share-based compensation expenses year-over-year was primarily attributed to additional options and restricted shares granted.

Net loss in the third quarter was RMB835.3 million or USD129.6 million, representing a decrease of 20.2% year-over-year and an increase of 42.3% quarter-over-quarter.

Net loss attributable to NIO's ordinary shareholders in the third quarter was RMB2.86 billion or USD443.7 million, representing an increase of 140.7% year-over-year and an increase of 333.6% quarter-over-quarter.

In the third quarter of 2021, NIO repurchased 1.418% equity interest in NIO China from a minority strategic investor for a total consideration of RMB2.5 billion and recorded an amount of RMB2.02 billion in accretion on redeemable non-controlling interests to redemption value.

Basic and diluted net loss per ADS in the third quarter were both RMB1.82 or USD0.28 per ADS.

Excluding share-based compensation expenses and accretion on redeemable

non-controlling interests to redemption value, non-GAAP adjusted basic and diluted net loss per ADS were both RMB0.36 or USD0.06 per ADS.

Our balance of cash and cash equivalents, restricted cash and short-term investment was RMB47.0 billion or USD7.3 billion as of September 30, 2021.

Now to our business outlook.

As William mentioned, for the fourth quarter of 2021 the Company expects deliveries to be between 23,500 and 25,500 vehicles, representing an increase of approximately 35.4% to 46.9% from the same quarter of 2020, and a decrease of approximately 3.8% to an increase of approximately 4.3% from the third quarter of 2021.

The Company also expects the total revenues of the fourth quarter 2021 to be between RMB9.38 billion and RMB10.11 billion, representing an increase of approximately 41.2% to 52.2% from the same quarter of 2020, and a decrease of approximately 4.4% to an increase of approximately 3.1% from the third quarter of 2021.

This business outlook reflects the Company's current and preliminary view on the business situation and market condition, which is subject to change.

Now this concludes our prepared remarks.

I will now turn the call over to the operator to facilitate our Q&A session.

Thank you.

Ladies and gentlemen, we will now begin the question and answer session.

To ask a question press star one on your telephone.

To cancel a request press the pound or hash key.

For the benefit of all participants on today's call please limit yourself to two questions.

You can re-enter the queue.

Your first question comes from Tim Hsiao of Morgan Stanley.

Please ask your question.

Hi William and Steven and Jade.

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've seen restructuring and upgrades of the production lines cause around two rounds of disruption to your delivery and production this year.

Just wanted to confirm if we have 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 they have been surging quite a lot.

I think more significant revenue increase was attributable to the sales of NEV credits and the battery upgrade services.

Could we have further breakdowns regarding the contribution from those items and what could be the scales of contribution into fourth quarter?

Because if you look at the current fourth quarter revenue guidance it seems that it just merely reflects the contribution from vehicle sales.

So should we expect the contribution from other sales to rise further?

Those are my two questions.

Thank you.

(interpreted) 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 plant, just like you mentioned starting from the end of September to the middle of October we have done some restructuring and upgrades of the manufacturing lines to further expand the production capacity and prepare for the new products introduction.

Following these upgrades we probably will do some minor restructuring 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 NEV credit sales and after deduction of these NEV credit sales, our total gross margin for other revenue decreased from minus 5.6% to 12.6%.

That's because the - it is 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 increased, especially in this year.

So we are expecting the total revenues of other service will increase but the gross profit margin for this part will decrease a little bit in Q4.

Sorry, just a quick follow-up.

Could you highlight some potential contribution from the sales of credit into fourth quarter?

Yes.

Almost the majority of the NEV credit sales was realized in Q3.

So in Q4 we don't expect significant revenue from this part.

(interpreted) Just like Stanley explained this year is a little bit different from last year.

We recognized the sales of the regulatory credits much earlier compared with last year.

Thank you William.

Your next question comes from Nick Lai of J.P. Morgan.

Please ask your question.

Thank you for taking my question.

It's Nick from J.P. Morgan.

Good morning William and Steven.

My two simple questions is number one, relating to margins and the second question is related to ET7, the new exciting model.

First of all on the margin front.

The vehicle margin in the third quarter was 18%, slightly down from 20% in Q2.

I wonder how should we think about the margin into Q4 or first half next year taking into account of two factors.

The first factor is the pricing dynamic of competition from peers.

The second is raw material price, especially on the battery front.

That's the first question.

I think you answered part of my question earlier on the credit sales.

So the second question on ET7, it's simply a very exciting product.

When should we expect the car to hit the showroom in the near term?

And in the 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 multi run rate sales point is roughly about 1500.

So how should we think about the profit margin and volume for ET7?

That's two simple questions.

Thank you.

Hi Nick.

It's Stanley.

About your first question regarding the gross profit margin.

Our 75 kilowatt hour battery - will start to be delivered from November.

Gross profit margin will be improved a little bit compared with 70 kilowatt hour battery.

But prices of our key materials like aluminum, copper and also chips are increasing.

There will be pressure for our cost controlling.

