NIO Inc.

Hello, ladies and gentlemen. Thank you for standing by for NEO Inc.'s second quarter 2020 earnings conference call. At this time, all participants are in listen-only mode. Today's conference call has been recorded. I will now turn the call over to host, Mr. Rui Chen, Director of Investor Relations of the company. Please go ahead, Rui. Thank you.

Thank you, operator. Good evening and good morning, everyone. Welcome to new second quarter 2020 earnings conference call. The company's financial and operating results were published in the press release earlier today and are posted at the company's IR website. On today's call, we have Mr. William Li, founder, chairman of the board, and CEO. Ms. Jenny Lin Feng, CFO. Ms. Danny Xu, VP of Finance. And Ms. Jade Wei, AVP of Investor Relations. Before we continue, please be kindly reminded that today's discussion will contain forward-looking statements made under the State Harbor provisions of the U.S. Private Security Litigation Reform Act of 1995. Overlooking statements involve inherent risks and uncertainties. As such, the company's actual results may be materially different from the views expressed today. Further information regarding risks and uncertainties is included in certain filings of the company with the U.S. Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements except as required under applicable law. Please also note that Niel's earnings press release and his conference call include instructions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. Please refer to Neil's press release, which contains a reconciliation of the unaudited non-GAAP financial measures to comparable GAAP measures. With that, I will now turn the call over to our CEO, Mr. William Li. William, go ahead, please.

Hello, everyone. Thank you for joining Neil's 2020 Q2 earnings call. In the second quarter of 2020, it was the first time to achieve a single delivery of more than 10,000 units. A total of 10,331 ES8s and ES6s were delivered, with a growth rate of 190.8% compared to a growth rate of 169.2%. In July 2020, the future delivery amount reached 3,533 units, which is the second highest in the history of monthly delivery. In the second quarter of 2020, NIO achieved the record quarterly deliveries of over 10,000 units.

and delivered an aggregate of 10,331 ES8s and ES6s, representing a strong growth of 190.8% year-over-year and 169.2% quarter-over-quarter. In July 2020, Niu delivered 3,533 units, marking the second highest monthly delivery results The cumulative deliveries in the first seven months of 2020 increased by 111.3% over the same period of 2019. Starting from October 2019, ES6 has ranked as the top-selling SUV across all EV sectors in China. For the first half of this year, ES8 has also achieved the number one in sales amount meet to large-size SUVs Luxury electric SUVs priced above 400,000 RMB in China.

In the third quarter, we are confident to achieve a new quarterly record of 11,000 to 11,500 deliveries. As for the gross margin, with the strong momentum of quarterly deliveries, rise of average selling price, reduction of battery pack and other bomb clock,

and improvement of manufacturing efficiency. Our growth margin has substantially increased in the second quarter. The vehicle margin and the growth margin reached 9.7% and 8.4% respectively, far above our previous guidance of 5% and 3%. 我们将继续提升毛利率。 我们非常有信心今年下半年整合毛利率和综合毛利率都将超过10%。 We will continue to improve our growth margin and expect our vehicle margin and the growth margin to both exceed 10% in the second half of this year.

In the second half of this year, we will continue to improve our growth margin and expect our vehicle margin and the growth margin to both exceed 10% in the second half of this year. With the growth margin turning positive and the operational efficiency improving comprehensively across the companies,

The operating loss of the second quarter has further narrowed to 1.16 billion RMB, representing a decrease of 64% year-over-year and a decrease of 26.1% quarter-over-quarter. The significant increase in deliveries and the direct self-model and the great support from supply chain partners have enabled us to achieve positive operating cash flow for the first time in our In the second quarter of 2020, the second quarter of 2020 is a milestone quarter for us. NIO has made significant breakthroughs in sales, gross margin, operational efficiency, and cash flow. After our enduring efforts in the past year, We have found our pace to implement efficient management and solid execution on near-term operational objectives, and meanwhile, to make decisive investments in R&D and services for our long-term competitive edges.

Next, I would like to share with you our recent key priorities. With respect to R&D, as the company overall situation improves, we have accelerated the new product development and will increase our investment in autonomous driving technologies.

