NIO Inc. (NIO, BUY) - 2Q26: Better Mix and Cash Flow Offset a Modest Miss; 4Q Outlook Remains Constructive; Maintain BUY but Lower PT to $6

NIO Inc. (NIO, BUY) - 2Q26: Better Mix and Cash Flow Offset a Modest Miss; 4Q Outlook Remains Constructive; Maintain BUY but Lower PT to $6

NIO reported a somewhat softer-than-expected 2Q26 at the headline level, though we view the result more positively when looking beyond the quarter. Importantly, 2Q deliveries had already been pre-released, and we believe much of the near-term volume softness had therefore been reflected in the share price ahead of the earnings release. More encouragingly, product mix continued to improve, vehicle margin remained resilient despite meaningful input-cost inflation, and the company generated positive operating and free cash flow. Management also maintained a constructive outlook for 4Q, targeting monthly deliveries of more than 40,000 units on average. We view 3Q as more of a transition quarter, with the key earnings inflection increasingly dependent on execution into 4Q. 2Q results were slightly soft, but underlying operating quality continued to improve. NIO delivered 107,658 vehicles in 2Q, up 49% YoY and 29% QoQ, driving vehicle revenue of RMB29.1bn (+80% YoY) and total revenue of RMB32.1bn (+69% YoY). The faster growth in vehicle revenue relative to deliveries reflected a higher ASP and more favorable product mix. Vehicle margin was 18.5%, broadly stable versus 18.8% in 1Q and substantially above 10.3% a year ago, while consolidated gross margin reached 18.4%. Adjusted operating profit was RMB207mn and adjusted net profit was RMB26mn, keeping the company around breakeven on a non-GAAP basis. We believe the most important positive from the quarter was the continued improvement in vehicle mix and pricing power. All three brands recorded YoY and QoQ growth in both sales volume and average transaction price, while NIO's premium models increasingly drove the mix. Management noted that NIO-brand ASP reached approximately RMB406k in 2Q and exceeded RMB430k in July. The ES8 remained a strong contributor, while the ES9 continued to gain traction in the RMB500k-plus segment and attracted a meaningful proportion of customers from outside the existing NIO user base. Management also indicated that both the ES8 and ES9 carry vehicle margins above 20%, providing an important offset to rising component costs. Margin resilience was particularly notable given substantial cost inflation. Management estimated that average vehicle input costs in 2Q were already roughly RMB14k per vehicle higher than in late 4Q25, reflecting increases in memory, batteries and other materials. Input costs are expected to increase by another RMB2k–3k per vehicle in 2H. Nevertheless, management aims to keep vehicle margin in 3Q and 4Q broadly around the current level through better product mix, relatively stable pricing and continued supply-chain cost reductions. We believe the improving contribution from the ES8 and ES9 makes this target achievable, although further-than-expected component inflation remains an important downside risk. Cash flow improvement. NIO generated positive operating cash flow and free cash flow in 2Q, while total cash, restricted cash and investments increased to RMB56.7bn. Management expects both operating cash flow and FCF to remain positive in 3Q and 4Q, suggesting the company's cash position could strengthen further through year-end. Full-year CapEx is expected at approximately RMB6–7bn, broadly flat YoY, with limited spending on incremental manufacturing capacity. In addition, NIO expects this year's new swap-station construction to be largely funded by Power Up partners, which should further reduce the capital burden associated with network expansion. On expenses, we see room for additional operating leverage in 2H. 2Q SG&A included roughly RMB500mn of incremental launch-related spending as most of the company's major 2026 product launches occurred during the quarter. Management expects non-GAAP SG&A to decline to approximately 10–11% of revenue in 2H versus roughly 13% in 1H, while non-GAAP R&D is expected to run at approximately RMB2.5bn per quarter. As revenue scales, we believe this expense framework should allow operating profitability to continue improving even if gross margin remains broadly stable. The near-term volume outlook remains mixed, but 4Q commentary was encouraging. NIO guided to 3Q deliveries of 108k–111k and revenue of RMB33.3–34.1bn, implying only modest sequential volume growth. With July and August deliveries already totaling 71.8k, the guidance suggests September does not require a major step-up. We therefore view 3Q largely as a transition period, with the five-seat ES8 and a fuller-quarter contribution from the ES9 improving mix while ONVO remains the main area requiring better execution.