Focus will mostly be on the gross margin, and management's guidance for first-quarter deliveries are expected to be weak.

Nio (NYSE: NIO) will report unaudited financial results for the fourth quarter and full year of 2023 on Tuesday, March 5, before the US stock market opens. As usual, Deutsche Bank analyst Edison Yu's team shares their preview.

The focus on Nio's results will mostly be on gross margin, and its management's guidance for first-quarter deliveries is expected to be weak, according to a research note the team sent to investors on February 29.

As a background, Nio delivered 50,045 vehicles in the fourth quarter, exceeding the upper end of its previous guidance range of 47,000 to 49,000 vehicles. That was up 24.95 percent year-on-year, but down 9.72 percent from the third quarter.

Nio had previously guided fourth-quarter revenue to be between RMB 16.08 billion ($2.24 billion) and RMB 16.7 billion, implying year-on-year growth of about 0.1 percent to 4.0 percent.

Yu's team expects Nio to report fourth-quarter revenue of RMB 16.9 billion, assuming a sequential deterioration in average selling prices due to model mix. Analysts in a Bloomberg survey currently expect RMB 16.8 billion.

The team expects Nio to spend RMB 3 billion to RMB3.5 billion on research and development in the fourth quarter.

SG&A (Selling, General, and Administrative expenses) should increase sequentially due to higher marketing spending, such as Nio Day, the team noted, adding that cost savings from layoffs are unlikely to have a material impact in the fourth quarter.

Nio held Nio Day 2023 on December 23 to unveil the ET9 executive flagship sedan. The company reduced around 10 percent jobs in November as part of its effort to improve efficiency.

Yu's team expects Nio's vehicle margin to grow to more than 13 percent sequentially in the fourth quarter, as lower volume and promotional activity could offset some of the savings, leading to total gross margin to about 10 percent.

Nio's gross margin in the third quarter was 8.0 percent and vehicle margin was 11.0 percent.

For the first quarter of 2024, Yu's team believes Nio management's likely to guide for deliveries of mid 20,000 units, a significant decline from the fourth quarter of 2023.

"Beyond the broader industry weakness, the company is changing over to MY24 models where the company is selling down old inventory and show cars," the team noted.

Nio offered discounts on inventory and show cars for models on sale in the fourth quarter and began taking customer orders on February 22 for the 2024 model year vehicles.

Yu's team expects Nio's vehicle margin to drop significantly in the current quarter, given Nio's much lower deliveries in the first quarter and discounts for the 2023 models.

Nio delivered 10,055 vehicles in January, up 18.21 percent from 8,506 a year ago, but down 44.18 percent from 18,012 in December.

Insurance registrations of Nio vehicles in China during February 1-25 were 5,100, according to figures shared by .

February 10-17 was the Chinese New Year holiday, which caused major disruptions to vehicle deliveries. Last year the holiday was January 21-27, 2023.

Major Chinese EV makers, including Nio, are expected to start announcing February delivery figures today.

"Looking ahead, there will be no new NIO branded models this year andmanagement already communicated its stance on not taking part in the raging price war. In that context, the key will be the sales force revamp that brought in >3,000 headcount to augment/deepen the brand's reach," Yu's team wrote.

The team doesn't see Nio as structurally falling victim to other EV upstarts, but rather failing to effectively win over enough customers from gasoline customers including BMW, Mercedes, and Audi.

"For example, Nio's sales in Shanghai and surrounding areas are quite high but struggle in the other regions," Yu's team added.

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