But we are confident to continuously improve our gross profit margin with combined efforts either from the product design or supply chain optimization.

So for Q4 we are expecting the gross profit margin will keep stable.

For next year, our target to achieve 20% gross profit margin for vehicles and along with our launch of NT2 products from a long run perspective we try to achieve a higher profit margin with about 25% for vehicles.

(interpreted) As Stanley mentioned basically for the NT2 products 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 reach 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.

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 the NIO Spaces around the spring festival 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 put a lot of pressure on the mass production of ET7.

But we believe everything is on schedule.

(interpreted) Thank you Nick.

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

Please ask your question.

Thank you.

Good morning, William, Steven, and Stanley.

My question is regarding your supply chain.

Right now actually we are hearing some of the auto companies expect the chip shortage situation will not be fully resolved by the middle 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.

Also, right now for your consumers, if they place their orders to you, I think the waiting time is more than two months already, so how will you retain those consumers?

Also, next year we expect the EV purchase subsidy to be cut further, so in this case if the consumer places an order before the yearend but they need to - we need to deliver the car I think in next year, so will we continue to give them similar subsidy amount, so we absorb the subsidy cut?

These are my questions.

Thank you.

(interpreted) Thank you, Ming, for your question.

Regarding the chip shortage situation, we believe right now is much better than the situation in Q3, but the challenge is still quite big because it is very difficult for us to forecast what is going to happen for the chip supply.

I think everyone knows about ST Micro'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 mature OEMs is still relatively small, so the challenges for us are smaller compared to the mature OEMs.

I would like to specifically mention that because 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 alternatives and do the rapid validation and the faster production of the vehicles and the chips.

So, because of these capabilities, we have already resolved some chip shortage situations that happened to our vehicles.

For the 75-kilowatt hour battery pack, we announced this in September, but we will gradually start the delivery of the 75-kilowatt battery pack in late November.

We also need some time to ramp up the production of the new battery pack and we believe the production is going to reach a reasonable level at 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 to support our vehicle production, but we believe the battery is still the main constraint on the overall production and supply capacity.

Yes, as we 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 NIO credit or NIO points to the users during this waiting time and these kinds of incentives have helped us in the past.

For example, starting from 2018 we have already got those policies in place, and we believe this is not going to affect the users regarding the waiting time.

Regarding the EV subsidy, we believe this is not going to have a significant impact on us because our average selling price is actually quite high regarding our products, so even considering the subsidy is not going to be a very big amount comparing to the selling price of the vehicles.

Thank you.

Your next question comes from Bin Wang of Credit Suisse.

Please ask your question.

Thank you for taking my questions.

I've got two ones, and the first one is about the application for IPO, because one of our key concerns that NIO seems to be the only one still just in the US.

Also, some media reports that is because of the NIO Users Trust.

Can you explain it a bit why NIO Users Trust could be one of the reasons preventing you come back to Hong Kong for IPO?

That is my first question.

The second thing is about the gross margin.

Actually, you mentioned one of the reasons because auto finance lead to the margin decline.

However, if you have seen the demand has been very good and short of supply.

I am just curious why we are in a very tight supply; we still increase the auto finance into the volume margin.

Theoretically, it should reduce the auto finance, right?

Also, some of my friends told me that you actually remove or reduce auto finance in the number 4 quarter.

Can I confirm this is the case?

If it is the case, can I assume the gross margin will have an increase in the number 4 quarter compared to number 3, because you don't provide auto finance anymore.

The average ASP also were increased by auto finance seems to be one of the reasons for ASP decline in number 3 quarter compared to second quarter.

Thank you.

Bin, this is Steven.

Thank you for your questions.

I would like with regard to your first question, I have two comments.

First, we are open-minded.

We will closely monitor the market and will 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 doing what is necessary to evaluate and communicate.

(interpreted) Thank you, Bin, for your question.

We will make the decisions to best serve the interests 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 to balance the supply and the product configurations 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 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 that if the right approach for us is not to reduce the price of our product or offer discounts, to offer users on the vehicle price.

So that is why we would like to take those measures to balance the demand and the 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 - overall gross margin and the vehicle gross margin are going to improve.

Thank you.

Your next question comes from Edison Yu of Deutsche Bank.

Please, ask your question.

Hi, everyone.

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, will you expect to do any sort of demonstrations on the road in the coming months, similar to what other competitors have done?

My 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 would be great.

Thank you.

(interpreted) Actually, I believe a lot of people are working on the demo, so we don't actually want the teams to focus their energy on the demo.

We would like it to have the teams to be fully dedicated to the mass production of the technology and our new product like the ET7.

Regarding the ET7 and the NAD, we will need some time to gradually release those advanced features to the users and we believe for all the features, 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 AD-as-a-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 and 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 kinds 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 the 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.

Yes, hi, William, Steven.

I've got three questions.

Number one, what kind of annualized total volume production from the NT2 platform should lead to the 25% GP margin according to your guidance?

Secondly - second question is apart from the three brand new products launching 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?

