NIO Inc. (NYSE:NIO) Q4 2023 Earnings Call Transcript

NIO Inc. (NYSE:NIO) Q4 2023 Earnings Call Transcript March 5, 2024

NIO Inc. beats earnings expectations. Reported EPS is $-0.45, expectations were $-0.51. NIO Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello, ladies and gentlemen, thank you for standing by for NIO Incorporated Fourth Quarter and Full Year 2023 Earnings Conference Call. At this time, all participants are in a 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.

Rui Chen: Good morning and good evening, everyone. Welcome to NIO’s fourth quarter and full year 2023 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 the CEO; Mr. Steven Feng, CFO; and Mr. Stanley Qu, Senior VP of Finance. 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 the 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: Hello, everyone. Thank you for joining NIO’s 2023 Q4 and full year earnings call. In Q4 of 2023 NIO delivered a total of 50,045 premium smart EVs, up 25% year-over-year. In 2023, NIO’s cumulative delivery reached 160,038 units, representing our goals above 30.7% from 2022. In January and February of 2024 due to the seasonality of industry and the Chinese New Year, NIO delivered 18,187 vehicles. On March 7, NIO will start to deliver for the 2024 model, featuring enhance the performance and experience, with that, NIO’s will gradually bounce back, and the total delivery in Q1 is expected to be between 31,000 to 33,000 units. In terms of NIO’s financial performance, with continuous improvements on the bond [ph] costs, the vehicle gross margin increased to 11.9% in Q4.

Now, I would like to share with you the recent highlights of our product, R&D and operations. On December 23 Nio Day 2023 was held in Xi’an, Shaanxi province, where the Smart Electric executive flagship NIO ET9 was unveiled. ET9 embodies NIO’s full stack of capabilities, and the global leading technology, featuring core technologies, such as in-house development AD chip, NX9031 Full-Domain 900v architecture, SkyRide Chassis System, and the flagship safety and security. ET9 defines that technology standard for the next generation premium smart EV. The delivery will start in Q1 2025. In the meantime, NIO will soon start to deliver its 2024 model with the configuration and the performance upgrades including the brand new center computing platform, Adam, which brings the computing power to a new level.

Enabled by the industries high computing power, NIO’s software release has become faster, making our products more competitive. It means that NIO Assisted and Intelligent Driving or NAD [ph], NIO’s collaborative intelligence capabilities has seen that group with the total validated open mileage increase in 100v in five months. As of the end of January, navigate on pilot paths while validated and made available more than 1 million kilometers of roads in China including 650,000 kilometers of complicated urban driving scenarios in 606 cities. In Q2, the NOP+ for urban roads is expected to be released to all NT2 users, which will make this OTA update the largest public release of its kind in China. So computing sharing across different domains on the center computing cluster, [indiscernible] our multimodal large vision model will be released to make that cockpit smarter and more secure.

In addition, NIO’s mass market brand will make its debut in Q2. The first product will be launched in Q3 with the mass delivery to start in Q4. As a full assess and such a network so far NIO has 148 new houses and 352 new spaces, as well as the 314 service center and 62 delivery centers. About the charging and the swapping network to-date, NIO has 2,419 Power Swap stations worldwide, providing over 39.5 million swaps cumulatively. Collectively. It also has installed over 10,000 power chargers and the 11,600 destination chargers. During the Chinese New Year, on the billings day, NIO completes 19,199 swaps, one power stations on highway provides the 195 swaps, battery swap has become the most reliable solution for NIO users. Following the battery swap corporation with Changan and Geely, another two digital corporation agreement was signed with JAC and Chery in January, NIO will rollout comprehensive and in-depth cooperation on battery swap with these partners.

Moreover, NIO has partnered with multiple energy companies, such as [indiscernible] Energy Group and the China Southern Power Grid to jointly build swap stations. The value of batteries swap has been appreciated by more people, making a holistic chargeable, swappable, and upgradable solution, a well recognized the core advantage of NIO. In 2024, NIO plans to build 1000 new battery swap stations and the 20,000 charges, bringing in the total to over 33,310 swap stations and 41,000 charges by the end of 2024. Regarding the capital market, in December, NIO received $2.2 billion strategical investment from Abu Dhabi investor, CYVN Holdings. The investment has further strengthened NIO’s balance sheet, laying a solid foundation for NIO’s investment into the next generation core technologies and products shouldering [ph] corporate social responsibility and supporting global sustainable development, NIO always stayed true to its foundation mission of Blue Sky Company.

