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

Thank you. Good morning and good evening, everyone. Welcome to NIO's Second Quarter 2024 Earnings Conference Call. The company's financial and operating results were published in the press release earlier today and posted on the company's IR website. On today's call, we have Mr. William Li, Founder, Chairman of the Board, and Chief Executive Officer; and Ms. Stanley Qu, Chief Financial Officer. Before we continue, please be kindly reminded that today's discussion will contain forward-looking statements made under the Safe Harbor Provisions of the US 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 US 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 Q2 earnings call. In the first half of this year, the NIO brand completes the 2024 model year face lifts, further enhancing the competitiveness of its NT2 products. In the meantime, as NIO technologies, products, services, and the user community were recognized by more people. Its order intake and delivery continued to grow. NIO’s delivery in Q2 reached a quarterly record of 57,373 units, up 143.9%. In China, NIO model had over 40% market share among all BEVs with a transaction price higher than RMB300,000. Since Q3, NIO's product mix has been continuously optimized. In July and August, the delivery was 20,498 and 20,176 respectively. With that, NIO's monthly delivery had been more than 200,000 for four consecutive months. The total delivery in Q3 is expected to be between 61,000 and 63,000 units. In terms of NIO's financial performance, with continuous cost optimization of core components and supply chain. The vehicle margin in Q2 increased to 12.2%. As the user community became larger and more vibrant, the second quarter also witnessed rapid growth in revenues from after sales and power services. The gross margin of other sales continued to improve. Now, I would like to share with you the recent highlights of our product, R&D and Operations. On July 27, NIO hosted Nio IN 2024, at the event we introduced the full-domain operating system, SkyOS, and the smart system, Banyan 3. Moreover, we also announced the successful tape-out of Shenji NX9031, our in-house developed chip for smart driving. As for NAD, NIO continued to integrate its [season] (ph) capabilities. In July, the industry's first AEB function based on end-to-end architecture was released. With the scenario coverage 6.7 times better than traditional AEB, it makes driving safer. At Nio IN, they also introduced the NIO owned model, NWM, the branding new architecture for smart driving. NAD Arch 2.0, we also released. This is the most advanced end-to-end architecture based on NWM. New features and experiences of NAD Arch 2.0 will be released in the second half of this year. On September 19, our family's centric mass-market brand ONVO, is going to celebrate the launch of its first model, L60. And the user delivery will start in late September. With strong confidence in this all-round product, we will spend no effort in ramping up production and fulfilling the market demand. For sales and services, as of now, the NIO brand has 161 NIO Houses and 408 NIO Spaces, as well as 351 service centers and 63 delivery centers. The ONVO brand has already opened 105 stores in 55 cities and we have over 200 stores at the end of the year. By the year end, about charging the swapping networks so far, NIO has over 2,561 power swap stations worldwide and has provided over 52 million swaps besides, NIO has installed over 23,000 power chargers and destination chargers. Quick and hassle-free recharging is critical for convincing ICE owners to drive BEVs. On August 20, we hosted the Nio Power Up event, where we announced the plan of Power Up counties. In the first half of 2025, NIO's charging network will become available in every country in Chinese mainland. By the end of 2025, the swapping network will become available in more than 2,300 counties in China. To better support this initiative, they also announced the Power Up Partner Plan and signed an agreements with [future partners] (ph). The continuous deployment of the charging and swapping network will help expand the market reach of NIO and ONVO and further drive sales growth. As for market development, we are accelerating the international expansion on August 20th, NIOs UAE Website went live, and in Q4, the products will be launched and delivered in UAE. While ensuring controllable investment and efficient operations, we will also actively evaluate opportunities worldwide, introducing products to more markets. In the NEV quality study released by JD Power in early June, NIO models ranked the highest in the respective segments. NIO is also the only [NEV] (ph) company winning top ranking for six consecutive years. Ever since its establishment, NIO has been committed to making itself a global benchmark of quality and providing great user experience through life cycle quality management. As NIO has been funded for almost 10 years with the multi-brand strategy and the international business [road out] (ph) as well as the external change, we upgraded the company's value system in July. In the quest of Blue Sky Coming, NIO aspires to shape a sustainable and bright future and invasions itself as a user enterprise where innovative technology meets experienced excellence. With new brands and products being launched step by step, the fundamental tech capability and the long-term strategic planning that NIO has been developing will have a greater effect. NIO's cumulative R&D investment, sophisticated community operations, and efficient infrastructure deployment will lead to better sales and margin. We look forward to NIO's performance in the second half. Thank you for your support. With that, I will now turn the call over to Stanley for Q2's financial details. Over to you, Stanley.