So we can develop industry-leading technologies to maintain the long-term competitiveness of our products.

产品方面,未来智能电动轿跑SUV EC6已于7月24日正式上市,补贴前售价36.8万元起。 EC6受到了市场和用户的广泛认可,开启预定后的订单表现超出我们的预期。

In terms of the project, the EC6 of a smart electric coupe SUV was officially launched on July 24 with a pre-subsidy price starting from RMB368,000. It has been very well received by the users and the market and presented a stronger order of performance The mass production of EC6 is proceeding well according to plan and will commence deliveries in late September.

产能方面,制造团队正在将合肥工厂的生产节拍 从15GPH提升至20GPH 与此同时也在协调供应链合作伙伴提升产能 我们将在8月底9月初达到单月单班4500到5000台的全供应链的产能

As for production capacity, the manufacturing team is going to increase the production rate of the Hefei plant from 15 drops per hour to 20 drops per hour while working together with supply chain partners to improve their capacity at the same time. By late August or early September, the overall supply chain capacity on a single shift is expected to reach 4,500 to 5000 units per month.

Regarding sales and service network,

We have opened 22 new houses and 119 new spaces in 89 cities and 142 battery swap stations in 63 cities in China. Moving forward, we will further expand the coverage of the battery swap stations and new spaces to better serve all the users.

与此同时,Battery as a Service 车电分离的创新业务模式取得重大进展。 We have completed all the work required for the product announcement and verification of the whole car and battery separate sales. The first BAS model car has also completed the insurance, loan, Shanghai, etc. process verification. This is a major breakthrough in the future technology and business model innovation. Currently, we are still in the final preparation work of officially providing BAS model service, and will officially release the implementation plan in the third quarter. In the meantime, we have also made profound progress with the innovative business model of battery as a service, namely decoupling the battery from the vehicle. We have completed the necessary product homologations and certifications

required to be qualified to sell vehicles and batteries separately. The process of the first vehicle under the bus model has been validated, including insurance purchase, loan application, and the license plate registration. This is a breakthrough moment in our technology and business innovation. Currently, we're still working on the final preparation for the official offering of our bus solution. which will be released publicly in the third quarter. Along with the increasing recognition from the users, governments, and industries, we believe the advantages of our chargeable, swappable, and upgradable products and services systems will become more self-evident.

As more and more vehicles are delivered to users, our user base is getting bigger and bigger, and the future user community is getting more and more mature. On August 8, 2020, As we deliver more and more vehicles, our user base is growing while the user community is maturing. On August 8, 2020,

The New Day 2020 host city bidding campaign came to a conclusion. Over 40,000 new users actively participated in the voting. After fierce but friendly competition, Chengdu stood out among 10 cities and won the bid to host the New Day 2020.

未来的每一点进步都离不开用户的信任支持。 今年的New Day的申办再次体现了未来社区的活力与激情。

Every little bit of our progress will not be achieved without the trust and support of our users. The feeding campaign of New Day 2020 has once again demonstrated the vibrancy and the enthusiasm of the new community.

I would like to thank our users and everyone for their support.

With that, I will now turn the call over to Stephen to provide the financial details for the quarter. Stephen, please go ahead.