Finally, it's the NEV credits.

So could you guide us how many points we sold in the third quarter?

So - and from which we can estimate the ASP of the NEV credit compared with our previous quarters.

Thank you, William.

Thank you, Steven.

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

(interpreted) Just like Steven mentioned, that our plan is if we can achieve an 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 products, of course we have a plan to upgrade our products to the NIO technology platform 2.0 and we believe that this is very important for the Company and we will need to focus managing the schedule for the product upgrades in specific details.

Internally, we have already kicked off the development work on this regard and we have studied how should we upgrade the different products to the NIO technology platform 2.0.

About the NEV credits, totally around 200,000 points were sold in Q3 and - but I want to remind you is the price volatility for NEV credit is also high along with the China's NEV penetration rate increase recently.

So I hope this can help you to build the expectations about our future NEV credit.

(interpreted) This year, basically we believe the number of the credits we receive will increase but this year the penetration rate of the NEV has increased very rapidly and 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 that the price of the NEV credit is going to be different or probably going to be lower compared with this year's price.

Xie xie.

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 Norway operation and obviously it has been more than one month and you just briefly mentioned 92% of the users' response and the order has been exceeding your expectation.

Can you give us more color, like how the achievement was there and what is the challenges over there?

Obviously, it is a rich country but the labor costs 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 expanse spending.

It seems like 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 expected.

What is the key rationale behind this and key reasons behind it?

Do you feel you have so many orders undelivered because of the supply chain disruption or will you consider a slow down a little bit on the SG&A and instead put more budget into the R&D in the following one or two quarters?

(Spoken in foreign language).

(interpreted) Thank you for your question.

Regarding our operations in Norway, we believe the basic operations have met expectations in all aspects.

After the new house opened on 30 September, 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 that basically the efficiency is much higher compared with that of here in China.

This is on the delivery side but on the services side we still have 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.

Then for the after sales we also encountered some challenges brought forward by the COVID situation.

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 for ourselves especially on the user satisfaction rate.

We have VAU, is Vision, Action, Upgrade system in the Company and basically, we use the VAU to set the target for ourselves.

My personal VAU is to make sure we can achieve the high user satisfaction rate.

Right now according to the feedback we got from the ground in Norway, we understand the word-of-mouth reputation has been quite good and one of my friend actually send a video to me to show that there are lots of visitors in the new house and I'm very happy to see this video and to see so many people in of our new house in Norway.

We will continue to make a decisive investment on the service and on other aspects and we will do this step by step.

Next year, besides Norway we are going to enter additional five countries in Europe and for this product planning of all those European countries, basically, the ES8 based on the NIO technology platform 1.0 will only be sold in Norway.

For the other new countries, we're going to enter, we will only sell the products based on the NIO technology platform 2.0.

I believe for the investment question this is more about the long term competitiveness or the long term strategy of the Company.

In China the competition is becoming more fierce because there have been many new entrants into the smart EV industry.

We believe product development, technology development, the sales and service network, infrastructure including swapping and the charging network are part of the long term competitiveness of the Company.

That is why we doubled down on our investments in all those regards in 2021.

In 2022 we will continue to make decisive investments on those aspects.

We believe the infrastructure like the swapping charging network, the sales and service network are also part of the long term competitiveness of the Company.

Maybe in the third quarter of this year the investment on those aspects ramped up a little bit faster than expected.

That is why we can see the SG&A cost increased higher than the previous expectation.

But on the R&D side we have also doubled our R&D personnel this year.

We have worked on - we have been working on many new products and new technologies.

But for all those new products and technologies it will need some time to ramp up all the pace.

In the fourth quarter we will be able to see some R&D expenses and cost increases in this regard.

You can imagine internally right now we have multiple new products and new projects working in parallel.

Then probably at the beginning when we set up those projects the cost is not going to be that high and it will need some time to reflect all those R&D investments on the balance sheet or P&L.

At the beginning it is relatively small but gradually along with the projects, this cost is going to increase.

But we believe that product and technology should be the cornerstone of the Company's long term competitiveness.

That's why we will continue to make decisive investment on those regards.

Thank you very much.

Xie xie.

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 guidance on next year's sales volume, especially for the new three models and also our current three models?

So can our capacity meet the need next year?

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?

I also have a follow-up question for our globalization.

So in longer term do we have guidance for the proportion of overseas sales account for the overall sales.

Thank you.

(interpreted) Thank you Liu Chang for your question.

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 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.

For the NIO Technology Platform 1.0 smart hardware upgrades we previously communicated with our users that we will study some plans 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 these 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 kind of experience of the NIO Technology Platform 2.0, but we believe the digital cockpit experience of the existing product is going to significantly improve.

We have already considered all those flexibilities and possibilities of the hardware and the software upgrades in our product design.

For example, just now I mentioned about the hardware upgrades and then for the software aspect 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.

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.

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 the overall sales of our product.

Yes.

Thank you, William.

As there are no further questions, now I would 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 line.

Thank you.