Mona delivery + overseas expansion drive monthly deliveries back to 20,000 in the third quarter (XPeng 2Q24 conference call minutes)

The following is the summary of the 2024 second quarter financial report conference call for XPeng Motors. For financial report analysis, please refer to " XPeng: Sales Challenges Finally Seeing Light? "

I. Review of Core Financial Information:

II. Detailed Content of the Financial Report Conference Call

2.1. Key Points from Executive Statements:

1) Business Progress

① Sales and New Vehicle Planning

a. In the second quarter of 2024, 30,207 electric vehicles were delivered, a 38% year-on-year increase and a 30% increase from the previous quarter. The gross profit margin increased to 14%, leading among Chinese electric vehicle manufacturers.

b. In August, the launch of MONA M03 surpassed the pre-sale orders of last year's G6 at a target price range of RMB 150,000, becoming a market competitor with its stylish design and intelligent cockpit. The supply chain is ready to support the rapid production increase of MONA M03, expected to set a new production speed record.

c. The plan for the fourth quarter is to launch the P7+ sedan, with a wheelbase of 3 meters and a total length exceeding 5 meters, targeting family customers. Based on the next-generation ADAS hardware platform, P7+ has a competitive advantage in cost control and technological innovation.

② Artificial Intelligence and Autonomous Driving

a. The AI-driven XRS version 5.2 is now open to all users, enhancing the intelligent driving experience on city roads and highways. The XNGP end-to-end AI model is now applied on national highways, making it the first enterprise to achieve this technology.

b. In the fourth quarter, the P7+ equipped with the next-generation ADAS hardware platform is expected to become the most competitive high-end ADAS solution in the Chinese market. More models equipped with XNGP will be launched in the future, with the goal of deploying high-end ADAS in models priced below $20,000.

c. In the second half of 2025, the plan is to provide close to L3 autonomous driving experience through AI-driven XNGP, requiring manual intervention only every few hundred kilometers.

③ International Expansion

a. In the second quarter, XPeng became the top exporter of pure electric vehicles priced above $30,000 among Chinese brands, with overseas markets accounting for over 10% of total sales. The G9 became the top-selling mid-to-large pure electric SUV in Norway, Denmark, and Israel, and ranked in the top three in similar models in Sweden and the Netherlands.

b. The latest AI-driven XOS OTA updates have been rolled out to all international customers; starting from August, deliveries of left-hand drive and right-hand drive versions of G6 have begun, with plans to enter the UK, Australia, and Southeast Asian markets in the second half of 2024

c. Expected to double the number of international sales outlets in the second half of 2024, overseas business will maintain strong growth in the coming years.

④ Strategic Cooperation with Volkswagen

a. Signed the main agreement with Volkswagen Group for EV architecture technology cooperation, co-developing electric architecture for CMP and MEB platform models. Starting from 2026, all locally produced models on the CMP and MEB platforms will be equipped with this architecture, with the first model expected to be mass-produced within 24 months. The cooperation will create greater synergies and strategic value for both parties.

⑤ Future Outlook

a. It is expected that in the third quarter of 2024, delivery volume will be between 41,000 and 45,000 vehicles, with a quarter-on-quarter growth of 35.7% to 49%. Total revenue in the third quarter is expected to be between 9.1 billion and 9.8 billion RMB, with a quarter-on-quarter growth of 12.2% to 20.8%.

2.2 Analyst Q&A

Q: Regarding the sales momentum of new models, the sales guidance for the third quarter shows 41,000 to 45,000 vehicles, which means that the delivery volume in September may return to previous peak levels. Considering the upcoming P7+, this may enable the company's monthly sales to reach around 30,000 vehicles. Given the relatively weak momentum of new models launched last year, how is the sales momentum of the new M03 and upcoming P7+ models?

A: The sales momentum of new models is one of the biggest challenges we are currently facing. To address this challenge, we have made significant efforts in supply chain management, platform manufacturing, and quality improvement of M03 and P7+. At the same time, we have comprehensively reformulated monthly OTA and other systems to enhance customers' experience with new models. In addition, sales and marketing systems have also been thoroughly adjusted to ensure long-term steady growth in the future.

In the sales guidance for the third quarter, we expect monthly delivery volume to reach 20,000 vehicles, which will be the highest level in our history. Two key catalysts to achieve this goal we can see two catalysts: 1) First, MONA is expected to be delivered in September, which may be the fastest delivery record among all electric vehicle startups; 2) Secondly, significant growth in overseas delivery volume, as you can see overseas delivery volume in the second quarter exceeded 10%. We expect overseas delivery volume in the third quarter to exceed 15%. These factors together support our confidence in achieving the delivery targets for the third and fourth quarters.

Q: Regarding XNGP or advanced ADAS, Xiaopeng is continuously investing in large models to enhance system capabilities and intelligent driving technology, and is launching XNGP faster than nationwide. When do you expect this large-scale investment to truly become a barrier to peers and bring a significant increase in new car sales? Are there any indicators we can monitor in the coming quarters?