In general, NIO was selected by Corporate Knights into the 2024 Global 100 most sustainable companies making to the list for the second time in a row. NIO was placed safety, among more than 6000 companies worldwide, up 20 months both from last year. As competition intensified in 2024, we see both challenges and opportunities, with faster deployment of charging and swapping facilities and the change in consumer behavior, the premium BEV segment to which NIO brands belongs will soon arrive at an inflection point of growth. In the second half, a new brand for the mass market will also become a growth level. In 2024 we will continue to focus on the corporate top priorities, level up system capabilities [indiscernible] cost mindset and the costs management, so as to bring our A game to the next phase of competition.

As always, thank you for support. With that, I will now turn the call over to Steven to give financial details. Over to you Steven.

Steven Feng: Thank you, William. I’ll now go over our key financial results for the fourth quarter of 2023. As we mindful of the length of this call as a reference to RMB only in my discussion today. I encourage listeners to refer to our earnings press release, which is posted online for additional details. Let me start with revenue for the fourth quarter of 2023 total revenues reached RMB17.1 billion, up 6.5% year-over-year, and 10.3% quarter-over-quarter. 90% of revenue come from vehicle sales in Q4, which was RMB15.4 billion, representing an increase of 4.6% year-over-year and a decrease of 11.3% quarter-over-quarter. The improvement year-over-year was driven by growing delivery volume despite the impact of lower average selling price resulting from product mix changes.

The decrease quarter-over-quarter was mainly attributed to a decrease of 9.3% in delivery volume. Moving to other sales. Other sales reached RMB1.7 growing 27.6% year-over-year and 0.4%, quarter-over-quarter, the year-over-year increase was mainly due to increased sales in accessories and the provision of power solutions, which both grew with our user base. Now, let’s have a look at the gross margin. Overall gross margin was 7.5% compared with 3.9% in the same period of last year, and 8.0% in the last quarter. The increase year-over-year was mainly attributed to the increase vehicle margin. The slight decrease quarter-over-quarter was due to the decrease in margin from provision of power solutions as a result of expanded power network, even though vehicle margin was growing.

The closer look at vehicle margin, which was up to 11.9% in this quarter, compared with 6.8% in Q4 2022 and 11.0% in Q3 2023. The year-over-year increase was mainly due to the decrease material cost per unit in Q4 2023 and lower base in Q4 2022, which resulted from inventory provisions, accelerated depreciation on production facilities, and the losses on purchase commitments for the previous generation of ES8, ES6 and EC6 recorded. Let me move on to the operating expenses. R&D expenses were RMB4.0 billion, remained stable year-over-year and increased 30.7% quarter-over-quarter. The increase was mainly driven by incremental design and development costs for new products and technologies and higher personnel costs in R&D functions. SG&A expenses were RMB4.0 billion increased 12.6% year-over-year and 10.1% quarter-over-quarter, which was mainly related to hire personnel costs in sales functions and increased sales and marketing activities.

Let’s move further to the bottom line. Loss from operations was RMB6.6 billion represents a decrease of 1.6% year-over-year and an increase of 36.8% quarter-over-quarter. Interest and investment income was RMB1.4 billion, increased 288.7% year-over-year and 375% quarter-over-quarter. The increase was primarily attributed to the recycling of unrealized gain from other comprehensive income to investment income of RMB977.3 million for available for the available-for-sale debt related to upstream industry investment. Net loss was RMB5.4 billion represent a decrease of 7.2% year-over-year, an increase of 17.8% quarter-over-quarter. Last but not least, our balance sheet get strengthened with RMB57.3 billion in cash and cash equivalents, restricted cash, short term investment and long term time deposits as of December 31, 2023.

For more information, details on our unaudited 2023 full year financial results, please refer to our earnings press release. Now, this concludes our prepared remarks. I will now turn the call over to the operator to proceed with our Q&A session.

Operator: [Operator Instructions] Your first question that comes from Tim Hsiao from Morgan Stanley. Please go ahead.

