Earnings Call Transcript - NIO Q4 2020

Operator, Operator

Hello, ladies and gentlemen, thank you for standing by for NIO Incorporated’s Fourth Quarter 2020 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, Ms. Eve Tang from Capital Markets and Investor Relations. Please go ahead, Eve.

Eve Tang, Investor Relations

Good morning and good evening everyone. Welcome to NIO’s fourth 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 Chief Executive Officer; Mr. Steven Feng, Chief Financial Officer; Mr. Stanley Qu, VP of Finance, and Ms. Jade Wei, AVP of Capital Markets and Investor Relations. 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 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.

William Li, CEO

Hello, everyone. Thank you for joining NIO’s 2020 Q4 earnings call. In the fourth quarter of 2020, NIO delivered 17,353 ES8, ES6, and EC6 models, showing a strong growth of 111% year-over-year and 42% quarter-over-quarter. The total deliveries for 2020 reached 43,728, reflecting a significant growth of 113% compared to 2019. In January 2021, we achieved a historic monthly delivery of 7,225 vehicles, and in February 2021, we delivered 5,578 vehicles, representing impressive year-over-year growth of 352% and 689% respectively. In 2020, all three NIO models performed exceptionally well in the market. The ES6 was the best-selling electric SUV in China for the entire year. The ES8 topped sales in the premium electric SUV segment priced at RMB 400,000 in China in 2020. The EC6 ranked first in the premium coupe SUV category for three consecutive months starting from November 2020, backed by superior product quality and service. NIO has received increasing positive recognition from users and the industry. In the China Insurance Automotive Safety Index published in January 2021, the EC6 achieved the best safety rating among all models tested in 2020. Supported by our competitive product offerings, exceptional service, and innovative business models, we expect overall deliveries in the first quarter of 2021 to reach between 20,000 to 20,500 vehicles. In terms of gross margin, driven by steadily increasing deliveries, stable average selling price, and better material costs and manufacturing efficiency, our vehicle gross margin in Q4 reached 17.2%. Additionally, thanks to the revenue from NIO energy credits, our overall gross margin also reached 17.2%. NIO has consistently generated positive cash flow from operating activities in both the fourth quarter and the full year of 2020. Our operational efficiency and overall system efficiency have significantly improved in 2020. Next, I would like to share some key topics about the company. At NIO Day on January 9, 2021, we launched the ET7, our first flagship sedan built on the NIO Technology Platform 2.0. The ET7 boasts groundbreaking design features, an efficient powertrain, an immersive digital cockpit, and leading autonomous driving capabilities. It has received outstanding feedback from users, media, and the industry, with order performance exceeding our expectations. Equipped with NIO’s in-house full-stack autonomous driving technology platform, the ET7 includes NIO Autonomous Driving, which features NIO Aquila Super Sensing and NIO Adam supercomputing. NIO Aquila Super Sensing consists of 33 high-performance sensing units, including 11 high-resolution cameras and one high-resolution LiDAR with a 500-meter detection range. The computing power of NIO Adam reaches up to 1,016 TOPS. The sensor suite and computing capacity of NAD are superior to those of competitors and will accelerate the mass production of autonomous driving technology. NAD will deliver a safer and more pleasurable autonomous driving experience across various scenarios to save time and reduce accidents. Additionally, NIO NAD will be the first autonomous driving system available through a monthly subscription service, allowing more users to experience it. We have also introduced the Power Swap Station 2.0 at NIO Day, which has a much lower cost and three times the service capacity of our first-generation station. Furthermore, we launched the 150 kilowatt-hour