NIO Inc. Q1 FY2023 Earnings Call

Hello, ladies and gentlemen, thank you for standing by, and welcome to the NIO Incorporated First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. Today's conference call is being recorded. I would now like to hand the conference over to your host, Ms. Eve Tang from Capital Markets. Please go ahead. Good morning and good evening, everyone. Welcome to NIO's first quarter 2023 earnings conference call. The company's financial and operating results were published in the press release earlier today and are posted at the company's IR website. On today's call, we have Mr. William Li, Founder, Chairman of the Board and Chief Executive Officer; Mr. Steven Feng, Chief Financial Officer; Mr. Stanley Qu, Senior VP of Finance; and Ms. Jade Wei, VP of Capital Markets. Before we continue, please be kindly reminded that today's discussion will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties, as such, the company's actual results may be materially different from the views expressed today. Further information regarding risks and uncertainties is included in certain filings of the company with the U.S. Securities and Exchange Commission, the Stock Exchange of Hong Kong Limited, and the Singapore Exchange Securities Trading Limited. 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.

Hello, everyone. Thank you for joining NIO's 2023 first quarter earnings call. In the first quarter of 2023, NIO delivered a total of 31,041 smart electric vehicles, which is a 20.5% increase compared to the same quarter last year. In April and May, NIO delivered 6,658 and 6,155 vehicles, respectively. We anticipate total deliveries in the second quarter of this year to range between 23,000 and 25,000 units. As we increase production of the All-New ES6 and other new models, we are confident in continuing to boost our delivery volume. Next, I want to share some recent highlights about our products, R&D, and operations. On May 24, we launched the All-New ES6, an all-around midsize smart electric SUV, and began deliveries the following day. The quality of the All-New ES6 has received widespread acclaim from the initial group of users. In May, we also started delivering the 2023 NIO ET7 and the flagship coupe SUV EC7, both featuring over 15 new enhancements and features. The 2023 NIO ET7 continues to dominate the premium smart electric mid-large sedan market. The EC7, as a flagship coupe SUV, upholds NIO's high-performance standards and promises an exceptional riding and handling experience. NIO's product quality and safety have also received recognition from authoritative organizations. On April 24, the NIO ET5 was rated as good, the highest safety level by the China Insurance Automobile Safety Index. In the J.D. Power 2023 China New Energy Vehicle Initial Quality Study released on June 1, the NIO ES6 secured first place in the premium BEV segment for the fourth year in a row. Furthermore, in J.D. Power's 2023 NEV-APEAL Study, which assesses the performance of new energy vehicles, the NIO ET7 ranked first among premium BEVs. We plan to launch the NIO ET5 Touring on June 15 and begin deliveries that same month. As the world’s first smart electric tourer, the ET5 Touring is designed for various uses by both individuals and families, greatly enhancing our competitiveness in the premium family vehicle market. Additionally, NIO's flagship SUV, the All-New ES8, will also begin deliveries soon. The new EC6, the second generation of our midsize smart coupe SUV, is set to be launched and delivered in the third quarter. As we move forward with our product platform transition, NIO will offer a complete NT2.0 lineup consisting of eight different products, which will work together to better meet the diverse needs of the premium smart EV market and provide exceptional user experiences. In June, NIO's smart system Banyan will be updated to version 2.0, introducing over 120 new features and improvements. This upgrade aims to connect NIO's products, services, and community in a more seamless manner, delivering a unique digital experience. Notably, Banyan 2.0 introduces an innovative feature for automated planning of charging and swapping routes. Supported by the new Power Cloud and an extensive power infrastructure, it allows users to plan charging and swapping along their navigation route for long-distance trips with just one tap. Regarding intelligent driving, NIO has launched Navigate on Pilot Plus Beta for all NT2.0 users. Built on NIO’s in-house developed intelligent driving technologies and closed-loop data management, NOP Plus Beta significantly enhances the comfort, safety, and efficiency of users' journeys. In Banyan 2.0, NOP Plus will leverage NIO’s proprietary BEV model and occupancy network perception, alongside a large language model trained on extensive data sets for improved planning and control. The NOP Plus experience will be further enhanced. We have also commenced testing our Power Swap Pilot for highways on a larger scale, aiming to make it available at 40 Power Swap stations on highways starting in the third quarter. This feature will gradually be expanded to more Power Swap stations, providing users with a seamless navigation and pilot experience from Point A to Point B on highways. In terms of our sales and service network, we now have 365 NIO Houses and NIO Spaces across 136 cities, along with 359 NIO service centers and delivery centers in 196 cities. For our charging and swapping network, the first batch of NIO Power Swap Station 3.0 began operations on April 13. This new generation features three synchronized operating positions, making it faster than previous versions while offering higher service capacity and smarter experiences. To date, NIO has installed 1,474 Swap stations globally, including 119 third-generation Power Swap stations, and has completed over 23 million swaps for our users. Additionally, we have installed 7,000 Power Chargers and 8,800 destination chargers. Our Power Map has connected to more than 1.1 million third-party chargers worldwide. On April 17, NIO’s first 500-kilowatt power chargers went online, completing the new generation of Power Up stations, which integrate both 500-kilowatt power chargers and the Power Swap Station 3.0. By efficiently coordinating chargers and swap stations, along with flexible capacity distribution, the Power Chargers can operate in a more stable and effective manner. On April 22, we established our fourth NIO User Council following an election that saw active participation from NIO users globally. This year, the NIO Users Trust will continue focusing on public welfare, user care, and shared growth. On March 26, deepening our collaboration with the World Wide Fund for Nature, NIO announced its commitment to the Science Based Targets initiative, aiming to set a science-based target within two years as part of our contribution to global sustainability and in line with our Blue Sky commitment. In response to changing market conditions, we will adjust our sales and marketing strategies promptly to maintain the competitive edge of our products and services. In the latter half of 2023, with the complete NT2.0 product lineup entering the premium battery electric vehicle market and the launch of 1,000 new Power Swap stations, NIO's product competitiveness will gradually be realized, positioning us favorably for the increasingly competitive environment. Thank you, as always, for your support. I will now turn the call over to Steven for the financial details of the first quarter. Over to you, Steven.

