Robert Way
XPeng’s (NYSE:XPEV) stock has been on a steady decline since late June despite outperforming delivery growth compared to its Chinese electric vehicle (“EV”) peers like NIO (NIO) and Li Auto (LI). On a year-to-date basis, XPeng has lost more than half of its value, underperforming the broader Chinese EV cohort.
Even favourable policy support announced by the Chinese government in hopes of shoring up the pace of EV adoption after the early-quarter COVID slump has done little in boosting the stock’s recent performance. Its market value has yet to bounce back from negative headlines pertaining to a recent downgrade from Macquarie, despite positive remarks by Morgan Stanley on XPeng’s latest innovations in battery technology. This is a stark contrast from peers like NIO, which staged a swift rebound on positive industry and internal developments following a brief stint of soured sentiment from a short-seller report.
This draws questions as to what is hampering XPeng’s stock from exhibiting similar resilience as its Chinese EV peers. In many ways, XPeng’s fundamental performance has been similar, if not better, than its domestic peers. It has demonstrated a quick recovery in production volumes from pronounced COVID disruptions in April and May, and delivered outperforming vehicle sales growth on a unit basis, underscoring both resilient demand as well as strength in navigating through unprecedented supply chain constraints. And from a valuation perspective, the stock also faces the same downside risks pertaining to regulatory uncertainties (e.g. Beijing regulatory crackdown; HFCAA delisting risks) like its peers.
The only idiosyncratic downside we can really think of is that XPeng’s auto margins have slightly fallen behind those of peers with similar growth profiles in recent quarters, which is not out of the ordinary as it continues to ramp up productions on the recently introduced P5, while also frontloading spending to support the expansion of its Zhaoqing production facility as well as the introduction of its flagship G9 SUV later this year.
The mystery surrounding the stock’s recent lag behind its peer group puts XPeng’s upcoming second quarter earnings release in focus. Management’s commentary on XPeng’s second quarter performance and forward outlook is expected to be a tell-tale in where the stock is headed next and whether it is indeed undervalued compared to peers that have demonstrated similar growth profiles. Key focus areas at the upcoming earnings call will include commentary on the EV maker’s anticipated resilience in 2H22 against mounting macro headwinds in China, as well as how it plans to convert its growing order backlog into realized revenue.
Positive updates pertaining to ongoing efforts in managing industry-wide supply chain snarls, the start of productions timeline at its expanded Zhaoqing facility, as well as sales of its newest G9 SUV are expected to be key near-term catalysts in jumpstarting the stock from its recent slump to trade on par with resilience demonstrated across its peer group. However, similar to all Chinese equities, we continue to caution that regulatory risks are the primary overhang on XPeng’s valuation outlook.
July’22 Production and Delivery Update
As mentioned in the earlier section, XPeng’s second quarter delivery results underscored its strength in getting productions quickly back up to pace after the COVID slump in both demand and operations across China during April and May. June volumes, in particular, stole the spotlight with triple digit y/y growth to 15,295 vehicles.
Yet, deliveries slowed by almost 25% in July to 11,524 vehicles compared to June’s record-setting results. However, the results still represented 43% y/y growth, beating its domestic EV peers by wide margins. Management has yet to provide an explanation in its latest delivery update press release, which we view as a key focus area at its upcoming earnings results on August 23rd. Based on a similar m/m delivery decline observed at NIO in July, which the EV maker has attributed to ongoing material shortages for some of its best-selling vehicles, we expect XPeng to be experiencing similar woes as it ramps up production on its existing portfolio of electric sedans and SUVs amid a volatile COVID environment in China, while also preparing for start of productions on its newest G9 SUV later in the year.
It’s a Supply-Driven Industry
As discussed in our ongoing coverage on EVs in recent months, the industry continues to demonstrate resilient demand despite near-term macro headwinds, yet productions have yet to reach prior year levels due to heightened supply chain constraints that remain in a never-ending cycle of tightening and easing. This is further corroborated by XPeng’s recent decision to suspend reservations on its P5 sedans in Europe due to “global supply chain issues”, which we have touched on in a previous coverage. It is also likely one of the key reasons why XPeng’s m/m deliveries for July fell by almost a quarter compared to the record-setting volumes achieved in June.
