XPeng 2023 Performance Conference: Delivering 140,000 vehicles throughout the year, with industry price wars intensifying in Q1 2024

According to the financial news app Zhitong Finance, on March 19, XPeng (09868) held its 2023 annual performance exchange meeting. At the meeting, XPeng stated that in Q4 2023, revenue was 13.05 billion RMB, with a year-on-year increase of +153.9% and a quarter-on-quarter increase of +53%. Among them, automotive sales revenue was 12.23 billion RMB, an increase of 162.3% year-on-year and 55.9% quarter-on-quarter, mainly driven by the sales growth of the G6/G9 in Q1-Q4 2023. The gross profit margin in Q4 2023 was 6.2%, down from 8.7% in Q4 2022 and -2.7% in Q3 2023. The automotive sales profit margin was 4.1% in 2023 and -6.1% in Q3, mainly due to inventory provisions and losses from purchase orders caused by existing model upgrades, corresponding to a profit impact of 1.9%, plus promotional expenses and the expiration of new energy vehicle subsidies partially offsetting cost reductions and product structure improvements.

XPeng mentioned that in Q1 this year, the industry price war is intensifying, with a number of well-known technology companies ceasing car production, marking the beginning of the elimination round. XPENG-W's 2023 strategy has been adjusted to prepare for larger-scale growth and more intense price competition. XPENG-W aims to enhance organizational capabilities and efficiency comprehensively, significantly improve operational quality and provide a fully closed-loop customer experience, including the scale layout of the supply chain and production manufacturing, reshape domestic and global brand sales and service capabilities, promote technology equality in fully automated assisted driving and autonomous driving, and accelerate global expansion. In the next 3 years, more than 10 new models will be launched, with left-hand drive and right-hand drive models for global markets, resulting in nearly 30 SOP models. However, XPENG-W has not significantly increased research and development costs because of its modular capabilities and mature research and development efficiency. Currently, efforts are being made to rapidly improve autonomous driving capabilities, significantly reduce costs, introduce more new models, and expand internationally.

Delivery of 60,000 units in Q4 2023, an increase of 121% year-on-year; total deliveries for the full year 2023 reached 140,000 units. The gross profit margin in Q4 2023 was 6.2%, with a 10% increase in vehicle gross profit margin compared to the previous quarter, mainly due to cost reductions from platform-based R&D technology and operational improvements. Positive free cash flow in the second half of 2023 was 6 billion RMB, achieving positive operating cash flow for the full year for the first time; cash flow at the end of 2023 was 45 billion RMB.

This year, the industry price war in Q1 is intensifying, with a number of well-known technology companies ceasing car production, marking the beginning of the elimination round. XPENG-W's 2023 strategy has been adjusted to prepare for larger-scale growth and more intense price competition. XPENG-W aims to enhance organizational capabilities and efficiency comprehensively, significantly improve operational quality, and provide a fully closed-loop customer experience, including the scale layout of the supply chain and production manufacturing, reshape domestic and global brand sales and service capabilities, promote technology equality in fully automated assisted driving and autonomous driving, and accelerate global expansion. In the next 3 years, more than 10 new models will be launched, with left-hand drive and right-hand drive models for global markets, resulting in nearly 30 SOP models. However, XPENG-W has not significantly increased research and development costs because of its modular capabilities and mature research and development efficiency We are currently promoting the rapid improvement of autonomous driving capabilities + significant cost reduction + updating more models + international layout.

The next competition will test how automakers can maintain scalability, intelligence, and internationalization on the basis of high quality and efficiency. XPENG-W needs more categories with disruptive innovation like X9. XPENG-W has been outstanding in both strengths and weaknesses in the past, and we need to be more directional in filling the gaps.

In 2024, we will first establish a strong new marketing team, transforming the previous automotive + internet approach into automotive + mobile internet. In the past, automotive marketing was mainly centered on PGC of centralized platforms, but now we are focusing more on decentralized investment in social media, fully utilizing the high-quality resources of a large number of users. Grassroots marketing to increase word-of-mouth.

Channel expansion is a key part of the transformation in 2024. In 2023, we phased out 130 stores and introduced 160 excellent dealer partners through the Jupiter Plan. We added coverage to 40 cities below the third-tier. In 2024, while nurturing new stores, we will further expand the coverage of sales functional areas, sinking to 345 fourth-tier cities, and plan to expand the number of stores to 600 in 2024 Q3.

Starting from 2024 Q2, a new dealer model will be launched to establish short-term channel inventory of about half a month, significantly speeding up terminal delivery speed; at the same time, strict control of inventory levels through systems and inspection mechanisms will be implemented to unify the purchasing experience of users nationwide.