Thank you, William. Now let me go over our key financial results for the second quarter of 2024. I will refer to RMB only in my discussion today unless otherwise stated. Our total revenue were RMB17.4 billion, up 98.9% year-over-year and up 76.1% quarter-over-quarter. Revenues from vehicle sales were RMB15.7 billion, representing an increase of 118.2% year-over-year and an increase of 87.1% quarter-over-quarter. The increase year-over-year was mainly attributed to higher deliveries partially offset by a lower average selling price due to changes in product mix and user rights adjustments since June 2023. The increase quarter-over-quarter was mainly attributed to higher deliveries. Other sales were RMB1.8 billion, representing an increase of 11.3% year-over-year and an increase of 15.6% quarter-over-quarter. The year-over-year increase was mainly due to the increase in sales of parts, accessories, and after-sales vehicle services, and provision of power solutions, which both grow with our user base and partially offset by lower sales of used cars. The increase quarter-over-quarter was mainly attributed to the increase in sales of parts, accessories and after sales vehicle services, provision of power solutions and other products, and the increased revenues from technical R&D services. Vehicle margin was 12.2% in this quarter compared with 6.2% for the same period of 2023 and 9.2% for the last quarter. The year-over-year increase was mainly due to the decreased material cost and was partially offset by a lower average selling price. The quarter-over-quarter increase was mainly due to decreased material costs. Overall gross margin was 9.7%, compared with 1% in the same period of last year and 4.9% in the last quarter. R&D expenses were RMB3.2 billion, decreased 3.8% year-over-year, and increased 12.4% quarter-over-quarter. The quarter-over-quarter increase was mainly due to the incremental design and the development costs and the increased personnel costs in R&D functions. SG&A expenses were RMB3.8 billion, increased 31.5% year-over-year and increased 25.4% quarter-over-quarter, which was mainly driven by higher personnel costs, related to sales functions and increased sales and marketing activities. Loss from operations was RMB5.2 billion, representing a decrease of 14.2% year-over-year and a decrease of 3.4% quarter-over-quarter. Net loss was RMB5 billion, representing a decrease of 16.7% year-over-year and a decrease of 2.7% quarter-over-quarter. As of June 30, 2024, our company had cash and cash equivalents, restricted cash, short term investments, and long-term time deposits in total of RMB41.6 billion. For more information and details of our unaudited second quarter 2024 financial results, please refer to our earnings press release. Now this concludes our prepared remarks. I will turn the call over to the operator to facilitate our Q&A session. Thank you.

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

Hi, management team. Thanks for taking my question. I have two questions. The first question is about our new model L60 because L60 started pre-sale in mid-May. And since then, I think the model has received tens of thousands of pre-orders, which is very robust compared to all the new launches lately. But how could NIO also ensure a high conversion rate this time after the official launch on September 19. Will the company consider getting more aggressive with the official pricing given the competition? And in the meantime, what kind of supply chain preparation the team has done to avoid any potential supply disruption after the release starts. That's my first question. Thank you.