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Q&A Session

Tim Hsiao : Hi, management team. Thanks for taking my questions. I have two question. The first one is about our upcoming the investment in [indiscernible]. Is NIO still talking to launch and deliver the first model on the upstream late in the quarter? And secondly, I think you’ve just two quarters away, could you share more information about the channel strategy target numbers of stores, store types and the scale of charging network et cetera. So any additional color would be highly appreciated. So that’s my first question

William Li: Thank you for the question. As I’ve mentioned in the prepared remarks, in the second quarter of this year, we are going to unveil our second brand, the brand for the mass market. And in the third quarter, we will launch the very first product of this new brand and the mass release and the delivery will be starting from the fourth quarter of this year. Actually the verification builds and maybe build off this car already rolled off the line in Q4 last year and we were pretty satisfied with the conditions of that build. In terms of the sales and the service network also this new brand, for the point of sales, it will have its separated and independent sales network. But in terms of the after sales services and the touch points, we do can leverage the existing service resources of the new brands.

In terms of the power swap network. We’ve previously mentioned that for the power swap network, we have a private network and a public network similar to the cloud infrastructure and the cloud service. For the private network, basically, it’s the power swap stations and the facilities that are designated and exclusive to the new brand. But in addition to that, we have a public network where we will share the power swapping resources with not only our second brand, as well as other car companies, as you’ve also know that we have already signed the agreements with several car companies, and the more will join the public service facility as well. Our fourth generation power substation will have the compatibility for both new products as well as ABS products.

And we will start to build the fourth generation swap stations from April this year. Previously, we’ve mentioned that in 2024, we are going to install another one Southern swap station and the most of the stations will be fourth generation stations for the public network.

Tim Hsiao: Thank you, for sharing all the details. So my second question is now on the margin target. If you recall that, that’s difficult to reach out. I think in the management team mentioned that the gross profit margin for 2024 this year, would be around 15% to 18%. And there could be additional, like 0.5% margin uptake contributed by in-house production. So based on current market environment and compare plans gap, do you still maintain the same target this year? Or look for any potential changes to the margin target? That’s my second question. Thank you.

Steven Feng: Hi, Tim. About the margin, yes, for the whole year, I think we’ll keep this 15% to 18% target, but quarter-by-quarter I think there will be some change. As you may know, we will upgrade our NT2 product to 2024 version in March. And during the transition of old and new products, more promotions are offered for the older models leading to the decrease of gross profit margin in Q1. But starting from Q2 along with the volume ramp up of our 2024 version, and also the further cost optimization activities as we mentioned, we believe our vehicle margin can come back to an upward trend. And so, starting from Q2, we are confident that 15 to 18% weaker margin can be achieved for NIO brands. And from a long run our target our margin target for NIO brand will also be over 20%. Thank you, Tim.

Tim Hsiao: Great, thank you very much.

Operator: Thank you. Your next question comes from Ben Wang from Deutsche Bank. Please go ahead.

Ben Wang : Thank you. My first question is about 2024 volume target, in the report you target 200,000 units for full year ’24 which means 25% growth. Can you confirm what is your target? That’s number one question. Number two is about the second product from the NIO brand, mass market brand. In the recent interview Will actually mentioned there may full size SUV bigger than the first one with the second product followed by MTV. Can I confirm if you’re planning for the new plan in the next second and third product? Thank you.

William Li: Thank you for that question. Definitely for this year, the competition is going to be continued to be intense. But as we’ve also mentioned that we will be having our products for the 2024 models with enhanced performance especially much better computing power, the computing power will continue to be the local market. So this will help us to improve the overall competitiveness of our existing products. This year, we will focus on accelerating the service, so that we can release more new [indiscernible] on the chips and computing power. And also in the second quarter, we’re going to release our NOP+ for urban roles, to all the NT2 users. By doing this public release, we can also enhance the competitiveness of the products.

Plus, we also have other new features like large language models, large vision models and the [indiscernible] and et cetera. In terms of our sales channels and networks. So far, we have around 500 new houses and the new spaces. And we will continue to enlarge the reach of ourselves and service network to the lower tier cities. And in the meantime, from last year, we have enlarged our sales force. As the team is getting more matured and skillful with the sales and getting better understanding of our products, we also see this salesforce starts to kick-in, especially in our delivery results for the February. Inside of the BEV segment were the new energy vehicle market. Our delivery results in February was actually pretty good, especially in comparison to our results in January.