battery pack, which offers a 50% increase in energy density, significantly extending the range of all NIO models. With this battery pack, the NEDC range of the ET7 can exceed 1,000 kilometers. Under NIO’s service system, every user can opt to upgrade to different battery packs as needed. NIO is committed to building an innovative model of battery vehicle operation and subscription services, providing flexible and comprehensive power solutions to users. With the increasing user base and battery offerings, a growing number of users are choosing battery-as-a-service (BaaS). In February 2021, the uptake of BaaS among NIO orders hit 65%. We believe that BaaS, along with NIO’s comprehensive battery charging and swapping services, will expedite the transition from internal combustion engine vehicles to electric vehicles. Ongoing development and research of NIO products and technologies are crucial for sustainable growth. NIO plans to significantly increase R&D investments in 2021, targeting approximately RMB 5 billion. Our production capacity reached 7,500 units in January. Our partner JAC has commenced further production capacity expansion at the Hefei plant, aiming to increase annual production to 150,000 units with one shift and 300,000 units with two shifts in preparation for producing the ET7 and future models. In February 2021, NIO entered a collaboration framework agreement with the Hefei government to jointly establish the Xinqiao Smart Electric Vehicle Industrial Park, encompassing R&D, manufacturing, pilot demonstrations, and support services, with the goal of creating a world-class smart electric vehicle industry cluster with a comprehensive value chain. Regarding our sales and service network, we currently operate 23 NIO Houses and 303 NIO Spaces across 121 cities in China. Given the continued positive impact of offline spaces on brand awareness, order growth, and community engagement, we plan to open 20 new NIO Houses and 120 new NIO Spaces in 2021 to further enhance our network, leveraging our competitive advantages in direct sales and improving user experience and sales process efficiency. NIO has established 191 swap stations across 76 cities. Beginning in the second quarter of this year, we will gradually deploy the Power Swap Station 2.0 to provide better experiences at lower costs. Our target for 2021 is to increase to at least 500 power swap stations. We will also accelerate the expansion of our supercharging network and destination chargers. Currently, we have 127 power charger stations and over 1,700 destination chargers, which we plan to expand to 600 and 15,000 respectively by the end of 2021. As our user base grows, the efficiency of NIO’s after-sales service system is improving as well. We now have 31 new service centers and 158 authorized service centers. To enhance service experiences, we will expand our after-sales service network to optimize our service system further. NIO aims to foster a community centered around smart electric vehicles, sharing joy and growing alongside users. The live broadcast of NIO Day 2020 on January 9, 2021 garnered 100 million views. During NIO Day, we introduced the Blue Point Plan, becoming the first automotive company globally to assist users in certifying emissions reductions and trading carbon credits. The second user council of the NIO User Trust in 2021 will prioritize user care, community engagement, public welfare, and environmental protection. The ongoing support from our users drives us forward. 2020 marks a significant milestone in NIO’s journey. Thanks to our users' support and our team's dedication, the company’s operations have regained momentum and entered a phase of rapid growth. As a startup, we remain committed to our original mission, continuing to make decisive and effective investments in R&D for new products and core technologies, and further enhancing our charging, swapping, and after-sales service networks to deliver an exceptional experience to NIO users. Thank you for your support. Now, I will turn the call over to Steven to share the financial details for the quarter. Steven, please proceed.

