Beijing time, September 5th, before the U.S. stock market opened and after the Hong Kong stock market closed, NIO Inc. (NIO.N/9866.HK) released its financial report for the second quarter of 2024.

In the second quarter of 2024, NIO's net loss attributable to the parent company reached 5.126 billion yuan. If we include the loss from the first quarter, NIO's loss for the first half of the year exceeded 10.3 billion yuan.

From 2018 to 2023, NIO had accumulated a loss of 86.63 billion yuan. Adding the loss from the first half of 2024, in the past six and a half years, NIO's net loss attributable to the parent company has exceeded 96 billion yuan.

However, after the financial report was disclosed, on the same night in the U.S. stock market, NIO (NIO.N) opened high and went higher, surging by 14.39%!

Despite continuous huge losses, how did it get hyped in the capital market?

Firstly, NIO's automotive business gross margin exceeded expectations, and sales reached a new high in the second quarter.

NIO had previously given guidance on the gross margin of its automotive business, expecting it to return to double digits due to reduced promotions in the second quarter. Therefore, the market anticipated that NIO's automotive business gross margin for the second quarter would increase sequentially to around 11%-11.5%, while NIO's actual car sales gross margin was 12.2%, exceeding market expectations.

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The increase in gross margin is mainly attributed to cost reduction.

In the second quarter, the average price of a car from NIO was 273,000 yuan, a decrease of about 6,000 yuan compared to the first quarter. This is because old and new models were sold together in the second quarter, with the old models being heavily discounted.However, on the cost side, NIO's cost per vehicle in the second quarter was 240,000 yuan, which is a reduction of 13,000 yuan compared to the first quarter. It can be seen that NIO's economies of scale have been somewhat realized. In the second quarter, NIO sold 57,400 vehicles, setting a historical record, which allows for a reduction in the cost per vehicle.

Moreover, NIO renegotiated supplier contracts in the second quarter, leading to some savings in procurement costs. Then, NIO is quite optimistic about its performance in the third quarter. NIO's delivery guidance for the third quarter is between 61,000 and 63,000 units; the revenue guidance for the third quarter is between 19.11 billion yuan and 19.67 billion yuan, both of which are historical highs.

In the previous second quarter, NIO delivered a cumulative total of 57,400 new vehicles, with revenue of 17.446 billion yuan. Calculations can be made to determine that NIO expects a sequential growth in sales of 6.27% to 9.76% in the third quarter, and a revenue growth of 9.48% to 12.92%. The revenue growth will be greater than the sales growth rate. Why is that?

Firstly, in the third quarter, NIO is highly likely to sell all new models for the year 2024, without the drag of discounted older models. In addition, NIO previously had a BaaS model "pay 4 get 1 free" preferential policy. This policy was phased out in June and, although it returned for a limited time from September 2nd to September 8th, the short duration means it will not have a significant overall impact on the third quarter's revenue.From a valuation perspective, in the first half of 2024, NIO's total revenue was 27.355 billion yuan. The latest revenue guidance for the third quarter exceeds 19.1 billion yuan. If NIO can maintain a revenue of over 19.1 billion yuan in both the third and fourth quarters, then the annual revenue could exceed 65.5 billion yuan. Before the financial report disclosure, NIO's total market value in the US stock market, converted to RMB, is about 63.1 billion, corresponding to a Price-to-Sales (PS) ratio of approximately 0.96 times, which is more than sufficient.

It's no wonder that after the release of the second-quarter financial report and the third-quarter guidance, NIO's stock price soared.

However, NIO is currently only able to catch a slight breath, far from being relaxed.

1. The surge in sales expenses indicates that NIO's vehicles are not as easy to sell.

In the second quarter, NIO's sales and administrative expenses reached 3.757 billion yuan, a sequential increase of 25.38% from the first quarter.

The sales expenses for NIO in the third quarter are still difficult to reduce, with the new brand Ledao delivering in September and the first batch of 105 new stores, requiring an increase in sales investment.

NIO's guidance for sales expenses for this year is expected to grow no more than 20% year-on-year. This target is challenging to achieve.

2. The pressure on NIO's cash flow is intensifying.

At the end of the first half of 2024, NIO's cash and cash equivalents were 24.652 billion yuan, 8.3 billion less than at the beginning of the year.

3. There is no doubt that NIO will continue to incur losses in 2024.November 27, 2022, at a face-to-face event with NIO founder William Li, in response to the question of when the company would become profitable, Li said: "The hope is to break even by 2024."

At present, it appears certain that NIO will continue to suffer losses in 2024.

4. It is currently embroiled in the most intense competition in the mid-to-low-end price segment for pure electric vehicles.

The launch of the Ledao in September marks NIO's attempt to move away from its long-standing claim of high-end luxury and enter the lower-end market. NIO has high expectations for Ledao. The pre-sale price of its first SUV, the Ledao L60, is set at 219,900 yuan.

However, the 200,000-300,000 yuan range is the most fiercely competitive price segment for pure electric vehicles, with competitors such as Xiaomi SU7, Tesla, and BYD already in the fray.

If NIO adopts its "BaaS model" for discounts, it is expected that the price of Ledao could drop to 150,000-160,000 yuan. But that would also mean NIO has completely let go of its so-called "high-end" status.

NIO is about to face even more brutal challenges.