This has also reflected the effectiveness and efficiency of our salesforce and also sales channel enlargement. And thirdly, we will also continue to deploy our power swapping network. As I’ve mentioned, we will deploy both public network and private networks for NIO and for else. And for our power swap network, this year, we will mainly serve the purpose of boosting sales volume, because we already have more than 2000 swap stations. So we basically have established the initial network of where the power swap services and now we will focus more on boosting sales via installing this stations. So overall speaking, we are confident with our sales and deliver results this year, as in our guidance in the first quarter of this year we are going to deliver around 31,000 to 33,000 units in March as weather gets better and the market gets more dynamic and vibrant we’re also confident that our sales volume will increase.

For the mid-term we hope that our sales volume can still be back to around 20,000 units per month and we hope that this can happen sooner. And for your second question about our mass market brand, some media has already captured some of our publicly tested vehicles on the roads, and also reported some sneak peeks of our very first product. For our second brand as we’ve previously introduced, its overall positioning is to target as the family oriented users basically families of different sizes, or for family of different sizes, we are going to launch different sizes of vehicles but all with strong product competitiveness. As we started relatively late in the family oriented the segment, we do can leverage such opportunities to better look into the real demands of the target users and the launch competitive products accordingly.

The first product of our mass market brand will have head-on competition with the most popular model of Tesla, that is model Y, but our car will support battery swap. So in terms of the cost and performance, we believe that this model will be highly competitive. In terms of the bond cost, it will be roughly 10% lower than that of Model Y, which also gives us better flexibility for the product pricing. And the second model of our mass market brand will be a SUV model for the large family. The R&D is in good progress, we have already kicked off the tooling for the second the model, and this car will be launched in 2025. And the third model is also on the way we have already started the product definition and R&D, but it’s too early to share the information and we will disclose more information when it’s appropriate.

Ben Wang: Thank you very much.

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

Yuqian Ding : Thanks team. Yuqian here. I got two questions. The first is we want to understand that what’s management’s priority or strategy between pricing and volume? We noticed that the company acted quite refrained in pricing among universal price action from peers. Has that been — we have been seen the ticket price rather stable. So does that read as more profitability as a priority over volume for this year? Or it’s a rope a dope tactic before our new mass market brand coming to the market? That’s the first one.

William Li: Thank you for the question. Starting the second half of this year, NIO group will sell two brands simultaneously. So, strategy wise, we have also differentiated for this two brands. For the NIO brand for now, we will not sell any products that will be cheaper than the existing ET5. Even for the products in our pipeline, we will be targeting at the premium segment, which means that our products for the NIO brand will be more a gross margin oriented. We will be carrying more on the gross profit of our product than the volume. So we will not cut the prices or enter the price or we will not realize higher volume at the cost of our compromise the margin where it goes profit. And for the second the brand, the brand for the mass market, it is targeted at the mass market and also for the family oriented users, where the competition is also more intense.

But luckily it can leverage the existing electrification and smart technologies and infrastructures already developed by NIO, so it has certain advantages than starting a completely new brand from the ground up. For this second brand we will focusing more — we will be focusing more on the volume. So the volume is prioritized over the gross margin of the products. That’s the overall strategy for this two brands. We believe that with this combined brand portfolio, it will also help us to realize a healthier long term sustainable development and operation. Thank you.

Yuqian Ding : Got it. And then my second question is the recent two sessions could talked about supporting so used to move more aggressively on the EV without constraint on the profitability. So looks like another pressure and making the industry harder and harder to consolidate. So thanks for the strong color on the new mass market brand and value proposition, guess this is this is us changing the way of asking other than the strong product are we aggressive enough on the pricing? You talked about the volume priority, but if the pressure is going to be overhang for longer are we ready for being aggressive on the pricing for longer?

William Li: It’s true that doing business in China, it’s inevitable that we will face competitions coming from all types of car companies, including companies like Tesla. Many startups from China, private companies, well established ones in China and also joint ventures and the state owned enterprises. Overall speaking, the China’s automotive market is a highly open market and such competition can actually benefit or bring benefits to the end users. However, it can be more difficult and challenging for car companies. But we believe that by the end of the day, those companies with good overall capabilities and competence as well as those companies who care about the experience of the end users will survive from the fierce competition.

