XPeng Motors released its second-quarter financial report on August 20, 2024, after the Hong Kong stock market closed and before the US stock market opened. The market had relatively optimistic expectations for XPeng's gross profit margin in the car-making business this quarter, but the actual performance showed:

1) Continued Recovery in Car Sales Gross Margin: The gross profit margin for the car business in the second quarter was 6.4%, continuing to recover compared to the previous quarter. The main reason behind this improvement was a significant reduction in costs, possibly driven by an increase in sales volume leading to higher capacity utilization, a decrease in P5 impairment impact this quarter (not specifically disclosed), and cost reduction efforts in technology.

2) Continued Recognition and Improvement in Cooperation with Volkswagen, Becoming a Regular Income: XPeng's overall business gross profit margin reached 14% in the second quarter, exceeding the market's expectation of 12.8%. The key to this outperformance lies in the cooperation with Volkswagen, receiving upfront licensing fees. The collaboration with Volkswagen continued to expand in the second quarter (details below), driving further growth in other income and expected to become a regular income source, boosting the overall gross profit margin.

3) Average Selling Price Decreased Compared to Previous Quarter, but in Line with Market Expectations: The average revenue per vehicle in this quarter was 226,000 RMB. Due to a deteriorating sales structure (decreased proportion of X9) and continued price reductions for main models G6/G9 in the second quarter to boost sales, the decrease in average selling price was within market expectations.

4) Third Quarter Guidance Implies Potential Overperformance in Mona M03 Orders and Sales: The sales guidance for the third quarter is 41,000-44,000 vehicles, exceeding the major banks' expectation of 38,000 vehicles. This suggests that September sales may approach nearly 20,000 vehicles, with the significant increase in sales volume mainly contributed by Mona M03, finally bringing hope for XPeng's sales turnaround.

5) Overall Operating Expenses Generally in Line with Expectations: In terms of research and development expenses, although the company had previously communicated that R&D expenses would increase in 2024, the increase in R&D expenses this quarter was not significant and remained below the market's expectation of 1.55 billion RMB.

As for sales expenses, due to a slight rebound in sales volume, increased commissions paid to franchise stores (dealers), and higher expenses on marketing, promotion, and advertising, the expenses exceeded market expectations.

Dolphin Research's Viewpoint:

Looking at the second-quarter performance, XPeng delivered a decent report. The gross profit margin slightly exceeded expectations, mainly driven by the increase in other income, particularly from the confirmed revenue from cooperation with Volkswagen, leading to an improvement in the gross profit margin.

In terms of the car business, although the average selling price decreased compared to the first quarter due to a deteriorating sales structure (decreased proportion of X9) and continued price reductions for main models G6/G9 in the second quarter, the decrease was within market expectations. However, the significant cost reduction per vehicle this quarter, along with a possible decrease in confirmed P5 impairment losses (not specifically disclosed), resulted in a continued increase in the gross profit margin for the car business compared to the previous quarter.

Looking at the sales guidance for the third quarter, the expected sales volume is 41,000-44,000 vehicles, exceeding the major banks' expectations of 38,000 vehicles. With 11,000 vehicles known in July, and based on the current weekly sales in August being similar to July, it also implies that September's monthly sales will be close to 20,000 vehicles, showing a significant increase month-on-month. Behind this is the implication that due to the delivery of Mona M03 in September, the order volume may exceed expectations, driving a rapid increase in September deliveries.

In terms of revenue guidance for the third quarter, the expected revenue is 9.1-9.8 billion RMB. Assuming that other revenues in the third quarter are consistent with the second quarter, the average price of a car in the third quarter is expected to be around 190,000 RMB, slightly lower than the market's expectation of 200,000 RMB. Similarly, the increase in the proportion of low-priced Mona M03 deliveries implies a decrease in the average vehicle price.

However, whether looking at the sales volume or revenue expectations for the third quarter, it may indicate strong order volume for Mona M03 and a high possibility of exceeding sales expectations. This is a solid positive for XPeng, which is currently lagging behind in sales.