Thank you, William. I will now go over our key financial results for the first quarter of 2023. And to be mindful of the length of this call, I'll reference RMB only in my discussion today. I encourage listeners to refer to our earnings press release, which is posted online for additional details. Our total revenues in the first quarter were RMB10.7 billion, representing an increase of 7.7% year-over-year and a decrease of 33.5% quarter-over-quarter. Our total revenues are made up of two parts: vehicle sales and other sales. Vehicle sales in the first quarter were RMB9.2 billion, representing a decrease of 0.2% year-over-year and a decrease of 37.5% quarter-over-quarter. The decrease in vehicle sales year-over-year was mainly due to lower average selling price as a result of higher proportion of ET5 and 75 kilowatt standard-range battery pack deliveries, partially offset by an increase in delivery volume. The decrease in vehicle sales quarter-over-quarter was mainly due to a decrease in delivery volume and lower average selling price as a result of higher proportion of ET5 and 75 kilowatt standard-range battery pack deliveries. Other sales in the first quarter were RMB1.5 billion, representing an increase of 117.8% year-over-year and an increase of 11.3% quarter-over-quarter. The increase in other sales year-over-year was mainly due to the increase in sales of accessories, provision of repair and maintenance services, provision of auto financing services, sales of used cars, and provision of power solutions, as a result of the continued growth of our users. The increase in other sales quarter-over-quarter was mainly due to the increase in provision of auto financing services, sales of accessories, provision of repair and maintenance services, provision of power solutions and sales of used cars due to the continued growth of our users, and was partially offset by a decrease in revenue from rendering of research and development services. Gross margin in the first quarter of 2023 was 1.5% compared with 14.6% in the first quarter of 2022 and 3.9% in the fourth quarter of 2022. The decrease in gross margin year-over-year and quarter-over-quarter was mainly attributed to decreased vehicle margin. More specifically, vehicle margin in the first quarter was 5.1% compared with 18.1% in the first quarter of 2022 and 6.8% in the fourth quarter of 2022. The decrease in vehicle margin year-over-year was mainly attributed to changes in product mix and increased battery cost per unit. The decrease in vehicle margin quarter-over-quarter was mainly due to changes in product mix and increased promotion discounts for the previous generation of ES8, ES6, and EC6, which were partially offset by the inventory provisions, accelerated depreciation on production facilities, and losses on purchase commitments for the previous generation of ES8, ES6, and EC6 in the fourth quarter of 2022. R&D expenses in the first quarter were RMB3.1 billion, representing an increase of 74.6% year-over-year, a decrease of 22.7% quarter-over-quarter. The increase in research and development expenses year-over-year was mainly attributed to increased personnel costs in research and development functions and the increased share-based compensation expenses recognized in the first quarter of 2023. The decrease in research and development expenses quarter-over-quarter reflected fluctuations due to different designs and development stages of new products and technologies. SG&A expenses in the first quarter were RMB2.4 billion, representing an increase of 21.4% year-over-year and a decrease of 30.7% quarter-over-quarter. The increase in SG&A expenses year-over-year was primarily due to the increase in personnel costs related to sales and general corporate functions and an increase in expenses related to the company's sales and service network expansion. The decrease in SG&A expenses quarter-to-quarter was mainly due to the decrease in sales and marketing activities and professional services. Loss from operations in the first quarter was RMB5.1 billion, representing an increase of 133.6% year-over-year and a decrease of 24.1% quarter-over-quarter. Net loss in the first quarter was RMB4.7 billion, representing an increase of 165.9% year-over-year and a decrease of 18.1% quarter-over-quarter. Net loss attributable to NIO's ordinary shareholders in the first quarter was RMB4.8 billion, representing an increase of 163.2% year-over-year and a decrease of 17.8% quarter-over-quarter. Our balance of cash and cash equivalents, restricted cash, short-term investments, and long-term deposits was RMB37.8 billion as of March 31, 2023. Now this concludes our prepared remarks. I will now turn the call over to the operator to proceed with our Q&A session.

