After nearly three years of decline, XPeng is finally making a comeback?

$XPeng(XPEV.US) released its Q3 2024 financial report after the Hong Kong stock market close and before the US stock market open on November 19, 2024, Beijing time. From the actual performance:

1) Automotive sales gross margin continues to recover month-on-month: The gross margin for the automotive business in Q3 was 8.6%, continuing to recover month-on-month. The market originally thought that the delivery of the inexpensive new car M03 would hardly boost the gross margin of the automotive business, but the cost side saw a significant decline this quarter.

Dolphin Jun expects the increase in automotive gross margin is partly due to the impairment impact of the P5 (which was discontinued in Q2) dragging down the Q2 automotive gross margin by about 2-3 percentage points, but the impairment impact in Q3 is expected to be minimal. On the other hand, it is anticipated that the increase in the proportion of overseas models this quarter contributed to this.

2) Automotive unit price declined month-on-month, leading to revenue below expectations: Although the revenue per vehicle in Q3 dropped to only 190,000, below the market expectation of 197,000, this was mainly due to the impact of model structure—the low-priced Mona M03's explosive sales increased its proportion in the model structure. Given that the gross margin performance is still quite good, this is not a major issue.

3) Continued revenue from collaboration with Volkswagen, showing improvement and becoming recurring income: The gross margin for other businesses in Q3 continued to increase month-on-month to 60%. This quarter, in addition to the technology licensing fees from Volkswagen based on the G9 platform, technology licensing fees based on the EEA technology architecture also began to be recognized in Q3. The gross margin for technology research and development services is higher (over 90%), leading to a gross margin that exceeded expectations.

4) Reasonable control of R&D expenses, resulting in operating profit losses lower than expected: Regarding R&D expenses, the company had previously communicated that it would increase R&D expenses in 2024, but this quarter, the increase in R&D expenses was not significant and was below the market expectation of 1.8 billion.

The gross margin exceeded market expectations by 150 million, while R&D expenses were below market expectations by 200 million, resulting in operating profit losses being better than market expectations by 470 million.

Dolphin Investment Research Perspective:

Overall, XPeng delivered a good performance this quarter, with automotive sales gross margin still recovering month-on-month despite the delivery of the low-priced M03, exceeding market expectations.

Looking ahead to Q4, although the unit price will continue to decline by 27,000 month-on-month, this is mainly influenced by the model structure—Q4's two main models: ① The low-priced M03's explosive sales continue to increase its proportion in the model structure; ② The XPeng P7+ has a lower starting price (3.7 million lower than the old P7), which will also increase its proportion month-on-month.

However, the market is more concerned about: ① Whether the explosive sales momentum from Q3 can continue: that is, whether the explosive sales models M03 and P7+ can smoothly ramp up production capacity in Q4; ② Whether the automotive business gross margin can continue to recover with the increasing proportion of M03 in Q4From the sales guidance perspective, the fourth quarter sales guidance of 87,000 to 91,000 units exceeds the market expectation of 80,000 units. Under this sales guidance, Dolphin Jun expects the Mona M03 to ramp up to nearly 15,000 units by the end of December, and the P7+ to ramp up to nearly 10,000 units, implying a smooth ramp-up in production capacity for these two best-selling models.

At the same time, due to the significant cost reduction of the P7+ (BOM cost down by 25%), even with a low starting price, the gross margin is expected to still reach double digits. Dolphin Jun expects this will drive the continued upward trend in the gross margin of the automotive business in the fourth quarter, but specific gross margin guidance needs to be referenced in the company's conference call.

Looking ahead to 2025, it is expected that XPeng's operational performance will continue to improve:

1）From the current explosive sales of the Mona M03 and XPeng P7+, XPeng's ability to define popular models has been validated. The core competitiveness of XPeng in creating popular models lies in:

① Highly competitive pricing through technological cost reduction: The P7+ and Mona M03 not only have competitive advantages in appearance, product definition, and three-electric technology, but one of the core factors for becoming a best-seller is their highly competitive pricing.