And we are confident that we will withstand such competition from all the competitors. But in the meantime, we also see cooperation’s out of the competition. For example, we have announced power swap cooperation with many car companies to China automobile is the first car company to partner with NIO in power swap, later we also collaborated with Geely Holding, JC Group and a Chery on the battery swap. We also have partnerships with energy companies like Sinopec and the PetroChina for the construction of power swap stations, as well as with China swaps and power grade on the energy storage as well as power swap stations. So in general, NIO is pretty good at partnering up with the peers in the industry. Since the competition is inevitable, we would like to look at how we can navigate through the intense competition from the reasonability of the business perspective.

Yuqian Ding : Got it. Thank you.

Operator: Thank you. Your next question comes from Ming-Hsun Lee from Bank of America. Please go ahead.

Ming-Hsun Lee : Hi, thank you, William and team. So I also have two questions. So first question is regarding the oversea market. Do you expect NIO to enter the new countries this year? Will you cooperate with more local distributors in an oversea market or you will maintain the direct sales business model? Also do you have any overseas sales target for this year? Thank you. That’s my first question.

William Li: Thank you for the question. Regarding the global market or international markets at the moment, we will still primarily focus on the Chinese market as it is the largest and also the most competitive market for the automotive industry. But in the meantime, we will not stop our exploration into the international market. So far we have already entered five European countries. And we will keep refining our operations and management in this five European countries. And this year, we are also planning to enter into several new countries, for example, UAE, as we are invested by the Abu Dhabi strategic investors, so we are also preparing for the market entry and the sales and the service in that market. For the other countries we are more awaiting and to see the development of the conditions and the strategic wise, we will also become more flexible.

Because there are two major changes. The first change is that we will soon have our mass market brand and the next year, we are going to announce our third brand, the price will be below RMB200,000. Which means that with all three brands combined, we will be able to cover larger market with more segments. Because NIO as a brand primarily focused on the premium segments, basically China, U.S. and Europe. These three continents contribute 90% of the sales of the premium segment. But for our second and third brands, as they are more affordable, they will be standing a bigger chance of tapping into a more diversified markets and in more regions. So our global market entry will also take this third brands into consideration. And the second change is regarding our strategy and to way into each market.

At the moment in China and in five European countries we adopt the direct selling model. And in China, we will continue to have the direct sales with direct touch points with users. But for the other markets, all sides of China, we need to respect the local conditions and also the special characteristics of each market. In that case, we will keep our strategy very flexible and very open, we will look at which way will be bringing us quicker return on investment, we don’t exclude any possibilities of cooperating with local partners for the market entry. So in general, we will have a very flexible and a very open strategy towards markets outside of China.

Ming-Hsun Lee: Thank you William. My second question is regarding the battery technology. So recently some auto brands start to launch a 100 volt charging battery in the system. So do we — when do we expect that the NIO brand and also probably your second brand will start to provide this spec and if after you have first charging battery will use switch to expand more on a charging station instead of battery substation in 2025? Thank you, William.

William Li: Thank you for the question. In terms of the battery technologies, actually, NIO has been having this long standing strategy also studying the ultra-fast charging as well as ultra-quick battery swapping. In terms of charging actually, NIO is the most active grant in terms of deploying public chargers for the users in China. And as of now, 80% of our electricity were charged for the now NIO users than for the NIO users. For the NIO powers charging business by itself, it is already breaking even. And we will continue to deploy the chargers for the users. Very soon we are going to install and launch our 640 kilowatt of power chargers. So definitely we will follow the latest technologies in the charging industry. In the meantime, we also need to emphasize on how fast the power swap can be.

Because no matter how quick you are on the charging rate, it can never out around the power swap. Some media has used the analogy where power swap is as fast as 20C in comparison to 5C on a common charger. Not to mention that battery swap also have the best experience for the users. And a NIO’s holistic solution in addition to chargeable and swappable we also have upgradable which is also very important specially to serve the interests of our users. Very soon, we are going to have our 150 kilowatt hour battery. We also have a 5C charging rates that will become available on our first models from the third generation products ET9. But in addition to looking at the battery capacity and the charging rate, what really matters is the lifetime of the battery.