Thank you, William. I will now go over our key financial results for the second quarter of 2020. And to be mindful of the length of this call, I encourage listeners to refer to our earnings press release, which is posted online, for additional details. Our total revenues in the second quarter were 3.72 billion RMB, or 526.4 million US dollars, representing an increase of 146.5% year over year, an increase of 171.1% quarter over quarter. Our total revenues are made of two parts, vehicle sales and other sales. Vehicle sales in the second quarter were 3.49 billion RMB, are 493.4 million US dollars, accounting for 94% of total revenues in this quarter. It represented an increase of 146.5% year-over-year, an increase of 177.6% quarter-over-quarter. The increase in vehicle sales year-over-year was primarily due to the increase of vehicle deliveries of the ES6, which began its first deliveries in late June 2019. Other sales in the second quarter were 232.8 million RMB or 33 million US dollars representing an increase of 147.7% year-over-year, an increase of 100% quarter-over-quarter. The increase in other sales year-over-year was mainly attributed to increased revenues derived from the service package and energy packages that subscribed, home charger installed, and accessories sold, which were in line with increased volume in the second quarter of 2020. Cost of sale in the second quarter was 3.31 billion RMB, or 482.1 million US dollars, representing an increase of 69.2% year-over-year, an increase of 121.2% quarter-over-quarter. The increase in cost sales year-over-year was meaning-driven by the increase of delivery volume in the second quarter of 2020. Gross profit in the second quarter of 2020 was 313.1 million RMB, or 44.3 million US dollars. produced an increase of 162.1% year-over-year and an increase of 286.9% quarter-over-quarter. The increase in gross profit year-over-year was mainly contributed by increased vehicle sales and higher gross margin in the second quarter of 2020. Gross margin in the second quarter The increase of gross margin year-over-year was mainly driven by the increase of recall margin in the second quarter of 2020. More specifically, recall margin in the second quarter of 2020 was 9.7%, compared with an active 24.1% in the same quarter of 2019 and an active 7.4% in the first quarter of 2020. The increase of vehicle margin was meaning to them by the decrease in purchase price of certain materials and lower unit manufacturing cost, attributed to an increased production volume in the second quarter of 2020. Besides above, the increase of vehicle margin year-over-year was also attributable to impact of what-of cost in relation to the company's voluntary battery cost in the second quarter of 2019. Iron expenses in the second quarter were 545.2 million RMB, or 77.2 million US dollars, representing a decrease of 58.1% year-over-year, an increase of 3.4% quarter-over-quarter. The decree in R&D expenses year-over-year was primarily attributable to the importance of expenses relating to rigorous testing activities of ES6 in the second quarter of 2019 before its mass production. SG&A expenses in the second quarter were 936.8 million RMB or 132.6 million US dollars, representing a decrease of 34.1% year-over-year and increase of 10.4% quarter-over-quarter. The decreasing SG and expenses year-over-year was primarily driven by the company's overall cost saving efforts and improved operating efficiency in marketing and other supporting functions. Loss for operations in the second quarter was 1.16 billion RMB or 164.2 million USD. represented a decrease of 64% year-over-year and a decrease of 26.1% quarter-over-quarter. Share-based compensation expenses in the second quarter were 45.3 million RMB, or 6.1 million US dollars, representing a decrease of 15.9% year-over-year and increase of 39.8% quarter-over-quarter. The decrease in share-based compensation expenses year-over-year was primarily due to less options granted driven by the decline in the number of employees and impact of part of the share-based compensation expenses being recopilized by using the accelerated method, with under which the expenses decrease gradually over the investing period. Net loss in the second quarter was 1.18 billion RMB, or 166.5 million US dollars, representing a decrease of 64.2% year-over-year and a decrease... Net loss attributable to NIO's ordinary shareholders in the second quarter was 1.21 billion RMB, or 171 million US dollars, representing a decrease of 63.6% year-over-year and a decrease of 29.9% quarter-over-quarter. Basic and diluted debt loss per ADS in the second quarter were both 1.15 RMB or 16 cents per ADS, excluding share-based compensation expenses. and Accretion on Redeemable Line Controlling Shinkets to Reduction Value. Line gap adjusted basic and diluted set loss per ADS was both 1.08 RMB or 15 cents per ADS in second quarter. Our balance of cash and cash equivalent, restricted cash and short-term investment was 11.17 billion RMB or 1.58 billion US dollars as of June 30, 2020. And now for all of this outlook. As William mentioned, for the third quarter of 2020, the company expects deliveries to be between 11,000 to 11,500 vehicles. represent an increase of approximately 129.2% to 159.6% from the end quarter of 2019, an increase of approximately 6.5% to 11.3% from the second quarter of 2020. They probably also expect the total revenue of the third quarter 2020 to be between 4.05% to 3.21 billion RMB, or between 572.9 to 596.2 million US dollars. This would represent an increase of approximately 124% to 109.3% from the same quarter of 2019, an increase of approximately 8.8% to 13.3% from 2nd quarter of 2020. This recent outlook reflects the complex current and the 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 operator to facilitate our Q&A session.