The market's current sales expectations for XPeng in 2024 are still around 170,000 vehicles. Dolphin Jun's sales forecast for XPeng in 2024 is around 160,000-180,000 vehicles, corresponding to a P/S multiple of 1.4-1.6 for XPeng in 2024, which is relatively reasonable. However, if the explosive success of Mona M03 is confirmed, and if the P7+ can continue to drive up the gross profit margin of the automotive business in the fourth quarter, XPeng's stock price may still have room to rise.

Below is the main content:

I. XPeng's automotive business gross profit margin rebounds this quarter

Since XPeng's sales for the second quarter have been announced, investors are more concerned about the gross profit margin situation in this financial report.

In the second quarter, as XPeng's sales recovered compared to the first quarter, the market expected an increase in XPeng's automotive business gross profit margin compared to the first quarter, reaching 6.3%. XPeng's automotive business gross profit margin in the second quarter reported in the financial statements was 6.4%, basically in line with market expectations.

Dolphin believes that the main reason for the rebound in the automotive business gross profit margin this quarter is the decrease in costs:

a) Average price per vehicle: Deterioration in model mix + price reduction impact, average price per vehicle decreased by 28,000 RMB

In the second quarter, the average price per vehicle was 226,000 RMB, with a decrease of 28,000 RMB compared to the previous quarter, consistent with Dolphin Jun's estimation in the previous guidance and the market's expectation of the average price per vehicle.

The decline in XPeng's average price per vehicle this quarter is mainly due to two reasons:

1) Deterioration in model mix: In the first quarter, XPeng launched the high-priced all-electric MPV X9 (priced at 359,800-419,800 RMB), which peaked in March with sales of over 30,000 all-electric MPVs priced above 300,000 RMB, nearly reaching 4,000 units. However, due to the limited market space for high-end all-electric MPVs as the infrastructure is not yet complete, the sustainability of sales is not high. In the second quarter, the proportion of X9 in the model mix has decreased from 36% in the first quarter to 17% in the second quarter

2) Price reduction due to weak sales: In the first quarter, XPeng started to reduce prices in March due to off-peak sales season and intensified competition. The P7i was reduced by 20,000-50,000 yuan (8-15% reduction), G6 was reduced by 20,000 yuan (7-10% reduction), and G9 was reduced by 0.5-10,000 yuan (1.4%-4% reduction). The price reduction mainly started in March, with only some of the impact included in the first-quarter unit sales price, but all will be reflected in the second quarter.

In the second quarter, XPeng's main models G6 and G9 still did not recover to the expected level of sales. In the second quarter, XPeng continued to reduce prices of these two models by 10,000-15,000 yuan, with an average reduction of 3%-5%. At the same time, clearance discounts continued for the old model P5.

b) Unit cost: However, the decline in unit cost has driven the rise in the gross profit margin of the automotive business

In the second quarter, the unit cost was 211,000 yuan, down by 29,000 yuan compared to the previous quarter. Dolphin believes this is mainly due to:

1) The quarter-on-quarter increase in sales to 30,000 vehicles, a 38% increase, led to higher capacity utilization and a decrease in unit depreciation costs.

2) The proportion of high manufacturing cost X9 in the model structure decreased by 19% to 17% this quarter.

3) The impact of P5 impairment may decrease this quarter: In the first quarter, XPeng made provisions for inventory impairment and purchase commitment losses for P5, dragging down the automotive business gross margin by -3.2%. The actual gross profit margin for the car sales business was 8.7%, and the impact of P5 impairment in the second quarter may decrease (but not specifically disclosed).

4) Cost reduction through technology has achieved certain results: XPeng has been committed to reducing costs through platform modularization and joint procurement with Volkswagen. The cost reduction plan in this quarter may have achieved certain results.

c) Unit gross profit: Slightly increased compared to the previous quarter

The average unit price decreased by 28,000 yuan, while the unit cost decreased by 29,000 yuan. In the end, for every car sold in the second quarter, a gross profit of 14,000 yuan was made. Compared to the previous quarter, there was an actual increase of 5,000 yuan, and the gross profit margin for car sales increased from 5.5% in the previous quarter to 6.4% in this quarter.

