XPEV - XPeng: Potential Recovery In 2023

Summary

• XPeng Inc. has seen a 60% drop in deliveries in January.
• However, investors should expect deliveries to fully rebound in March.
• New product launches could drive XPeng’s delivery growth going forward.

Chinese electric vehicle ("EV") manufacturers have not exactly received a lot of love from investors lately: companies like XPeng Inc. ( XPEV ), NIO Inc. ( NIO ), or Li Auto Inc. ( LI ) have seen severe downside revaluations in the last twelve months as COVID-19 lockdowns and overall moderating growth weighed on the sector. A weak forecast for Q4'22 deliveries also weighed on XPeng. However, I believe the selloff regarding XPeng has gone too far, as the electric vehicle startup has lost 75% of its market value, but nonetheless remains on a strong upwards trajectory regarding deliveries. XPeng stock is scheduled to launch 3 new EV products in FY 2023 which could be catalysts not only for accelerating delivery growth but also for an upside revaluation!

XPeng's latest delivery card showed a large delivery drop due to Lunar New Year

XPeng delivered just 5,218 electric vehicles in January, showing a near 60% drop-off compared to the year-earlier period, which is when the Chinese EV manufacturer delivered 12,922 electric vehicles to its customers. The decline in deliveries is likely not going to be a big deal for XPeng, however. It certainly does not indicate a permanent downturn in electric vehicle deliveries, since January and February deliveries are typically suppressed due to the Lunar New Year holidays, which run from mid-January to the end of the month. As people return from the holidays in February, deliveries often don't fully recover until March. Therefore, I don't believe investors should read too much into XPeng's delivery report from January.

Since seasonal factors explain XPeng's delivery drop-off in January, XPeng wasn't the only electric vehicle company that reported slowing delivery growth for the month of January. NIO saw an 11.9% decline in deliveries in January and delivered just 8,506 EVs that month. Li Auto managed to go against the industry trend and delivered more than 15 thousand electric vehicles in the month of January. More recently, Li Auto has seen stronger delivery momentum than some of its EV rivals in China, which is also the reason why Li Auto's shares have dramatically outperformed XPeng's and NIO's shares.

This is my comparison table for XPeng, NIO, and Li Auto deliveries for the last three months.

(Source: Author)

XPeng is launching new EV products

I expect a return of stronger delivery growth rates by March, which is when production should run normally again for most Chinese electric vehicle start-ups. XPeng is also launching new EV products this year, which could help boost the company's delivery growth, especially in the second half of the year. XPeng just recently opened up its order books for the popular G9 sport utility vehicle as well as the P7 all-electric sport sedan in Europe. Customers in Denmark, Norway, the Netherlands, and Sweden can now order these models and expect deliveries in June for the P7 and in September for the G9.

New products in China are expected to include a facelifted P7, the coupe sport utility vehicle G7 and a multipurpose vehicle that hasn't been officially revealed yet. The launch of a new slate of EV products could help reinvigorate XPeng's delivery growth and also help close the gap that has recently opened up between XPeng and its EV rivals. XPeng delivered 120,757 electric vehicles in FY 2022, showing just 23% year-over-year growth. With new products coming to market in Europe and in China, I believe a 20-25% year-over-year jump in deliveries is a possibility for XPeng in FY 2023... if the company executes well and the supply chain fully works again.

XPeng's valuation

Like most of its rivals in the electric vehicle business, XPeng is not yet in the profitability zone. XPeng is projected to report its first operating profit in FY 2025 as COVID-19 lockdowns in many Chinese cities throughout 2022 played a role in delaying profitability. XPeng's sales are projected to increase 71% in FY 2023, suggesting that the market sees a major reversal in deliveries this year. Based off of revenues, XPeng has a P/S ratio of 1.24 X. The P/S ratio is about 50% below XPeng's 1-year average P/S ratio of 2.53 X (which is not shown in the chart below).

Risks with XPeng

A key risk for XPeng Inc. as well as all the other electric vehicle companies is that growth in the sector overall could be slowing further. There are a few factors that impact XPeng's delivery growth potential, such as supply chain problems, which made it more difficult to source parts in 2022. A resurgence of COVID-19 may also be a significant risk factor. Most recently, Tesla, Inc. (TSLA) has started to cut prices for some of its EV products in China, which could shift sales away from XPeng and towards Tesla.

Final thoughts

The slowdown in deliveries in January was more or less expected. XPeng Inc. and other Chinese EV companies typically see weaker delivery growth in the first two months of the year because the reporting periods include Lunar New Year, an important Chinese holiday period during which millions of people leave cities and return to their provinces. Since the drop in deliveries is likely only transitory, investors should expect a strong rebound in deliveries towards the end of February, with a full normalization of the delivery picture emerging only in March. New product launches could also help XPeng make a splash in China and in Europe and reinvigorate XPeng's delivery growth going forward!

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