NIO Inc. Q3 FY2024 Earnings Call

Hello ladies and gentlemen, Thank you for standing by for NIO Incorporated’s Third Quarter 2024 Earnings Conference Call. At this time all participants are in listen-only mode. Today's conference call is being recorded. I will now turn the call over to your host, Mr. Rui Chen, Head of Investor Relations of the Company. Please go ahead, Rui.

Good morning and good evening, everyone. Welcome to NIO's Third Quarter 2024 Earnings Conference Call. The company's financial and operating results were published in the press release earlier today and are posted on the company's IR website. On today's call, we have Mr. William Li, Founder, Chairman of the Board, and CEO, Mr. Stanley Qu, CFO. 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 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 2024 Q3 earnings call. In Q3, the company achieved a new quarterly record with 61,855 deliveries. The new brand maintained its position as the top-selling brand in China's BEV segment, priced above RMB300,000, with its market share reaching 48%. The ONVO brand also started to deliver its first model L60 on September 28, marking its entry into the broader mainstream family market. In October 2024, the company delivered 20,976 vehicles while the ONVO brand continued to ramp up production capacity. The company's total deliveries in Q4 are expected to be between 72,000 and 75,000 units. On the financial side, our Q3 results reflected continued improvement in component costs leading to a vehicle margin of 13.1%. Besides, the gross margin of other sales has improved steadily, supported by sustained growth in revenues and gross margin. The company achieved positive operating cash flow and free cash flow in Q3. Now I would like to share with you some updates on our products, R&D, and operations. NIO's Executive Flagship ET9 is in the final testing and preparation before mass production and the delivery is expected to start in March next year. The ET9 brings together NIO's leading innovation. Its delivery will reinforce NIO's premium brand image. With new models to be introduced in the coming year, the NIO brand will be more focused on improving profitability. The ONVO L60, aiming at the mainstream family market, has been a hit with family users thanks to its spacious cabin, ultra-low energy consumption, comprehensive safety features, and the hassle-free charging and swapping experience. Now we are ramping up our supply chain capacity. Near the monthly production capacity is expected to hit 10,000 units in December and 20,000 units by March. Besides, on December 21, NIO's third brand, officially named Firefly, will make a global debut on NIO Day 2024. Its first product will be delivered in the first half of next year. Targeting the boutique compact car market, the Firefly brand will enrich the company's product lineup and make full use of existing SaaS networks. In terms of smart driving, by October, NIO’s smart driving had over 610,000 users, and 78.4% had activated NIO's “Navigate on Pilot”. Together, they had driven over 1.39 billion kilometers with NOP. The ONVO Smart Driving, based on the company's experience and expertise built over time, was rolled out with the L60, making ONVO the first brand to deliver vision-based navigation guided smart driving on urban roads. The company's success footprint continues to grow. So far NIO has 176 NIO houses and 412 new spaces worldwide, while ONVO has 191 stores across China. On the service end, the company has 398 service centers and 65 delivery centers. The Power Up Counties plan is making strong headway with more partners joining us, expanding the network. As of now, the company has 2,737 power swap stations worldwide, including 887 on highways, having provided over 58 million swaps for NIO and ONVO users. In addition, over 24,000 power chargers and destination chargers are up and running. We continue to expand globally. On November 28th, the first NIO house in the MENA region will open, and our sales and delivery have already started in UAE. Next year with NIO products from ONVO and Firefly, the company will accelerate its international market entry. On September 29, NIO China signed a new investment agreement and secured RMB3.3 billion from strategic investors. This capital boost reinforces our balance sheet and reflects the investors’ high confidence in NIO's industry leadership. On October 26, the 2024 NIO Cup Formula Student Electric China came to an end, supporting the event for 10 years. NIO has helped more than 60,000 talented students chase their dreams in the rapidly evolving Smart EV industry. November 25th marks NIO's 10th anniversary, a milestone that wouldn't have been possible without the trust and support of our users and investors. Going forward, as the new brand starts to enter a new product cycle, Firefly will deliver more new products, and the company is embarking on a phase of robust growth. We are confident in what is to come. Thank you for your support. With that, I will now turn the call over to Stanley for Q3's financial details. Over to you, Stanley.