In 2023, we integrated intelligent power and vehicle platforms into a single platform, platform-based research and development and economies of scale reduced supply chain costs and intelligent costs, accelerating the achievement of the 25% cost reduction target mentioned in our 2023 Q2, while significantly improving research and development efficiency. We will continue to innovate in categories, such as X9 creatively compatible with 4-seat and 7-seat large cars, attractive to MPV and SUV customers, so it became the sales champion of pure electric three-row seat cars in the first 2 months before delivery, and it is expected that the sales volume of X9 will continue to increase significantly month-on-month in March and April.

At the Beijing Auto Show next month, XPENG-W will launch a brand new brand targeting the 100-150k price range. It will be equipped with autonomous driving capabilities + profitability. Committed to creating the first AI intelligent driving car for young people, the first model is expected to be delivered in 2024 Q3. Confident to become a hit in the A-class pure electric market this year. A brand new model of the main brand will be launched in 2024 H2. Three new products are expected to be released this year.

The next decade is the decade of intelligence. XPENG-W, with autonomous driving as the core, will increase investment in AI in 2024, introducing international AI talents. In 2024 Q2, mass production of AI large models will be achieved, possibly the first mass-produced general artificial intelligence cognitive engine for cars in the Chinese automotive industry, making intelligent driving smarter.

Starting from early 2024, the MAX version will be rolled out in over 200 cities nationwide, with an active penetration rate of 83% among users in February, and XPENG-W XNGP achieving the highest historical data for active users in urban intelligent driving XNGP has accumulated a total mileage of 70 million kilometers, with a daily utilization rate of 67%, and a daily utilization rate in urban areas of 49%. The next step is to significantly improve autonomous driving capabilities and greatly reduce costs. In 24H2, a new generation XNGP model is expected to be launched, with new technological solutions reducing hardware costs by 50%, to promote faster and wider spread of advanced intelligence.

In terms of internationalization, with models like G9 being launched overseas in 23H2, the XPENG-W G9 delivered in Norway and Denmark became the best-selling large and medium-sized pure electric SUV locally just 2 months after delivery. It is expected that in 24Q2, 6 versions of the G6 will be introduced to the global market, along with an international left-hand drive version, and a right-hand drive version in H2. This year will focus on entering Western Europe, the Middle East, Southeast Asia, and Commonwealth countries. Sales will collaborate with more outstanding dealers.

We have signed a joint development agreement with Volkswagen for platform and software strategic technical cooperation + joint procurement; starting from 24, it has contributed to gross margin and reduced R&D investment in intelligent and AI technologies, improving return on investment.

Starting from 23Q4, we focus more on short video marketing + reducing inefficient purchases + significantly reducing sales centers. The total delivery volume is expected to be 21,000-22,500 vehicles in 24Q1, an increase of 15.2-23.4%, with revenue expected to be 5.8-6.2 billion RMB, an increase of 43.8-53.7%; although there is a month-on-month decrease, the effects of the transformation are expected to be seen in March, with an expected increase in delivery volume in 24Q2.

Financial Situation:

Revenue: In 23Q4, revenue was 13.05 billion RMB, an increase of +153.9% month-on-month and +53% year-on-year; of which automotive sales revenue was 12.23 billion RMB, an increase of 162.3% year-on-year and 55.9% month-on-month; mainly due to the growth in G6/G9 sales in 23Q1-4. Gross margin in 23Q4 was 6.2%, in 22Q4 8.7%, in 23Q3 -2.7%, and automotive sales profit margin was 4.1% in 23, 5.7% in Q3, -6.1%; mainly due to losses from inventory reserves and procurement order losses caused by existing model upgrades, offset by promotional expenses + expiration of new energy vehicle subsidies to offset cost optimization from cost reduction and product structure improvement.

R&D expenses in 23Q4 were 1.32 billion RMB, an increase of 6.3% year-on-year and 0.1% month-on-month, mainly due to new project development progress being in line with expectations. SG&A expenses in 23Q4 were 19.4 billion RMB, an increase of 10.3% year-on-year and 14.4% month-on-month, mainly due to increased marketing and promotional advertising expenses to support sales. Operating expenses in 23Q4 were 2.05 billion RMB, 2.52 billion RMB in 22Q4, and 3.16 billion RMB in 23Q3; derivative liabilities fair value income in 23Q4 was 560 million RMB, mainly due to signing a share purchase agreement with Volkswagen Group in Q3. The fair value fluctuations of forward stock purchase agreements are measured through profit and loss, so when the transaction was successfully completed on December 6, 2023, there was a non-cash income of 560 million RMB in 24Q4 In 23Q4, the net loss was 13.5 billion yuan, in 22Q4 the loss was 23.6 billion yuan, and in 23Q3 the loss was 38.9 billion yuan. In terms of cash flow, the operating cash flow was positive in 23.

Q&A

Q: Regarding products, in 24H2, we will see the launch of facelifted old models. How to avoid the new models impacting the old products, preventing a situation where the sales of different models offset each other, making it difficult to break through the total sales volume?

