Authors:
Shaun Tan (Wenshuan.tan@gmail.com)
Ru Chern Chong (ruchern.chong@fynvent.com)
A hidden gem among its peers
On the 8th of March, Xpeng (NYSE:XPEV) announced their Q42020 earnings, reporting a revenue of US$895.7m (YoY: +151.8%) and a net loss of US$418.7m (YoY: -26.0%), similar to its Electric Vehicle (EV) startup peers NIO (NYSE:NIO) and Li Auto (NASDAQ:LI) where all three of the EVs startups reported a loss. Yet, we believe that Xpeng is still worth much more than it is at the time of this report, and could potentially outgrow its peers in the future. With the recent pull-back due to the global bond sell-off, we believe this is a great opportunity to add Xpeng into your investment portfolio.
Strong deliveries in 2020 and a strong start to 2021
Despite the devastating blow to the economy globally in 2020, Xpeng delivered a whopping 27,0001 vehicles in 2020, just trailing NIO by 14,000 deliveries. We believed that this is a relatively strong result as Xpeng only started production of their cars a year later when compared to NIO. The vehicle delivery in 2021 got off to a strong start with 6,015 delivered in January and 2,223 in February (seasonal decline due to long weekends and slow down going into the Chinese New Year). The growth in the deliveries has been strong and progressive, and the March deliveries will be a crucial result to determine if the trend can continue. Given the trajectory of the growth, we project Xpeng to deliver around 80,000–90,000 vehicles by the end of 20211.
Source: Data by Xpeng Motors and NIO
Negative profits… albeit increasing margins
The net loss for the year 2020 was RMB2,732.0m (US$418m), a decline of 26% compared to RMB3,691.7m for the prior year. A negative profit is very common for companies that are in the early stages, due to higher R&D costs, marketing costs, and etc1. We expect Xpeng losses to continue through 2023 before turning profit in 2024. The gross margin for the year was 4.6% while Q42020 gross margins reached 7.4%. We believe that the gross margin will continue to improve with the increased adoption of the XPILOT software and the LiDAR technology as R&D continues. More on the technologies below…
Navigation Guided Pilot — XPILOT
XPILOT, also known as the Navigation Guided Pilot (NGP), is the autonomous driving system used in all Xpeng vehicles. The NGP is capable of up to L3 autonomous driving with XPILOT 3.0 delivered as of March 2021 and is expected to undergo multiple upgrades to improve on the self-driving capabilities throughout the years. Xpeng had announced plans to upgrade the NGP to an L4 autonomous driving with XPILOT 4.0 in 2022 and full automation with XPILOT 5.0 planned for 2025.
Levels of autonomous driving
L2 (Partial automation) — The vehicle can perform steering and acceleration. The human still monitors all tasks and can take control at any time.
L3 (Conditional automation) — Surrounding detection capabilities. The vehicle can perform most driving tasks, but human override is still required. This is used for features like auto-parking and assisted driving such as lane changing and auto-braking.
L4 (High automation) — The vehicle performs all driving tasks under specific circumstances. Human override is still an option.
L5 (Full automation) — The vehicle performs all driving tasks under all conditions. No human attention or interaction is required.
LiDAR
Xpeng is set to bring its first model with the LiDAR (Light Detection And Ranging) system in the first half of 2021. The equipment is used for measuring distances, object detection and scanning the surroundings with better precision. Livox is the supplier of the hardware for Xpeng’s new models slated for mass production in 2021. This will put Xpeng at the forefront of a smart electric car maker in its bid to deliver a smart driving experience with superior safety and comfort. It will also cover more usage scenarios, effectively enabling Xpeng vehicles to perform low-speed NGP functions for city driving. While Xpeng is the industry-leading brand to bring the LiDAR to their production cars in 2021, many other EV makers and competitors are planning to bring LiDAR to their lineups as well. As such, we believe that the future of autonomous driving is based on precision delivered from the LiDAR technology and that more companies getting on-board are a testament to the paramount importance of it.