Certainly. Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press pound or hash key. For the benefit of all participants on today's call, please limit yourself to two questions. and if you have additional questions, you can re-enter the queue. Thank you. We have the first question from the line of Tim Heschel from Morgan Stanley. Please go ahead.

Congratulations on the strong results and thanks for taking my questions. So two quick questions. The first one regarding second quarter's gross margin because it came in as a strong base versus previous guidance. I think in addition to the strong scale because you just mentioned also attributable to the high air reach around nuclear vehicles. So could we have a rough idea what the gross margin difference between like ESA and ES6 at the moment. And could we expect ES6 margin to reach similar level as ESA with additional contribution from EPS6 later this year? And my second question is about R&D expenses. Because if you look at the state and first half, I think R&D expenses are under great control with around like 500 to 600 million per quarter despite the model launch. So would this be the normalized level because as William mentioned about investment in new vehicle development and also the autonomous driving technology. So we also have the rough breakdowns about how many percentage of the R&D is now for the vehicle development and the rest like autonomous driving and other technology.

Thank you. This is Stanley. For the first question about the and Lihong Qin. And we are trying to improve both the two models in the future, but we will only break down details of margins of each model. Okay?

Thank you. Let me answer the second question, which is about the investment in R&D. Generally speaking, we guarantee that our investment in R&D will be within 3 billion RMB per year. This is the amount of investment we guarantee. Of course, this includes all the wages, including some of the costs for our partners in the supply chain. In general, the investment in research and development related to vehicles is higher. It is directly related to vehicles. Of course, I also talked about investment in AD. We will increase it. This has already been invested in our entire research and development. We now have a team of more than 200 people in AD. In itself, it already accounts for a regular cost of development. But the next step, we are really looking for the technology of the next generation of autonomous vehicles. I would like to answer the second question regarding the RMD investment.

Right now, we would like to control our R&D investment within 3 billion RMB every year, including the labor cost, the supplier's EDD cost. In terms of the breakdown, of course, the percentage we invested for the vehicle-related R&D is higher, but just like I mentioned, we will increase our investment on the autonomous driving technology. Right now, we have already got a team around 200 people focusing on the autonomous driving technology development, which accounts a fixed part of the RMD cost. For the next generation, our autonomous driving technology, we are going to increase our investment, but at a normal pace, just like you mentioned, it should be around 500 million to 600 million for one quarter, but for some quarter, because of our productive development cadence, we may need to increase this investment.

Thank you. Got it. Thank you very much.

Thank you. We have our next question from the line of Bing Wang from Credit Suisse. Please go ahead.

I have three questions. I will speak in Chinese first. The first question is all about this kind of driving. I would like to ask, we once said on this app that we might launch two higher driving cars this year. One is called NGP, which is Navigation Guide Pilot, and the other one is the pilot. I would like to ask, is it possible to launch this year? When will it be launched? This is the first driving driving problem. The second question is, in the future, the future people will have to pay 30,000 yuan to get a driving driving car. Actually, I got three questions about autonomous. and many more. Thank you. Thank you. Our NLP function will be launched this year.

We are still testing this and we will hand it over to the users this year. As for the call function, we should say that because of the hardware limitations, we are not as efficient as Tesla, but our call function is mainly a function of entering and exiting the car seat, of downloading the car seat. I don't want to mislead Tesla that it can't reach Tesla's current standard, our call function. But for our NOP, Thank you for your question. Regarding the Navigate on Palette feature, we are now doing rigorous tests on this feature and we plan to release this within 2020. However, regarding the Nearpoint Sampling feature,

Because of the hardware constraints, our feature is not as competitive as Tesla's nearby family because our feature can only support getting out and in the parking space, so I don't want to mislead the users. But together with the HD map, we believe our Navigate appellate can achieve a very good performance.