II. Third-quarter sales guidance exceeds major banks' expectations, possibly implying that orders for Mona M03 are exceeding expectations

a) Third-quarter car sales target: 41,000-45,000 vehicles, exceeding major banks' expectations of 38,000 vehicles

Since the beginning of the year, XPeng's sales and order volume have been continuously declining. Although there was some recovery in the second quarter, the recovery speed is still slow. The competitiveness of XPeng models has started to decline as competitors continue to launch new models and continuously lower prices.

Currently, the main model G6 is facing competition from BYD's new Song L/IM Motors LS6/Model Y with reduced prices. P7 is also under pressure from the new ZEEKR 001/ZEEKR 007 and Xiaomi SU7, with both orders and sales showing weakness. XPeng is forced to continuously lower prices due to the pressure of declining sales and orders. However, the speed of sales recovery remains slow. Currently, with the new product cycle yet to begin, weekly sales can only be maintained at around 2,000 units.

XPeng's sales guidance for the third quarter is 41,000 to 45,000 units. With sales of 11,000 units in July already known, and August sales expected to remain at around 10,000 units based on current trends, it implies that September's monthly sales need to reach around 20,000 units (19,000 to 23,000 units), showing a significant increase month-on-month.

If expectations are for other models to maintain sales at around 10,000 units, it is highly likely that Mona's first delivery month sales can reach around 10,000 units (launched in August, deliveries in September). XPeng has also previously stated that Mona M03's order volume is significantly higher than G6's order volume during the same period, which is a solid positive for XPeng that is currently lagging in sales.

b) Third-quarter revenue guidance implies continued decline in unit price

XPeng's third-quarter revenue guidance is between 9.1 billion and 9.8 billion. Estimating based on the same revenue as the second quarter (13 billion), the unit price corresponding to the third-quarter guidance is about 190,000 yuan, a decrease of 36,000 yuan compared to the previous quarter, lower than the market's expectation of around 200,000 yuan.

The continued decline in unit price in the third quarter may be due to the decreasing proportion of high-priced all-electric MPV X9 sales:

In the second quarter, X9's proportion in the model structure had already decreased from 36% in the first quarter to 17% in the second quarter. In July, X9's proportion continued to decline, with monthly sales now falling to around 1,500 units, accounting for only 13%.

However, it may also imply that the delivery volume of XPeng's low-priced model Mona M03 (starting at only 135,900 yuan) exceeds expectations, leading to an increase in its proportion in the model structure and causing the third-quarter unit price to be lower than expected.

Although the initial delivery of Mona M03 is expected to drag down the third-quarter gross margin, XPeng's main issue currently lies in the difficulty of improving sales. If the order volume and delivery volume of Mona M03 exceed expectations, it will be a significant positive for XPeng.

III. Overall revenue meets expectations, with gross margin exceeding market expectations

In the second quarter, XPeng achieved total revenue of 8.1 billion, in line with market expectations, and achieved a comprehensive gross margin of 14%, exceeding the market's expectation of 12.8%, mainly driven by the growth in sales and gross margin of other businesses.

a) Automotive sales revenue: Automotive sales revenue this quarter was 6.8 billion, slightly lower than the market's expected 7 billion

In terms of quantity, the delivery volume in the second quarter was 30,000 vehicles, a 38% increase from the previous quarter, basically in line with the mid-point of the second quarter guidance of 29,000 to 32,000 vehicles given in the previous financial report, slightly lower than the market expectation of 31,000 vehicles.