Thank you, Tim. [Foreign Language] Thank you for the question. On August 15th, we have witnessed the offline of the very first mass-produced L60. And the head of sales of the ONVO brand is actually driving this very first mass-produced car having a road trip in China. And he has been driving the car for almost 20 days while doing the broadcast on the social media. It has received a lot of attention from the public. Every day there are several millions of views of the broadcast by the members. In terms of the pre-order intake, it actually is pretty good and has surpassed our expectations. So we are quite confident with overall competitiveness of this project. Regarding the pricing strategy, well, we launched the project in mid-May. We have announced a pre-sale price, which is [RMB290,900] (ph). That is around RMB30,000 cheaper than Model Y. And before the official launch of the project on September 19th, we still have some time and room for the final price adjustments and decisions. But overall speaking, we will try to strike a balance between the vehicle margin and the price point of the product to find the sweet spots. In general, we will not be very aggressive as we need to realize a reasonable margin for the project. Regarding the supply chain security, our target is that by the end of this year, which is in September, we hope that we can realize a supply capacity of 10,000 units. And sometime next year, we will be able to realize a supply capacity of 20,000 units per month. And next question?

Sure. Thank you, William, for sharing the details. My second question is about the NIO brands, the vehicles on the NIO brand, because we noticed the monthly sales of models on the NIO brand have stabilized to 20,000 levels in second quarter. So looking forward, would there be any further upside to the vehicle sales and the gross profit margin based on the current product portfolio? If yes, please share with us that where would be the upside to the volume and the margin of NIO branded vehicles are coming from? That's my second question. Thank you.

Tim, this is Stanley. [Foreign Language] Thank you for your question. Regarding the vehicle margin of the NIO brand. In the second quarter, we have achieved a vehicle margin of 12.2%. That is mainly because of the efficiency improvements on the supply side and also in the production. As in the past four months, we have realized the monthly, delivery volume of 20,000 units -- of more than 20,000 units. We also see the opportunities for further improvements including the cost optimization of the product, as well as to improve the high margin products in the product mix from the marketing side. With that, we will keep improving the vehicle margin in the following two quarters of this year and expect to realize a vehicle margin of around 15% by the end of the year. [Foreign Language] And also a comment to add here is that we also see opportunities to improve our delivery volumes month-over-month, yet we will also need to strike a balance between the vehicle delivery volume and the vehicle margin. Both will increase but it will not be in a very drastic manner for either margin or the vehicle volume. As we -- ultimately, we pursue a very good gross profit with our product. So we need to find the sweet spot in between. [Foreign Language] And for the much longer time as NIO brand targets, our premium segments priced over RMB300,000 as we are going to launch NIO products and also do facelift and upgrades on the products, we believe that in the battery electric vehicle segment, realizing a monthly volume of around 30,000 to 40,000 units is a reasonable target in the volume. [Foreign Language] So all sum up, for the NIO brand, our long-term operational target is to realize a monthly volume of 40,000 units and a vehicle margin of 25%. [Foreign Language] As for the ONVO brand, it faces a much larger market with a total car park of more than [8 million] (ph). In that case, leveraging our Battery-as-a-Service, as well as our well-established charging and swapping network, we believe that ONVO's products will be competitive even against the competition with PHEV, RAV and other BEV models. [Foreign Language] So for ONVO products, they do have a higher potential or bigger potential for a higher sales volume month-over-month. And for the longer-term, our operational target for ONVO products will be 15% or more than 15% for the vehicle margin. And we believe that it is also a reasonable target.

Thank you very much. Great, understanding. Thanks for all the insights, and looking forward to the L60 launch. Thank you.

Thank you.

Thank you. Your next question comes from Ben Wang from Deutsche Bank.

Okay. Thank you so much. My first question is also about the ONVO L60. Previously, you mentioned that this year, your volume target is about 20,000 units. Given the strong order, do you still maintain such a volume target? And if you get back down by month, because we are not exactly in the end of the month, so with the progress for October, November, December? So that is my first question. And second question is about the expense. SG&A expense. It seems like expenses keep increasing, what's your targets for this quarterly exchange expense. Do you have guidance for each quarter in the upcoming second half? Thank you.

