It has been nearly three years since Xiao Peng (09868) finally intends to make a comeback?

XPeng, Inc. ADR Sponsored Class A (09868, XPEV.US) released its third quarter financial report on November 19, 2024, after the market closed in Hong Kong and before the market opened in the United States. In terms of actual performance: 1) The gross profit margin of car sales continued to improve compared to the previous quarter: The gross profit margin of the car business in the third quarter was 8.6%, showing continued improvement compared to the previous quarter. The market originally thought that the delivery of the inexpensive new car M03 would not have much impact on the gross profit margin of the car business, but the cost reduction was significant in this quarter. Dolphin analysts predict that the increase in the car gross profit margin is partly due to the impact of the P5 impairment (halted production in the second quarter) which dragged down the car gross profit margin by about 2-3 percentage points in the second quarter, but the expected impact of impairments in the third quarter is minimal. On the other hand, it is expected that the increase in the proportion of overseas vehicle models in this quarter has led to the improvement. 2) The average selling price of cars decreased compared to the previous quarter, resulting in revenue below expectations: Although the average revenue per vehicle in the third quarter dropped to only 190,000, below the market's expected 197,000, this was mainly due to the impact of the vehicle structure - the proportion of the low-cost Mona M03 model increased in the vehicle structure. This is not a major issue given the good performance of the gross profit margin. 3) Continued cooperation with Volkswagen and improvement in recurring income: The gross profit margin of other businesses in the third quarter continued to increase to 60%. In this quarter, in addition to the Volkswagen technology licensing fees based on the G9 platform, the EEA technology architecture technology licensing fees also began to be recognized in the third quarter, with a higher gross profit margin for technology research and development services (over 90%), leading to a better-than-expected margin. 4) Reasonable control of research and development expenses leading to operating losses below expectations: In terms of research and development expenses, although the company had previously communicated that research and development expenses would increase in 2024, the increase in research and development expenses in this quarter was not significant and was lower than the market's expected 1.8 billion. With the gross profit margin exceeding the market's expectations by 150 million and research and development expenses lower than the market's expectations by 200 million, this led to operating losses being 470 million lower than market expectations. Dolphin Research views: Overall, XPeng delivered a good performance this quarter. The gross profit margin of car sales continued to improve despite the delivery of the low-cost M03 model, exceeding market expectations. Looking ahead to the fourth quarter, although the price per vehicle will continue to decrease by 27,000 compared to the previous quarter, this is mainly due to the impact of the vehicle structure - the proportion of the two main models in the fourth quarter: the low-cost M03 model continuing to increase in the vehicle structure; the XPeng P7+ with a lower starting price (3.7 thousand lower compared to the old P7 starting price), leading to an increase in its proportion. However, what the market is more concerned about in the fourth quarter is whether the strong sales momentum from the third quarter can continue: whether the bestselling models M03 and P7+ can smoothly increase production capacity in the fourth quarter; and whether the car business gross profit margin can continue to improve with the continued increase in the proportion of the M03 model. Based on the sales guidance, with a sales target of 87,000-91,000 vehicles in the fourth quarter, exceeding the market's expected 80,000 vehicles, Dolphin analysts estimate that by the end of December, Mona M03 will reach nearly 15,000 units, and P7+ will reach nearly 10,000 units, implying that the production capacity of the two bestselling models is increasing smoothly. Furthermore, with a significant reduction in costs for the P7+ (BOM costs reduced by 25%), even with the lower starting price, the gross profit margin is expected to remain in the double digits. Dolphin analysts predict that this will continue to drive the gross profit margin of the car business in the fourth quarter, but specific gross margin guidance will need to be reviewed in the company's conference call. Looking ahead to 2025, XPeng's operational performance is expected to continue to improve: 1) Based on the success of the Mona M03 and XPeng P7+ in terms of sales, XPeng's ability to create bestselling models has been validated. The core competitive advantage of XPeng in creating these bestselling models lies in: Competitive pricing through cost reduction capabilities: The P7+ and Mona M03, in addition to having competitive advantages in terms of appearance, product definition, and electrification technology, have been core factors in becoming bestselling