Thank you, William. Let's now review our key financial results for the third quarter of 2024. Our total revenues were RMB18.7 billion, decreased 2.1% year-over-year and up 7% quarter-over-quarter. Vehicle sales were RMB16.7 billion, down 4.1% year-over-year, primarily driven by a lower average selling price due to changes in product mix. This was partially offset by higher deliveries. Vehicle sales increased 6.5% quarter-over-quarter, which was mainly due to increased delivery volume. Moving to the performance of other business, other sales were RMB2 billion, growing by 19.2% year-over-year and 11.9% quarter-over-quarter. The year-over-year increase was mainly due to increased sales of parts, accessories, after-sales vehicle services, and provision of power solutions, partially offset by lower sales of used cars. The increase quarter-over-quarter was mainly attributed to the increase in sales of parts, accessories, after-sales vehicle services, and provision of power solutions. Vehicle margin was 13.1% in this quarter compared to 11% in the same period of 2023 and 12.2% last quarter. The year-over-year increase was mainly due to decreased material costs per unit, partially offset by lower average selling price due to changes in product mix. The quarter-over-quarter increase was mainly due to decreased material costs per unit. Overall gross margin was 10.7%, up from 8% in the same period of last year and 9.7% in the last quarter. Turning to OpEx, R&D expenses were RMB3.3 billion, increased 9.2% year-over-year and 3.1% quarter-over-quarter. The year-over-year increase was mainly driven by increased personnel costs in R&D functions. SG&A expenses were RMB4.1 billion, increased 13.8% year-over-year and 9.3% quarter-over-quarter, which was mainly driven by higher personnel costs related to sales functions and increased sales and marketing activities associated with new product launches. Loss from operations was RMB5.2 billion, up 8.1% year-over-year and relatively flat quarter-over-quarter. Net loss was RMB5.1 billion, showing an increase of 11% year-over-year and remaining relatively stable quarter-over-quarter. Lastly, we ended the quarter with a stronger balance sheet with total cash and cash equivalents, restricted cash, short-term investments, and long-term time deposits amounting to RMB42.2 billion. That wraps up our prepared remarks. For more information and the details of our unaudited third quarter 2024 financial results, please refer to our earnings press release. Now I will turn the call over to the operator to start our Q&A session. Thank you.

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

Hi, good evening NIO management team and this is Tim from Morgan Stanley. Thanks for taking my questions. I have two questions. The first one is about brand strategy alignment. Because we notice things that L60 onboard. L60 was launched in September. The orders of NIO brands and ONVO brands have been seesawing. That is, the older trends of NIO and ONVO appear contrary. Should we be worried about the potential cannibalization between these two brands when it comes to the in-demand brand position and the supply chain management? That's my first question. Thank you.

Thank you for the question. Concerning the overall delivery volume of the NIO brand, we have observed a decline in our delivery numbers starting in October. This is more of an active adjustment rather than a passive result. Prior to October, our monthly delivery volume was consistently above 20,000 units for several months. However, we noticed that vehicle margins were under pressure due to some promotional and marketing expenses. Therefore, beginning in October, we have reduced our expenses in that area, cutting approximately 15,000 RMB per unit on promotional and marketing costs. This shift has naturally affected our sales volume. Nevertheless, starting in November, as we stabilize our delivery volume and demand, we are witnessing a recovery in our figures. Regarding our brand strategy, we believe that employing two or three brands to target different user segments is currently successful. The ONVO brand continues to compete with others in the same price range. When we examine the primary source of ONVO users, we find that most come from Model 3 users. We are also considering the potential internal competition between the ONVO and NIO brands. However, the actual overlap or impact on the NIO brand is minimal, around 2%. While some users may choose ONVO over NIO, the overall effect on NIO's sales and deliveries is limited. Consequently, the combined increases from both ONVO and NIO still exceed the volume decline we experienced with the NIO brand over the past month or two. To clarify, the main source of our ONVO users primarily comes from Model 3.