[Foreign Language] I will take the first question. This is William. Regarding the ONVO L60, we will start the delivery of the products from late September, but it will take some time for us to ramp up the production and supply of the new product. So most of our deliveries this year will happen in Q4. We will start delivery from September, but not in a very significant volume. And towards the end of the year, we hope that our monthly delivery will be around 10,000 units for the month of December. In terms of the supply side, as the car is equipped with many new technologies, it will also take some time for the supply side to ramp up their production. Thank you.

[Foreign Language] This is Stanley. I will take the second question. Regarding expenses, there are two categories. The first is R&D expenses. We will still keep the similar R&D investment pace and intensity on a quarterly basis. So roughly on the non-GAAP basis, it will be around RMB3 billion every quarter, but there will also be fluctuations or slight differences from quarter-to-quarter as they are relevant to our actual R&D activities conducted. And regarding the second category, SG&A expenses. As we have mentioned that in late Q3, we will start the delivery of L60. With that, there will be increase in our SG&A expenses. But as we ramp up the delivery volume of the project, we also think that we will keep optimizing the percentage of the SG&A expenses against the overall sales revenue from L60. Thank you.

Thank you.

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

Thanks for taking my question. So my first question is also regarding on ONVO L60. So just wondering at let’s say, 10,000 volume in December this year and 20,000 volume next year, what kind of gross margin should be reasonable for this model? Also, as we are ramping up to higher and higher volume, what is our capacity expansion plan and also CapEx plan for 2025 and maybe 2026? Should we expect CapEx to become higher versus 2024? So that's the first question. The second question is also regarding the sales and marketing expense. So we had over 30% SG&A expense growth in the second quarter. Wondering, could you give more details on the sub items, which is the one that's growing the fastest? And also, is any of the sales policy recorded in the SG&A expense? Yes. So that's my second question. Thanks.

[Foreign Language] Thank you for your question. This is William. I will take your first question. Regarding L60, when its overall production volume reaches a reasonable and expected targets, we believe that it will naturally realize a 15% vehicle margin. Of course, against the fierce competition, we have also reserved some room for the variable marketing of the product so that we will be more flexible in the competition. Yet overall speaking, as the product itself is designed for efficiency and cost, 15% vehicle margin is a reasonable target for this model, as we actually managed to realize a good balance between the technology advancement and the cost competitiveness. Regarding the capacity preparation, we are having the mid and long-term planning for our production capacity in 2025 and 2026. As of now, we already have two factories in operation, F2 has already started to upgrade to double shifts to support the production of L60. In late September or early October, the upgrade to two shifts will be completed in F2. And in the meantime, we are also planning our third factory. And around Q3 next year, the third factory will be ready to produce the products which means that by Q3 next year, we will have three factories in operations and it will be sufficient to support our production. [Foreign Language] Overall speaking, we don't think production capacity will be a bottleneck for us, especially it will not be a long-term bottleneck for us. Here in China, the production capacity and capabilities of vehicles and parts are quite competent. Maybe some companies will face short-term disturbance in their capacity and the supply, yet for long term, it will not be a bottleneck. Especially last year, we have obtained independent manufacturing qualification. This has also laid a foundation for our long-term stable capacity.

[Foreign Language] This is Stanley. I will take your second question. Regarding the CapEx, according to the status quo of the company, we are making prudent control and the management of the pace of our investment and expenses, especially starting last year, we have already started such management by postponing certain projects or even canceling some projects. So overall speaking, the R&D or the CapEx in the year of 2024 will be significantly lower than that in 2023. As for 2025, as we haven't started budgeting for the next year, we don't have a clear picture over that, but we believe that the overall expense intensity will be similar to this year. Thank you. [Foreign Language] As for the increase in the SG&A expenses in Q2, it's mainly contributed to two reasons. The first is that in Q1, we delivered around 30,000 units. And in Q2, we delivered a total of more than 57,000 units. The increase of our sales volume naturally drove up the staff cost mainly because the team size has grown and also the incentives for the sales force has increased as well. And the second reason is that in the first half of this year, we have launched our model [ES6] (ph), and many of the NIO products were launched in around April -- around May and -- around March and April. In that case, we have also started a series of communications and marketing campaigns relevant to our model year products that has also increased the development expenses from Q1. Thank you. Tina.