Steven Feng, CFO

Thank you, William. I will now go over our key financial results for the fourth quarter of 2020. 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 fourth quarter were RMB 6.64 billion or $1.02 billion, representing an increase of 133.2% year-over-year, an increase of 46.7% quarter-over-quarter. Our total revenues consist of two parts; vehicle sales and other sales. Vehicle sales in the fourth quarter were RMB 6.17 billion or $946.2 million, accounting for 93% of total revenues in this quarter. It represented an increase of 130% year-over-year and an increase of 44.7% quarter-over-quarter. The increase in vehicle sales year-over-year was primarily due to higher deliveries achieved from more product offerings and the expansion of our sales network through the continuous launch of NIO Spaces in 2020. Other sales in the fourth quarter were RMB 467 million or $71.6 million, representing an increase of 184.1% year-over-year and an increase of 80.2% quarter-over-quarter. The increase in other sales year-over-year was mainly attributed to sales of automotive regulatory credits as well as the increased revenues derived from home charger installations and accessories sold in conjunction with incremental vehicle sales. Cost of sales in the fourth quarter was RMB 5.50 billion or $842.8 million, representing an increase of 77.3% year-over-year and an increase of 39.6% quarter-over-quarter. The increase in cost of sales year-over-year was primarily driven by the increase in delivery volume in the fourth quarter of 2020. Gross profit in the fourth quarter was RMB 1.14 billion or $175 million, representing an increase of RMB 1.40 billion from the fourth quarter of 2019, an increase of RMB 556.1 million from the third quarter of 2020. This growth in gross profit was primarily due to increased vehicle sales and vehicle margin improvements. Gross margin in the fourth quarter was 17.2%, compared with negative 8.9% in the same quarter of 2019 and 12.9% in the third quarter of 2020. The increase in gross margin was mainly driven by the increase in vehicle margin during Q4 2020. More specifically, vehicle margin in the fourth quarter was 17.2% compared with negative 6.0% in the same quarter of 2019 and 14.5% in the third quarter of 2020. The rise in vehicle margin was mainly attributed to the increased vehicle deliveries, along with a decrease in purchase price for certain production materials. R&D expenses in the fourth quarter were RMB 829.4 million or $127.1 million, representing a decrease of 19.2% year-over-year and an increase of 40.4% quarter-over-quarter. The year-over-year decrease in R&D expenses was driven by reduced expenses associated with the EC6, which achieved mass production in September 2020, and the company’s overall cost-saving efforts improving operational efficiency in R&D functions. SG&A expenses totaled RMB 1.2 billion or $185 million, representing a decrease of 21.9% year-over-year and an increase of 28.3% quarter-over-quarter. The decline in SG&A expenses year-over-year was mainly due to the company’s overall cost-savings initiatives and enhanced operational efficiency. Loss from operations in the fourth quarter was RMB 931.4 million or $142.7 million, indicating a 67% year-over-year decline and a 1.5% decrease from the previous quarter. Share-based compensation expenses in Q4 were RMB 60.2 million or $9.2 million, representing an increase of 17.6% year-over-year and an increase of 22.3% quarter-over-quarter. This growth in share-based compensation expenses year-over-year was primarily driven by the incremental options granted at relatively higher grant date fair values due to the increased share price. The net loss in the fourth quarter was RMB 1.39 billion or $212.8 million, reflecting a 51.5% year-over-year decline, and a 32.6% increase quarter-over-quarter. The quarter-over-quarter rise in net loss was primarily due to unrealized foreign exchange losses resulting from the depreciation of US dollar cash reserves held by domestic entities with RMB as their functional currency during Q4 2020. Net loss attributable to NIO's ordinary shareholders for the fourth quarter was RMB 1.49 billion or $228.7 million, representing a decrease of 48.4% year-over-year and a quarter-over-quarter increase of 25.6%. Basic and diluted net loss per ADS for the fourth quarter stood at RMB 1.05 or $0.16 per ADS. Excluding share-based compensation expenses and accretion on redeemable non-controlling interests to redemption value, non-GAAP adjusted basic and diluted net loss per ADS were both RMB 0.93 or $0.14 per ADS. Our balance of cash and cash equivalents, restricted cash, and short-term investments totaled RMB 42.5 billion or $6.5 billion as of December 31, 2020. Additionally, we achieved positive cash flow from operating activities for the full year of 2020. As for our outlook, as William mentioned, for the first quarter of 2021, we expect deliveries to be between 20,000 to 20,500 vehicles, representing an increase of approximately 481% to 424% from the same quarter of 2020, and an increase of approximately 15% to 18% compared to the fourth quarter of 2020. The company also anticipates total revenues in the first quarter of 2021 to be between RMB 7.38 billion and RMB 7.56 billion or between $1.13 billion and $1.16 billion. This would represent an increase of approximately 438% to 451% from the same quarter of 2020 and an increase of approximately 11.2% to 13.8% from the fourth quarter of 2020. This reflects the company's current and preliminary view on business situations and market conditions, which may change. This concludes our prepared remarks. I will now turn the call back over to the operator to proceed to our Q&A session.

Operator, Operator

Thank you. Your first question comes from Edison Yu from Deutsche Bank. Please ask your question.

Edison Yu, Analyst

Thank you very much. My first question is about NIO's emphasis on the premium market and whether you might consider launching another brand to target the mass or mid-tier market. The second question pertains to your international expansion plans. You mentioned plans to enter Europe later this year, so what sales volume do you anticipate in the long run? Additionally, there has been recent speculation about NIO becoming more committed to entering the U.S. market. Could you provide your latest insights on this? And I'll translate that.

William Li, CEO

Thank you, Edison, for your questions. It is indeed possible for us to enter the U.S. and the mass market. However, the NIO brand will focus on the premium market. That being said, over the past few years, we have explored different ways to access the mass market, such as forming joint ventures with GAC and Changan. Our stake in those joint ventures was previously over 40%, but it has now decreased to 5%. This reduction provides us with greater flexibility to try various methods for penetrating the mass market. We aim to be more proactive in this area as it will be an integral part of our long-term strategy. Concerning our expansion into international markets, we plan to enter the European market this year. We are in the process of establishing our own sales and service network there. Currently, we are preparing the necessary team structures, products, and network setups, which covers all operational aspects in Europe. This will be a key element of our long-term strategy for global expansion, and we will need to exercise patience. Ultimately, we strive to capture significant market share in major global markets, which will require considerable effort and time. From the outset, we have been conducting R&D and other initiatives across various regions, but we recognize that sales and service will become increasingly complex as we target different markets. Regarding the U.S. market, we have initiated preliminary research for potential entry at a very early stage. We are examining possible business models, strategies, and approaches for entering the U.S. market, but this journey will require significant patience, and we prefer to approach it gradually.