However, compared with other new energy vehicle companies, XPeng's sales recovery in the second quarter was relatively slow, already falling behind among the new forces. Looking back at the sales recovery trend and reasons for new energy vehicle companies in the second quarter, Dolphin found that the car companies with faster sales recovery, in addition to benefiting from seasonal factors, have the following characteristics:

1) This year is a big year for product launches, or the release of new models that become popular, driving sales recovery in the second quarter: such as BYD's new product boom with DMI 5.0 technology, Li Auto's brand sinking through the L6 model (monthly sales exceeding 20,000 units), Aito creating the M9 hot-selling model (monthly sales exceeding 15,000 units) with brand strength, channels, and intelligent driving advantages;

2) Significant changes in the 2024 models, or significant price reductions for updated models: such as BYD's significant price reduction for the Honor version, achieving a "lower cost than oil" for plug-in hybrids, bringing the main price range down from 100,000 to 200,000 yuan to 70,000 to 150,000 yuan, ZEEKR's 2024 model 001 with significant updates and a price reduction of 31,000 to 57,000 yuan compared to the old model;

Looking back at XPeng's performance in the second quarter, it can be seen that the main reasons for the slow sales recovery are:

1) Adjusting to intense competition at a slower pace:

From a historical sales review, XPeng has the ability to create popular models, but the sustainability of sales is not high -

When the G6 was launched, with leading intelligent driving technology, pricing advantages, and 800V, monthly sales peaked at 8,000 to 9,000 units, but in January this year, sales quickly dropped to less than 2,000 units. Later, under continuous price reductions (starting price reduced by 30,000 yuan), monthly sales in July only recovered to less than 5,000 units.

The G9 was updated in October 2023, with a high monthly sales of nearly 6,000 units due to price reductions, intelligent driving, and SKU simplification. However, sales also dropped to less than 1,000 units in February, and monthly sales in July were around 3,000 units, affected by the price reduction of the G9 (the starting price of the updated model was reduced by 20,000 yuan).

The most direct reason is the intensifying competition. Currently, the competition in the 200,000 to 300,000 yuan pure electric vehicle segment is fierce, with the most new pure electric models launched this year in this price range. All new models this year come standard with 800V and rapid improvement in intelligent driving capabilities. XPeng's previous leading advantages have gradually been caught up.

However, the indirect reason is that XPeng's adjustment speed in the face of intense competition is relatively slow, possibly due to organizational efficiency, management, and marketing issues: Unlike ZEEKR's significant updates and price adjustments for the 001 model, XPeng's 2024 model updates are not significant (most updated models were released in 2023, the P7 still remains at 500V fast charging, and in 2024, only the G6 was updated with no significant changes in configuration, mainly focusing on price reductions).

2) Limited market space for pure electric MPVs, new product cycle has not yet begun:

In terms of new vehicles, XPeng only launched the pure electric MPV X9 in the first half of this year. Although it initially created a peak in sales of pure electric MPVs priced above 300,000 yuan in March, reaching nearly 4,000 units due to its high cost performance (compared to ZEEKR 009/Li Auto Mega), the X9 sales have now dropped to around 2,000 units as the high-end pure electric MPV market is still limited by insufficient infrastructure and limited market space, and the new product cycle has not yet begun

b) Services and Others: Technical R&D services in cooperation with Volkswagen have increased revenue and gross profit margin

In this quarter, service and other revenue reached 1.3 billion, exceeding the market's expectation of 1.12 billion. The gross profit margin of other businesses reached 54.3%, surpassing the market's expectation of 53%. The revenue exceeding expectations in this quarter from services and others is still contributed by the growth in technology licensing sales revenue received in advance from the cooperation between XPeng and Volkswagen.

The cooperation between XPeng and Volkswagen started in July 2023, initially developing two B-class electric vehicles jointly based on the G9 platform and XPeng's intelligent driving capabilities by 2026. However, in April 2024, the cooperation expanded to jointly develop and integrate based on XPeng's latest generation EEA 3.5 electronic architecture into Volkswagen's CMP and MEB platforms in China.

Although both types of cooperation models will not generate fees based on Volkswagen's vehicle sales until 2026, they will receive upfront technology licensing fees (not linked to sales volume) in advance in 2024-2025. This portion of technology licensing fees has a gross profit margin of over 90%, directly boosting XPeng's revenue and gross profit margin in other businesses.

XPeng has previously stated that this type of revenue is recurring in subsequent quarters, with a very high gross profit margin, and is expected to record platform and software technical service revenue in every quarter in the future, boosting XPeng's overall business gross profit margin.