Can I have a very quick follow-up? So in terms of ONVO store, do you have the average store rental cost versus a NIO store? And also how many employees do you plan to deploy in an ONVO store versus that of a NIO store? Thank you.

[Foreign Language] Regarding the opening of ONVO stores, we actually require the team to open up the stores in a quick and efficient manner. So in terms of the CapEx as well as the rent of a single ONVO store, it is significantly lower than that of a NIO store. But we don't have the specific numbers for comparison as the actual expenses may be quite different depending on the locations and the type of the store. But overall, the expense is lower, significantly lower than that of NIO. [Foreign Language] And in terms of the renovation fee for each of the ONVO store, we actually have a very strict requirement. For the ONVO -- for the existing 100 ONVO stores we have just opened, for each store, the renovation fee was no more than RMB1 million. And for the following 100 stores we are going to open by the end of the year, we will have an even more strict requirement on renovation. With that, we will be able to make full use of the existing resources and to renovate the store in a more efficient manner. In terms of the team sites for each of the stores, it depends on the actual number of orders and deliveries we plan for each store in each city. But in general, we will make sure that the team is also set up in the most efficient and compact way.

Thank you Tina.

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

Thank you team. Yuqian here. I've got two questions. First is about autonomous driving progress and second is about market and competition dynamics. First question, could you share the NIO NOP progress? Especially could you break down in terms of the consumer take rate, our disengagement rate, scenario coverage, the regional expansion, these aspects. And the second question is to ask against the backdrop of -- in the premium EV segment, there's a couple of new models coming, especially in the coming months until the end of the year. And also, we noticed the high-tier city versus the low-tier city, the consumer consumption is sliding in general and more so than the low-tier city. So could you help us to get comfortable and conviction on NIO and ONVO's portfolio product technology and service expansion could counter these macro headwinds and still book growth quarter-on-quarter perspective, maybe in an aspect of channel order momentum and the latest consumer feedback? Thank you.