With a low starting price, the P7+ can still achieve double-digit gross margins, and although the proportion of the M03 has increased this quarter, the gross margin of the automotive business is still rebounding quarter-on-quarter, which actually implies that XPeng's technological cost reduction capability has been successfully validated.

The BOM cost of the P7+ has decreased by 25%, partly due to the improvement in autonomous driving algorithms that switched to a pure vision solution, and partly possibly due to joint procurement with Volkswagen and enhanced platform capabilities.

Looking ahead to 2025, XPeng's speed of launching new cars will continue to accelerate, from 1-2 new models in the past year to "planning about 30 new or updated models within 3 years." The strong product cycle will continue to open up (specific model planning needs to be seen in the conference call guidance). The new cars are expected to continue the technological cost reduction path of the P7+ and Mona M03, replicating the success of best-selling models.

② The autonomous driving technology has successfully switched to a pure vision route, ranking among the top tier in the country. This not only creates differentiated advantages for models but also opens up the imagination space for software technology licensing capabilities:

The P7+ is equipped with the latest "AI Eagle Eye Vision" autonomous driving solution. Due to the significant increase in computing power, it has successfully switched to a pure vision route (without lidar solutions), and the progress of urban no-map autonomous driving is also at the forefront of the industry. The success of the pure vision path has significantly reduced the costs of autonomous driving hardware, allowing autonomous driving to be first deployed in models priced at 100,000 to 200,000 yuan, creating differentiated competitive advantages.

Moreover, the progress and leadership in autonomous driving capabilities also open up the imagination space for XPeng's software licensing capabilities. Currently, XPeng's cooperation with Volkswagen is progressing smoothly, and the previously high-margin technology licensing fees have begun to materialize, continuously raising XPeng's overall business gross margin while also opening up a new growth model for autonomous driving technology licensing.

2）XPeng is set to launch extended-range products in 2025, adopting a "pure electric + extended range" dual approach to create new growth, with the first model expected to be launched in the second half of 2025The extended-range models will be equipped with a new generation of batteries, entering the "large battery, small fuel tank" era, with a pure electric range exceeding 400 kilometers, a 5C charging efficiency, and a comprehensive range exceeding 1,400 kilometers, further expanding the customer base and creating new growth.

With the strong product cycle beginning, and XPeng's ability to create popular models validated through technology cost reduction and leading intelligent driving, Dolphin Jun expects XPeng's sales in 2025 to double to 400,000 units compared to 190,000 units in 2024, continuing to see high growth in sales.

Based on the expected sales of 400,000 units in 2025, the implied overall P/S ratio for XPeng in 2025 is around 1.2 times. Although this is higher than the valuation multiples of peers (Li Auto at 0.85 times, BYD at 0.88 times), XPeng's stock still has upward potential given that ① the revenue CAGR from 2024 to 2026 is higher than the industry average; ② the improvement in XPeng's intelligent driving capabilities opens up possibilities for intelligent driving licensing.

The following is the main text:

I. XPeng's automotive business gross margin exceeds expectations this quarter

Since XPeng's third-quarter sales have already been announced, investors are more concerned about the gross margin situation of the automotive business in this financial report.

Although sales rebounded by 54% quarter-on-quarter due to the explosive sales of the M03, the market generally expected the gross margin of the car sales business to only increase by 0.5% quarter-on-quarter to 6.9%, while the actual gross margin of the car sales business was 8.6%, exceeding market expectations.

a) Average price per vehicle: Model structure + price reduction impact, average vehicle price decreased by 37,000 yuan quarter-on-quarter

The average price per vehicle in the third quarter was 189,000 yuan, a decrease of 37,000 yuan compared to the previous quarter, which is basically in line with the implied average vehicle price of 190,000 yuan in XPeng's previous guidance, but lower than the market expectation of 197,000 yuan.

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

Model structure impact: In the third quarter, due to the explosive sales of the Mona M03, its proportion in the model structure increased by 23% quarter-on-quarter. However, the M03 has a low price (only 119,800-155,800 yuan), and the intelligent driving version priced at 155,800 yuan has not yet been delivered, which dragged down the average vehicle price.