A: It takes 2-3 years from planning, research and development to marketing for a new product launch. We have been discussing how to plan the product matrix since last year, and we will try to minimize the introduction of new car models in the sedan category. Technologically, we will support all models with a swing arm architecture + 2 sets of intelligent platforms. New models will start to be launched in 24Q3. At the end of 23, XPENG-W will fully implement the SPD end-to-end product, ensuring the execution of different products within the XPENG-W system; and in the entire product planning, we will differentiate products based on price segments and product capabilities.

Q: How to deal with price wars and increase sales of existing models?

A: Firstly, by building the capability of our own product system. Secondly, having a clear product plan and innovating pricing strategies. Thirdly, pursuing scale after ensuring quality. From a micro perspective, we will significantly reduce marketing efficiency and enhance sales service capabilities. For example, in 23Q4, we closed 130 poorly performing stores, and in 24Q2, we will establish new stores and expand coverage to third and fourth-tier cities to increase sales.

Q: Volkswagen became our shareholder in 23. Besides vehicle procurement, can you provide more specific details on our cooperation with Volkswagen? What quantifiable help does Volkswagen's investment provide us?

A: Firstly, in terms of platform cooperation, we have signed a main agreement for platforms and software + joint procurement plans. Secondly, model sharing on the G9 platform. Thirdly, supply chain capability management. Fourthly, starting from 2024, revenue from platforms and software services will increase. This will have a meaningful positive impact on our GP profit margin.

Q: The MONA product that will debut next month, in 24H2, will it target ToB or ToC first? What is the product launch schedule? What is the level of integration of autonomous driving capabilities? Is the advanced driver assistance system it carries equivalent to level 3.5?

A: We believe it will be a hit in both A and pure electric markets, with strong autonomous driving capabilities and competitive costs. It will first enter the consumer market for validation before entering the business market.

Q: Sales volume in 24? Is the annual target of 260,000-280,000 units still within the company's reasonable range? Because this means selling 70,000-80,000 units per quarter, delivering 25,000 units per month. When can we achieve monthly sales of 25,000 units?

A: We are currently unable to provide annual delivery figures, but we are optimistic about this year, mainly due to the expected market share growth from new product launches. Compared to the industry, we expect our performance in 24H1 to remain flat year-on-year, but the transformation of our marketing channels and the launch of the MONA product in 24Q3-4 will help us achieve our delivery targets more effectively starting from 24H2 Mona may be launched in Q3.

Q: How do we maintain our leading position in the field of autonomous driving in terms of technology?

A: Huawei is excellent, and we are working hard together. We each have our own strengths in the field of autonomous driving. XPENG-W needs to improve its brand and marketing capabilities. Autonomous driving requires attention to capabilities, safety, costs, globalization, and per-vehicle profit. The true demand from the mass market has not been fully realized because no one has been able to excel in comprehensive autonomous driving assistance, cost-effectiveness, and comprehensive marketing. I believe there will be improvements in the next year and a half. The large-scale deployment of XPENG-W will enhance automation capabilities and reduce costs. And we are more focused than Huawei.

Q: For the new brand, will the sales channel network be shared with XPENG-W or sold independently? Are there any channel differentiations? Will the design gross margin be lower than XPENG-W?

A: We will establish independent showrooms in existing channel stores and then build an independent dealer network. We hope to have hundreds of independent stores by 2025. In terms of gross profit, MONA will focus on the A-level pure electric market and will be launched at the Beijing Auto Show. Specific profit guidance will be provided in the next quarter. However, sales costs will be lower than other brands of XPENG-W.

Q: The delivery report in February mentioned that X9 had supply chain bottlenecks before the Spring Festival. How will you better avoid such bottleneck issues in the future?

A: The supply chain challenge was resolved by the end of February. In the future, we will optimize our supply chain partners, reduce the number of partners, and seek high-quality and flexible partners. Secondly, the new architecture platform will be modularized and standardized to ensure the flexibility of the supply chain. Thirdly, we will adjust the quality team of the supply chain, streamline the organization and tools of procurement, and ensure that every new car can be mass-produced on time.

Q: Do you still believe that the penetration rate of intelligent driving in China will exceed 30% by 2027? What is your timeline logic?

A: It will be ahead of 2027 by a certain period of time. Firstly, large-scale deployment will rapidly improve the internal universal intelligent capabilities that are difficult to solve in the new intelligent driving field. Secondly, the reduction in hardware costs will drive the scale support of hardware, and large-scale deployment will enable low-cost intelligent driving solutions with higher computing power and larger memory requirements to be implemented earlier. Thirdly, the solution without high-definition maps, which we initially thought would have a linear impact on urban development, but in reality, we found that it exponentially improves. Therefore, high-definition map-free driving will be one of the key factors for the efficient layout and expansion of future autonomous driving