[Foreign Language] Thank you for your question. We also noticed the fierce competition in the area of smart driving, yet we are also confident that NIO is among the top players in this area. Regarding NOP Plus, it is now being used by more than 300,000 users, as it is now offered as a standard feature on our NT 2.0 project. In the meantime, the cumulative knowledge driven with NOP and NOP Plus has reached -- or has surpassed 1.1 billion kilometers. So in terms of the user base, as well as the total mileage driven with the functionality, we are also a top player in China. [Foreign Language] Regarding the technology road map. Right now inside of the industry, many players are converging their technology solutions and the roadmap into end-to-end model, be it Tesla or other players in China. For NIO, we are also working on our end-to-end model, and we have already released our first end-to-end based feature that is end-to-end AEB. Its performance has been significantly improved than the traditional AEB functionality as its scenario coverage is 6.7 times better than the traditional AEB. And in the meantime, at the NIO Inc., we have also released our end-to-end architecture based on the NIO work-model because end-to-end is an architecture, but its foundation technology is also very important, and we are the first company to develop and announce such work model and the end-to-end architecture based on the model. We have also released the NAD Arch 2.0. So the end-to-end model will be based on the NIO -- the end-to-end architecture will be based on the NIO work model where you can see that the NIO work model is developed with the end-to-end architecture solution. Overall speaking, we believe that we are still leading the block in terms of the smart driving technologies. We have already tested the latest functionality on NAD Arch 2.0 at the small scale, and its performance is pretty impressive. Overall speaking with the work model and end-to-end architecture, we will be able to realize quicker functionality iteration, better experience at a lower cost. In terms of the ONVO brand, its product will come with a single range with pure vision technology solution. But even with that, it has realized a very good performance in the urban driving scenario. The other day, I have tested the functionality in Shanghai and it is also pretty good. So overall speaking, we believe that -- and we also saw facts that the smart driving functionalities will help users improve the safety of driving. In terms of the actual usability of the functionality, we will also keep working on that. [Foreign Language] Regarding your second question, we also understand the intensity of the market competition, and this is not the first time for us to face such fierce competition, yet the NIO brand has been realizing a pretty stable market share in the premium segment for years. This is mainly because we have a diversified and rich product portfolio to offer for the premium segment. We have ET5, ET5T, ES6, EC6, ET7, ES7, plus ES8. So it's a pretty wide range of a product offering that will be enough to cover many product segments. And many of these products are also leading the sales volume in their respective BEV product segment. Not to mention that for some niche products like ET5T, EC7 or EC6, in their respective segment, their volume is even higher than some of the ICE competitors. So overall speaking, we’ve made a quite successful product portfolio and offering strategy. Plus, we also have other advantages such as charging and the swapping network, leading technologies, good product experience, service and the user community. This has further enhanced and solidified our foothold in the premium segment. Of course, in the meantime, we also hope that more players can also come into this segment so that we can work with them together to enlarge the size of this premium segment, premium EV segment. [Foreign Language] In the meantime, for the entire NIO company, we actually have a pretty clear and straightforward strategy for the continuous business growth. The first is by a wider price range. From next year, we are going to have three brands in the market. With actually, our price range -- the price range that can be covered by these three brands will be as wide -- will be pretty wide, ranging from RMB140,000 all the way to RMB800,000. And with Battery-as-a-Service, the price range will be from RMB100,000 to RMB700,000, which will be a very strong competition to the ICE costs in the respective segments. With three brands with a wide price range, we will be able to reach a broader market than many of our other competitors. The second approach is via our products, wide product range. We have three brands. We also have a very diversified product portfolio of each brand. In that case, we will be able to cover a pretty comprehensive product segment with clear differentiation between each brand. And the third approach is through the market and regional coverage. Right now, we are expanding our point of sales into the lower-tier cities especially for NIO at the moment, most of our sales are in the first and second-tier cities. So such coverage expansion is also very important. We have also announced other plants like the County Power Up plan where we will expand our charging and swapping network to the counties at all levels. With that, it will help us to further enhance the reach of all three brands. Plus we also have the business development plan for the overseas market. So overall speaking, for the long-term growth and the development, we have a clear road map, that is by a wide price range, wide product range and also further regional coverage.

Awesome. Thank you.

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

Hi, William. Thanks for taking my questions. Two questions here. The first one is regarding the flagship sedan, ET9. I think it was announced to schedule for launch in Q1 next year. Is that still on schedule? And can you give some updates regarding this model in terms of the position in new technology adoption as well as, say the targets volume outlook? Yes. The second question is regarding the overseas expansion. You are going to open the store in UAE and start delivering there. Is that a signal of the change of direction as a result of the EU tariff that you are reaching the direction from Europe into Middle East? Also, one of your peers has nowadays been delivering over 10% of their volume into the overseas markets. Do you think this serves as a benchmark for your overseas expansion over the next one years or two years?

