"Our gross margin is meaningfully higher as we believe Nio will recognize the majority of its regulatory credit sales in 3Q, similar to last year," writes Deutsche Bank analyst Edison Yu's team.

Nio will report its third-quarter unaudited financial results on Thursday, November 10, before the US markets open. As usual, Deutsche Bank analyst Edison Yu's team has provided their preview.

"We expect a mostly decent quarter with potential for headline margin upside from regulatory credits but think all eyes will be on the 4Q delivery outlook given the recent Hefei COVID disruptions hurting Oct production," the team said in a research note sent to investors today.

Previously released data showed that Nio delivered 31,607 vehicles in the third quarter, a record high. This was up 29.33 percent from 24,439 vehicles in the same period last year and up 26.13 percent from 25,059 vehicles in the second quarter.

Nio's guidance for third-quarter deliveries was 31,000-33,000 units when it reported its second-quarter earnings on September 7.

The company's guidance for third-quarter revenue was between RMB 12.85 billion and RMB 13.6 billion, implying year-on-year growth of about 31.0 percent to 38.7 percent.

Yu's team expects Nio to report revenue of RMB 13.2 billion, gross margin of 16.5 percent and adjusted earnings per share of RMB -1.04 in the third quarter. That compares with the current analyst consensus of RMB 13.1 billion, 14.9 percent, and -1.11, respectively, in a Bloomberg survey.

For reference, Nio reported revenue of RMB 10.29 billion, gross margin of 13 percent, and adjusted earnings per share of -1.34 in the second quarter.

"Our gross margin is meaningfully higher as we believe Nio will recognize the majority of its regulatory credit sales in 3Q, similar to last year," Yu's team wrote.

Notably, Nio is usually the last to announce quarterly results compared to Xpeng Motors and Li Auto, but this time it unexpectedly beat its two local peers.

"Considering how early Nio is reporting earnings, we suspect management guidance may come in overly cautious, perhaps around 40,000 units to provide some cushion in case supply-chain issues emerge again," Yu's team said.

The team believes that expectations for Nio in the fourth quarter have naturally declined, as Covid lockdown severely disrupted production in October and could remain a headwind in the first half of November.

It is not clear how fast production can ramp up in November, but consumer sentiment for older models is low, so the team is taking a more conservative stance, according to the note.

The team expects Nio deliveries to be 14,00 units in November and 21,000 units in December, bringing the fourth quarter to about 45,000 units, including sales of models based on the NT 1.0 platform that are below 10,000 units.

The team believes the key to Nio growth is the ET5, with 12,500 units expected to be delivered in the fourth quarter, mostly in December.

With the exception of the ET5, casting supply shortages are improving. Wait times for the ET7 are now 4-6 weeks, compared to 9-11 weeks in early October, the team noted.

"Based on our conversations, investors are hyper worried about EV competition in 2023," the team wrote, adding:

For example, in the premium SUV segment, we already observe several new promising models coming to market such as the Xpeng G9, Avatr 11 (Changan +Huawei), Jidu Robo-01 (Baidu), and Li Auto L7/L8.

Tesla also recently cut the price of the Model Y.

While these concerns are valid, the company isn't very vulnerable outside of the old 866 models, given Nio's strong branding, unique ecosystem and fresh portfolio, especially in the ET5 and ET7 sedans. Yu's team said.

The team slashed its forecast for SUV deliveries, while the forecast for sedans remains largely unchanged. They now expect Nio to deliver 260,000 units for the year, down from 290,000 units previously.

"We continue to believe ET5 can eventually become a 150,000 unit/year model, similar to BMW 3-series," the team wrote.