Thank you. Your first question comes from Tim Hsiao from Morgan Stanley. Please go ahead.

My first question is about volume and cost control. NIO has been investing more aggressively since 2021 in new models, sales and marketing, and the energy replenishment network. Given the challenging industry and macro outlook, would NIO consider streamlining the model portfolio and reducing investment in projects like smartphones, batteries, and chipsets to focus resources on a few flagship models? Additionally, does NIO still plan to launch its mass market brand ALPS next year? Thank you.

Thank you, Tim, for your question. As we've noted, competition in the market is increasing, and we are experiencing significant changes in market dynamics. For the NIO technology platform 2.0, we are preparing to introduce a complete lineup of eight products based on NT2.0, which will gradually enter the market soon. We are currently focused on establishing a new organizational structure that will allow for a more targeted sales and marketing strategy for each of these eight products to effectively reach their intended user groups. Each product is designed with specific positioning tailored to its segment and target audience. Our challenge is ensuring that our marketing and sales teams can commit more fully to each of these eight products, in terms of showroom presentation, product availability, and marketing outreach, as well as how resources are allocated within the sales and marketing teams. We aim to have dedicated teams for each product responsible for sales and marketing initiatives. Naturally, for key products, we will allocate more resources to enhance sales performance. However, our primary focus is to ensure that we have dedicated resources for the eight products individually to help them capture significant market shares within their segments. We recognize the need to be more agile in adapting to the evolving market landscape to maintain our competitiveness in products and services. Regarding our R&D projects, we intend to stay the course with our overall strategies. In the short term, while we face certain pressures, we believe it is critical to concentrate on developing our R&D capabilities to bolster our long-term competitiveness. Simultaneously, we can adjust the pace of investment in different R&D projects based on our resources and company priorities. Concerning the ALPS project, our timeline for launching the ALPS brand remains unchanged for the second half of 2024, when we plan to release ALPS products, and we will establish specific timelines for each product. However, we want to ensure a quicker market entry for ALPS products, which will enhance efficiency and allow us to better plan our resources, particularly in marketing and sales.