Thank you very much, William. My second question is about the production ramp-up because we noticed the production ramp-up of L60 so far is still a little bit slow. What is the main reason for a more moderate ramp-up pace? Would there be any impact on our current order backlog towards the year end? And in the meantime, in view of the busy model pipeline Fireflies and also the new ET9 in March next year, as William just mentioned, and more upcoming models under ONVO and NIO, how would the group consider solving the bottlenecks into 2025? That's my second question. Thank you.

Thank you for the question. For the ONVO L60, the market has indeed set high expectations for its ramp-up and production capacity. However, we must consider that the L60 features several advanced technologies. It includes a 900-volt high voltage architecture that is essential for the battery and powertrain system production and preparation, along with a sophisticated e-architecture. Its operating system and digital platform, such as Coconut, also integrate many new technologies. Consequently, the technological preparation requires time, and we did not have enough launch stock for an exceptionally high initial delivery. We believe that reaching a production rate of 10,000 units per month by December, our third month of full delivery, and increasing to 20,000 by March next year is a sensible progression. We acknowledge that this pace may not meet everyone's expectations, and we understand that by the end of this year, some local subsidies and national trade-in incentives will no longer be available. Users who placed their orders later may not receive their vehicles by the end of the year, which could impact their access to subsidies. We have analyzed the users who eventually declined and found that 50% to 60% of them cited late deliveries and the lack of eligible subsidies by year-end as their reasons. This is understandable, as with a product cost around 200,000, a subsidy of 10,000 or 20,000 can make a considerable difference. The ET9 and the Firefly will also have their own ramp-up strategies, but we plan to prepare the launch stock more proactively for these two models. Thank you, Tim.

The next question comes from Nick Lai with JPMorgan. Please go ahead.

Thank you for taking my questions, Nick from JPMorgan. My first question for William is how do you strategically balance profitability and volume? William just mentioned that in the third quarter, in recent months, we reduced the incentive by RMB15,000, which obviously has supported a vehicle margin towards year-end but at the same time could slow sales volume. So long-term, can you share how we should think about the balance between profit margin and volume or, in other words, do we have a desired vehicle margin in Q4 in the medium to longer term? I remember in the past you talked about a longer-term vehicle margin between 15%, 18%, or even 20%. Can you share with us the medium to longer-term volume and profit margin strategy? Thanks.

Thank you for the question. This is Stanley speaking. In response to your inquiry about balancing volume and profitability, as William also noted, our main focus after launching the ONVO brand is to enhance our premium brand positioning and improve product profitability. This will be our priority moving forward. Starting in October, we began to cut back on our product promotions and incentives. While this has temporarily impacted our sales volume, we've recently noticed an uptick in our order backlog. The vehicle margin for the new brand in the third quarter stands at approximately 13.1%, and we are targeting 15% for the fourth quarter, which we are confident we can achieve. As we continue to strengthen the premium positioning of this brand for 2025, we will use a 15% vehicle margin as our baseline and aim for a 20% gross margin in the future by enhancing our marketing strategies and supply chain.

Thank you. My second question relates to CapEx and OpEx guidance. We are launching the new Firefly brand into 2025 and also higher-end ET9 product and so on. Can you give us some guidance regarding OpEx ratio as well as CapEx in 2025? Thanks.

Thank you for the question. As mentioned, starting next year we will begin to deliver our ET9, and there will also be new models coming from our second and third brands. Overall, we will see increases in our operating expenses. In the third quarter of this year, we have already noticed an uptick in our selling, general, and administrative expenses, primarily due to preparations for the launch of the ONVO brand. These expenses will persist and rise in the fourth quarter, as we plan to have around 300 ONVO stores operational by the end of the year. We will need to invest in those facilities and stores. Meanwhile, to achieve our target of 20,000 monthly sales by March next year, we must continue enhancing our sales network and sales force. However, as we develop the sales capacity and capabilities for the ONVO brand moving into the first quarter of next year, our selling, general, and administrative expenses will gradually decrease. Currently, our selling, general, and administrative expenses are taking a significant portion of our sales revenue, but this will steadily reach a reasonable level starting in the first quarter next year. Therefore, our operating expenses, along with the increase in our sales volume, will demonstrate quarter-over-quarter efficiency improvements from next year. This year, our total capital expenditures saw a significant decline compared to last year, with full-year capital expenditures around RMB8 billion. For next year, we will keep it at a similar level, continuing prudent management of our capital expenditure expenses. Thank you, Nick.

