Overnight surge almost 50%, what did Xiaopeng say during the conference call? (Brief minutes)

$Realty Income MD.USn Nov 30th, XPeng Motors released its Q3 2022 financial report after the Hong Kong Stock market closed and before the Nasdaq market opened. Highlights:

Overview of core financials vs market expectations this quarter:

1. Revenue: QoQ revenue increased by 19.3%, reaching RMB 6.82 billion, which missed the market expectation by approximately RMB 100 million.
2. Gross Margin: The gross profit margin for the quarter was 13.5%, down by 0.9% YoY, but higher than the market expectation by 1.3%.
3. Delivery: XPeng delivered 30,000 vehicles this quarter, in line with previous guidance.
4. **Q4 2022: **Delivery is estimated at 20-21k vehicles; revenue is forecasted to be RMB 4.8-5.1 billion.

For a detailed breakdown of the financial report for XPeng-W.HK, see Dolphin Analyst's analysis - "Poor Performance Despite Stock Rise? XPeng Still Needs to "Refine the Muscle".

Summary of the Conference Call:

1. XPeng's CEO, He Xiaopeng, plans to focus more on the company's strategy, product planning and R&D, promote organizational change and upgrades, and significantly reduce his direct involvement in the ecological enterprise.
2. The G9 is expected to achieve a delivery volume of 10,000 units by December, ranking in the top 3 of the pure electric SUV market with over 300k price; in Q4 2022, P7 and G9 are expected to account for 55% to 60% of the total deliveries, leading to a slight increase in ASP.
3. By the end of 2023, XPeng will introduce a new SUV model priced between RMB 200-300k, which is expected to have higher sales than XPeng's current models.
4. XPeng is accelerating the development of its next-generation XNGP intelligent driving-assistance product, which is planned to launch in Q3 2023 with at least several dozen cities supported. XNGP is highly sought after in the Max version of G9, and will expand to more models and nationwide users next year, driven by product reputation and cost.
5. With the completion of its E platform and the planned completion of its 3rd generation F and H platforms next year, XPeng has laid a solid technical foundation for product iteration. A large proportion of the models on these platforms will share powertrain systems, intelligent driving systems, chassis and electrical architecture, as well as corresponding supply chain and production capabilities.
6. As of 3Q22, XPeng's operating cash flow is RMB 6 billion, and the expected capital expenditure for 2022 is RMB 4.5 billion, which is lower than planned. Due to the completion of capacity construction investment and the construction of two brand-new platforms, capital spending in 2023 is expected to be significantly reduced to less than RMB 3 billion. 2. Telephone Conference Summary

2.1 Remarks by Management

1. Delivery Volume

In 3Q22, Xpeng delivered 29,570 vehicles, a YoY increase of 15%; as of 3Q22, cumulative deliveries are at 98,553 units, a YoY increase of 75%.

2. Internal Organizational Adjustments

Recently, the company has conducted a deep strategic review and price adjustment to tackle challenges on the road to achieving long-term strategic goals. Intelligent electric vehicles are a marathon-style competition, and only the strongest players who master core technology and possess outstanding comprehensive capabilities to achieve large-scale revenue from hardware and software will ultimately emerge victorious.

To enhance product competitiveness and increase sales, the company will be more effective in listening to user needs, simplifying product configurations, and improving software and hardware appeal. As market competition intensifies, Xpeng will enhance product marketing capabilities and methods to allow customers to fully appreciate the enormous value generated by the company's industry-leading smart and electrification technology, further improving brand sales and service capabilities.

Recently, the company has restructured its organizational framework. He Xiaopeng will focus on Xpeng's strategic product planning and development, driving organizational change and upgrades. Its ecosystem enterprises, Xiaopeng Huitian and Xiaopeng Pengxing, have completed independent financing and have independent operational capabilities. Therefore, He Xiaopeng's personal involvement with the ecosystem enterprises will be greatly reduced in the future, while co-founder Xia Heng will step down from the Board of Directors' executive director role to focus all his energy on product development.

Customer value drives the entire process of defining, researching, and selling products and services, making the company more focused and efficient as a whole. Recent strategic reviews have shown that the era of intelligent vehicles will gradually intensify and expand from the second half of 2023. Therefore, Xpeng will firmly invest in the research and development of autonomous driving and intelligent cabins, achieve excellent cost control on the path towards intelligentization, and ensure customer-oriented research and development work to achieve overall improvements in customer satisfaction, competitiveness and profitability of intelligent products. At the same time, the company will fully utilize cross-model vehicle platforms and three-electric platform research for efficiency, continuous cost reduction technology, and decrease overall research and development costs and BOM costs.

