Fourth quarter gross profit margin will turn positive (Xiaopeng 3Q conference call summary)

Here is a summary of the third-quarter earnings conference call for XPeng.US in 2023. For a review of the financial report, you can refer to the article "Mediocre Performance of XPeng: When Will the New Breakthrough Come?".

Management Discussion:

XNGP: The first batch of imageless versions will cover 20 cities, and by the end of the year, it will expand to 50 cities.

Integration of Different Systems: The next generation of architecture for electronic appliances, unified intelligent driving domain, intelligent assisted driving system for human-machine co-driving, intelligent voice, intelligent cockpit capabilities, and new large language model capabilities. The next generation of intelligent chassis and intelligent power domain will integrate these aspects to achieve rapid deployment in different vehicle models and global expansion, enhancing our engineering capabilities for global deployment and multiple product deployment.

Cash Flow: Cash on hand is 36.5 billion, and positive free cash flow was achieved in the third quarter, with an inflow of over 1 billion yuan. A larger scale of free cash flow is expected in the fourth quarter.

G6: Became the sales champion of the 250,000-level intelligent pure electric SUV in the first quarter after listing, with a delivery volume of over 8,700 units in November. The successful performance of the G6 fully demonstrates that XPeng can redefine benchmark models in the segmented market and lead the penetration of intelligence into a larger customer base through differentiated product technology and effective marketing.

G9: Launched the 2024 G9 in September, implemented technical scripts, and achieved a gross margin higher than the original G9. The new G9 has already delivered over 4,000 units in October, becoming a star product in the 300,000-level pure electric SUV segment.

X9: Pre-sales of the MPV X9 started at the Guangzhou Auto Show on November 17. The pure electric intelligent 7-seater MPV X9 is equipped with rear-wheel steering, with a turning radius even equal to that of the P7. It is equipped with the imageless XNGP and will be delivered in early January 2024. We look forward to the X9 becoming the best-selling large pure electric MPV.

Mona: A-class pure electric sedan based on a brand-new model in the 150,000-level range. It will be launched in the third quarter of 2024 and will support high-end autonomous driving models in the mainstream 150,000 yuan (20,000 USD) price range, creating a gap with other models in the same price range.

Sales Channels: Targeting more third- and fourth-tier regions, nearly 100 sales stores were eliminated by the end of the first three quarters of this year. The Jupiter Plan was launched, and over 100 new stores were recruited within two months. We also cooperated with a large number of luxury car dealer groups for the first time. Opening Over 500 Stores by the End of This Year and Early Next Year to ensure the growth of Xiaopeng Motors' sales in 2024 and beyond.

Collaboration with Volkswagen: The joint development of models based on the G9 platform is progressing efficiently, and the strategic cooperation in the supply chain will significantly reduce costs next year. We are confident in accelerating the achievement of the goal of reducing costs by 25% by the end of 2024, thus improving the gross profit margin.

With a cash flow of 36.5 billion yuan and a projected free cash flow of 1 billion yuan, we expect a larger scale of free cash flow in the fourth quarter.

Q&A

Q1. How will Xiaopeng Motors bridge the ecological gap with the entry of Huawei and Xiaomi into the competition?

Through our experience in the mobile internet entrepreneurship, we have found that although there is complementary competition in many areas with abundant traffic, there is no interoperability in terms of PC/mobile phone/TV content traffic.

In the layout of Xiaopeng Motors, we have been considering the layout of travel and AI ecology for several years. The fifth year is dedicated to robots, and the ninth year is dedicated to flying motorcycles. We are cooperating with Volkswagen in the supply chain/manufacturing field. In August, we collaborated with Didi in the A-level car/Robotaxi with different capabilities to strengthen our competitiveness.

Q2. Pricing Power: In addition to cost, pricing power in the segmented market seems to be more important. We have seen that some domestic car companies seem to outsource this pricing strategy, such as Tesla and BYD. How can Xiaopeng Motors gain stronger pricing power in the segmented market?

We hope to achieve long-term pricing power similar to Apple's smartphones.

Pricing power comes from scale and comprehensive cost control capabilities, as well as brand premium and the ability to meet customer differentiation.

Xiaopeng Motors will make comprehensive efforts in scale, cost, brand, and differentiation from 2024 to 2025 to obtain stronger pricing power.

Q3. Progress of channel reform, how many stores will be opened by the end of next year? What will be the proportion of direct sales/dealerships in the future? What are the quantifiable effects of store efficiency and other indicators resulting from channel reform?

The number of stores is related to the number of future models, which will be significantly higher than the current number by 2025. Currently, the stores are mainly located in first- and second-tier cities, and will expand to lower-tier cities in the future.

In the medium to long term, we will establish 500 comprehensive stores integrating sales and service functions, as well as nearly a thousand experience centers and satellite points, to achieve a closed-loop of sales and service. At the same time, we expect to open 100 new dealer stores in Q4, bringing the total number to over 500 by the end of the year, with dealerships as the main proportion.