A: Since the launch of XNGP 5.0, we have collected many encouraging data. Firstly, the penetration rate of advanced ADAS functions and mileage penetration rate has increased by at least 20% compared to before version 5.0. In addition, we have fully promoted the test drive function of XNGP in all national dealer stores, allowing consumers to experience its powerful capabilities firsthand XPeng is currently the only Chinese electric vehicle manufacturer to implement an end-to-end AI model, despite facing multiple challenges. Firstly, while we are enhancing the upper limit of ADAS capabilities, we also need to ensure the lower limit of capabilities, which requires significant changes in technology and architecture. Additionally, although we are able to provide a human-like driving experience in a wider range of areas, there may still be some minor setbacks in certain cities or routes. In some cases, rule-based small model technology may perform better, as end-to-end enhances the upper limit, but there is still much work to be done in maintaining the lower limit.

However, we believe this year will be a turning point in adopting end-to-end AI models to enhance ADAS capabilities, due to technical reasons, there may be some regression in autonomous driving capabilities in certain regions, but next year, XPeng's autonomous driving capabilities will increase several times or even dozens of times. Coupled with the cost advantages of the new generation hardware platform launched at the end of the year, it will demonstrate higher-level automation capabilities and affordable costs.

Q: You are implementing cost reduction strategies and joint procurement with Volkswagen. Will you reduce reliance on certain suppliers in the future? In what areas can more cost reductions be achieved? Also, how is the gross margin trend in the third quarter, especially due to Mona's impact?

A: In the past, we were more focused on technology development and products, but now we will pay more attention to commercialization capabilities. Starting from the second half of this year, we will comprehensively reform and restructure our business model to better cope with market competition. Cost reduction will be an important part of this, especially in areas such as cost reduction in technology, design, supply chain integration, and overall operational improvement brought by strategic cooperation with Volkswagen. In the coming quarters, especially in 2025 and 2026, you will see improvements in quarter-on-quarter basis due to these measures.

As for the gross margin trend, the proportion of exports may increase in the second half of the year. Starting from the third quarter, we still have income from cooperation with Volkswagen, while delivery volume will also increase significantly, further optimizing manufacturing costs.

On the other hand, Mona's sales are increasing, and we expect it to become a high-volume model. Although the incremental sales of the Mona model will put some pressure on the gross margin, with the launch of P7+ - the first model on our new platform to achieve cost reduction, we expect the gross margin of P7+ to reach a healthy double-digit percentage.

Therefore, looking at the delivery trend, we expect the gross margin to remain stable in the second half of the year, in the mid to low double-digit range.

Q: P7+ is your first model to use a visual solution. Can you talk about your progress in improving autonomous driving capabilities through pure visual technology?

A: More details on this question will be disclosed at future product launches and our technical day on October 24th. What can be revealed now is that we have significantly reduced costs by not relying on sensors and high-precision maps. At the same time, vision-based technical approaches and end-to-end AI models have significantly enhanced our ADAS capabilities. For more detailed information, please stay tuned for our upcoming events.

Q: If we achieve the high-end target of 45,000 vehicles in the third quarter, this means we can exceed 20,000 vehicles in September. Can you provide a detailed breakdown by product, especially for September, and how much Mona will contribute if we meet the target?

A: We currently do not provide specific details on the upcoming month's delivery of vehicle models. However, we expect Mona's deliveries to be very strong in September, potentially setting a new record for new energy vehicle deliveries. Additionally, this includes a significant proportion from overseas, mainly G9 and G6, with deliveries of these models starting this month and next month. Therefore, our mainstream models will mainly contribute to the delivery volume.

Q: Could you provide more details on next year's product plans?

A: Currently, we are unable to provide specific guidance or quantities on new model releases for next year. However, we anticipate a very strong product cycle in the fourth quarter. The number of new and updated models to be released in the next two years will be higher than this year. Specific information will be provided at a later stage.

Q: Regarding export prospects, we see the company pushing exports, but also facing challenges in rising protectionism in developed markets, including upcoming additional tariffs. Moreover, competition among Chinese manufacturers is intensifying. How do you address these challenges and overcome them?

A: The opportunities in the global market are immense, but indeed come with many challenges, especially in the face of tariffs in the European market. We have successfully launched our high-end electric vehicle brands in Europe and other global markets, such as G6 and G9, priced higher than competitors in the Chinese market, which has helped us position ourselves more upscale in the global market. Despite the challenges of increased tariffs, we remain confident in achieving good marginal contributions through collaboration with local partners and the efforts of our team.

Apart from Europe, other regions also present significant growth opportunities, such as the Middle East, including Israel and Southeast Asia. These are markets where we will be launching right-hand drive models this month and next month. We are confident in achieving the expected global sales volume and profits.

Q: XPeng once planned to enter the Robotaxi field but later made adjustments. Why is there no longer active promotion of Robotaxi operations?

A: The development path of Robotaxi is significantly different from our current end-to-end AI model architecture. Robot taxi services in the market typically focus on providing safe and good customer experiences within specific small areas, while our goal is to provide a broader, human-like driving experience. This difference defines our current focus.