My second question is about the new ES6. The guidance for the second quarter was stronger than what the market anticipated, which could lead to an increase in sales of 3,000 to 4,000 units of the new ES6. Could you provide more details about the order intake of the new ES6 since its launch? Are there any obstacles in delivering the new ES6? Additionally, do you still expect the combined sales of the ET5, ES6, and the upcoming ET5 Touring to reach 20,000 units a month? When do you anticipate achieving that target? Thank you.

Thank you, Tim. The ES6 has received a positive response from users and has garnered great feedback from the media. We believe the order performance has met our expectations, and the test drive conversion rate for the ES6 has reached an all-time high in NIO's history, which boosts our confidence in its sales performance. Right now, particularly in June, our priority is to increase ES6 production. Our goal for July is to produce and deliver 10,000 units, and we are confident we can achieve this target. Our supply chain, manufacturing, and all other teams are preparing to meet this goal. We also see potential for the combined volume of the ET5, ET5 Touring, and ES6 to reach 20,000 units in a month. The main challenge we face is with the ET5, as last year users benefitted from around RMB12,000 in subsidies and received home chargers for free. This year, however, users will need to purchase the home chargers for the ET5, which could increase costs by roughly RMB20,000 compared to last year. This is an issue we need to address. Our current focus is on discovering better ways to meet user needs and demands. We anticipate that the launch of the ET5 Touring on June 15 will significantly improve our product competitiveness, effectively catering to the needs of individual and family users and enhancing our competitiveness in this market segment. Thank you, Tim.

Thank you, William.

Thank you. Your next question comes from Bin Wang from Credit Suisse. Please go ahead.

Thank you. I have two questions. First, I would like to know about the margin outlook. We have achieved a target of 10,000 per month for ES6 in the third quarter. What are the gross margin expectations for the second half, especially concerning our guidance?

Hi, Bin, this is Stanley. As William mentioned, with the delivery of our NT2.0 product with higher prices from Q2 and Q3, the average selling price and gross profit margin per vehicle will recover. So we are confident that the gross profit margin will start to rebound to double-digits in Q3 and exceed 15% in Q4. Yes, thank you.

My second question is about any additional fundraising needs, as there are concerns about your declining net cash position. Can you provide an update on your potential fundraising efforts, particularly regarding the NIO China IPO?

Thank you, Bin, for your question. For this year, comparing the first and second quarters to the fourth quarter of last year, our delivery performance has been lower, which has impacted our operating cash flow. However, with the increase in delivery volume in the third quarter, we expect our operating cash flow to improve as well. We currently believe our cash is adequate to support the company’s business development. As a publicly listed company, we manage our cash positions very carefully and have various fundraising avenues available in different markets. This year, we've made some adjustments to our cash expenditures, such as delaying certain capital expenditures and postponing some research and development projects. Additionally, regarding global market expansion, we think it is more important to concentrate on markets where we have already established a presence, like Europe. If we have any fundraising plans in capital markets, we will inform everyone. Thank you, Wang Bin.

Thank you. Your next question comes from Ming-Hsun Lee from BofA. Please go ahead.

