XPEV - XPeng: The Intense Price Wars May Lead To Compressed Margins

2023-03-29 11:29:38 ET

Summary

• The ongoing price wars in China had naturally impacted XPeng's deliveries and margins, triggering further headwinds for its forward execution.
• It also remains to be seen if the appointment of Wang Fengying as the President may reverse the pessimistic market sentiments.
• However, with the stock recording a moderate recovery despite the double misses and poor forward guidance, we reckon XPEV has found sufficient support here.
• The strategic choice to offer XNGP separately may also contribute to its positive operating margins by 2025.
• Therefore, we believe interested investors may still add XPEV at $7s, due to its speculative potential turnaround over the next few years.

XPEV's Speculative Turnaround Story

XPEV 1Y EV/Revenue

In this article, we shall discuss XPEV's prospects after the recent FQ4'22 earnings call on March 17, 2023. The stock's EV/NTM Revenue has been further moderated to 0.82x, lower than its 2Y mean of 7.01x and 1Y mean of 1.81x. Given its top and bottom-line misses over the past three quarters , its pessimistic valuation is not surprising indeed, especially worsened by its lack of profitability.

The XPEV stock has also displayed a declining peak and trough trend, suggesting more uncertainty ahead, worsened by its lower-than-expected forward guidance.

The auto company has guided FQ1'23 revenues of RMB 4.1B at the midpoint, suggesting a notable decline of -20.2% QoQ and -44.9% YoY. Furthermore, it expects to only deliver 18.5K vehicles at the midpoint for the next quarter, suggesting another decline of -16.6% QoQ and -46.4% YoY . These numbers also contrast drastically against its upper-range guidance of up to 34K vehicles in FQ1'22.

Combined with XPEV's declining gross margins of 8.7% in FQ4'22, against 13.5% in FQ3'22, and 12% in FQ4'21 , it is unsurprising that we have grown uncertain about its short term prospects. Given the upcoming launch of three new models in 2023, its gross margins may be impacted as well.

Its situation was significantly worsened by the intensifying price wars in China, originally started by Tesla (NASDAQ: TSLA ) and now sustained by many other automakers . This strategy had worked for TSLA, given the robust jump in its sales, with both Model 3 and Y "nabbing the top spots in February 2023 NEV sales," growing by +46% YoY to 33.92K units .

Naturally, these came at the cost of its competitors, with XPEV's delivery remaining unimpressive despite the -12.5% price cuts on some models. The automaker only delivered 6.01K units in February 2023, compared to 6.22K units in February 2022.

Part of the headwinds was also attributed to BYD's ( OTCPK:BYDDY ) growing popularity in the low-cost RMB 100K segment, diverting sales from premium brands. This trend was attributed to the country's uncertain economic outlook after three years of Zero Covid Policy.

While XPEV had also moderated its operating expenses by -4.5% QoQ and -14.2% YoY to 2.96B Yuan by the latest quarter, it remains to be seen if the company might achieve the ambitious plans of positive operating margins by 2025.

Nonetheless, we remain cautiously optimistic for the automaker's slow and sustainable turnaround moving forward, attributed to two factors to be discussed below.

XPEV's Nascent Robotaxi/ADAS Dreams

We have been monitoring XPEV's progress in Advanced Driver Assistance Systems [ADAS], also referred to as XNGP, XPeng Navigation Guided Pilot, attributed to the excellent autonomous driving capabilities thus far.

The company has highlighted its ambition in expanding to several dozen Chinese cities by FQ3'23, which we presume may include robotaxi capabilities. With it already obtaining the relevant road test permit for public roads in Guangzhou, we reckon a public launch may be sooner than expected.

In addition, XPEV aims to separate its XNGP software as a stand-alone offering, "allowing more customers to use the latest autonomous driving capabilities ." The eventual adoption may be more than healthy, in our opinion, due to the notable reduction in the software pricing by up to -30% from the current cost.

Particularly, the company expects to improve its XNGP capabilities to match a "human driver with three years of driving experience" by 2024, with manual takeovers every 100 kilometers (the equivalent of 62 miles) reduced to 1 or lesser.

In addition, XPEV will be leveraging AI technology to accelerate its XNGP capabilities nearer to Level 5 autonomous driving, with partners yet to be announced. We reckon a good choice may be Alibaba (NYSE: BABA ), given the company's advancement in AI tools and driverless robots through DAMO Academy.

