Xiaopeng Motors (09868) 2023 Q3 financial report conference call: it is expected that the delivery volume in the fourth quarter will be between 59,500 and 63,500 vehicles. The overall gross profit margin is expected to significantly improve next year.

On November 16th, Xiaopeng Motors (09868) stated during the Q3 2023 earnings call that it expects fourth-quarter revenue to be between RMB 12.7 billion and RMB 13.6 billion, an increase of approximately 86.1% to 99.3% year-on-year. It also expects the delivery volume to be between 59,500 and 63,500 vehicles, an increase of approximately 101.2% to 114.7% year-on-year. Xiaopeng expressed confidence in accelerating and even surpassing its original plan to reduce costs by 25% by the end of 2024, thus significantly improving the overall gross profit margin next year. In the third quarter, Xiaopeng Motors' total revenue was RMB 8.53 billion (USD 1.17 billion), a 25% increase year-on-year and a 68.5% increase compared to the second quarter. The total delivery volume reached 40,008 vehicles, a 72.4% increase compared to 23,205 vehicles in the second quarter. It also achieved positive free cash flow, exceeding RMB 1 billion. Among these numbers, automotive sales revenue was RMB 7.84 billion (USD 1.08 billion), a 25.7% increase year-on-year and a 77.3% increase compared to the second quarter. From a cash flow perspective, Xiaopeng Motors had a positive free cash flow of approximately RMB 36.5 billion at the end of the third quarter and achieved positive free cash flow of over RMB 1 billion in the third quarter. With the cost reduction driven by new products and technologies, the company expects to generate a larger scale of positive free cash flow in the fourth quarter. In terms of vehicle models, the G6 became the sales champion of the 250,000-level intelligent pure electric SUV in its first quarter on the market. It delivered over 8,700 units in November. In September, the company launched the 2024 version of the G9, which has higher gross profit compared to the original G9. The new G9 has already delivered over 4,000 units in October and has become a star product in the 300,000-level pure electric SUV market. On November 17th, at the upcoming Guangzhou Auto Show, the new flagship model X9 will officially meet consumers and begin pre-sales. Meanwhile, the delivery of X9 will start in early January 2024, and the company expects X9 to become the top-selling large pure electric MPV in the market. In addition, the first MONA model, a sedan in the 150,000-level category, is expected to be launched in Q3 2024, supporting advanced intelligent driving. In terms of distribution channels, the company has eliminated hundreds of sales outlets in the first three quarters and plans to recruit over 100 new dealerships in the Jupiter plan within two months. It is expected to open 100 new dealerships by the fourth quarter of this year, with a total of over 500 stores by the end of the year. In the medium to long term, the company plans to establish 500 comprehensive stores integrating sales and services, nearly 1,000 experience centers, and satellite stores. The company stated that in 2024, Xiaopeng will integrate the self-developed capabilities of different systems to integrate the next generation of electronic and electrical architecture, unified intelligent driving field, intelligent assistant system for human-machine co-driving, intelligent voice, intelligent cabin capabilities, new large language model capabilities, and the next generation of intelligent chassis and intelligent power. These will be integrated and quickly deployed to different vehicle models, further globalized, and realize the integration of the new Xiaopeng across different platforms, even from automobiles to other transportation vehicles. It believes that in the long term, this will greatly improve the company's engineering capabilities in global deployment and multi-product deployment and strengthen its barriers in the overall smart field through the integration of different intelligent domains. Q&A Q: Regarding competition, we have seen more tech companies like Huawei and Xiaomi entering the electric vehicle market in the past few quarters. How does management address the competition situation in terms of the commercial ecosystem derived from consumer electronics, and how to bridge the gap in this aspect for electric vehicle companies? A: Originally, I was in the mobile internet entrepreneurship field, and when I invested in mini-programs, traffic could complement each other in many ecological areas and penetrate different capabilities, but there was no successful case in terminal devices such as PC, mobile phones, and televisions, where their traffic could not be interconnected. However, nowadays, we see more and more cross-industry competition (cross-industry competition from real estate, mobile phones, and the internet). It depends on whether this cross-industry competition and the strong AI capability of electric vehicles have derivations. Xiaopeng has been looking forward to such a layout in its own field. A few years ago, we cooperated in the travel and AI fields, and in July, we cooperated with Volkswagen in the manufacturing field, focusing on the areas of the supply chain, manufacturing, and after-sales service. In August, we cooperated with Didi in the field of ride-hailing, combining different capabilities and complementing each other. Q: Regarding pricing power. Apart from cost reduction in the whole vehicle, product differentiation and branding play a more important role in pricing power in the segmented market. How does Xiaopeng Motors plan to gain stronger pricing power in the future segmented market, as some domestic car companies have been passively adjusting prices? A: Brand reshaping and branding, innovative points of product categories. Xiaopeng will comprehensively exert efforts in four elements for 2024-2025: scale, cost, brand, and differentiation to gain stronger pricing power. Q: In the third quarter, some stores were opened or closed. What is the progress of channel reform? How many stores can be opened by the end of next year? What is the proportion of direct sales and dealers? Did the financial indicators and channel reform have any effect? A: Feng Ying came from Great Wall Motors and has done well in cost, channel, and product innovation. For the past few months, we have been observing Xiaopeng's innovation system. Xiaopeng used to have a combination of direct-operated and dealership channels, but with unified pricing. We started the transformation from the third quarter because it is related to the number of models in 2025 and 2026. In 2025, the number of our vehicles will increase significantly compared to now. Taking into account future market changes and competition, we will expand to lower-tier cities. So we started the transformation in Q3. In the medium to long term, we plan to establish 500 comprehensive stores integrating sales and services, nearly 1,000 experience centers, and satellite stores, realizing a large-scale closed-loop of sales and services. We expect to open 100 new dealership stores in the fourth quarter of this year and have a total of over 500 stores by the end of the year. The proportion will be mainly dealerships. It takes some time for a new store to transition from start-up to maturity, but we are confident that it will bring huge sales growth in the first and second quarters of next year. Sales in lower-tier cities will also increase, and we will maintain our pricing power.Xiaopeng is responsible for the sales volume and NPS satisfaction of the self-operated distributors in various regions. They provide consistent standards of service and heavily invest in tools and processes to enhance empowerment. Looking at it today, there is still room for improvement in Xiaopeng's store efficiency compared to the industry leader, but it is expected to significantly increase by 2024.A: Let me answer the question regarding international expansion. Currently, we adopt a hybrid model in European countries. We have both direct stores and partners and distributors, but in the future, we may choose to use the partner model more, using agents or distributors in specific markets. Therefore, the proportion of the partner model may be higher. As for the products for the international market, we have already launched G9 and P7 in Europe, and next year we will launch G6 as a global product. So, we will only design and validate a portion of the products for the international market, not all of them. The products I mentioned are the ones that have been determined for the global market, and we also plan to launch right-hand drive models next year. For example, by the end of next year, we plan to launch our first right-hand drive model, which is likely to be based on the G6 model. This way, we will be able to enter the Southeast Asian market. This is definitely one of our plans, and we will also focus on other right-hand drive model markets. Q: Regarding the sales guidance for Q4, it has already exceeded the monthly sales guidance of 20,000 units in October, but remained relatively flat in November and December. Is this due to the company being relatively conservative in budgeting or are there new developments? A: The guidance of 60,000 units for Q4 reflects the company's confidence in the achievements made in the past few months. Achieving 20,000 units per month is a very important milestone, taking into account the competition and macroeconomic conditions that the company will face in Q4. It is a very realistic target that reflects the current market conditions and current order momentum. Q: Excluding the G3 EOP, why is the gross margin per vehicle flat? In 2021, when monthly sales exceeded 100,000 units, the gross margin reached 10.9%, but this time, with sales exceeding 40,000 units, the gross margin is only flat. What is the reason? How much weight is there in the expected decrease in vehicle prices? A: Compared to the gross margin base in previous years, the decrease this time is mainly due to the following factors: First, the impact of G3 EOP, but this part has been provisioned in this quarter. Second, the cancellation of subsidies for new energy vehicles in 2023. In addition, the decrease in ASP over time is also an overall market factor. The gross margin for Q4 will improve, as the company is actively optimizing the product portfolio. For example, the upcoming 2024 version of G9 will have a much higher gross margin than the old version, which will prove the ability to continuously improve the profitability of the products. Q: Which models next year can benefit from the cost reduction brought by technology? A: All models will benefit from the cost reduction in technology and business operations, with a focus on the best-selling models to perform better. Q: The price positioning of MONA is slightly lower than that of the main brand. What is the specific positioning of MONA and will it be sold through the existing channels? A: The company will share the specific positioning of MONA next year, as well as the overall situation of channels and after-sales. Currently, preparations are still ongoing. A significant portion of MONA's channels will be separate from the main brand's channels. Q: What is the situation with the cooperation with Volkswagen? Zero Run and Stellantis have established Zero Run International, where they take advantage of each other's strengths to sell Chinese products overseas. Is this a faster and better solution for international expansion? A: The joint development based on the G9 platform has been very smooth and will soon reach an important milestone. The cooperation with Volkswagen is an important measure of the internationalization strategy. Volkswagen has a global supply chain capability in manufacturing, from