The second question is our... The penetration rate of Neopilot, because our earliest batch of creative versions, the earliest 10,000 units, all contain this function. So this definitely has a relatively large improvement in our overall penetration rate. Of course, now, in normal sales, it is about 20% to 30%, about 25%. Regarding the second question for the take rate of the Navigator palette, we have the Founders Edition which accounts for around 10,000 units. This

Founder's Edition has the MOP as a standard feature, so this is quite helpful with the take rate of our speaking. But normally speaking, the take rate for the MOP right now is around... Right now, for the take rate of the new pallet is around 25%. This year, we have released a selected new pallet, which priced around 10,000 RMB which has enjoyed a much better tech rate.

The third one is about our next generation of AD development. We call it ND2 development, near technology 2 development. We are working hard on it. Of course, the specific technical route we talked about too early today. But what I can say is that we set very high standards. We believe that In terms of production vehicles, our AD technology is very advanced. If you look at our performance in terms of AD, when we delivered the ES8 in 2018, we were the first in the world to have a mobile X4 chip. That's actually about a year later than us. So if you look at our production ability in terms of ADAS and AD, For the next generation autonomous driving technology or other new technology platform 2.0,

Right now, we are speeding up our development pace for this new technology platform, but it's still too early to share any specific information regarding the technology roadmap. All I can say right now is we set a very high bar for ourselves for this next generation platform, and we have been working on the autonomous driving technology development. In 2018, when we released the ES8, We are the first car to be equipped with the mobile IQ4 chipset. Other competitors, they launched the car with the IQ4 chipset around one year later, so it shows we have much more experience in terms of the mass production and autonomous driving. Our experience in this regard has been tested and verified. So for the next generation platform, we would like to set a much higher standard for ourselves and we will keep you guys updated at a timely manner.

另外我想说一下,我们不会用Level 3, Level 4这样的角度去定义我们的AD的技术。 我们更看重两点对用户带来的利益。 一个的话是到底能解放 How much time does the user spend in the car? This is a very important point for us. Another point is how much the risk of an accident can be reduced compared to human driving. These two points are the two very core indicators for our assessment of AD technology. This is a very big difference between what is defined as Level 3 and Level 4.

But here I would like to emphasize that we don't actually use the level three or level four to define over-80 technologies. We use two different criteria from the user's interest perspective. The first one is we focus on how much time we can free up and the second criteria is how many accidents we can reduce compared with the human driver. We believe that these two criteria are more important than the definition of a level three and level four. Thank you for the question.

Can I have another follow-up? Please. Yeah, please. Okay, thank you. Actually, from the website, we go to Germany. So just want to know your global dream plan also limited to China. What's your future plan for the overseas expansion? Thank you.

We are a global startup. As you know, even last year, when we had the most difficulties, we were still... to ensure the normal operation of our offices in Germany, the UK, and the U.K. This year, of course, the pandemic did not affect the development of our global business. In fact, we have been conducting very detailed research and preparation work in the early stages of the overseas market. Of course, this includes product preparation, team preparation, and detailed plans for the market. But what I can say is that this year, because everyone knows that the reason is not a good timing, but we are preparing these things carefully. Of course, a lot of overseas media, media outside of China, are very concerned about our products. In fact, we have recently seen some very famous automotive media in Europe, including some automotive media in the United States. So after testing our car, it should be said that the evaluation is still very high. From day one, new is different from other companies. We are a global startup. So we have a cap

We are now doing the preliminary research regarding the international market entry including the product appropriation, team building and also the market entry planning. But this year, I believe everyone understands it's not a very good year for us to enter the international market. We understand many overseas media pay great attention to our project. After the renowned European and the US media tested our vehicle, they also speak very highly of our vehicle. So we would like to do this step by step and build up our capabilities to enter the global market. So I would like to ask for your patience.

Thank you so much and congratulations for the great result. Thank you.

Thank you.

Thank you. We have our next question from the line of Lihong from CICC. Please go ahead.

Thank you. Good evening, William and Steven. This is Wang Lei speaking from CSCC. Congratulations on the positive cash flow and better than expected gross margin. That's for sure a great move. I have three questions on the financials. So the first question goes with the gross margin. I know William just guided the GPM above 10% by end of this year, but considering we just have hit a 9.7% big gross margins by second quarter already, Can we have an updated margin target if you have any? That's the first question.