Your next question comes from Ming Hsun Lee with Bank of America. Please go ahead.

Hi William, this is Ming from Bank of America. So my first question is related to the situation in Europe. I want to know that after the tariff in the EU is increased, do you change your pricing strategy? And currently does this impact demand in Europe? Thank you. That's my first question.

Thank you for the question. It's true that the tariff on battery electric vehicles from China has impacted our pricing strategy and sales volume in Europe. Overall, we maintain a unified global pricing strategy that is generally based on cost with a markup. Due to the tariff, our prices in Europe have increased significantly. However, we are focused on the long-term strategy for the European market. Currently, we are concentrating on enhancing our sales and service network, understanding local customer needs, and improving user satisfaction with our services and products. This approach is not solely a response to the tariff; even prior to that, we focused on several key objectives beyond just sales volume. We aim to make reasonable investments in our European operations while ensuring good user satisfaction and enhancing brand awareness. Our long-term target for Europe remains clear, and among the five European countries we've entered, Norway is not affected by the tariff policy, so our sales volume in the Norwegian market continues to be strong.

Yes, thank you. So my second question is related to the gross margin profile for the ONVO brand. Because Stanley just mentioned the NIO brand in Q4, gross margin will continue to improve to around 15%. But assume you deliver around 20,000 units of ONVO in 2024, what is the rough gross margin profile for this brand? And when your monthly delivery reaches 20,000 units for the ONVO brand, what will be the potential gross margin profile for the brand? Thank you.

Thank you for the question. This year, as we have just launched and started delivering the product, and due to exclusive user rights for early users, the vehicle margin for the ONVO L60 is currently low. It has a positive gross margin but remains in the single digits. For 2025, as we increase both production capacity and delivery volume, we expect the vehicle margin for the ONVO brand to be around 10%. That will serve as our baseline for next year. With ongoing improvements in the product cost structure and more products added to the lineup, we anticipate that our overall vehicle margin target for the ONVO brand next year will be around 15%. Thank you, Min.

Your next question comes from Bin Wang with Deutsche Bank. Please go ahead.

Thank you very much. My first question is about new products in the second half. You just mentioned you will have robust growth in 2025, and the first half seems to have only some niche products such as the ET9 and a new brand. However, what's the plan for the second half? Do you plan to refresh or go to new generations for your evolving products such as the ET5, ET5 Touring, and ES6ET6? Will all these four products go to a new generation or not in the 2025 second half? Thank you.

Thank you for the questions. Next year, under the new brand, our products will be upgraded to the next generation platform, with the ET9 being the first product to come from this platform. We have additional products in the pipeline, including facelifts and upgrades. By 2025 and 2026, we will gradually complete the upgrades of our existing products. For the ONVO brand, we will continue to deliver and sell our first product, the L60, while also preparing to launch two more family SUVs next year. The research and development for these two products is progressing well, and they are on track for mass production. With these two products, we will have a complete lineup of family SUVs under the ONVO brand. One will be a mid-large size SUV with six and seven seater options, and the other will be a large five-seater SUV. These products will be very competitive in terms of cost and performance, with the L8 and L7 from Li Auto serving as a proper benchmark. The price difference between our L60 and Li Auto's L6 is around RMB40,000, which gives you an idea of the price range for our next two ONVO SUVs that will follow a similar pricing strategy. Additionally, we are enhancing our charging and swapping network, particularly in county-level areas across China. With an improved service and sales network, we are optimistic about the ONVO brand's overall performance next year. Regarding Firefly, we will deliver our first product, also named Firefly, next year. We are adopting a strategy where the brand and the first product share the same name. More details will be shared on December 21 this year at our NIO Day, where the brand will be officially launched along with the product. Overall, we are very confident about our product and brand lineup. Our sales volume for the entire company is expected to double next year compared to this year's results.