which the company can learn a lot and leverage each other's strengths in international markets. Q: Regarding products, how do you view the demand in the lower-tier cities? How can the company leverage its strengths through products in the lower-tier market? A: Currently, regarding the demand in the lower-tier market, we have considered it in the MONA platform and another category of innovation. We cannot provide specific product development information before the products are released, but there are two important points: firstly, we expect to provide excellent intelligent assisted driving capabilities to meet the needs of users in third and fourth-tier cities, and we may even make these capabilities standard and fully used in these cities. Secondly, we will definitely make significant changes in the entire channel aspect. Q: Regarding the company's R&D plan, it can be seen that from last year to this year, the overall R&D expenses have remained relatively flat. With the expectation of continued sales growth next year, will the company allocate more funds to R&D? Where will the increased R&D investment mainly go? A: 1) Regarding R&D, the company has done a series of things in the recent three quarters to make R&D expenses more efficient. For example, the first thing the company did when reorganizing was to subtract unnecessary R&D expenses. The second is to promote modularization so that different models and platforms can enter a common architecture system. Thirdly, as an example, we currently have many discussions with various research and development suppliers, and we directly record their R&D expenses into the BOM, even though the BOM may be higher, we aim to reduce R&D expenses. Fourthly, we are strengthening the integration of tools in the entire R&D system, which is a series of things we have been doing recently. 2) Starting from next year, we will definitely strengthen our capabilities in several areas, such as styling, intelligence, craftsmanship (we believe there is great room for improvement), internationalization, and long-term strategic cases for future layout, etc. Therefore, the absolute number of R&D expenses in next year will definitely show a significant increase compared to this year. Q: How do you expect autonomous driving to reshape competition? A: We expect autonomous driving to reshape competition in the industry. It will bring new opportunities and challenges for companies. We are actively developing autonomous driving technology and will strive to be at the forefront of this field. We believe that autonomous driving will revolutionize the way people travel and will be an important part of the future automotive industry.The speed of competition?A: These five years will be similar to the period of rapid development of new energy vehicles from 2018 to 2022. We can expect to see a rapid development of new energy vehicles similar to that of 2020 by around 2025. Currently, we are still in the process of technological preparation and industry groundwork, but young users who are interested in exploring and enjoying technology are already trying it out. I believe that in some time, there will be more mass users. Q: What are the advantages of a full-stack self-developed approach? A: There are many advantages to a full-stack self-developed approach. 1) Localization is best done within the technological aspect, and it requires self-development in localization. 2) Users now have a higher acceptance of fully autonomous driving, but they expect it to be at a suitable cost, with appropriate safety and experience. To achieve better cost, only a full-stack self-developed approach is possible. For example, how to embrace new technological changes. We have seen changes in large-scale language models in the past year. Whether large-scale language models assist in autonomous driving partially or end-to-end across the whole system, only a full-stack self-developed approach can achieve that. Additionally, we have observed an interesting viewpoint that intelligent automobiles now, unlike traditional vehicles, are shifting from loose coupling to a tight coupling with AI. Only through full-stack self-development in multiple areas, such as in the cabin, intelligent driving, EEA architecture, language models, can the coupling of different hardware, software capabilities, costs, and operational systems be achieved. Therefore, we believe that in the future trend, it will be difficult for partial self-development or partial full-stack development in certain domains to cope with long-term competition. Q: Is there a chance for the whole vehicle gross margin to turn positive in the fourth quarter? Will the guidance be adjusted? MONA's price range is around 150,000 RMB, and currently, vehicles in this price range have weak profitability in the market. How can MONA achieve both competitiveness and profitability? A: We still maintain the guidance that the gross margin will turn positive in Q4. The product portfolio has been optimized compared to Q3. The cost of batteries at the end of Q3 has decreased, so the cost of batteries in Q4 will be reduced by 1/4, thanks to the stabilization of lithium prices. It is expected that the gross margin in 2024 will show a significant improvement compared to 2023. 1) This is mainly due to the company's continuous cost reduction efforts, ultimately achieving the goal of a 25%+ reduction in costs. 2) Next year, a better product portfolio will be launched. For example, the X9, which currently has the highest gross margin in the product portfolio, and the new products on the 2.0 platform next year will also achieve better profits. MONA is positioned in the A-class vehicle market and has good cost control and process planning. MONA is very competitive from a cost perspective and will bring economies of scale, so its larger scale will not drag down profits. It is expected that MONA's sales expenses can be further reduced.