[Foreign Language] Thank you for the question. Regarding the first question on the ET9, we're still proceeding the ET9 launch preparation according to the plan and we haven't made any changes on SUD of this product. But in the meantime, as you know that the ET9 is equipped with many new technologies, including steer-by-wire, fully active suspension, in-house developed chip as well as SkyOS, so we will need to bear no effort in making sure and preparing for the successful launch of this product next year. Regarding your second question on our international expansion, we haven't changed our direction. Yes, because of the tariffs in Europe, now selling or exporting costs from China to Europe becomes more expensive. So we will focus on the existing five European markets that we have already started. We also know that to establish NIO, such a premium brand in the European market, will also take a longer time and we are very patient with that. But in the meantime, it doesn't mean that we have stopped our activities there. Earlier this year, we have just opened our NIO house in Amsterdam, and we are still installing and deploying our power swap stations in Europe. So we will still keep the same plan. In terms of the market entry into UAE, as you may know that last year, we have received $3 billion strategic investment from the Abu Dhabi government. And then the market entry into UAE is part of the plan. With that, we will work with our strategic partners in UAE to offer our products and services to the local market. Starting next year, a big difference is that we not only have NIO brand and products, but also products from ONVO and Firefly, which are more suitable for the global market. With that, we will be actually more active with our international expansion. But in the meantime, we will also need to keep a good balance between our investment scale and the efficiency to make sure that we enter into the global market in a smarter and more efficient way. Thank you.

Thank you. That’s excellent.

Thank you. Your next question comes from Ming-Hsun Lee from Bank of America. Please go ahead. Ming-Hsun Lee: William and Stanley, I also have two questions. So my first question is more related to the overall macro. So in your view, what is the potential growth rate for the China EV market in the next few years? Because I think recently, some investors expect that the EV penetration will still be down because right now, the EV penetration is already very high. So just in your view, what is the EV penetration in the next three years? Yes. That's my first question. And my second question is regarding the Firefly pipeline. So right now, will you launch one or two models in 2025 for Firefly? Thank you. That's my two questions.

[Foreign Language] Thank you for the question. If you look at the overall passenger vehicle market, in the first half of this year, it has increased by around 3.6%. For the longer term, actually, if you look at the total [BEV] (ph) population in China, it is as big as 20 million to 30 million units. So it's already a very significant amount. Definitely, it will keep growing, but probably not a very -- not at a very significant growth rate. And it's even normal for the BEV segment or BEV market to suffer a slight decrease. But even with that, the Chinese market will still be the largest passenger vehicle market in the world. In terms of the penetration rate of the new energy vehicle, it has already surpassed 50%. And I think that it will continue to increase and at an even faster manner because for the replacement of the ICE cost, [indiscernible] by BEVs or [indiscernible], it will be much faster once it has surpassed this 50% keeping point. We can take Norway as a reference for example. It actually grew at 50% penetration rate at first, and then it has quickly increased to 80% and 90%. So similarly for China, I believe that in two years to three years, the penetration rate of new energy vehicles among new vehicle sales will surpass 80%. [Foreign Language] If we look at the ICE cars in China, actually they have entered into an unsustainable cycle or a vicious cycle because many ICE brands have to cut their prices to keep their market share, be it premium brands or mass market brands, be it brands from China or from other countries. Many of these ICE costs are having a price flushed for the sake of market share. But as they cut prices, it also hurts the profit and interest of their dealers, hurt the image of the brand as well as the residual value of their products. With that, it is even more difficult for them to keep a very strong market share in your segment. So there -- the decline of their market share is even faster than it should be. For the recent years, we have already witnessed the significant decline of the market shares of the Korean brands like Hyundai, Kia, including Ford and General Motors. And for the recent years, Japanese brands like Toyota, Honda and Nissan are also entering the same space. So in general, we believe that the ICE costs from these joint venture brands will face quite difficulties in the future competition. And when they lose some market share, they normally lose market shares to other new energy vehicle brands, including brands from China and Europe. So in that regard, I believe that the penetration rate of the new energy vehicle will grow at a pretty quick pace even faster than we expected. And regarding your second question, yes, we are going to deliver the product from Firefly from 2025. We are in smooth progress with our product preparation.

Thank you Ming.

Thank you. Your next question comes from Chang Xing from CICC. Please go ahead.