A strong balance sheet with support from state-backed bank and companies
On the balance sheet side of things, Xpeng had a very strong balance sheet with RMB29b cash on hand (equate to about 65% of its total asset) and a debt-to-equity ratio of about 5%1. This meant that they have enough cash to tide through the early period of loss-making as well as to expand their production capacity.
Xpeng had also signed an agreement with 5 China banks, 3 of which are China’s largest banks (CCB, ABC, and BOC), for a total of RMB12.8b in credit facilities. They have also recently received RMB500m support from the Guangdong government to aid them in the expansion of their business. This is a very good sign for investors as they have support from the local government as well as the top banks.
Apart from that, Xpeng is also considering the potential of a dual listing on HKEX (Hong Kong Stock Exchange), which could see it raising approximately an additional US$US$5b in capital to fund its expansion. At the same time, this will also limit the risk of any potential delisting that the US may impose should the relationship between the USA and China continue to deteriorate.
However… a saturated market with tough competition
The EV market in China is getting more saturated, with many of the top automaker companies such as BYD, Geely, BAIC, SAIC, and Chang’an Automobile, getting involved in making EVs. Similarly, big tech companies such as Baidu, Meituan, Xiaomi, and Huawei have joint ventures with the automakers to provide the necessary technology for smart systems and autonomous driving. Everyone is competing to grab a slice of the pie in the EV industry — you cannot get more competitive than this.
Strong competition means compressed margin and this may hurt Xpeng’s profitability as their margin is already low. However, Xpeng still has a positive outlook based on its strong delivery numbers, capacity expansion plans as well as innovation on their smart systems. We believe that Xpeng has an advantage in terms of its technological development over its peers and may outgrow them in the near future.
Shortage of chips may hinder growth potential
China is facing an “unprecedented” chip shortage since 2021, and this has affected many of the automakers in the coming few months as chips are essential hardware in the production of driving assisted electric vehicles. The shortage is likely to last through Q2 2021 as China has stepped up the production of these chips by supporting the chip manufacturers.
While the impact will likely be limited to the months of March, April, and May, a fall in deliveries will very likely pause the growth of Xpeng in the aforementioned months and may affect their growth target for 2021. Xpeng had announced guidance and had managed expectations by setting a lower target of 12,500 deliveries for Q1 despite already delivering 8,238 vehicles in the first 2 months of 2021, implying an estimated delivery of 4,262 in March 2021. Once again, we stress that the March and April vehicle delivery will be a very crucial result for the company’s short-term outlook. However, a few months of setback is unlikely to affect the long-term outlook.
Conclusion
The future of the electric vehicle industry certainly looks very promising and exciting as China is looking to go green and cut its emissions very aggressively, to reach peak carbon emission by 2030 and to reach carbon neutrality by 2060. There is without a doubt that EVs will replace petrol vehicles as the new normal mode of transport within the next 10 to 20 years as many more companies are set to enter this industry to gain a slice of the pie.
We believe that the 3 EVs startups — Xpeng, NIO and Li Auto, have good potential and will likely continue to grow as they each offer unique features that could appeal to different customer bases. However, we favour Xpeng over the others for the reasons mentioned in this report. We believe that Xpeng has the lead in terms of its innovation and technological developments and have a high expectation to outgrow its peers in time to come.
Currently, Xpeng trades at around US$37.50 per share with a price-to-sales ratio of 32.93, comparable to 28.65 of NIO. Based on our estimates of 80,000 to 85,000 deliveries in 2021 (300% increase from 2020), we set our target price for Xpeng of around US$60 per share (an upside of 60% from the traded price aforementioned) with a more conservative price-to-sales ratio of about 15.00.
Xpeng Tracker
We have set up a tracker for Xpeng to monitor the deliveries and other metrics for Xpeng. We will periodically update this document to reflect the change in deliveries as well as the change in target price which is based on the deliveries reported.
Disclaimer: This research report is written in the opinions of the authors with general information available on the web and does not constitute professional financial advice. Please do not rely solely on this research report to make any investment decisions. Always do your due diligence when making investment decisions.
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