Okay. Hi, I would like to answer the first question. You know, generally in the Q3 and Q4, we expect the vehicle every certain price remains relatively stable. And for the battery pack cost, We foresee there will still some room for us to further reduce its cost. Together with other cost savings for the form, I think generally the over 10% target for vehicle margin and the overall margin can be achieved. But As you mentioned, whether we want to further like increase our target for the growth market, I don't think we want to do this at this moment. I think we still keep like the guidance of over double digit in the second half, yeah.

对,就是我们现在,当然我们还是能看到我们毛利率持续提升的这种空间,我们在按照自己的节奏在往前走。 In all aspects, we still have the opportunity to improve. You know that we are always giving guidance to this aspect. Just like last quarter, we are now willing to look at this matter from a more cautious perspective.

Of course, we understand that there are still room for improvement in terms of the gross margin and many other aspects, but we would like to move forward according to our own pace. Just like the last quarter, we would like to keep a more conservative attitude regarding those targets.

All right. Thanks, William. Thanks, Jess. So the second question goes with the operating cash flow. I think that's primarily driven by optimized working capital and I wanted to see if you or Stephen could kindly provide a breakdown.

Regarding the positive cash flow, generally there are four reasons which drive the positive cash flow. The first is operating loss. We control that at a relatively lower level. And second, as you mentioned, we negotiate the credit term and also the payment methods with our suppliers. And for example, we ask the supplier to extend the credit term from 60 days to 90 days and also ask them to accept the back notes instead of cash for the payment of the purchase. So the third one, as William mentioned, the direct sales model and also make us to receive the cash collections earlier than the payment to the suppliers. So generally, all these reasons drive us to achieve the positive cash flow in Q2.

Yeah. I think the payment streams is a very positive signal as the supplier already has some confidence on you. That's a pretty good example. So the third question and the last question, we didn't mention the monthly production capacity of between 4.5K to 5K units. And as Steven just cited, roughly 11,000 unit car deliveries in next quarter. And why do we see a gap between the production capacity and the sales outlook?

This is Steven. First, we increased our product capacity at end of August. And we know for any plant, which tries to increase its product capacity, there is a ramp-up period. Okay, so our production capacity in July and August is still below 4,000 units. And that is a constraint for our delivery in Q3. And why do we increase our product capacity to 4,500 to 5,000? That's because that's The preparation for our Q4 delivery.

Yes, I would like to add that the capacity we are increasing is very strong. If you look at our ES8, I have been receiving a lot of requests from friends asking if they can speed up my car. There are a lot of users who have to wait a long time to mention ES8. In fact, there is a lot of order pressure. In addition, we see EC6, our September next month starts to deliver. Its production also needs some time. So in Q4, EC6's production capacity is mainly in Q4. If the previous order is to be laid there, the delivery pressure of Q4 is still relatively high. So in general, We want to improve the production capacity because of the strong demand in the market.

Many of my friends have asked me to check whether it's possible to have their ES8 delivered early. So there is a very big ES8 order backlog right now. As I mentioned, the ES6 delivery will commence at late September this year. So we also need some time to ramp up the production of the ES6 in the front. Before we start the delivery of the EC6, we will start to accumulate orders for the EC6. So it means that in the fourth quarter of this year, we're going to witness the significant pressure of our delivery and production. That's why we would like to increase our production capacity at the end of August. Then we can be fully prepared for the EC6 ramp-up and the Q4 delivery.

All right. Thanks, William. Thanks, Stephen. That's all my questions with the initial results. Thank you. Thank you.

Thank you. Thank you.

Thank you. We have our next question from the line of Mason Lee from Buffa. Please go ahead.

Thank you, William, Stephen, and the management. Congrats on the good result of the creation. So the first creation is that I think the market seems does not understand too much on the battery as a service. So probably I think probably you can take this opportunity to give more explanation on the business. First of all I want to know that right now how much of a battery are assets on your book and once you set up a new battery management company around how much assets you can reduce down from your balance sheet. This can increase your pressure on balance sheets going forward. And also the second question is that once the BAH business model is confirmed, then I believe you can start to open the auto finance program for both the vehicle as well as the battery. So I think that the down payment and other consumers will be much lower compared to the current stages. So how much more new demand do you think you can create soon as battery as a service? So that's my first question. Thank you, William, and the management team.