Steven Feng, CFO

Thank you, Edison.

Operator, Operator

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

Ming-Hsun Lee, Analyst

Thank you, William, and the management team. My first question is about the margin improvement in the fourth quarter. When I adjust for the contribution from credit sales, the gross margin for the company is approximately 15.7% this quarter, which shows significant improvement from last quarter. Could you provide a breakdown of the margin improvement, such as the ASP improvement during this quarter? Additionally, can you elaborate on the battery supply and chip supply? Recently, we noticed the company postponed the battery upgrade for certain customers in June. Could you provide more details on this? My second question is also related to batteries, as we have observed upstream cost inflation. We are interested in the cost trend for 2021 and some rough gross margin guidance for this year. Thank you.

Steven Feng, CFO

Thank you, Ming. Stanley will answer the first question.

Stanley Qu, VP of Finance

Yes. The vehicle gross margin increased from 14.5% in Q3 to 17.2% in Q4. It was primarily driven by the higher deliveries of ES8 and EC6, both of which feature higher gross profit margins, and a slight decrease in material and manufacturing costs. To provide the numbers, I believe the average selling price improved by RMB 10,000 per unit, while manufacturing and material costs decreased slightly. Regarding the overall gross margin, we booked RMB 120 million from EV credit sales in Q4, contributing 1.8% to the overall gross profit margin increase. Thus, the overall gross profit margin has improved. Concerning gross profit margin guidance for 2021, I can state that the margin in Q1 is likely to see slight improvement, but not as pronounced as it was in 2020. For the full-year guidance, I think it’s too early for us to make any projections at this moment. Regarding battery and chip supply, we will revert to William.

William Li, CEO

Thank you, Stanley. Thank you for your questions. Regarding chip supply and battery supply, this significantly impacts our overall supply chain, which is one of the constraints we anticipate in the second quarter of this year. Currently, we have sufficient chip supply to support normal production; however, the situation remains fluid, and changes will evolve gradually. For the second quarter, we still expect some risks regarding chip supply, but starting last year, our team began communicating and collaborating with our supply chain partners to secure chip sourcing. We even have direct communications with chip suppliers to ensure we have ample supplies of chipsets. We believe that for the second quarter, we will have chip supply to meet basic demand, but the risk remains fairly high. Regarding battery supply, this also constrains our performance in the second quarter. We have limited supplies concerning the 100 kilowatt hour battery pack and other battery packs, which are not meeting current demand due to a booming market. Starting from July, we anticipate that battery supply should normalize and meet our demand. Because of the constraints in battery supply and chipset supply, our production capacity in the second quarter will be approximately limited to around 7,500 units. For battery cell costs, we believe there won't be a significant impact on us. This year, battery costs may decrease slightly, but we expect the impact to be minimal since we have already secured our supply with our battery partners, and we remain a critical customer for CATL. Consequently, we have favorable pricing for CATL's batteries.

Steven Feng, CFO

Thank you, Ming.

Operator, Operator

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

Bin Wang, Analyst

Thank you. I have just one question about EV sales as we recently received different information. For example, Li Auto has given weak guidance, yet today's guidance seems to be unexpectedly positive, particularly with March achieving a new high for NIO. We are also observing competition from the Tesla Model Y, and the situation regarding near-term EV demand remains unclear. This is quite confusing. Nevertheless, you seem optimistic about the second quarter, projecting around 7,500 units per month. Is that your forecast for the second quarter? Thank you.