Thank you. I got a second question about your service margin because you actually improved the service margin in the third quarter to only negative 8.8. Can you explain what's driving the margin increase in the third quarter in the service, and what's your guidance for the number four quarter this year and also for 2025? Is it going to be double digits of negative gross margin next year? So what's your guidance? Thank you.

Thank you for the question. Regarding the vehicle margin improvement in the third quarter, it is mainly due to two drivers. The first is the enhancements and optimizations in the cost of parts and components, including batteries and other parts, which were more significant this quarter than in previous ones. The second driver is that as we increased our sales volume, our production capacity also improved, allowing us to leverage efficiency gains and better amortization in manufacturing. This led to an increase in vehicle margin from 12.2% in the second quarter to 13.1% in the third quarter. For the fourth quarter, we aim to enhance the premium positioning of our new brand, which will involve improving product profitability by reducing marketing expenses and promotions while refining our supply chain cost structure. We are optimistic about achieving a vehicle margin of 15% in the fourth quarter for the new brand. Looking ahead to next year, we expect several key factors to help further improve our vehicle margin, including enhancements on the supply chain side and significant iterations and upgrades to our smart hardware that will positively impact our cost structure. Additionally, as mentioned by William, we will roll out updates and facelifts for our new brand products, which will enable us to introduce more competitive offerings and improve overall brand profitability. We are also confident that we can reach a vehicle margin of 20% for the new brand by 2025.

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

Thanks. Tim Yuqian here. I have two questions. The first is on autonomous driving. What milestones does management see for NIO in the coming 6 months to 12 months on this front? What are the key challenges at the moment? And what is the biggest highlight of NIO's capability? Maybe give us a bit of a breakdown in terms of user adoption, end-to-end modeling, development, processing power, and its cost. Thank you.

Thank you for the question. In late July at NIO in 2024, we introduced the NIO World Model and the end-to-end solution based on the NIO World Model. We have already started to release some functionalities based on the new architecture and the World Model, and we invited users for internal testing and experience of this new architecture. Before that, we had already released active safety features based on this end-to-end approach. In some third-party tests and assessments on the active safety performance of the electric vehicles, our performance is quite strong—better than many peers. For the ONVO brand, it is also the first brand to deliver vision-based navigation guided smart driving for urban roads. Recently, we have launched a new release, and our users really appreciated and liked that feature. Overall, our computing power and sensing capabilities on our vehicles, along with our data closed-loop and also our end-to-end model, will leverage all these capabilities. In the coming months, there will be several releases, and you will gradually see the impacts of all this R&D investment. The entire industry has various roadmaps and solutions, and we have chosen our roadmap and are confident in its success and the results it will yield. Regarding our smart driving, we always prioritize the benefits and interests of our users. We have two primary goals: first, smart driving should relieve driving pressure, and second, it should reduce traffic accidents. For next year, our target is for smart driving to assist in driving tasks, achieving a safety level ten times higher than completely human-driven aspects. This is an achievable target, and safety is always our top priority. On top of that, by securing a good level of safety, we will then look at usability and the experience of features, relieving driving stress further. We have the same approach for our other features like our end-to-end model, starting with active safety and noticing significant improvements to user safety with that feature.

Thank you, William. My second question is on breakeven and capital requirements. It looks like next year is very exciting, fully loaded with a strong product cycle, coupled with CapEx and OpEx intensity. Do we have a refreshed breakeven timetable? And how do we look at capital requirements in the coming 12 to 18 months?