Thank you. Thank you. This is a very innovative business model. In fact, it is not easy to get through this. I also mentioned earlier that we have already obtained all the approval from the government. Our first car with no battery that can be sold has already completed all the insurance, loans, and all the process of listing. To put it simply, Batch-as-a-Service refers to the concept of buying a car and renting a battery. In other words, the battery can not be included in the price of your car. In the past, although we have promoted some services, we have more restrictions on policy. We are more of a financial policy. Thanks for the question. Battery as a service is a very innovative business model and it's quite difficult to validate this process. Just like I mentioned in my previous prepared remarks, we have now got the government approval

and the first vehicle without the battery has already finished the validation process regarding the insurance purchase, loan application and the license plate registration. Basically, it means that you buy the car without the battery and it means that when you pay for the car, you do not need to pay the cost of the battery. We have already gathered support from the government and the related policies. We believe it's the right time for us to do this.

What is the difference? Now we can use a way to analyze the battery to buy this vehicle. But if today's NIO users choose to pay less than 100,000 yuan and pay how much every month, they cannot pay the money from today's perspective. That is to say, for example, our current service, our 30... and so on. Then it can really be compared in the same way. It can be used for the previous part of the loan. The latter one can really be used in the mode of using by the industry. This can greatly reduce the threshold of purchase of users. Whether it is首付 or月供, compared to the original, it will be much less. So this is for not affecting our interest rate, or even improving our interest rate. I would like to explain a little bit about the difference. Right now, if the user wants to do the financing for the battery, then it means that at the beginning of the vehicle purchase, they can pay less.

and many more. We also want to say thank you to all of you who have participated in this event. They cannot get the loan from the bank because of the government policy restrictions. But if we can go with the BAT solution, then it means that with the new product homologation policy and the certification policy, the users can have less payments at the beginning, but they can still enjoy the loan for their monthly payments. which, just like you mentioned, should be able to lower the down payment as well as the monthly payment for the users. We believe that this is not going to affect our gross margin or probably is even going to help us with the gross margin. But with this solution, we should be able to help the users to lower their down payment and the monthly payment, and we believe that it is going to be a very good boost to our vehicle sales.

Of course, the specific price plan, as I said before, will be released in three weeks. We are now in the final business preparation work. One of the important parts is that we are building an electronic asset company. Of course, we are one of the shareholders, but we are not a shareholder. It will not affect our asset supply. The construction of this electronic asset company is also going well. We expect to complete the establishment of this electronic asset company in August. Electronics companies will hold the assets and rent them out to the users. This will allow more companies interested in this field to enter this field. We believe this will create a positive cycle. This is a huge change for the entire industry.

Just like I mentioned before, we will release the detail in the third quarter. We're now at the final commercial preparation stage. A very important task for us is to prepare the setup of the battery access management company. We are one party out of this endeavor, but we're not the main stakeholder, so it means it's not going to affect our balance sheet, but Thank you.

Thank you, William. That's my question. Thank you.

Thank you. Thank you, Ming.

Thank you. We have our next question from the line of Paul Gong from UBS. Please go ahead.

Hi. Thanks for taking my question. I have two questions. I remember at the early stage of NEO, it has planned the... and other new plants but they get either delayed or cancelled last year but nowadays since you have received a lot of refinancing and has a much stronger balance sheet than last year will you consider to build the second plant by yourself and will you consider launch the GT7 at certain time or would the fourth model be a different model can you give us a little bit of color on the next model coming in the new day later this year?

Thank you. We have kept the tradition of releasing a new model every year but we have kept the tradition Thanks for your question.

We have kept our cadence of launching one new product every year. After we released the ET preview in the Shanghai Auto Show, we have attracted great attention from the market and the users. People are looking forward to our SEDEM product development. What we can say now is the next product will be a SEDEM, but I would like to ask for your patience.