Price reduction impact: Dolphin Jun observed that XPeng further reduced prices for its models in the third quarter: compared to the second quarter, the entire G9 series was reduced by 10,000 yuan, the old P7i was reduced by 15,000-26,000 yuan, and the high-end version of the G6 was reduced by 15,000 yuan, which also dragged down the average price to some extent.

b) Vehicle cost: Vehicle cost decreased significantly due to the impairment of the old P5

The vehicle cost in the third quarter was 173,000 yuan, a decrease of 39,000 yuan quarter-on-quarter. Dolphin Jun believes this was mainly due to:

The impairment impact of the P5 continued to decrease this quarter: In the second quarter, XPeng made provisions for the inventory impairment and procurement commitment losses of the P5, which had a drag of 2-3 percentage points on the gross margin of the automotive business, while the actual gross margin of the car sales business was between 8.4% and 9.4%Due to the suspension of production of the P5 in the second quarter, the expected impairment impact on the third quarter is relatively small.

The proportion of overseas models increased in the third quarter: In the third quarter, XPeng models began to go overseas, with an estimated proportion of overseas models around 10%, which further raised the gross margin.

Release of scale effects: Third quarter sales increased by 54% quarter-on-quarter to 47,000 units, capacity utilization rose, and the per-vehicle amortized cost decreased quarter-on-quarter.

The low-cost Mona M03 has a low manufacturing cost, which lowers the overall manufacturing cost.

c) Per-vehicle gross profit: The decline in per-vehicle manufacturing cost significantly boosts the automotive gross margin.

The average price per vehicle decreased by 37,000 yuan, but the per-vehicle cost dropped by 39,000 yuan. Ultimately, in the third quarter, for every car sold, the gross profit was 16,000 yuan, an actual quarter-on-quarter increase of 2,000 yuan compared to the previous quarter, with the gross margin on car sales rising from 6.4% in the previous quarter to 8.6% this quarter.

II. Fourth quarter sales guidance exceeds expectations, revenue guidance implies continued decline in unit price.

a) Fourth quarter automotive sales target: 87,000 to 91,000 units, exceeding major banks' expectations of 80,000 units.

With October sales known to be 24,000 units, this implies an average monthly sales of 32,000 to 34,000 units in November and December, exceeding market expectations of 80,000 units. The explosive sales characteristic for the fourth quarter has been established.

The fourth quarter sales are mainly driven by two key models:

① Mona M03: With its high aesthetic appeal and cost-effectiveness, it successfully takes on the role of XPeng's "volume" model. Although the intelligent driving version has not yet been delivered due to capacity issues (expected delivery in early 2025), the delivery volume in September and October has already surpassed 10,000 units, and the current waiting time for the Mona M03 is over 9 weeks, indicating that the order volume for the XPeng M03 remains sufficient.

Dolphin Jun expects that based on the current sales trend, the Mona M03 will successfully climb to 15,000 units in December, with its proportion in the fourth quarter model structure continuing to increase by 18 percentage points to 41%.

② XPeng P7+: The P7+ has:

a. A low starting price: starting at 186,800 yuan, which is a reduction of 37,000 yuan compared to the old P7;

b. High-level intelligent driving features (first pure visual end-to-end).

It has also successfully become XPeng's second explosive model, achieving 31,500 pre-orders within 4 hours of its launch, significantly exceeding market expectations. Dolphin Jun expects the P7+ to climb to 10,000 units in December, with its proportion in the fourth quarter model structure increasing by 14 percentage points to 15%.

2) Fourth quarter revenue expectation: 15.3 to 16.2 billion yuan, implying Q4 per-vehicle revenue of 162,000 yuan.

XPeng's fourth quarter revenue guidance is 15.3 billion to 16.2 billion yuan. Based on other revenues expected at 1.35 billion yuan in the fourth quarter, the revenue guidance implies a per-vehicle price of 162,000 yuan, a quarter-on-quarter decline of 27,000 yuan.