But in addition to external supply chain snarls, XPeng is also dealing with internal constraints on its production capacity. Specifically, XPeng is almost maxing-out on production capacity of 100,000 vehicles per year at its current Zhaoqing facility. Paired with a still-growing order book that demands wait times of close to 20 months, the anticipated completion of XPeng’s phase II expansion at its Zhaoqing facility later this year remains a highly-watched catalyst for unlocking further fundamental growth over the longer-term.
With an annual output of 200,000 vehicles at full ramp-up, XPeng’s newly expanded Zhaoqing production line coming online later this year will be critical for two reasons: 1) capitalizing on accelerating demand in the Chinese EV market, and 2) penetrating new opportunities with the roll-out of its brand new large-size G9 SUV.
1. Capitalizing on Accelerating Demand
China is currently the largest and fastest growing EV market in the world. EV sales currently exceed 25% of China’s monthly new car registrations, surpassing the Chinese government’s initial goal outlined in the “State Development Plan for the New Energy Automobile Industry (2021-2025)” for clean vehicle penetration to hit 20% by mid-decade. The China Passenger Car Association has also upped its forecast for annual EV sales from 5.5 million to 6 million by the end of 2022 despite slowing consumer spending and ongoing COVID disruptions across the country, underscoring a robust demand environment that continues to play in XPeng’s favour.
But whether XPeng can really benefit from rapidly growing domestic EV demand circles back to its ultimate ability in bringing its expanded production capacity online before year-end and ramping up volumes within an adequate timeline. This means XPeng’s reaffirmation on the completion timeline for its Zhaoqing facility expansion at its upcoming earnings call will be critical to maintaining investors’ confidence in the stock’s near-term performance.
2. Penetrating New Opportunities
Drawing on the favourable demand environment in China discussed in the earlier section, XPeng’s upcoming roll-out of its “flagship G9 SUV” will open doors to a new cohort of consumers, underscoring continued growth from a fundamental perspective. The newly introduced five-seater represents the first full-size SUV in XPeng’s product line-up, bolstering the brand’s appeal to one of China’s best-selling vehicle segments:
Meanwhile, the anticipated start of reservations in August on the newest G9 SUV launching in September will be important for XPeng in the remainder of the year and through 2023. The newest five-seater, large-size SUV will broaden XPeng’s penetration into the premium EV market in China and bolster its market share in one of the country’s best-selling vehicle segments. SUVs currently account for more than 46% of annual passenger vehicle sales in China. Paired with the rapid adoption of EVs in the country, the G9 makes a compelling choice for new car buyers.
Source: “EV Roundup: Everything from Tesla to NIO, U.S. to China“
This is further corroborated by signs of pent-up demand for the G9 in the first 24 hours of opening reservations. The G9 acquired more than 22,800 reservations on the first day that the vehicle was made available for pre-order in China earlier this month, which has an estimated value of approximately RMB 8 billion ($1.2 billion). But again, the ability to materialize on growth stemming from G9 demand will all depend on XPeng’s ability in bringing its expanded production capacity online and ramping up in a timely manner.
The G9 makes a key differentiator for XPeng against rivals within the increasingly crowded Chinese EV landscape. From a technology perspective, the G9 boasts the fastest charging speed – the vehicle is built on XPeng’s newest “XPower 3.0 powertrain“, which features an 800-volt battery pack that can add more than 120 miles of range in under five minutes. The G9 also features XPeng’s next-generation “XPILOT 4.0” advanced driving assistance system, which leverages best-in-class software enabled by “NVIDIA DRIVE Orin-X” chips (NVDA). As discussed in a previous coverage, the combination of newly introduced technological features in XPeng’s newest SUV accordingly puts it on par with competitive offerings observed in rival EV makers, such as NIO’s “Power Swap“, which switches out a dead battery for a fully charged one in under three minutes, and “NIO Autonomous Driving” (“NAD”), which also leverages the “NVIDIA DRIVE” platform.