Thank you for the question. Regarding capital requirements, in the third quarter of this year, we generated free cash flow. In the fourth quarter, based on our current volume guidance, we anticipate maintaining positive free cash flow. For 2025, as we aim to double our delivery volume and manage our funding and pace each quarter, we expect ongoing growth in our operating cash flow to support our operational and capital expenditures. Overall, concerning fundraising, we do not have an urgent agenda; instead, we will adapt our fundraising strategies based on market conditions. Regarding your question about profitability, I would like to address it from three angles. First, as a relatively new automotive company, sales volume is vital. We have products from all three brands launching next year, and with these new brands and products, we expect to achieve higher volumes, which gives us confidence in our sales outlook for the coming years. Second, we are improving our vehicle margin starting in the fourth quarter of this year, and with rising sales volumes, we can enhance profitability. Third, we are continuously pursuing cost-saving and efficiency improvement initiatives. We've initiated a project internally called cost mining to identify waste and optimize cost structures, leading to savings across the board. We are seeing positive outcomes from this initiative. Therefore, as we improve our volume and operations, we expect our loss to gradually decrease.

This is William speaking. Stanley has introduced our strategy to reduce losses. Regarding our overall expenses, our R&D expenses will remain high. Our SG&A expenses will also experience short-term pressure due to our PowerApps County plans, as we roll out the charging and swapping networks and enhance the sales and service network for the ONVO brand. Nevertheless, we are making progress in gradually reducing our losses. We anticipate that the entire company will reach full-year breakeven by 2026, and we will use this timeline to guide our strategies and activities.

Your next question comes from Xue Deng with CICC. Please go ahead.

Hi, thank you for taking my questions. So my first question is a follow-up on the overseas market. NIO has been a pioneer in the European market, but now we see some peer companies accelerating their exposure in Europe. Can you share our current strategies for the European market and how we can differentiate our brands to further expand our volume? Also, with the launch of Firefly new models next year, will there be more aggressive overseas expansion targets?

Thank you for the question. It's true that NIO has been in the European market for a while, but our overall operations and performance have not yet met our initial expectations. We see our goals for the European market as a long-term vision for the NIO brand. This year and next year, we plan to utilize our second and third brands, ONVO and Firefly, which have wider global markets, playing a larger role in our future plans. With the tariff in Europe, the selling price of the NIO brand is now similar to Porsche, which limits its market. While we will continue to maintain the NIO brand's long-term presence in Europe, we will focus on international growth with the ONVO and Firefly brands. This will be our approach moving forward. Starting next year, you will notice ONVO and Firefly products becoming available in more countries and regions. Additionally, in China, we have launched a new brand aimed at the premium segment, working on establishing the power swapping and charging network. The ONVO brand now utilizes these established resources and networks. However, on a global level, the NIO brand will increasingly depend on the ONVO brand. We will set up charging and swapping facilities with a focus on the ONVO and Firefly brands for global markets.

Okay, thank you. My second question is regarding the growth of other sales. We have seen the gross loss of other sales narrow significantly in the previous quarters, which may relate to the increase in sales volume and charges from charging and swapping services. How do we see the trend of gross profit margin in other sales, and when do we expect it to turn positive?

Thank you for the question. Regarding other businesses, in the second and third quarters, we have reduced the losses and improved the gross margin. This improvement is primarily attributed to increased efficiency in our after-sales services and a slowdown in the deployment and construction of the fourth-generation power swap stations. Consequently, our net loss has decreased in Q3. In the upcoming quarters, we plan to further enhance efficiency and profitability in our after-sales services. However, we also need to expedite infrastructure construction for the entire company, particularly for the ONVO brand, to ensure our power swap stations and other facilities are operational ahead of demand. While we expect to incur more losses associated with the advanced rollout of power swap facilities, we anticipate that the profitability gains in our after-sales services will help balance those losses. That will be our overarching strategy.

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

Hi William, thank you for taking my question. I have two inquiries. First, I'm curious about the demand visibility for the ONVO L60. You seem confident about delivering 20,000 units of the L60 in March, which would align it with the Xiaomi 27 and the auto L6. However, considering it's currently peak season aided by stimulus, and moving into Q1 where we may see less policy support, how do you have such visibility? Will you carry over a significant amount of the current backlog into Q1 delivery, or what gives you such strong assurance for the 20,000 deliveries in March?