William Li, CEO

Thank you, Bin, for your question. Typically, the first quarter of the year is a slower period for the EV industry due to subsidies and other policies. Model Y has announced pricing for the locally produced vehicle, which is a common strategy for Tesla. Generally, they reduce prices to increase order numbers. Our strategy is quite different from Tesla; we prioritize maintaining stable order performance without significant fluctuations in our order backlog. We do not plan to reduce prices to artificially boost order figures. Our main focus is on improving service, enhancing customer experiences, and fostering a positive brand reputation in the market, which allows us to keep our product prices steady. This approach will also help support our gross margin and vehicle gross margin. Notably, in February, our Battery-as-a-Service take rate among new orders hit 55% and continues to grow each month. Therefore, with our distinct competitive advantages and long-term capabilities, we believe it is essential to build a strong presence in the market instead of being influenced by short-term strategies.

Operator, Operator

Your next question comes from Tim Hsiao from Morgan Stanley. Please ask the question.

Tim Hsiao, Analyst

Good morning, management team. Congratulations on your strong results and good guidance. I have two questions. The first question is about vehicle sales this year because since our next model, the ET7 won't start deliveries until next year, how can NIO meaningfully grow vehicle sales in 2021? Will there be any spec upgrades or major model facelifts in addition to the aggressive channel expansion plan and BaaS program? My second question pertains to your comments about the NIO House. I recall that during the last call you mentioned that NIO House might be less cost-efficient. Could you elaborate further on the key considerations when deciding to resume the deployment of NIO House? What would the overall investment and additional operating expenses be to scale up NIO House coverage based on current estimates? Thank you.

William Li, CEO

Thank you, Tim, for your question. We will start delivering the ET7 in the first quarter of 2022, which requires us to prepare extensively before the launch, particularly in relation to autonomous driving technologies. Thus, we need to conduct sufficient testing and development for these technologies. Until the ET7 launch, our sales performance will primarily depend on our three existing models: the ES8, ES6, and EC6. The EC6 was launched in September 2020, the new ES8 was introduced in March 2020, and the ES6 started deliveries in the second half of 2019. We believe all three models remain competitive with gasoline vehicles and other EVs, so we do not foresee significant changes or updates to our current models before the NT 2.0 launch. We plan to further enhance our sales and service network because China is a large market with ample opportunities; improving our infrastructure will positively affect our sales performance. This year and into next year, we aim to focus on enhancing our sales and service network and improving customer experiences to support our sales goals. Additionally, we will offer battery-as-a-service and deliver the 100 kilowatt battery pack to aid the transition from internal combustion engines to electric vehicles. We are seeing a rapid shift away from traditional combustion engines. In 2022, Audi, BMW, and Mercedes reached record sales, indicating potential in the market. We believe our products are superior to theirs, which presents us with significant opportunities. We do not have overly ambitious sales targets, as we do not plan to sell hundreds of thousands of vehicles in a single year. Given our current sales targets, we should meet our objectives.

Steven Feng, CFO

Hi, Tim. I would like to elaborate on our reasoning for reintroducing NIO House and its cost-efficiency. I want to highlight the three key functions of the NIO House. First, it aids in converting leads to orders and accelerates deployment while enhancing brand awareness and increasing user touch points. Second, the NIO House serves as a strong brand presence; increased investment in brand communication will yield long-term benefits for our brand. Third, the NIO House is vital for our user system and community. Furthermore, we have accumulated rich experience in managing offline stores, resulting in better control over planning and costs, significantly lowering the investment and operating cost per store. To provide perspective, the average investment in a store is now only 40% of the original cost, while the rent and operating costs average about 50% of those in the past.

William Li, CEO

Thank you, Tim.

Tim Hsiao, Analyst

Thank you, William.

Operator, Operator

Your next question comes from Nick Lai from JPMorgan. Please ask your question.

Nick Lai, Analyst

Yes. Hi, good morning. It's Nick from JPMorgan. Great results. Congratulations indeed. So two straightforward questions. First, regarding NIO's autonomous driving solution. You mentioned that the NIO ET7 model will be equipped with Adam supercomputing and Aquila Super Sensing capabilities. I wonder whether these two solutions will also be applied to existing models such as the ES6, EC6, and ES8? If so, how soon can we expect to see this happen? Additionally, is it fair to say this would broaden our monetization strategy beyond basic battery-as-a-service to a more advanced AD-as-a-service in the future? The second question relates to volume. You mentioned that the second-quarter capacity will be around 7,500, but at the same time, you noted that JAC is expanding capacity to 150,000 units on a single-shift basis. As we transition into the second half of the year and with hopes of resolving battery and chip supply bottlenecks, how should we predict production capacity or monthly output toward the latter half of the year? Regarding the ET7 backlog order, you indicated it is above expectations. Could you clarify what that means? Are we talking 20,000, 30,000 units or anything along those lines? Any guidance would be appreciated. Thanks.