models due to their competitive pricing. Despite the low starting price, the P7+ maintains a double-digit gross profit margin, and while the proportion of the M03 model has increased this quarter, the gross profit margin of the car business is still showing an improvement compared to the previous quarter, indicating that XPeng's cost reduction capabilities have been successfully validated. The BOM cost reduction for the P7+ reached 25%, partly due to the improvement in autonomous driving technology transitioning from algorithm-based to pure visual solutions; this, in addition to possible joint procurement with Volkswagen and advancements in platform universal capabilities, have contributed to this cost reduction. Looking ahead to 2025, the speed at which XPeng introduces new cars will continue to accelerate, with a plan to introduce approximately 30 new models or updates within three years. This strong product cycle will be continued (specific models will be detailed in the conference call). The new cars are expected to follow the cost reduction path of the P7+ and Mona M03 and replicate the success of the bestselling models. The autonomous driving technology has successfully transitioned to a pure visual route, positioning XPeng at the forefront domestically and creating differentiation in models while opening up opportunities for software technology licensing capabilities: The P7+ is equipped with the latest "AI Eagle Eye Vision" autonomous driving solution, which has successfully transitioned to a pure visual route (without laser radar solutions), with urban mapless driving progress also leading the industry. The success of the pure visual route has significantly reduced the cost of autonomous driving hardware, allowing XPeng to be the first to lower the cost to the 10,000-20,000 yuan vehicle segment, creating a competitive advantage. The progress in autonomous driving capabilities and leading positions have also opened up XPeng's software licensing capabilities; the cooperation with Volkswagen has progressed smoothly, and the high-margin technology licensing fees are starting to be realized, continuously raising XPeng's overall business gross margin and opening up new growth opportunities in autonomous driving technology licensing. 2) XPeng is set to launch extended-range products in 2025, adopting a "pure electric + extended range" strategy to tap into new markets. The first model is expected to be launched in the second half of 2025. The extended-range models will be equipped with Contemporary Amperex Technology's next-generation batteries, entering the era of "large batteries, small fuel tanks", with a pure electric range of over 400 kilometers and a 5C charging efficiency.Overall endurance exceeds 1400 kilometers, further expanding the customer base and creating additional value.In the strong product cycle, and after Xiaopeng's ability to reduce costs through technology and lead in intelligent driving has been verified, Dolphin forecasts that Xiaopeng's sales in 2025 will double from 19,000 vehicles in 2024 to 40,000 vehicles in 2025, with sales continuing to grow at a high rate. Based on the expected sales volume of 400,000 vehicles in 2025, Xiaopeng's overall P/S ratio is estimated to be around 1.2 times, higher than the industry average multiples (ideal 0.85 times, BYD Company Limited 0.88 times). However, given the higher income CAGR compared to the industry average from 2024 to 2026 and the potential for Xiaopeng's intelligent driving capabilities to open up imagination in the field of intelligent driving authorization, Xiaopeng's stock price still has upward potential. Here is a detailed analysis: I. Xiaopeng's automotive business gross margin in this quarter exceeded expectations Since Xiaopeng's sales in the third quarter have been announced, investors are more concerned about the situation of the automotive business gross margin in this financial report. In the third quarter, although sales increased by 54% due to the strong sales of M03, the market generally expected that the gross margin of the car sales business would only increase by 0.5% to 6.9% due to the low price and low gross margin of M03. However, the actual gross margin of the car sales business was 8.6%, exceeding market expectations. a) Average price per vehicle: Due to the impact of the vehicle model structure and price reductions, the average price per vehicle decreased by 3.7 thousand yuan compared to the previous quarter. In the third quarter, the average price per vehicle was 189,000 yuan, a decrease of 3.7 thousand yuan compared to the previous quarter, which basically met the implied average price of 190,000 yuan in the previous quarter. However, it was lower than the market's expected 197,000 yuan. The decline in the average price of Xiaopeng's vehicles in this quarter was mainly due to two reasons: 1) Impact of the vehicle model structure: Due to the strong sales of Mona M03 in the third quarter, its share in the vehicle model structure increased by 23%. However, due to its low pricing (only 119,800-155,800 yuan) and the fact that the intelligent driving version of 155,800 yuan has not been delivered yet, it dragged down the average price per vehicle. 