Thank you for the question. We are confident in the demand for the L60. In recent months, the wait time for L60 delivery has been relatively long, and we anticipate strong demand. Starting next year, some vehicle subsidies will expire, which may affect short-term demand. The conversion rate from test drive to order is high, although I can't disclose specifics at the moment. This conversion rate is higher than for any existing new product. Overall, with a competitive product price, we are optimistic about the L60's performance against market competition. Our main focus is on enhancing the coverage of our sales and service networks. Currently, we have around 190 ONVO stores, and we plan to expand this coverage compared to Tesla, as our coverage isn't extensive enough yet. We will open more stores and strengthen our sales force, and the positive effects of these actions will gradually become evident. Starting January next year, as national subsidies are eliminated, we will be on a more level playing field with the competition. Nevertheless, with our stronger product competitiveness and established sales capacity, we are confident in the L60's overall performance. Thank you.

Thank you. My second question is about the next generation platform NT3. I believe there are significant advancements in autonomous driving calculation power with NT2 compared to NT1, including improvements in power rings and powertrain efficiency. How are you approaching the design of the NT3 in relation to computing power for the battery size, motor power, and system integration architecture? Can you share insights on the technological direction for the NT3 platform?

For the new platform, the ET9 will be the first model utilizing our latest generation technology platform. It features numerous enhancements, including high voltage architecture, e-architecture, an operating system, and smart driving capabilities powered by our in-house developed chips, along with advanced high-performance sensors. Its configuration and performance stand apart from our current offerings, positioning it in a higher category. Over time, these technologies will be applied to our future products on the third generation platform. We plan to use these advancements to improve and update our existing products. The ET9 represents our R&D investments and achievements over the last decade. Thank you, Paul.

Your next question comes from Tina Hou with Goldman Sachs. Please go ahead.

Thanks management for taking my questions. The first one is regarding operating expenses. In terms of R&D, I also see that usually in the fourth quarter there are roughly RMB1 billion higher R&D expenses compared to Q3. Should we expect a similar seasonality into Q4, 2024? Also, as we continue to develop new products and invest in autonomous driving and other technologies, what level of R&D spending are we looking at? Additionally, for sales and marketing in 2025, noting that this year we launched one model, the ONVO L60, next year we're going to launch four new models, does it appear that the SG&A expenses will continue to grow? Is my understanding correct? Thanks.

Regarding the R&D expenses in general, we will have our investment in R&D for around RMB3 billion per quarter, stabilizing at that level. However, due to project differences and stages in R&D, actual spending will vary quarterly. For example, in the fourth quarter of this year, we expect R&D expenses to be higher than Q3 due to product stages in R&D and related expenses. For 2025, we will maintain R&D expenses at around RMB3 billion per quarter on a non-GAAP basis, and we will keep our R&D team at approximately 11,000 people. During our R&D projects, though there will be slight fluctuations in expenses, it will generally remain around RMB3 billion. Regarding SG&A expenses, in line with increased sales volume, SG&A expenses will likewise rise. We will also manage this quarter-over-quarter to optimize the SG&A ratio compared to overall sales revenue.

Thanks, Stanley. So my second question is concerning the share of losses of equity investees. Over the past three quarters, we've seen a negative number, and that number has been expanding. Is this related to the battery-as-a-service operation? How should we think about this loss from equity investees going forward? Thanks.

Thank you for the question. In the third quarter, the share of losses from equity investees increased. This is primarily because we have made investments into upstream and downstream companies within the industry. The loss in Q3 was mainly due to our investee's performance, which is understandable as they face a competitive industry. Specifically, regarding Weineng, our battery asset management company, its actual business means that it will not worsen our losses from equity shares. Since Q1 this year, after we adjusted the prices for the battery-as-a-service monthly subscription fee, we've actually seen a higher take rate on this service, especially in the second half with both new and existing products in the market. Thus, we see promising profitability going forward from this business.

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

Thank you again for joining us today. If you have any further questions, please feel free to contact us through the contact information provided on our IR website. This concludes the conference call. You may now disconnect your line. Thank you.