We will still have pricing power and will use standard services and invest in tools and processes to empower management and control. Currently, there is still a lot of room for improvement in store efficiency compared to industry leaders, and we expect a significant improvement by 2024.

Q4. Overseas Expansion - We have opened direct stores in overseas European markets. In the future, will we consider establishing more direct stores or relying on local dealerships? Which models are more suitable for overseas markets or for the entire product line to go global? What are the plans for the Southeast Asian market?

For international expansion, we currently adopt a combination of direct sales and dealership models. In Northern European countries, we have direct stores as well as partners and agents. However, in the future, we may choose to use more agents or distribution channels tailored to specific markets. For international market products, we are currently selling the G9 and P7i in Europe. We plan to launch the G6 as a global product next year, so not all models will be available overseas.

We also plan to introduce right-hand drive models next year. For example, by the end of next year, we plan to launch the first right-hand drive model, possibly based on the G6 model, so that we can enter the Southeast Asian market.

Q5. Sales guidance for the fourth quarter, with monthly sales exceeding 20,000 vehicles in October, and guidance for November and December remaining flat. What is the reason for this conservative estimate?

Excluding the one-time impact of the G3, the gross profit margin was 10.9% when monthly sales reached 40,000 vehicles. The gross profit margin for this quarter is very low. What is the reason for this?

Next year, there is a clear path to cost reduction mentioned by management, and they mentioned a significant increase in gross profit margin. How much will the decrease in vehicle prices contribute to this?

Achieving monthly sales of 20,000 vehicles is an important milestone. In the fourth quarter, we consider the impact of competition and the macro environment, but we are confident in achieving our guidance because we have a backlog of orders.

Compared to the same period last year, the decline in profit margin is due to the impact of the G3i, but this quarter is the final impact. Additionally, the cancellation of new energy subsidies in 2023 also affects the gross profit margin.

We expect the gross profit margin to turn positive in the fourth quarter, thanks to improvements in the product portfolio, with the new G9 having a higher gross profit margin than the old G9.

Q6. Next year's plan for cost reduction through technology. Which models will benefit from this cost reduction?

All models will benefit, with more emphasis on models with higher sales volume.

Q7. Mona brand positioning - lower prices. How will Mona be differentiated from the main brand positioning? Will it be sold through existing channels?

Next year, we will share the positioning, overall channels, and after-sales of Mona. We have already started preparations. In terms of channels, Mona will be sold separately from the existing Xpeng channels.

Q8. How do you view the establishment of Zero Run International by Zero Run and Stellantis to expand the international market?

First of all, our joint development with Volkswagen based on the G9 platform has been progressing very effectively. I believe that a milestone will be achieved soon. I think international market cooperation is one of the strategic initiatives that we and our partner Volkswagen are exploring.

We will not comment on the cooperation models of other companies.

Q9. How do you view the demand in the lower-tier market? What are the strengths of our products in meeting this demand?

In terms of product offerings for the lower-tier market, Mona's brand will be used, but specific product directions are not currently provided.

The best intelligent driving assistance can be made available to the lower-tier market, achieving universal usage. At the same time, there will be significant changes in the channels.

Q10. R&D plans for next year? What areas will be invested in?

First, we will streamline our R&D efforts by eliminating unnecessary R&D projects to make R&D more efficient.

We will vigorously promote modularity, allowing different models to enter a unified architecture system.

We will include supplier R&D costs in the BOM (Bill of Materials), and we would rather have a higher BOM to reduce R&D expenses. We will accelerate the integration of R&D across the entire system. Next year, R&D will be used to strengthen design, intelligence, technology, internationalization, and future layout. Next year, R&D expenses will significantly increase compared to this year.

Q11. How will autonomous driving affect the speed of industry competition?

Similar to the rapid development of new energy vehicles from 2018 to 2022, 2025 will be equivalent to the rapid development of new energy vehicles in 2020. Currently, young users with a preference for technology are trying out autonomous driving, and in the future, more mainstream users will enter the market.

At the same time, full-stack self-research has many advantages, including localized resources and cost reduction. Embracing new technological changes, such as changes in large language models, and achieving end-to-end full-stack self-research is necessary.

To integrate different hardware, software, costs, and operational systems, it is necessary to leverage AI in various fields such as intelligent cabins, EA architecture, language models, and other comprehensive resources. Full-stack self-research is essential to cope with long-term competition in certain areas.

Q12. Will the gross profit margin turn positive in the fourth quarter? With the A-grade Mona priced at 150,000 yuan and equipped with ADAS, will it drag down the gross profit margin?

The vehicle gross profit margin will turn positive in the fourth quarter, thanks to a better product mix and a reduction in battery costs compared to the third quarter.

The gross profit margin in 2024 will significantly improve compared to 2023, benefiting from a 25% cost reduction target.

The new product X9 has the highest gross profit margin in the product mix, and the SPEA 2.0 platform next year will also generate better profits.

Mona will achieve a larger scale, thereby reducing costs and improving profit margins. At the same time, marketing expenses related to Mona will be controlled to avoid dragging down the gross profit margin.