Thank you, William and Steven. So, I also have two questions. My first question is, what is the battery price decline in the first quarter? How much does the battery price help gross margin in the first quarter? Could you also comment on the expected battery price trend for the second and third quarters? That's my first question. Thank you.

Hi, Ming. Overall, the price of lithium carbonate has decreased slightly since the first quarter, which has positively affected our gross profit margin. In terms of specific amounts, I believe the impact was unclear per vehicle. However, we've observed a slight recovery in the lithium carbonate price to RMB310,000 per ton. Therefore, fluctuations in lithium prices could create uncertainties concerning our gross profit margin. Yes, that's the general effect of lithium.

Thank you, Stanley. And my question is regarding your latest CapEx and operating expense guidance. I remember last year, the CapEx was around RMB10 billion. What is your guidance for this year's CapEx and OpEx? Thank you.

Yes, Ming. Our CapEx will still concentrate on the construction of Power Swap stations, charging networks, and tooling and production facilities for our new models. We will control the cadence of those investments. But at this moment, I don't believe we can provide clear guidance for CapEx investment for this year. Yes, we will make adjustments dynamically according to spending and status.

Yes. Also any guidance on operating expenses? Sorry.

Okay. Regarding operating expenses, first for R&D expense, the upcoming years will remain a crucial stage for our R&D and mass production of our core technology as well as new models. Therefore, our average non-GAAP R&D expense will be kept at RMB3 billion to RMB3.5 billion per quarter for 2023. Yes, we will manage the spending curve and continue improving efficiency within our system. For SG&A expenses, we can see a decrease in Q1 primarily due to reduced marketing activities and the seasonality impact of the Chinese New Year, along with more marketing events such as the Auto Show and Road Show, as well as launching new models. The SG&A total will increase from Q2, but the efficiency will improve from Q3 as more NT2.0 products are launched and volumes are realized. I mean, that's the guidance for OpEx for the next quarters.

Thank you, Stanley. Thank you.

Thank you, Ming.

Hi, operator, next question, please.

Thank you. Your next question comes from Yuqian Ding from HSBC. Please go ahead.

I have two questions. First, are there any plans to create a budget version of our existing model, particularly the potential volume carrier ET5, by reducing the price and features to increase sales volume? Secondly, you mentioned reducing operating expenses. Will this impact or delay our breakeven point for the year?

Thank you, Yuqian, for your question. We understand that there are various pricing movements in the market, but regarding the ET5, we don't find it reasonable to have a budget version. Our philosophy is that different configurations or important functionalities should come standard for all our NT2.0 products. For example, dual motors and other essential functions and features should be standardized across our offerings, as this serves the long-term interests of our users. However, we do have some flexibility in other approaches such as user rights, including free battery swapping. When we make such considerations and adjustments, it is essential to keep our users' interests in mind. For the breakeven point, based on the current situation, we may need to delay our break-even point to within a year. We believe this is a reasonable assumption.

Thank you, Eve Tang.

Thank you. Your next question comes from Nick Lai from JPMorgan. Please go ahead.

My first question follows up on the prior inquiry about cash burn and the CapEx cycle. You mentioned delaying R&D expenses. With that in mind, how should we anticipate the CapEx or cash burn in 2024 and 2025 compared to 2023? Thank you.

Thank you for your question, Nick. Regarding the dynamic market situation, we understand the need to control risks and maintain stable operations. For the ALPS brand, the project is progressing as planned. Our current production capacity is adequate to meet the needs of both the new and ALPS brand, eliminating the necessity for substantial capital investments in production facilities. Starting this year, we will have enough Power Swap stations to support both brands in utilizing the infrastructure. Earlier, we mentioned the need for some capital and operational investments to prepare for the ALPS launch, but we plan to manage the pace of this launch more flexibly to save resources and capital. As a publicly listed company, we must be careful with cash management. We have various financing options available in both RMB and U.S. dollar capital markets. Therefore, we do not expect cash to be a major concern, but we will continue to carefully manage cash and working capital.

