TSLA - XPeng: China Struggles Won't Last

Summary

• XPeng Inc. got 2023 off to a slow start with weak January deliveries.
• With the Tesla, Inc. price cut, covid and the Chinese New Year, most Chinese consumers stayed on the sidelines looking for price cuts.
• The Chinese EV manufacturer predicts a big year ahead due to the new G9 SUV.
• XPeng stock is cheap, trading at only 1x '23 sales targets.

The Chinese electric vehicle ("EV") market got off to a slow start in January, with XPeng Inc. ( XPEV ) reporting a major sequential decline in monthly deliveries. The Chinese New Year and Tesla, Inc. ( TSLA ) price cuts impacted customer demand in the quarter. My investment thesis remains Bullish on a rebound in the Chinese EV sector, as much as on an XPeng gain with the stock still trading close to the lows.

Weak January

XPeng started 2023 on a weak start, with monthly deliveries of only 5,218 smart EVs in January. The company blamed the slowdown on the Chinese New Year holiday period, which began in mid-January.

The January 2023 deliveries were far below the 2022 levels and the prior month, where deliveries jumped to 11,292. The most likely reason for XPeng only delivering 5K EVs during January was the Tesla price cut at the start of the month and end of subsidies in December boosting those numbers.

Deutsche Bank suggested the monthly weakness in the Chinese sector was due to the consumers pausing purchase decisions to wait-and-see whether more price cuts would follow. Also, analyst Edison Yu prescribes a weak Q1 due to covid case counts and forecasts the Chinese EV market to rebound over the year to grow 30% units to reach 7.4 million NEV units for 2023. The industry is forecast to export 1.0 million units, bringing the 2023 production forecast to 8.5 million units.

XPeng is making a big push to return to the European markets with the launch of the G9 SUV and P7 sports sedan in Denmark, Norway, the Netherlands, and Sweden. A big question remains whether Western consumers will buy luxury Chinese EVs, though the company is offering an expanded standard warranty to 7 years/160,000 km from the date of delivery to ease any quality fears.

The Chinese EV manufacturer does offer promising ADAS technology. Any signs XPeng becomes a leader in the space could boost vehicle deliveries over time due to the competitive advantage.

200,000 Target

During an internal staff meeting, XPeng CEO He Xiaopeng revealed a goal to reach a 200,000 vehicle delivery goal for the year. Oddly, the goal was revealed at the end of January, knowing 2023 vehicle deliveries got off to a weak start.

XPeng only delivered 120,757 units in 2022, requiring the EV company to deliver nearly 195,000 units over the last 11 months to reach this goal. The company would need to average over 16K units per month, which alone would be a monthly record each and every month.

The additional sales opportunity in 4 European countries could help expand vehicle sales and deliveries in the months ahead. Though, the export opportunity in these countries isn't expected to come close to approaching the sales within China.

XPeng had targeted up to 300,000 EV deliveries in 2022 and came nowhere close to this goal. China covid shutdowns reduced demand and production dramatically, but the company also faced internal issues without new models reaching market until the G9 in October.

Regardless, the stock remains a play on the Chinese reopening. XPeng hasn't rallied this year despite the market rally and China moving away from the zero covid policy.

If XPeng comes anywhere close to the internal targets of 200,000 EVs delivered in 2023, the company will have to hit the following targets suggesting a massive ramp by Q4:

Q1'23 - 25,000

Q2'23 - 40,000

Q3'23 - 60,000

Q4'23 - 75,000

In essence, XPeng would have to average nearly 25,000 monthly vehicle delivers in Q4 to reach the 200,000 vehicle goal. The EV company has struggled to even top 10,000 units in any particular month in the past.

The flagship G9 is a game changing model, with a fastest-charging EV claim at launch along with an advanced ADAS system. The company claims a maximum CLTC range of 702 km with the 4C version able to add up to 200 km of CLTC range in as little as 5 minutes.

Takeaway

The key investor takeaway is that XPeng Inc. has several catalysts to substantial growth in 2023. The Chinese EV manufacturer needs to hit production targets, but XPeng stock hasn't generally rallied this year providing upside potential.

The whole sector trades at low multiples with XPeng Inc. stock now only warranting a forward P/S multiple of 1x.

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