Dolphin Jun believes that the main reason for the decline in① The low-priced Mona M03 continues to increase its proportion in the sales structure to 41%, lowering the average vehicle price;

② The starting price of the P7+ is only 186,800 yuan, which is a reduction of 37,000 yuan compared to the old P7. It is expected to gradually replace the old P7 in the fourth quarter, with its proportion in the model structure increasing by 14 percentage points to 15%. The lower starting price compared to the old P7 has also somewhat reduced the average vehicle price.

However, Dolphin believes that the issue of declining average price in the fourth quarter is not significant, mainly influenced by changes in the model structure. The P7+, due to cost reduction through technology, has seen a 25% decrease in BOM costs, and even with a lower starting price, the gross margin still reaches double digits, which is expected to drive the gross margin of the automotive business to continue rising in the fourth quarter.

III. Overall revenue slightly below market expectations, but gross margin exceeds market expectations

In the third quarter, XPeng achieved total revenue of 10.1 billion yuan, slightly below the market expectation of 10.5 billion yuan, mainly due to the lower-than-expected vehicle price. However, the overall gross margin reached 15.3%, exceeding the market expectation of 13.2%, with both the automotive business and other business gross margins exceeding expectations.

a) Automotive sales revenue: This quarter's automotive sales revenue is 10.1 billion yuan, slightly below the market expectation of 10.5 billion yuan

The automotive sales revenue this quarter was lower than expected mainly due to the increased proportion of the low-priced M03 in the model structure, which lowered the average vehicle price. However, whether the M03 becomes a bestseller and does not drag down the gross margin of the automotive business is what the market is most concerned about, so the issue of lower-than-expected average price is not significant.

b) Services and others: Collaboration with Volkswagen on technology R&D service fees boosted revenue and gross margin

This quarter, the revenue from services and other businesses reached 1.31 billion yuan, with a gross margin of 60.1%, exceeding the market expectation of 56%. This was mainly driven by the high-margin technology R&D service fees from the collaboration with Volkswagen (over 90% gross margin).

XPeng's collaboration with Volkswagen began in July 2023, initially focusing on jointly developing two B-class electric vehicles based on the G9 platform and XPeng's intelligent driving capabilities by 2026. However, in April 2024, the collaboration will expand to include the latest generation EEA 3.5 electronic architecture from XPeng, jointly developing and integrating it into Volkswagen's CMP and MEB platforms in China.

In the third quarter, in addition to confirming the preliminary technology licensing service fees based on the G9 platform and software, the preliminary technology licensing service fees for Volkswagen's use of XPeng's EEA electronic architecture also began to be recognized, boosting the revenue and gross margin of other businesses.

IV. Operating expense control is reasonable and below market expectations

XPeng Motors positions itself with intelligence as its core competitiveness, which inevitably requires continuous investment in R&D to form and solidify its advantages. At the same time, the company is deepening channel reforms, enhancing the dealership ratio through the Jupiter Plan, and transitioning from a direct sales model to a dealership model1) R&D expenses of 1.63 billion, lower than market expectations of 1.82 billion

From this quarter's situation, XPeng's R&D expenses reached 1.62 billion, lower than the market expectation of 1.72 billion.

XPeng's R&D expenses are mainly invested in intelligence and new model development. In terms of intelligence, XPeng takes intelligence as its core competitiveness. Due to a significant improvement in algorithm capabilities, the intelligent driving has now switched to a pure vision solution.

The P7+ is equipped with the latest "AI Eagle Eye Vision" intelligent driving solution, achieving a 50% reduction in the cost of autonomous driving hardware by switching to a pure vision solution, while also reducing BOM costs by 25%, making the P7+ highly competitive in terms of starting price, quickly becoming a best-selling model for XPeng, while still maintaining a double-digit gross margin.

XPeng previously stated that the total R&D expenses for the entire year of 2024 would be around 7 billion, implying an average R&D expense of 2.1 billion for the third and fourth quarters, while this quarter's R&D expenses were only 1.6 billion, indicating reasonable control of R&D expenses.

2) Sales and administrative expenses of 1.63 billion, basically in line with expectations

Sales and administrative expenses for this quarter reached 1.63 billion, an increase of 0.06 billion quarter-on-quarter. The increase was mainly due to the rise in sales volume, increased commissions paid to franchise stores (dealers), and increased marketing, promotion, and advertising expenses for the launch of Mona in the third quarter.