My second question is about the product mix. Will the new ES6 product make up a significant part of the volume? How should we assess the contributions from the four major models? What are your views on the product mix moving forward? Thank you.

Hi, Nick. Regarding the volume percentage of ET5, ET5 Touring, ES6, and EC6, I believe that, in the long run, approximately 80% of our volume will come from these models. Additionally, with all NT2.0 products launched this year, we expect our gross profit margin to recover to 15%. In the long term, considering the cost advantages provided by our in-house technology and capabilities, as well as innovative supply chain developments, our target for vehicle gross profit margin with NT2.0 products will still be around 20%. Yes, thank you.

Thank you. Your next question comes from Paul Gong from UBS. Please go ahead.

So, my first question is regarding dual-motor sales. It seems that a few recent new models all started strong but faced subsequent declines after a few months. Does our ES6 also face such challenges, or how should we avoid this happening again?

Thank you, Paul, for your question. Last year, we launched three products: ET7, ES7, and ET5. To be honest, the recent performance of these three products, including in the second quarter, has not met our expectations. When assessing factors affecting their performance, we see that users who purchased these products last year enjoyed more user rights and benefits and could take advantage of national subsidies. However, this year, users are facing higher costs compared to last year. Analyzing the macro environment, we recognize that market competition is intensifying. As a result, some users are considering other NIO brands or even traditional brands. Another factor influencing performance is internal competition or cannibalization. For instance, some ES7 users might choose the ES6 instead, while some ET5 users may decide to wait for the ET5 Touring. This is the challenge we are currently navigating. Therefore, we plan to make adjustments in the near term regarding our sales channels and network, as well as changes to our organizational structure, sales, and marketing strategies. However, for the five new products based on the NIO Technology platform 2.0 that we launched this year, we do not have similar concerns. The first product we launched this year is the EC7, and after delivery, we noticed that demand has remained stable. Regarding the ES6, as I mentioned earlier, we are confident about its sales performance following the product ramp-up. For this year, we are optimistic about all new products launched, including the ES8, which is also about to begin delivery. Currently, the reservation order performance is exceeding our expectations. We are seeing much better pacing for product quality and market entry strategy compared to previous experiences, leading us to believe that these five new products based on our NT2.0 technology platform will achieve reasonable delivery performance during their ramp-up phases. We also recently launched the 2023 ET7, which we believe will meet expectations with stable auto performances.

I apologize for not translating. My second question concerns the margin outlook for the high-end NIO brand versus the low-end ALPS brand. NIO remains relatively expensive due to its branding and excellent services, but it has yet to achieve satisfactory margins. As we move toward ALPS in the lower-tier segment, how do you foresee margins developing, especially in comparison to the high-end ones? Thank you.

Thank you for your question. Regarding brand positioning, we are navigating a challenging period for brand dynamics. For many users, purchasing decisions mainly depend on price. Currently, in terms of product, services, technology, and experience, we believe we have significant advantages over competitors. However, the value of our offerings is not yet reflected in product pricing, which is a reality we are facing. Nonetheless, we believe that over time, market recognition of our product and service values will improve. At the same time, we are dealing with challenges in the macro environment, particularly the rising cost of lithium carbonate, which has negatively affected our vehicle gross margins. In 2021, we achieved about a 20% vehicle gross margin. If lithium carbonate prices return to reasonable levels, we believe it is possible to reach that 20% vehicle gross margin target again. Long-term, we are optimistic about economies of scale, efficiency improvements, vertical integration of core components, and in-house R&D capabilities as a strong foundation for achieving this target. For ALPS, our strategy differs, focusing on defining products for market segments targeted by ALPS. Currently, we see companies selling products at around RMB200,000 and achieving vehicle gross margins over 20%, which proves it's an attainable goal. For NIO, since we include many high-spec configurations in our products, such as over a thousand computing powers and various smart capabilities, lowering costs for those components to reduce product pricing presents challenges. However, for ALPS, our goal is to achieve reasonable vehicle gross margins that we believe are possible, aiming for around 20%.

