Maintain HOLD. We acknowledge NIO’s cost reduction efforts, which has been partially reflected in 2Q25 earnings. However, we expect losses to continue in FY26E even with our sales volume assumption of 0.5mn units. We believe its recent share price rally has pushed its valuation to a fair level.
　　2Q25 earnings largely in line. NIO’s revenue in 2Q25 was about 5% higher than our prior forecast amid slightly higher average selling price and R&D services. GPM of 10% during the period was about 0.2ppts higher than our projection. R&D expenses were about RMB200mn higher than our forecast, mainly due to organizational optimization charges. SG&A expenses were about RMB350mn lower than our forecast. Accordingly, its net loss of RMB5.1bn in 2Q25 was about RMB300mn lower than our prior projection.
　　We expect 4Q25E net loss to narrow significantly but not to break even yet. Management laid out key assumptions for 4Q25 non-GAAP net profit breakeven: unit sales of 0.15mn, vehicle GPM of 16-17%, non-GAAP R&D expenses of RMB2bn, and SG&A ratio of 10%. We acknowledge management’s cost reduction efforts, which was partially reflected in 2Q25. However, we are not convinced with its Onvo L90’s 20% GPM target, given its aggressive pricing, especially when compared to the Onvo L60’s GPM. We raise our FY25E sales volume forecast to 0.345mn units with 4Q25E being 0.158mn units, and project vehicle GPM to be 15.7% in 4Q25E. We also do not expect SG&A expenses to remain the same as 2Q25 when sales volume is to be more than doubled. Therefore, we expect GAAP net loss of RMB1.6bn and non-GAAP net loss of RMB1bn in 4Q25E.
　　Investors should not overlook competition in FY26E. We are of the view that we could not draw a linear extrapolation on NIO’s sales volume in FY26E, based on its 4Q25 figures, as other automakers could launch new models with even more aggressive pricing. Even as we project NIO’s FY26E sales volume to be 0.5mn units, we still expect NIO to post a GAAP net loss of RMB7.8bn in FY26E. We believe NIO’s three-brand strategy, heavy investments in NIO House, battery swap, chips and even mobile phones, would require a higher sales volume threshold for breakeven.
　　Valuation/Key risks. We maintain our HOLD rating but raise target price from US$4.00 to US$7.00, based on 0.9x our FY26E P/S (prior 0.8x FY25). We believe such valuation is fair given both Li Auto (LI US/2015 HK, BUY) and Leapmotor (9863 HK, BUY) are now trading at slightly lower than 0.9x, with much better profitability than NIO. Key risks to our rating and target price include higher or lower sales volume and margins than we expect, as well as a sector re-rating or de-rating.