Since the third quarter of last year, XPeng has launched the "Jupiter Plan" channel reform plan, starting to increase the proportion of authorized stores, especially focusing on lower-tier cities, mainly through expanding the dealer model to rapidly penetrate the market and expand the coverage of stores in lower-tier cities, preparing for the launch of the low-priced "Mona" model.

As of the end of the third quarter, XPeng had a total of 639 stores, with a net increase of 28 stores in the third quarter, mainly through the dealer model rapidly opening stores in lower-tier cities (covering a net increase of 21 cities), preparing for the explosive sales of the low-priced Mona.

In this quarter, the Non-GAAP operating loss was only -1.6 billion, significantly lower than the market expectation of nearly 2 billion loss, on one hand due to overall gross margin exceeding expectations, and on the other hand mainly due to reasonable control of R&D expenses.

Dolphin's in-depth research and follow-up comments on XPeng include:

Earnings report season

Financial report review on May 21, 2024: The ‘explosion’ did not spread, XPeng managed to hold on”

Telephone conference on May 22, 2024《 Maintaining Overall Gross Margin at 10%-15% 》

Financial report review on March 19, 2024《 XPeng: Sales Volume is a Major Challenge, Relies Solely on Didi's Mona 》

Telephone conference on March 19, 2022《 Looking Forward to Mona Achieving Positive Gross Margin, Stable Monthly Sales Exceeding Ten Thousand 》

Financial report review on November 15, 2023:《 When Will the Average Performance XPeng Experience a New Breakthrough?》

Telephone conference on November 16, 2023《 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)"

Financial report review on August 23, 2022: "XPeng is Far from 'Making Money', Still a Distant Prospect"

Telephone conference on May 24, 2022: "XPeng: The Fourth Quarter is the Quarter Where Price Increases Reflect Results and Gross Margin Rebounds Significantly (Meeting Minutes)"May 23, 2022 Financial Report Review: Sales Champion, Loss King, is the market still buying XPeng's story?

March 29, 2022 Conference Call: Rapid channel penetration has opened the ceiling for XPeng's delivery volume (2021 Q4 Conference Minutes)

March 28, 2022 Financial Report Review: Selling more and losing more, is XPeng awkward or impressive?

November 23, 2021 Conference Call: XPeng: Exploring Robotaxi business, is intelligence advancing again? (Conference Call Minutes)

November 23, 2021 Financial Report Review: Booking the annual champion of new forces, how far is XPeng from "China's Tesla"?

August 26, 2021 Conference Call: XPeng Motors: Roll up your sleeves and work hard

August 26, 2021 Financial Report Review: XPeng Motors: Healthy financial report, full of "intelligent" heart

May 14, 2021 Conference Call: XPeng Motors 2021 Q3 Performance Conference Call Minutes

May 13, 2021 Financial Report Review: XPeng Motors: Tesla entangled in negativity and XPeng exceeding expectations, who do you pick?

March 9, 2021 Conference Call: XPeng Motors' Q4 Conference Call, not as exciting as the financial report?Live Broadcast

November 30, 2022: XPeng Motors-W (09868.HK, XPEV.US) Q4 2022 Earnings Conference Call

August 23, 2022: XPeng Motors (XPEV.US/09868.HK) Q3 2022 Earnings Conference Call

May 23, 2022: XPeng Motors (XPEV.US/09868.HK) Q2 2022 Earnings Conference Call

March 28, 2022: XPeng Motors (XPEV.US/09868.HK) Q4 2021 Earnings Conference Call

November 23, 2021: XPeng Motors (XPEV.US) Q4 2021 Earnings Conference Call

September 15, 2021: XPeng P5 Super Launch Event

August 26, 2021: XPeng Motors (XPEV.US) Q3 2021 Earnings Conference Call

May 13, 2021: XPeng Motors (XPEV.US) Q1 2021 Earnings Conference Call

April 14, 2021: XPeng P5 New Car Launch Event

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