With a gross margin in the “high teens“, the ability to scale up productions of the G9 will also play a critical role in XPeng’s profitability trajectory over the longer-term. And management has already previously acknowledged the importance of prioritizing procurement of “adequate chip suppliers for production” to kickstart the launch of the G9:
I think we hope by the time that G9 has started volume delivery towards the second half or the fourth quarter, the supply chain issue will get alleviated. But I think right now, both models are representing high gross margin products for us in the high teens. So I think for us, those are models that we will obviously make sure that has adequate chip suppliers for production.
Source: XPeng 4Q21 Earnings Call
This again also highlights the importance of on-schedule start of productions at the expanded Zhaoqing facility later this year, making any related updates a key focus area for investors at XPeng’s upcoming earnings call.
And over the longer-term, additional production capacity coming online in Guangzhou and Wuhan beginning mid- to late-2023 to support the roll-out of two additional new models will also be critical to supporting XPeng’s trajectory to profitability, which is currently expected by mid-decade. As mentioned in XPeng’s 1Q22 earnings call, the new models are expected to boast margins north of 20% – a range that puts it near or on par with industry leader Tesla (TSLA):
…the products that we’re going to introduce next year, which will include a product coming from a C Class platform, will be at a premium to the current portfolio of products that we have, including the G9. So you can expect that will be close to or even exceeding the RMB400,000 price range. And for such a product that we certainly hope it will have high gross margin. So, 20% will be very important benchmark for us to target our product design. But for that product, I think, assuming a 20% or above product margin is actually reasonable.
Source: XPeng 1Q22 Earnings Call
Acknowledging the Downside Risks
While the Chinese EV sector has demonstrated a “greater tolerance for higher valuations” in the face of Beijing’s yearslong regulatory crackdown by being the Chinese government’s favoured industry, it has yet to escape the grips of the U.S. SEC. Growing delisting risks are dulling the lustre of Chinese EV stocks like XPeng despite their robust growth profiles. Valuation prospects of the high growth cohort continue to be capped, as the U.S. SEC and the CSRC struggle to find common ground in complying with PCAOB audit inspection requirements for primary listings in American exchanges.
While the recent slew of Chinese state-owned companies that have voluntarily delisted from the U.S. exchanges are stoking heightened concerns over the fate of the rest of U.S.-listed Chinese firms, we view XPeng’s position to be slightly better than peers like NIO. This, again, draws questions on why XPeng’s stock has been an underperformer against its Chinese EV peers in recent months, given both its fundamental and valuation prospects demonstrate a comparatively lower risk exposure.
As mentioned in our previous coverages, NIO is partially owned by a consortium of state-backed entities, which exposes it to greater risks of delisting compared to XPeng on the grounds of national security – China’s number one concern with opening up its corporate sector’s books for U.S. scrutiny. This is further corroborated by the voluntary delistings by state-owned entities observed in recent weeks, which many have viewed “as a sign that China has started a screening process to decide which companies they do not want to be subject to U.S. audit investigations…instead of a sign that there is no deal [in complying] with the SEC audit investigation requirements”. If anything, this recent development may actually indicate that Chinese regulators are ready to accept the SEC-mandated PCAOB audit inspections, implying that companies like XPeng may be further withdrawn from looming delisting risks after all.
Final Thoughts
XPeng’s upcoming earnings call will be a moment of truth for the stock’s significant YTD slump and recent divergence from gradual uptrends observed across Chinese EV peers with similar growth profiles.
In the meantime, we are maintaining the near-term price target for the stock at $36, which would represent upside potential of more than 60% based on the shares’ last traded price of $22.06 on August 17. Our fundamental growth projections for XPeng also remain unchanged, with current year delivery volumes estimated to exceed 157,000 units (+60% y/y) considering its increasing monthly production run-rate observed in the first half of the year, and additional capacity that is expected to come online in the second half.
With outperforming y/y delivery growth in July and solid reservation volumes observed for the G9, XPeng continues to benefit from a resilient demand environment against macro uncertainties in China. This likely points to a continuation of solid fundamental performance in the second half to restore investors’ confidence in the stock and unlock greater valuation upside in the near-term.
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