XPEV - XPeng's Turnaround Is Almost Complete

2023-06-20 09:00:00 ET

Summary

• XPEV's strategic restructuring, including entering the mass market and reducing operational costs, shows promising progress thus far.
• The launch of the XNGP Navigation Guided Pilot software system may also differentiate XPEV from domestic competitors in the Chinese market.
• Despite the recent underwhelming financial results, H2'23 may herald improved deliveries and top/ bottom lines.
• While we are rating XPEV as a Buy, investors may want to observe a little longer and consider waiting for a retracement to $9 for a better margin of safety.

The XPEV Investment Thesis Looks Promising, Thanks To The Strategic Restructuring

We had previously covered XPeng ( XPEV ) in March 2023, with the ongoing price wars in China naturally impacting its deliveries and margins, triggering further headwinds in its stock prices at that time. Despite so, the stock recorded a moderate recovery instead, potentially suggesting its excellent support levels at $7.

XPEV 1Y Stock Price

True enough, XPEV successfully bounced from those levels two weeks ago, likely boosted by the promising deliveries and optimistic G6 pre-orders. The automaker delivered 7.5K EVs in May 2023 ( +6% MoM / -25.8% YoY), sustaining the recovery cadence since January 2023, as NIO's ( NIO ) continued to decline .

This is on top of the robust pre-orders for the former's new G6 model to be delivered from July 2023 onwards, thanks to the SUV's more affordable price point of RMB 313.9K at the midpoint.

With XPEV opting to enter the mass market against its historical cadence of RMB 389.9K for the flagship G9 SUV released in 2022, there is good progress from the management's reshuffling efforts indeed, with it likely emulating BYD's ( OTCPK:BYDDF ) pricing strategy thus far. Combined with the 25K preorders for the G6 model, consumer demand appears to remain healthy after all.

In addition, the automaker has finally launched the Navigation Guided Pilot software system to its existing consumers, allowing vehicles to navigate city streets and highways with driver supervision. With the platform already live in Guangzhou, Shenzhen, Beijing, and Shanghai, we may see the company report greater traction in sales ahead, significantly aided by the accelerated launch in multiple cities by H2'23.

This cadence may eventually boost XPEV's revenue stream, assuming that the XNGP software is offered as a stand-alone SaaS to other automakers in China. While it remains to be seen how things may develop ahead, we are cautiously confident that we may the company achieve improved top and bottom-line expansion in H2'23 and 2024.

The management's commentary in the recent earnings call proves optimistic as well, with its "current production capacity insufficient to meet growing demand." Combined with the robust demand for the P7i sedan model and G9 SUV model, we may see the automaker's delivery improve from henceforth.

This is on top of XPEV's refocused efforts in the mass market with the target price point of RMB 250K and optimized R&D cycles with shared technology/ compatible architectural components across different models, allowing it to "substantially reduce R&D spending" moving forward.

Thanks to the company's restructuring efforts, it also plans to reduce its cash burn by optimizing operational costs by up to -25% by 2024, while ramping up its monthly delivery targets to over 20K vehicles by FQ4'23, achieving improved economy of scale then.

Therefore, while XPEV's FQ1'23 revenues of $587.3M (-21.1% QoQ/ -50% YoY) and gross margins of 1.7% (-7.6 points QoQ/ -10.5 YoY) may be underwhelming, we are cautiously optimistic about its turnaround in the intermediate term.

So, Is XPEV Stock A Buy , Sell, or Hold?

XPEV 1Y EV/Revenue

XPEV is currently trading at an EV/NTM Revenue of 1.64x, lower than its 3Y mean of 6.49x. Thanks to the growing geopolitical concerns and normalization post hyper-pandemic cadence, other Chinese auto stocks have also suffered the same moderation in valuations. Tesla ( TSLA ) naturally is exempt from the pessimistic sentiments, visibly recovering since the bottom in December 2022.

Then again, we are cautiously optimistic, since the market analysts still expect XPEV to record a top-line expansion at an excellent CAGR of +34.4% through FY2025, though down from the +114.4% recorded between FY2020 and FY2022.

While it remains uncertain when XPEV may achieve break-even, much less positive EPS, we suppose the optimistic cadence from its XNGP Navigation Guided Pilot software system may sustain its execution and stock prices in the near term. This is especially when TSLA is unlikely to introduce its Full Self-Driving platform in China.

While XPEV may face competition domestically, we are not overly concerned now, due to China's large market size and different end-use cases in autonomous driving.

We believe the former may focus on the passenger vehicle segment, easily differentiating itself from competitors such as Baidu (NASDAQ: BIDU ) for robo-taxi services, Alibaba ( BABA ) for last mile deliveries, and many other independent players, such as Yutong Xiaoyu for driverless shuttle buses.

Rally of Chinese Stocks Since May 2023 Bottom

For now, it appears that market sentiments have temporarily lifted other Chinese stocks, with XPEV being the biggest winner at the time of writing, thanks to the recently lowered cap on dollar deposit rates by the country's central bank, with the latter expected to " provide a jolt to the struggling economy."

As a result of the rally, the stock is likely to retest the H1'22 resistance levels in the near term, potentially triggering moderate volatility, especially due to its elevated short interest of 8.57% at the time of writing.

Therefore, while we continue to rate XPEV stock as a Buy, investors may want to observe the situation a little longer and add only if these support levels hold. Otherwise, bottom-fishing investors may want to wait for a moderate retracement to $9 for an improved margin of safety.

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