William Li, CEO

Thank you, Nick, for your question. The ET7 is the first model built on the NT 2.0 platform. All future models will be developed based on this new technology, but we won't start this process immediately; it's already in the pipeline. For other products and upcoming models, we will use the latest technologies and will provide more information about product planning and portfolios at the appropriate time. Regarding AD-as-a-Service, we believe this is the right path forward since we think that in the future, AD-as-a-Service will be offered through subscription models that will benefit users. From a technological standpoint, this approach is reasonable and feasible compared to the traditional ADaaS model, as it relies on the installed base. Considering that the user lifecycle typically lasts 15 years, we can generate revenue over this timeframe with the AD-as-a-Service model. We believe this model is more sustainable than the traditional ADaaS model. Looking at the cloud service business, similar to what companies like Amazon, Google, Microsoft, and other domestic players in China offer, it’s clear that the AD-as-a-Service subscription model will create a valuable revenue stream, which is why we are strongly advocating for this approach. Thanks to our advancements in Battery-as-a-Service, we've gained significant experience and skills that we believe increase user acceptance of AD-as-a-Service. In summary, we think that AD as a Service will see a higher adoption rate and will aid in revenue generation throughout the user lifecycle, benefiting our users and providing a solid, sustainable business model. Regarding production capacity, we reached a capacity of 7,500 units in January. I want to expand on the overall concept of supply chain production capacity, which includes both our plant and supply chain capabilities. During the Spring Festival, the Hefei plant began ramping up production. As a result, we can produce 10,000 units monthly with two shifts in certain workshops. However, I must emphasize that due to constraints with chip and battery supplies, our production capacity in the second quarter may remain limited to around 7,500 units per month. Starting in July, we expect to increase our supply chain production capacity. Additionally, our partner JAC has started expanding their production capacity, which shows that the annual capacity will reach 150,000 units with one shift and 300,000 units with two shifts by the end of this year or the beginning of next year. In terms of ET7 order performance, keep in mind that ET7 became available for orders on NIO Day, which was on January 9, 2021. The order backlog for the ET7 has surpassed all other models we currently offer. However, we cannot share specific order backlog information, as we prefer to concentrate on overall delivery performance. Nonetheless, it's noteworthy that with the ET7’s pricing set at around RMB 448,000, it has been performing exceptionally well in terms of gaining orders.

Nick Lai, Analyst

Thank you, William.

Operator, Operator

Your next question comes from Lei Wang from CICC. Please ask your question.

Lei Wang, Analyst

Good morning. This is Wang Lei speaking from CICC. I would say that's a very strong earnings report and a very strong first-quarter guidance. I have one follow-up question about the joint venture of BaaS. William just mentioned a 55% take rate. Could you please inform us about the capital status of the joint venture and how many batteries this company can support theoretically? Thanks.

William Li, CEO

Thank you, Lei, for your question. Regarding the battery assets management company, we have completed two rounds of financing and currently have eight shareholders, including NIO. We have raised approximately RMB 4.4 billion to date. Numerous new investors have expressed interest in investing in the battery assets management company. Additionally, we have obtained sufficient credit facilities from banks to ensure the operations of the battery asset management company. As an essential part of the Battery-as-a-Service business model, the battery asset company has already secured enough cash to support this initiative. In terms of battery penetration rates and the number of Battery-as-a-Service users, please note that deliveries will lag behind orders due to our make-to-order business model. Initially, we will establish penetration rates based on order backlogs, followed by a gradual delivery of batteries to users.

Operator, Operator

The next question comes from Paul Gong from UBS. Please ask the question.

Paul Gong, Analyst

Yes, thanks for taking my question. I have two questions. The first one pertains to near-term sales. Do you foresee that lower-tier cities will become increasingly key for your expansion? How do you perceive your network expansion strategy and your ideal mix of sales between tier one, tier two, and tier three cities? Do you anticipate gradually moving from focusing on tier one cities to lower-tier cities over the next 12 months? The second question relates to the development of the autonomous driving system for the ET7. Clearly, you have integrated highly capable hardware into the vehicle. For those who do not choose to subscribe to the AD system, will they still receive the same hardware on the vehicle, or will those opting not to subscribe receive an upgraded version later? If you include redundant hardware, will that increase costs and consequently result in lower margins for car sales rather than attempting to monetize it via subscriptions during the later stages of the vehicle's lifecycle? Thank you.