For that we think that it’s very important because at the moment the industry average warranty duration is around eight years where 100,000 kilometers something or when the battery sheet 70% state of health. But if you look at the vehicle, it has a lifecycle of around 15 years. For most of the electric vehicles when you’re on the streets, they haven’t really hit the end of life of their batteries yet. But as the car companies we really need to consider about the 15-year lifecycle of your products including cars, including batteries. That’s why the calendar lifetime of the batteries becomes more important for the car companies. Over the past several years we have tackled the difficulties on the battery safety, efficiency of charging and also the accessibility of the charging and swapping facilities.

And from this year we will focus on the long life batteries. We have already done some research and studies on the technologies and the recently we’re going to share more information with the industry. What we believe that with a longer battery life, especially longer calendar life, it will help not only the battery electric vehicles, but also PH EVs and ER EVs, or the new energy recourse in general, because after eight years when the battery hits its under warranty life, you cannot ask the user to pay another RMB100,000 to upgrade the battery, where to buy a new battery, even for a smaller battery pack of only 40 kilowatt hour capacity, you cannot ask them to pay RMB80,000 or RMB 90,000 for a brand new battery. So as a car company, we need to look after both battery and cars across or throughout its lifecycle.

In that case, we need to provide the ultimate factory solution to the industry.

Ming-Hsun Lee: Thank you, William.

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

Paul Gong : Hi, thanks for taking my question. My first question is regarding your R&D budget for 2024. How much do you plan to spend into R&D for this year? And if you can, would you please give a rough breakdown of how much of this would goes to the NIO models and how much go to the output? How much go the third brand, and how much go to the autonomous driving software and some key components et cetera. So, regarding the R&D spending plan for 2024?

Stanley Qu: Hi, Paul, this is Stanley. Regarding your question about the R&D expense expectation for 2024. Generally, the scale of R&D expense will be consistent with 2023. And average the quarterly spending for R&D will also be around RMB3 billion. Yeah, that’s the general guidance for R&D.

William Li: In terms of how to allocate the R&D expenses this year, we will mostly allocate our resources on the fundamental technologies as well as the technologies that can be shared across all three brands. We have mainly focused on the smart and electric technologies which can already be shared across NIO Alps, and also Firefly which is our third brand. And the last year in September, we have announced our top technologies at the NIO Tech Day. And basically our R&D investments will be dedicated into these main areas. And in terms of the personnel structure around the 70% of our R&D people are focusing on the smarter technologies where relevant areas.

Paul Gong: My second question is regarding the costs of Alps. Just now I think you mentioned that the cost is going to be about 10% lower than Tesla. Can you give it a bit more color given this is actually a pretty impressive number, when you consider Tesla is building almost 1 billion cars in China a year of which 700,000 is already is like model Y what volume scale are you based on are to assume the Alps costs and so what are the key advantages that you have adopted for these costs advantage compared to Tesla?

William Li: Thank you for the question. Actually, for Tesla, as they also public their gross margin details on the product, so it’s easy for us to make a comparison. In terms of what advantages we can take for the Alps and its cost structure. Actually, China is the largest automotive market, it is also the biggest market for the smart electric vehicles with already well established a supply chain. So we can already leverage the advantages of the domestic supply chains here in China. Not to mention that in the past several years, we have made investments and also achieved accumulations on the R&D activities. And R&D is one of the key drivers of improving the cost structure and reducing the bomb costs of the product. In that case, we already have a pretty good foundation.

And with that we doesn’t need to really realize a very huge volume to realize that level of cost structure. In China for the manufacturing facility, a reasonable volume will be around a 10,000 units per month. We doesn’t need — we don’t need to really go to the level of 1 million to realize that level of bomb cost.

Paul Gong: So the cost is a compared to Tesla China, or Tesla global offer the 10%? Sorry, just a quick follow up.

William Li: [Non-English]

Paul Gong: Okay, thank you very much.

Rui Chen: Yes, to translate for that. We didn’t really look at the Tesla China specifically, we are comparing with Tesla globally.

Paul Gong: Thank you very much. That’s quite helpful. Thank you.

Operator: Thank you. Your next question comes from Cheng Jing from CICC. Please go ahead.

Cheng Jing : Okay, thank you for taking my questions. I have two quick questions. The first is also about the charging and also batter swap network. We can see that our network is still — our construction — progress of the charging network is still fastest in China. But at the same time, you see many other companies that still also accelerating their construction of the especially the fast charging network. So how do we think that we can maintain our first mover advantage and also how do we look at the relationship between fast charging and also battery swap?