2) Impact of price reductions: Dolphin observed that Xiaopeng once again reduced the prices of its models in the third quarter: compared to the second quarter, the G9 series was reduced by 10,000 yuan, the old model P7i was reduced by 15,000-26,000 yuan, and the high-end version of G6 was reduced by 15,000 yuan, which also to some extent dragged down the unit price. b) Unit cost per vehicle: The significant decline in costs due to the depreciation impact of the old P5 model The unit cost per vehicle in the third quarter was 173,000 yuan, a decrease of 39,000 yuan compared to the previous quarter. Dolphin believes that this was mainly due to: 1) The continued reduction in the depreciation impact of P5: In the second quarter, Xiaopeng made provisions for the inventory depreciation and purchase commitment losses of P5, which dragged the automotive business gross margin by 2-3 percentage points. However, the actual gross margin of the car sales business was between 8.4% and 9.4%. Since P5 has stopped production in the second quarter, it is expected that the impact of depreciation on the third quarter will be minimal. 2) Increase in the proportion of overseas models in the third quarter: In the third quarter, Xiaopeng's models began to go overseas, and it is expected that the proportion of overseas models in the third quarter will be around 10%, further increasing the gross margin. 3) Economies of scale being realized: In the third quarter, sales increased by 54% to 47,000 vehicles, capacity utilization increased, and unit costs were reduced. 4) Low-cost Mona M03 model production resulted in lower manufacturing costs. c) Unit gross profit: The significant decrease in unit manufacturing costs drove an increase in the automotive gross margin Although the average price per vehicle decreased by 37,000 yuan, the unit costs decreased by 39,000 yuan. Therefore, for each vehicle sold in the third quarter, a gross profit of 16,000 yuan was earned, representing an increase of 2,000 yuan compared to the previous quarter. The gross profit margin for car sales increased from 6.4% in the previous quarter to 8.6% in this quarter. II. The fourth quarter sales guidance exceeded expectations, and the revenue guidance implied a continued decline in unit price a) Fourth-quarter automobile sales target: 87,000-91,000 vehicles, exceeding market expectations of 80,000 vehicles Since the sales volume of 24,000 vehicles in October is known, it implies an average monthly sales of 32,000-34,000 vehicles in November and December, surpassing market expectations of 80,000 vehicles, laying the foundation for strong sales in the fourth quarter. The main driving force behind the fourth quarter sales are two main models: 1) Mona M03: With its high appearance and cost-effectiveness, Mona M03 successfully supports Xiaopeng's "massive" models. Although the intelligent driving version has not been delivered yet due to capacity issues (expected to be delivered in early 2025), deliveries in September and October have exceeded 10,000 vehicles, and the waiting time for Mona M03 is currently over 9 weeks, indicating that Xiaopeng's Mona M03 still has sufficient orders in hand. Dolphin predicts that based on the current sales trend, Mona M03 will reach 15,000 vehicles in December and its share in the vehicle structure in the fourth quarter will continue to increase by 18 percentage points to 41%. 2) Xiaopeng P7+: P7+ with: a. Low starting price: Starting at 186,800 yuan, it is 37,000 yuan lower than the old P7 starting price; b. High-end intelligent driving label (first visual end-to-end launch) It has also become Xiaopeng's second popular model. It sold 31,500 units in just 4 hours of its launch, greatly exceeding market expectations. Dolphin predicts that P7+ will climb to 10,000 units in December and its share in the vehicle structure in the fourth quarter will increase by 14 percentage points to 15%, surpassing the old P7. The low starting price of P7+ has also to some extent lowered the unit price. 2) Fourth-quarter revenue expectations: 15.3-16.2 billion, implying a fourth-quarter unit revenue of 162,000 yuan Xiaopeng's revenue guidance for the fourth quarter is 15.3 billion to 16.2 billion. According to the forecasted revenue of 1.35 billion for the fourth quarter, the revenue guidance for the fourth quarter implies a unit price of 162,000 yuan, a decrease of 27,000 yuan compared to this quarter. Dolphin believes that the main reason for the decline in unit price in the fourth quarter is due to the two main models expected to have strong sales in the fourth quarter: 1) The low-cost Mona M03 is expected to continue to account for 41% of the sales structure in the fourth quarter, lowering the unit price; 2) P7+ starting at only 186,800 yuan, is 37,000 yuan lower than the old P7 starting price. It is expected to gradually replace the old P7 in the fourth quarter, accounting for 15% of the vehicle structure, an increase of 14 percentage points from the previous quarter. The low starting price of P7+ also to some extent contributes to lowering the unit price. However, Dolphin believes that the decline in unit price in the fourth quarter is not significant and is mainly influenced by changes in the vehicle structure, with technology reducing costs.The BOM cost has decreased by 25%, even with a low selling price, the profit margin still reaches double digits. It is expected