XPEV - XPeng: Expensive EV Company In A Highly Competitive Market

2023-04-26 01:02:58 ET

Summary

• XPeng is just another of the many EV startups that sprout out of China benefitting from the government subsidies issued in the last decade.
• The Chinese EV market is highly competitive, with XPeng facing tough competition from BYD and Tesla, who have superior economies of scale, technology, and brand recognition.
• Despite the considerable price correction, XPeng still does not represent a good investment opportunity given the high competition it will have to face.

Investment Thesis

You may wonder what happens when a Chinese EVs startup, like XPeng (XPEV), goes public amid an electric vehicle stocks bubble. Well, its stock price will probably rise more than 200% in less than a month, to then just inexorably collapse more than 80%, leaving avid investors empty-handed.

XPeng is just another of the many EVs startups that sprout out of China benefitting from the government subsidies issued in the last decade to help the transition to new energy vehicles.

In 2020, the year XPeng turned public, they sold only 27 thousand cars but that didn’t stop the market from pricing the company $46 billion at its peak, the same value as SAIC Motor, the biggest Chinese automaker by revenues.

Back to the present day, with more than 250 thousand cars delivered so far, and stock prices returned to rational levels, XPeng might seem a good growth stock to be added to investors’ portfolios.

However, in today’s analysis, we will assess why given the high competition of the market in which XPeng operates and its lack of a significant competitive advantage, XPEV stock does not represent a good investment opportunity.

Business Model

XPeng develops, manufactures, and sells battery electric vehicles comprising three sedans and three SUVs spanning from mid-size to flagship models. The bulk of XPeng’s vehicles is priced between $20 thousand and $35 thousand, with the only exception of the G9 flagship SUV with a selling price of around $50 thousand.

The price range of XPeng BEVs is the most important factor in determining the company’s future success. Unlike NIO (NIO), another ultra-hyped Chinese EV company, which targets the high-end segment of the passenger vehicle market with an average selling price of more than $50 thousand, XPeng is mostly competing in the middle segment of the market, where all the biggest players like BYD and Tesla are ferociously competing for market shares.

In 2022 XPeng’s products obtained decent success among Chinese consumers placing seventh, with 120 thousand cars delivered, in the race for the best-selling electric vehicle company in China.

Other than the sale of electric vehicles, XPeng, like most of the other EV companies, develops and sells power solutions to help its customers with their charging needs. As of the end of 2022, revenues derived from power solutions and others accounted for 7.5% of total revenues.

Operating Performance

Looking at XPeng’s past operating performances, revenues grew at a compound annual growth rate [CAGR] of 126%, from $333 million in 2019 to $3.8 billion in 2022. The gross margin was around 12% in 2021 and 2022, below the industry median value of 18.66%.

XPeng hasn’t yet reached profitability, registering an operating loss equal to -$1.2 billion in 2022.

Financially, XPeng is solid with a net cash position of $2.6 billion, a current ratio of 1.81, and a debt-to-equity ratio of 0.35.

Market & Risks

The Chinese EV market is highly competitive with hundreds of players competing for market shares, but especially for XPeng, competition represents a serious threat. The average selling price for an electric vehicle in China is around $33 thousand, in line with the average selling price of XPeng battery electric vehicles.

And if you wonder why this represents such a big problem, in this segment are operating the two biggest and best-selling electric vehicles companies, the Chinese king of EVs BYD (BYDDF), with 1.8 million electric cars sold in 2022, and the main contender for such title, Tesla (TSLA), with 400 thousand cars sold last year.

Both companies have in their line-ups the best-selling EV models in China, with prices in the same range of XPeng ones, but the key difference is that they can leverage their far superior economies of scale to attract customers with better pricing, and especially for Tesla, equal or superior technologies. Unfortunately, XPeng doesn’t possess any significant competitive advantage in terms of scale, technology, or brand name, if not the momentary hype, to let us assume it can come out victorious in the race to be the best Chinese EV company.

Other than these two colossal players, the Chinese EV market is characterized by a constellation of smaller EV startups which came to life in the last 13 years as a direct consequence of the subsidies implemented by the Chinese government to stimulate the adoption of green energy vehicles.

However, with the beginning of 2023, the government subsidies ceased to exist, with the only exception of a 10% purchase tax exception available until the end of 2023.

After the lift-off of subsidies, a price war has begun in the Chinese EVs market, which along with lithium prices rising, has severely damaged the whole industry. EV sales have slowed down since the beginning of the year, and XPeng was affected too with 18 thousand vehicles sold in the first quarter, down 48% y-o-y.

Projections

Trying to project XPeng future performances, the story we tell here sees XPeng remaining an average EVs company, given its lack of any significant competitive advantage that can represent a possible threat to giants like BYD and Tesla and steal their dominant position.

We will assume XPeng to grow its revenues at a sustained rate in the coming years and reach profitability levels in line with the industry average.

Starting with revenues, we can assume XPeng to deliver 150 thousand BEVs in 2023, and quickly grow that number in the coming years, reaching 600 thousand vehicles sold by 2032, as its products attract the growing middle-class portion of the Chinese population. Considering that Tesla has sold 400 thousand cars in 2022, ten years from now XPeng can reasonably surpass that threshold as electric vehicle adoption increases.

Assuming the company will maintain an average selling price of around $30 thousand, revenues generated by the sale of EVs are expected to be $18.5 billion by 2032. Assuming the company will generate 10% of its revenues from power solutions and other ancillary services, total revenues are expected to be $20.5 billion by 2032, increasing 5 folds since 2022 at a CAGR of 18.11%.

Moving on to future efficiency and profitability, to continue the story of XPeng not being able to become a market leader, after a couple of more years of struggling to breakeven, we can assume it will achieve an operating margin and a return on invested capital [ROIC] around the median industry value of 6.53% and 9.8% respectively.

With these assumptions, XPeng FCFF is expected to be around $800 million by the time the company enters a steady state.

Valuation

Applying a discount rate of 12.79%, calculated using the WACC, the present value of these cash flows is equal to an equity value of $4.8 billion or $5.69 per share.

Conclusion

Given my analysis and assumptions, XPeng’s stock results to be overvalued at today’s prices.

Curiously the intrinsic value of XPeng is close to the one of NIO, a company that I recently analysed . Both companies result to be valued at around $5 billion with NIO expected to deliver fewer vehicles but have higher margins given the high-end segment they target, and XPeng expected to deliver more vehicles but achieve lower margins.

Despite the considerable price correction, XPeng still does not represent a good investment opportunity given the high competition it will have to face, that given its current status, won’t permit the company to emerge as a leader in the Chinese EV market.

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