Okay. Thank you for taking my questions. I have two questions. The first is in regard to our NIO operating system, SkyOS, which has been released in July. So it has shown very comprehensive and invest our software self-development ability. So can you just introduce -- and ask more details so what are the technical challenges we have faced and work advantages and also the improvement of our product can be brought by the new system? So this is the first question. The second is with regard to the other income, gross profit margin. We have seen the second -- in the second quarter, the gross profit margin has improved significantly. So how to understand these major drivers? And also what's our forecast for the trend and the continuity of the margin improvement in the future? So also with our growth of our sales volume, can we see that our -- especially charging and battery swap business, can turn to profit in future?

[Foreign Language] Thank you for the question. Regarding SkyOS, it's the world's first full domain vehicle operating system. That is the special thing with SkyOS, which is also the difficulty or the challenge we have faced when developing the SkyOS, because when it comes to the era of the smart electric vehicles, we cannot use the fragmented operating systems to manage the electric architecture of the car anymore. With that, we have developed the SkyOS. It comes at three levels. At the bottom, we have the SkyOS-H, that is the hypervisor. And in the middle, we have 4 kernels for the SkyOS. And on the top, we have SkyOS middleware. So it's a very comprehensive solution we have developed. We've used the four years with 20,000 [per month] (ph) with this great work. In terms of its benefit, the SkyOS is definitely making the car safer and more secure. It also makes the system stable and it also help us to realize more efficient R&D process and iteration process. It also helped us solve the problems faced by the smart electric vehicles like huge data throughput, domain -- cost domain fusion and also the latency along the communication, because we know that it is impossible to realize such benefit by simply working on the application, the year adaptation. We need to do something at the foundational level, and we are very happy that we have made it happen. The SkyOS will be applied to our [offer] (ph) brands, including NIO ONVO and Firefly. We can say that SkyOS is a software cornerstone for our future products and development. [Foreign Language] Regarding the revenues, where the loss on other sales in Q2, we have significantly narrowed the losses on other results in Q2. It's mainly because of the two reasons. I think in Q2, we have improved or increased our user deliveries. With that -- well actually, there are two reasons. The first is that we have improved the profitability and the efficiency of our aftermarket source. Earlier this year, in February -- on February 20, we have released the 2024 [indiscernible] service-policy. With the new policy, our aftersales services become more efficient and also more profitable. And secondly, we have also decoupled the life-time [free power] (ph) swap from the sales of the vehicles. With that, more and more users, especially new users have to pay for the power swap services. This has also helped us improve the revenues and the margin on the power swap related services. With that, we have significantly narrowed the losses on the other sales. And we believe that in the future, as we continue to grow the total user base and the sales volume, especially with the launch and delivery of the ONVO products, the profitability of the other sales will also become stronger, and we look forward to the breakeven or even the profit from this part. [Foreign Language] And in terms of the profitability of the power swap service or in general power swap stations, if we look at the single swap station, if it can offer more than 60 power swaps per day, it itself will -- and in the meantime, if we charge all the power swap services at the same level for the supercharging, then the single station will become breakeven. And right now, in China, we have more than 2,500 power substations and on average, each station can complete around 30 to 40 swaps per day. So from 30 to 40 to 60, it's not a long way to go for us to make the power swap station breakeven. But in the meantime, we still suffer the loss on the power swap business. It is mainly because of 2 reasons. The first is that at the early stage for the early adopters of the NIO products, we have offered free lifetime power swaps to many of these users, which has actually worsened the burden on the cost of the power swap stations and the power swap services. And secondly, as we roll out our business and the network, we also came to realize that the network effect of the power swap station actually has a very significant meaning to the boost of the sales volume. In that case, we are more active in installing power swap stations, even ahead of the actual need. So this swap stations deployed in advance also bring additional losses or burden to the business. So in general, if we look at the power swap station itself, it is not far away from breakeven and profitability, yet considering its actual contribution to the sales volume, we have decided to deploy many stations in advance, and this has caused the loss on the business.

Thank you. Very clear.

Thank you. 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 further questions, please feel free to contact NIO's IR team through the contact information on our website. This concludes the conference call. You may now disconnect the line. Thank you.