In the meantime, the automaker may have to contend with Baidu (NASDAQ: BIDU ). The latter already obtained the relevant robotaxi permits in Beijing, Wuhan, and Chongqing. BIDU also claimed to have provided 20+ daily rides per vehicle, with a cumulative ride of 561K ( +18% QoQ & 162% YoY) in FQ4'22.

These numbers suggest that its robotaxi is seeing expanded commercial success, surpassing the supposed daily average of 15 rides for China's traditional ride-hailing services and Uber's (NYSE: UBER ) average of 12 rides in New York City by September 2022.

Furthermore, it is also important to highlight that BIDU has been relying on machine learning and deep learning autonomous driving models provided by Pony.ai. The latter had notably collaborated with many other domestic automakers, such as BYD, Guangzhou Automobile Corporation, and FAW Car Company, on top of Ford (NYSE: F ), Hyundai ( OTCPK:HYMLF ), and Toyota (NYSE: TM ).

Nonetheless, assuming that XPEV's XNGP licensing shows similar success, we may see the company record improved top-line growth from 2024 onwards. This cadence may be significantly aided by the increased consumer awareness about autonomous driving capabilities, on top of the domestic regulator's push toward 20% of all new vehicle sales with Level 4 capabilities from 2030 onwards.

New Leadership To Steer The Sluggish Auto Maker

XPEV was also determined to reclaim its domestic market shares, which had declined from 3.05% in 2021 to 2.12% in 2022, based on XPEV)%20sold,sold%2071%2C941%20vehicles%20in%202022." > 120.75K sales out of 5.67M of China's retail EV sales last year.

This stemmed from the management's decision to bring in Wang Fengying as the company's president, the former vice chairman/ general manager of Great Wall Motor ( OTCPK:GWLLF ). This development was important, since Wang was responsible for GWLLF's success in the domestic market through the HAVAL SUV branding. Eric Han, a senior manager at Suolei, a Shanghai-based advisory firm, said:

XPeng can tap Wang's experience and vision to help it effectively develop new models, to lure its targeted customers in China. She knows the automotive industry well and understands what Chinese drivers want. But XPeng needs to improve sales as it tries to catch up with Tesla. ( South China Morning Post )

By 2022, GWLLF also reported 173.18K (+21.2% YoY) vehicles exported internationally, comprising 16.2% of its total sales then. Therefore, with XPEV still eyeing the EU market , it was unsurprising that Wang's 30Y expertise had been tapped, given her important role in introducing GWLLF's HAVAL SUV to the region since 2005.

While President Wang only joined the company for slightly less than two months, the restructuring work had already started, with optimization plans already underway for product planning and sales/ marketing thus far. Therefore, we may see improved results from H2'23 onwards, boosting the chances of its stock recovery then.

Nonetheless, we must also warn investors that XPEV's turnabout story may one that is slower than expected, given the intense competition in the EU, offered by TSLA, legacy automakers, and other Chinese EV companies. Particularly, TSLA commanded the two top spots in the region's ranking by Q4'22, with the rest dominated by legacy automakers from the EU and US, barring Lynk & Co (a Chinese-Swedish automobile brand).

XPEV also had to contend with NIO (NYSE: NIO ) in the EU, which plans to deliver up to 10K EVs in 2023 . BYD similarly projected an ambitious annual delivery of up to 800K EVs in the region by 2030. With Chinese EVs already capturing 2% of the EU market in 2022 with a total of 58K EVs, XPEV's forward execution needs to be highly strategic.

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

Therefore, is XPEV a buy here? It really depends on individual investors' risk tolerance and investing trajectory. On one hand, the company's lackluster guidance and financial performance do not inspire confidence, as similarly reflected in the stock prices thus far.

On the other hand, the recent robotaxi/ADAS development and President Wang's leadership may potentially turn this sluggish company around over the next few years, in our opinion. Naturally, this means that the stock is only suitable for investors with a long-term investing trajectory, given that it only expects to achieve positive operating margins by 2025.

XPEV 6M Stock Price

According to the CEO , the domestic price war is likely to continue in the near term, suggesting more downward pressure from the current $10s. Therefore, we think interested investors should add XPEV at the March 2023 bottom range of between the $8s and $9s for an improved margin of safety for long-term investing.

On the other hand, bottom fishing investors may consider waiting for another retracement to $7, given the excellent support at the previous November 2022 bottom. When the short interest is elevated at 11.02% at the time of writing, patience may not be a bad idea since the macroeconomic outlook remains uncertain in the short term.

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