William Li, CEO

Thank you, Paul, for your question. We have been proactive in building and expanding our sales networks. Currently, we have established NIO houses and NIO spaces in about 121 cities. Since last year, we have accelerated the growth of our NIO spaces. In 2021, we plan to add 20 new NIO Houses and 120 new NIO Spaces. We focus on establishing our points of sale in cities that have dealerships for brands like BMW, Audi, Mercedes, or Lexus. While full coverage is not yet achieved in these cities, I am confident that with our current momentum, we can reach comprehensive saturation. For our existing NIO houses and NIO spaces, we have expanded into several tier three and tier four cities. We do not use specific tactics to decide on the placement of NIO houses or NIO spaces; our decisions are primarily based on sales performance. For example, the Yangtze River delta region has shown excellent sales performance, which is why we are developing NIO houses and NIO spaces there. Overall, we aim to enhance our sales network coverage more broadly across cities and regions. We also plan to expand our charging and swapping networks in more remote or lower-tier cities, especially by establishing supercharging networks and destination chargers. For instance, we will deploy our charging and swapping networks in regions like Inner Mongolia and Heilongjiang, along with other distant cities that lack strong EV infrastructures. Starting this year, we will increase our infrastructure efforts in these locations. Our principle and vision is that EV users should have access everywhere while enjoying a great user experience. Therefore, we will focus on building our infrastructures in areas where third parties are hesitant to develop. Regarding AD-as-a-Service and ET7 hardware, all vehicles, including the NIO ET7, will come standard with NIO Aquila Super Sensing and NIO Adam Super Computing features. However, we will not compromise our vehicle gross margin simply because we are adopting the AD-as-a-Service subscription model. We still aim for a reasonable vehicle gross margin at the time of sale. Previously, we indicated that a 20% vehicle gross margin target is feasible, and we intend to maintain that target. Concerning NAD, we believe it will significantly enhance our overall gross margin and vehicle gross margin in the long run. Thank you, Paul.

Paul Gong, Analyst

Thank you everyone.

Operator, Operator

Your next question comes from Jeff Chung from Citi. Please pose your question.

Jeff Chung, Analyst

I have three questions. What are the NOP and BaaS attach rates historically, currently, and in the future? How do these rates impact the GP margin and earnings? My second question is about an estimated range for the full year sales volume target. Thank you.

William Li, CEO

Thank you, Jeff, for your questions. As previously mentioned, the Battery-as-a-Service take rate among NIO orders in February was about 55%. Regarding the NIO Pilot, we offer two different packages: a full package and a selected package. The combined take rate for the NIO Pilot across both packages is around 50%. We expect that some users may decide to install or activate the NIO Pilot after purchasing their vehicle. This ongoing user preference is likely to increase the take rate for the NIO Pilot. However, due to varying individual preferences, we anticipate this growth will be modest but continuous. The Battery-as-a-Service will not significantly alter our gross margin, so we expect its impact to be minimal. Registering the NOP will positively affect gross margins and improve overall margins. If the NOP's take rate rises, it will further enhance gross margin, as the full package of the NOP is priced at RMB 39,000, which significantly boosts gross margin. This year, we plan to focus on expanding our installed base. Currently, we have around 88,000 users, which means that half have not yet chosen NOP. By introducing innovative models and plans for these users, we have seen promising initial results from our financing models for NOP and NIO Pilot. In terms of after-sales installations or NOP activation, this will contribute positively to our overall margin, although it will not directly improve vehicle gross margin. Regarding overall supply chain performance, we plan to be cautious in the first half of this year, preparing our production based on 7,500 units as stated earlier. For the second half of the year, we remain positive about demand, despite a lack of complete visibility. We will continue to develop our sales and service networks, along with our charging and swapping infrastructure, to enhance sales performance, which we believe will result in higher sales figures during the latter half of this year. Thank you, Jeff.

Operator, Operator

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

Eve Tang, Investor Relations

Thank you once again for joining us today. If you have further questions, please feel free to contact NIO’s Investor Relations team through the contact information provided on our website. This concludes the conference call. You may now disconnect your lines. Thank you.

William Li, CEO

Thank you everyone. Bye.