to drive the gross profit margin of the automotive business to continue to rise in the fourth quarter.3. Overall revenue slightly below market expectations, but gross margin exceeds market expectations In the third quarter, Xiaopeng achieved a total revenue of 10.1 billion, slightly below the market expectation of 10.5 billion, mainly due to the lower-than-expected car unit price. However, the total gross margin reached 15.3%, exceeding the market expectation of 13.2%, with both the gross margin of the car business and other business exceeding expectations. a) Car sales revenue: Car sales revenue for this quarter was 10.1 billion, slightly lower than the market expectation of 10.5 billion. The lower-than-expected car sales revenue this quarter was mainly due to the increase in the proportion of low-priced M03 models in the vehicle structure, which lowered the unit price. However, whether the M03 becomes a hit model is what the market is most concerned about, so the lower-than-expected unit price is not a big issue. b) Services and others: Revenue and gross margin boosted by higher fees for technical research and development services in cooperation with Volkswagen In this quarter, revenue from services and other businesses reached 1.31 billion, with a gross margin of 60.1%, exceeding the market expectation of 56%, mainly due to the high-margin fees for technical research and development services in cooperation with Volkswagen (with over 90% gross margin). Xiaopeng's cooperation with Volkswagen began in July 2023, initially developing two B-class electric vehicles based on the G9 platform and Xiaopeng's intelligent driving capabilities, with plans to expand to cooperation on Xiaopeng's latest EEA 3.5 electronic architecture in April 2024, integrating it into Volkswagen's CMP and MEB platforms in China. In addition to confirming the upfront technical licensing fees based on the G9 platform and software in the third quarter, Volkswagen's upfront technical licensing fees for using Xiaopeng's EEA electronic architecture also began to be confirmed, boosting the revenue and gross margin of other businesses. 4. Operating expenses are reasonably controlled, lower than market expectations XPeng, Inc. ADR Sponsored Class A focuses on intelligence as its core competitiveness, requiring continuous R&D efforts in the field of intelligence to form and solidify its advantages. The company is also deepening channel reforms, increasing the proportion of distribution through the Jupiter plan, shifting from a direct sales model to a distribution model. 1) R&D expenses were 1.63 billion, lower than market expectations Based on the situation this quarter, Xiaopeng's R&D expenses reached 16.2 billion, lower than the market expectation of 17.2 billion. Xiaopeng's R&D expenses are mainly invested in intelligent and new model R&D. In terms of intelligence, Xiaopeng uses intelligence as its core competitiveness, and with a significant improvement in algorithm capabilities, intelligent driving has now switched to a pure visual solution. The P7+ model is equipped with the latest "AI eagle eye vision" intelligent driving solution, which achieved a 50% reduction in hardware costs for autonomous driving by switching to a pure vision solution. At the same time, it achieved a 25% reduction in BOM costs, making the P7+ highly competitive in terms of starting price and quickly becoming a hit model for Xiaopeng, while still maintaining a double-digit gross margin. Previously, Xiaopeng stated that the full-year R&D expenses for 2024 would be around 7 billion, implying an average R&D expense of 21 billion for the third and fourth quarters, while R&D expenses for this quarter were only 16 billion, indicating reasonable control of R&D expenses. 2) Sales and administrative expenses were 1.63 billion, basically in line with expectations Sales and administrative expenses for this quarter reached 16.3 billion, an increase of 0.6 billion compared to the previous quarter. The main reasons for the increase were the increase in sales volume, increased commissions paid to franchise dealers, and increased marketing, promotion, and advertising expenses for the launch of the Mona in the third quarter. Since the third quarter of last year, Xiaopeng has initiated the "Jupiter Plan" channel reform program, increasing the proportion of authorized stores, especially focusing on lower-tier cities, mainly expanding the distribution model to quickly expand into lower-tier markets, and expanding the coverage of stores in lower-tier cities in preparation for the launch of the low-priced Mona. As of the end of the third quarter, Xiaopeng had a total of 639 stores, with a net increase of 28 stores in the third quarter, mainly through the rapid opening of stores (covering a net increase of 21 cities) through the dealer model in lower-tier cities, preparing for the high sales of the low-cost Mona. In this quarter, the Non-GAAP operating loss was only -1.6 billion, significantly lower than the market expectation of nearly 2 billion in losses. On the one hand, this was due to the gross margin exceeding expectations, and on the other hand, it was mainly due to the reasonable control of R&D expenses. This article is reprinted from the "Dolphin Research" public account, GMTEight editor: Jiang Yuanhua.