In our entire product development project, Of course, we have a very complete and detailed plan for the development of the products in the next few years. We certainly need the second factory at a certain time. Of course, we are now seeing that our cooperation with JEC is also very successful. The quality of our production vehicles is in the first place in all kinds of comparisons. So we are very confident in our cooperation with JEC. We are not particularly anxious to start the second factory right away. However, we are already planning the second factory and the progress of our product development. Of course, I don't think it is a must. We have a very comprehensive and detailed planning for our project development for the coming years.

In the future, we see there is a need for the second plant, but right now we have a very successful cooperation with JSC. The product we manufactured together with JSC has ranked at the top in many quality assessments conducted by the third parties. I'm very confident with our cooperation with JSC, and we do have room for improvement for the production capacity of our current plant. So we do not have an immediate need to kick off the second factory, but we are now working on the planning of the second factory because of our product development cadence. We don't need to say that we will build this plant by ourselves. What we need from the company's perspective is to make sure we have sufficient capacity to support our product development and the doings. We are now preparing the sufficient capacity for the products that we are going to launch in 2022.

另外我补充一下我们现有的和江淮合作的这个工厂 在不需要增加太多的投资的情况下 是可以做到双班年产15万辆的 在我们现在的这个工厂 不需要增加太多投资 双班可以到15万辆 Another point is about the current NeoJC plant

Without significant investment, we should be able to increase the production capacity of our current plant to 150,000 units under two shifts.

Thank you. That's very helpful.

Thank you, Paul.

Thank you. We have our next question from the line of Alex Potter from Piper's Handler. Please go ahead.

Hi, thanks very much. I have one question on selling regulatory credits. You've probably seen that Tesla gets a fair amount of revenue, several hundred million dollars a quarter, from selling regulatory credits to non-compliant auto brands, primarily in Europe. and I know that China is considering a similar credit trading system and I'm wondering if you are having discussions with any foreign auto brands or other auto brands to prepare to sell those automotive credits in the future in China. That's my first question.

Thanks for your question. This year the Chinese government

Thanks for your question.

This year the government has updated their policy of the NEV and the CAFC credit which they have launched in the past which has helped us to increase the value of the credit we are now on our hands. Last year, we generated a total of 100,000 double points. As of now, according to this year's price, we can generate about 120 million yuan. This is last year's points. If we sell this year, according to the current market price, it will be about 120 million yuan. So we have accumulated

and the rest of the industry. Different from Tesla, we're not going to account this as a part of the vehicle margin. We're going to consider this as part of the gross margin.

今年我们大体上会产生20万个积分 那么这部分积分的话呢 我们会在明年进行这个销售 我们预计的话 积分的价格还会进一步上涨 但具体道理是多少 这个要取决于这个供需的关系 但是我能说的是在中国 The market of points is already meaningful. This is completely different from last year. The government's direction is also to encourage people to produce electric vehicles through points to replace subsidies. From this point of view, This year, we believe we are going to accumulate around 200,000 credits.

which will be sold next year with an increased pricing. Of course, the pricing will depend on the demand and the supply in the market, but we believe this is the future direction because the Chinese government would like to make sure they use the credit to replace the subsidy and encourage OEMs to produce EVs. And we believe there will be a very big market for the credit trading between different OEMs. Last year, with 20,000 units, we have achieved 120 million RMB revenue, which means that for each vehicle, it can generate 60,000 RMB revenue. With increased pricing, we believe this is going to benefit of a gross margin in the long term.

Thank you. Thanks very much. That's very interesting. I'll pass it on.

Thank you. If there are no further questions, I would like to hand the call back to our presenters for any closing remarks. Thank you.

Thank you again for joining us today. If you have any further questions, just contact Neil's IR team through the contact information provided on our website. This concludes the conference call. You may now disconnect the line. Thank you and stay safe.

Thank you.

Thank you. Bye. Thank you. Bye.

Thank you. Ladies and gentlemen, that does conclude the conference for today. Thank you for participating. You may all disconnect now. Thank you.