IV. Operating Expenses Increase Month-on-Month

XPeng Motors positions itself with intelligence as its core competitiveness, which means it will need to continuously increase R&D efforts in intelligence to form and solidify its advantages. At the same time, the company is deepening channel reforms, increasing the proportion of distribution through the Jupiter Plan, transitioning from a direct sales model to a distribution model.

1) R&D expenses of 1.47 billion, slightly lower than the market's expectation of 1.55 billion

Looking at this quarter's situation, XPeng's R&D expenses reached 1.47 billion, an increase of 120 million compared to the previous quarter, slightly lower than the market's expectation of 1.55 billion.

XPeng's R&D expenses are mainly invested in intelligence and new vehicle development. In terms of intelligence, XPeng takes intelligence as its core competitiveness, making it difficult to reduce R&D expenses. In terms of new vehicle models, the models launched in the second half of the year include Mona M03 and P7+.

Currently, in terms of intelligent driving progress, XPeng has launched the first mass-produced end-to-end large model in China - based on the neural network XNet+, the rule control large model XPlanner+, and the large language model XBrain. The application of the end-to-end large model accelerates the opening speed. In July this year, XNGP was opened to all cities, and both the opening speed and Huawei are in the first echelon.

In order to reduce the cost of XNGP, XPeng has also started to shift towards a pure visual intelligent driving solution similar to Tesla's FSD (neither the upcoming Mona M03 nor P7+ is expected to be equipped with LiDAR). Although the upfront hardware embedded costs are reduced, the large amount of information collected by the cameras requires sufficient backend training and inference computing power, making it difficult to reduce R&D expenses.

XPeng previously stated that the R&D expenditure guidance for the whole year of 2024 is between 7 to 7.5 billion, with a total investment of 3.5 billion in R&D in the "AI technology core centered on intelligent driving." It is expected that the subsequent R&D expenses will continue to increase. Currently, XPeng has a maximum computing power reserve of 2.51 EFLOPS.

2) Sales and administrative expenses of 1.57 billion, higher than the market's expected 1.47 billion

Sales and administrative expenses reached 1.57 billion this quarter, an increase of 190 million compared to the previous quarter, exceeding the market's expected 1.47 billion. The main reasons for the increase are the increase in commissions paid to franchise stores (dealers) and the increase in marketing, promotion, and advertising expenses.

Since the third quarter of last year, XPeng has initiated the "Jupiter Plan" channel transformation plan, increasing the proportion of authorized stores, especially focusing on lower-tier cities. It mainly expands the distribution model to rapidly expand the sinking market, expand the coverage of stores in lower-tier cities, and prepare for the launch of the "Mona" low-priced models.

As of the end of the second quarter, XPeng had a total of 611 stores, of which approximately 71% were dealer stores. The net increase in the number of stores in the second quarter was 37, and the speed of store openings has significantly accelerated this year, mainly due to the use of a dealer model to open stores in lower-tier cities.

This quarter's operating loss was -1.6 billion, lower than the market's expected loss of nearly 2 billion. On the one hand, this is due to the higher-than-expected gross profit margin, and on the other hand, mainly due to the growth of other income this quarter, which increased by nearly 200 million, mainly due to government subsidies.

V. XPeng's hope, can the sales decline be reversed by looking at Mona M03 and P7+

Looking ahead to the second half of the year, Xpeng's new product cycle is about to kick off with Mona M03 and P7+:

1) Xpeng Mona M03: Xpeng's bet on a "high-volume" model

Xpeng is about to launch the first model of the mid-to-low-end Mona series, M03, with a starting price of only RMB 135,900. The differentiation advantages of M03 compared to its competitors are: 1) Core selling points of intelligent driving empowerment + high cost performance: sinking intelligent driving into the price range below RMB 150,000; 2) Endurance reaching 515km-620km, leading the competition; 3) Large electric motor power, improving acceleration performance.