Thank you. Your next question comes from Jing Yang from CICC. Please go ahead.

My first question is about our NOP Plus. Our NOP Plus beta version has been open for several months. Can you share some user data, such as usage time, accumulated mileage, or average takeover mileage during this period? What feedback have you received? Additionally, we see the official version will be subscription-based. Can you elaborate on your understanding of the subscription charge? Also, in Q2 of this year, highway navigation functions for swapping stations were launched. How do you assess improvements in customer experience with this new function? Lastly, is there any timeframe for our function in the latter half of the year?

Thank you for your question. I will address the inquiries related to NOP Plus, and Steven will handle questions about Power Swap stations. Currently, we have over 50,000 users utilizing the NOP Plus service. The total accumulated mileage through NOP Plus has surpassed 41 million kilometers, averaging about 2 million kilometers weekly. We have begun testing NOP Plus in city scenarios and use cases, and this year, we will accelerate urban environment tests. As we finalize this feature, we will release it to users accordingly. Based on our internal evaluations so far, we are very confident in NOP Plus's performance in urban settings. At the same time, we are testing NAD, and once we meet the necessary regulatory and legal conditions for the NOP Plus release, we will proceed with releasing NAD for our users. Currently, all R&D for NOP Plus and NAD is proceeding on schedule.

My second question regards the battery swapping station. You currently have nearly 1,500 stations. This year, we have observed the addition of around 200 stations. Have you seen the density of our battery swapping station networks improving favorably, particularly regarding our new models, especially in lower-tier cities?

The short answer is a definitive yes. We have seen a clear flywheel effect between our Power Swap station network and sales growth. We have deployed 1,500 Power Swap stations across China, and by the end of the year, the total will be close to 2,400. Daily, we provide around 60,000 to 70,000 Power Swaps to users, averaging 40 to 50 swaps per station. This shows that our users prefer Power Swap stations as their charging method, and these stations are used efficiently. Therefore, we are committed to speeding up the deployment of Power Swap stations, believing this will lead to more sales growth. In some Tier-1 cities, we see that better charging experiences directly enhance volume increases. Thus, we are confident that as Power Swap stations reach lower-tier cities, NIO sales will gain strong momentum and solid growth.

We are committed to accelerating Power Swap station deployment, confident that this will lead to more sales growth. Particularly in certain regions and some Tier-1 cities, we observe that improved charging experiences directly correlate with volume increases. Hence, we are confident that as Power Swap stations penetrate lower-tier cities, NIO sales will experience strong momentum and solid growth.

Thank you.

Thank you. Your next question comes from Vijay Rakesh from Mizuho Securities. Please go ahead.

Yes, hi, just a quick question. Given the recent ramps with five new models, it appears you are getting a good response. Should we expect second-half or third-quarter production rates to reach that 20,000 per month average? And what is the expectation for Q2 compared to Q1 deliveries?

Thank you, Vijay, for your question. Indeed, our target for the second quarter of this year is to deliver over 20,000 units each month, and we are very confident we will meet this target.

Got it. Just one other question. If you look at some of the subsidiaries moving to Tier-2 cities, could that pose a near-term challenge for NIO given the insufficient number of Swap stations, etc. in those Tier-2 cities?

This year, our goal is to deploy an additional 1,000 Power Swap stations, primarily along highways and also in Tier-3 and Tier-4 cities. We believe this will directly enhance our product sales performance. We began the rollout of Power Swap Station 3.0 in April and ramped up the pace in May. By June, we aim to have approximately 100 Power Swap Station 3.0 installations, and we anticipate gradually improving the deployment rates from then on.

Thank you.

Thank you, Vijay.

As there are no further questions at this time, I would now like to turn the call back 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.