Secondly, for XPeng, based on our previous experience operating multiple vehicles, the field of Robotaxi is still very concerned about costs and operational effectiveness, in addition to public opinion. Therefore, we believe that the majority of Robotaxi companies have not achieved "low cost" and "good experience" in the hardware field.

First, XPeng is indeed planning its own Robotaxi, which is very different in capabilities and experience from L4 vehicles. Secondly, XPeng is not willing to heavily engage in Robotaxi operations, focusing on producing high-quality products or vehicles and collaborating with global operators. Thirdly, the new ecosystem of the L4 system is quite different from our simple travel. We will share some differentiated ideas about our Robotaxi when we have time later.

Q: Regarding the production readiness of Mona M03. Considering that the supply bottlenecks of G6 and X9 were mainly related to LiDAR, and M03 does not have LiDAR, does this mean that the production speed will be faster? How is the production preparation for M03 in the coming months?

A: We have learned a lot from the releases of G6 and X9, so we have made more comprehensive preparations for Mona's production readiness. We have identified supply constraints of key components in advance and formulated response plans. So far, there have been no issues with the supply chain and production capacity, and we expect to achieve our established production and delivery targets.

Q: Regarding research and development expenses, the previous guidance was RMB 7 to 7.5 billion for the whole year, will there be additional R&D expenses in the second half of the year?

A: Our R&D expenses in the first half of the year were basically in line with last year, but as we enter a very heavy product cycle, expenses related to design and product development will increase. We expect R&D expenses to increase in the second half of the year, while the full-year R&D expenses will still be maintained at around RMB 7 billion.

Q: Recently, I personally inspected the M03 and found its quality to be excellent. Only those who have seen this car in person can truly feel this quality. Do we have plans to let more people see and experience this car?

A: Indeed. M03 performs excellently in terms of functionality and performance, especially in both static and dynamic production capabilities. Since the launch of M03 in various stores in early August, consumer feedback has been very positive, confirming your observation that one must see and feel this car in person to truly understand its excellent quality. After the official product launch at the end of this month, we plan to encourage more customers to test drive the M03 through a large number of offline promotional activities and online publicity. We expect the market response to MONA M03 to far exceed that of the previous G6 model. Additionally, we are very confident in the reputation of M03, and after its official delivery, its outstanding performance will attract more people to test drive it at dealerships nationwide.

Q: Since 2022, we have undergone a lot of reforms. After two years, how do you evaluate our current sales and marketing capabilities?

A: Two years ago, we lacked systematic planning in product launches and overall business planning, especially in sales and marketing systems. However, by refining it into aspects such as technical development, sales and marketing systems, customer service, etc., we have made significant progress in the first phase and achieved varying degrees of improvement in products and competitiveness.

Starting from the third and fourth quarters, we will see how these improvements translate into sales performance, which will come not only from the prioritized product launches but also from the comprehensive enhancement of our capabilities, including sales and marketing, customer service, etc. We are now implementing new strategies in second, third, and fourth-tier cities to provide better after-sales service to customers and support in areas such as car insurance. At the same time, we are focusing on training sales personnel to enhance their overall capabilities and work efficiency Looking ahead, we are confident in becoming one of the top companies in China's automotive manufacturing industry in terms of sales and marketing capabilities.

Q: Regarding gross profit margin, could you break down the gross profit margins for overseas and domestic segments, especially the impact of wholesale on profitability? Additionally, will the gross profit margin in the second half of the year be affected by the decrease and increase in product mix and channel discounts, offset by software gross profit support?

A: Our rapid expansion globally, compared to the first half of the year, will see an increase in overseas sales in the second half of the year, both in absolute sales volume and as a percentage of total sales.

Overall, the gross profit performance in overseas markets is strong, contributing to the overall profitability. Different business models in different countries (direct sales, dealerships, distribution) result in varying gross profit and profit performance, but from a gross profit contribution perspective, the overseas business performs well. As for the gross profit margin trend in the second half of the year, the various factors we mentioned, including higher sales volume, changes in product mix, increased revenue from collaborations with Volkswagen, and the launch of new models Mona and P7+, are expected to keep the gross profit margin stable in the mid to low double-digit range. However, from the perspective of vehicle gross profit, we anticipate a moderate increase compared to the first half of the year.

Q: In terms of autonomous driving technology, is the industry entering a stage where the technological development curve is flattening? How do we view breakthroughs in this field and future diversified revenue models?

A: Traditional ADAS technology relies on high-precision maps and rule-based architecture, which poses challenges in extreme situations and does not provide a perfect driving experience for customers. For example, in Chinese autonomous driving, the speed is often only 40-50 kilometers per hour, and the turning is very mechanical, which does not mimic the human driving experience.

The end-to-end logic is to learn from local expert drivers in each region, emphasizing the need for excellent expert drivers, or to learn your own driving style, creating a smooth and safe driving experience. However, it may not address special scenarios, such as a corner with many stray animals, where it may not behave like traditional autonomous driving and establish a rule to avoid these stray animals. Ultimately, we believe that the progress of end-to-end technology will be rapid and will surpass the previous L3 or L4 autonomous driving capabilities in China.

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