M03 is a model that Xpeng cooperates with Didi on, and will be sold in both the B and C ends. Currently, in the price range of 100,000 to 200,000 yuan, the leading pure electric sedan model in terms of sales volume sold 14,000 to 17,000 units in June. Xpeng has high sales expectations for this model, hoping that stable sales can reach tens of thousands of units, becoming Xpeng's main "high-volume" model. From the sales expectations for the third quarter, it may mean that the first delivery month of Xpeng M03 could achieve sales of around 10,000 units. The turnaround in Xpeng's sales decline this year is also seeing the dawn.

2) Xpeng P7+: Xpeng's model dedicated to improving gross profit margin

This year, P7+ is expected to be launched in the fourth quarter, achieving a cost reduction of 25% for the first time on the cost side. Xpeng expects that the gross profit of this sedan will be higher than the existing models (except for X9), expecting to achieve a double-digit gross profit, driving the return of Xpeng's automotive business gross profit margin.

However, the pricing of P7+ is particularly important. Currently, there are 25 models of competitors in the market, such as ZEEKR 001 (priced at RMB 269,000-329,000 for the intelligent driving version, already making up for the shortcomings in intelligent driving, all using the NVIDIA Orin X*2 chip), Xiaomi SU7 intelligent driving version (priced at RMB 245,900-299,900). The core selling points of P7+ are large space + intelligent driving + high aesthetics. Referring to competitors, the expected price is also between RMB 250,000-300,000. However, in the competitive range of 200,000 to 300,000 yuan for pure electric vehicles, Dolphin Jun conservatively estimates that the monthly sales may be around 5,000 units, and the key lies in whether the pricing can exceed expectations.

Currently, the market's sales expectations for Xpeng in 2024 are still around 170,000 units. Dolphin Jun's sales expectations for Xpeng in 2024 are around 160,000 to 180,000 units, corresponding to Xpeng's 2024 P/S multiple of 1.4-1.6 times, which is relatively reasonable. However, once the explosive success of Mona M03 is verified, and P7+ can continue to drive the gross profit margin of the automotive business in the fourth quarter, Xpeng's stock price may still have room to rise further.

Dolphin Jun's in-depth research and tracking comments on Xpeng include:

Financial Report Season

May 21, 2024 Financial Report Review ["No Contagion from the 'Bombshell', Xpeng Rarely Holds On"](https://longportapp.cn/zh-CN/topics/21260073? 2024年5月22日电话会议《 Maintaining Overall Gross Margin at 10%-15% 》

2024年3月19日财报点评《 XPeng: Sales Volume is a Major Challenge, Relies Solely on Didi's Mona 》

2024年3月19日电话会议《 Looking Forward to Mona Achieving Positive Gross Margin, Stable Monthly Sales Exceeding Ten Thousand 》

2023年11月15日财报点评《 When Will the Average Performance XPeng Experience a New Breakthrough?》

2023年11月16日电话会议《 Gross Margin Expected to Turn Positive in the Fourth Quarter (XPeng 3Q Conference Call Summary)》 Financial report review on August 18, 2023: "XPeng's Gross Profit Plummeted? The Last 'Embarrassment' Before Rebirth"

Telephone conference on August 18, 2023: "G3i Residual Impact Continues in the Fourth Quarter, Expected Gross Margin to Turn Positive in the Fourth Quarter"

Financial report review on May 24, 2023: "XPeng: Performance has 'cooled down', when will it recover?"

Telephone conference on May 24, 2023: "XPeng's Military Order: Targeting 20,000 Monthly Sales in the Fourth Quarter (Minutes)"

Telephone conference on March 17, 2023: "XPeng in 2023: Reform, Cost Reduction, and New Product Launches (22Q4 Conference Call Minutes)"

Financial report review on March 17, 2023: "XPeng Motors: Under Attack, Can it Survive the Crisis?"

Telephone conference on November 30, 2022: "Nearly 50% Surge Overnight, What Did XPeng Say in the Conference Call? (Minutes)"

Financial report review on November 30, 2022: "Poor Performance Still Rising? XPeng Needs to 'Reshape its Bones'"

Telephone conference on August 24, 2022: "G9 and B-Class 'Model Y', or XPeng's Last Effort (22Q2 Conference Call)"