Currently, the company is restructuring its brand and marketing teams. As restructuring continues, branding and marketing will continue to improve Xpeng's brand and reputation through stronger teams and customer perceptions, grasping the channels and decision-making factors that consumers care most about, and continuously improving customer perception of Xpeng's brand and influence.

The company will continue to deepen its construction of vehicle platform and modularization, including overall vehicle platforms, power platforms and intelligent platforms, to improve product research and development efficiency, cost control and supply chain management capabilities. Based on Xpeng's investment in the past few years, it has already established three powerful vehicle platforms, including the completed E-Platform and the planned third-generation F-Platform and H-Platform to be completed next year, laying a solid technical foundation for product upgrades and iterations. These vehicles will share a large proportion of power systems, intelligent driving systems, chassis and electrical and electronic architecture, as well as the corresponding supply chain and production capabilities. Research and development costs and time for each new product will be significantly reduced, while the overall software and hardware quality of each vehicle will be more stable. In addition, the company has also made adjustments to the organizational structure of vehicle management. Each platform is managed end-to-end by one large matrix product manager, responsible for the entire lifecycle management decisions of the models on this platform (design, research and development, sales, and service), forming a closed loop facing the market and customers to enhance user experience and sales.

3. G9

G9 has started mass delivery at the end of October. G9's entire line is equipped with an 800V high-voltage platform, with solid endurance and charging speed exceeding all electric vehicle models currently on the market, and its influence at home and abroad is gradually expanding. This shows that the leading electrification technology is becoming another distinctive brand label that Xiaopeng Motors is striving to create after its leading automation. Although the short-term still needs to overcome the challenges of the epidemic and production capacity ramping, the company believes that G9 will become one of the top three pure electric SUVs with a price of over 300,000 yuan in the market, and with the accumulation of reputation next year, it will further narrow the gap with the first place.

G9's sales contribution will drive sales out of the trough in October, and three new products will be launched successively from 1Q23 to drive further improvement in product competitiveness. At the same time, marketing capabilities will continue to improve with the launch of new products and technologies, and the launch of the next-generation full-scenario intelligent driving products will provide the company with a huge differentiation advantage, achieve significant increase in sales volume and average sales price, and obtain higher-than-industry-average revenue growth and market share in 2023.

Since the third quarter of 2022, the company has made significant breakthroughs in mass-produced autonomous driving technology and continuously improved consumers' trust and willingness to purchase intelligent auxiliary driving. On September 17, City NGP was first launched in Guangzhou. In the city traffic scene that is much more difficult than the highway, P5 has achieved a level of safety that is among the best in the industry with lower-cost hardware.

4. XNGP

Currently, the company is accelerating the development of the next-generation full-scenario intelligent auxiliary product XNGP and plans to launch the main functions of XNGP in 3Q23, and it can support dozens of cities at least. XNGP will become the turning point for high-frequency and rigid products in intelligent auxiliary driving software. We are currently very happy to see that in the orders of Xiaopeng G9, a relatively high proportion of users chose to support the Max version that supports XNGP when XNGP has not yet been OTA. Next year, driven by product reputation and cost, XNGP will expand to more models and accelerate popularization among users nationwide. The hardware cost of XNGP is expected to be much lower than that of competitors as technologies advances and the supply chain matures. With the driving force of product reputation and cost, XNGP will accelerate popularization among users nationwide.

On October 31, G9 obtained the qualification for intelligent network-connected vehicle road testing in Guangzhou, marking the first time that a mass-produced car without modification has obtained China's autonomous driving road test qualification. XNGP and Robotaxi research and development are running in parallel, and through repeated closed loops of data and capabilities, we hope to achieve low-cost, high-security unmanned driving in mass-produced cars. Continuously advancing the research and development of intelligent and electric technologies, while the company’s current leading technologies have tremendous user and business value, so the company remains open to strategic and technological cooperation worldwide.

5. Cash scale

Xiaopeng's current cash on hand exceeds RMB 40 billion.

Compared with favorable times, car companies should consider how to grow steadily in adverse times. In the next few quarters, we will continue to strengthen cost control, improve operational efficiency by streamlining investment projects, focusing on research and development, making the platformization and modularization of shared models. The company plans to launch more new products in the future with lower R&D investment, coupled with adjustments to its strong product portfolio and internal system, which will significantly improve sales efficiency. Also, thanks to earlier production capacity layout, the company's capital expenditure requirements will decrease more significantly in the next few years than this year, and cash flow is expected to further improve. Currently, the cash on hand of about RMB 40 billion is sufficient to support the business development needs of the next few years, and cash flow will improve significantly as product sales increase.

6. 4Q22 Guidance

Looking ahead to the fourth quarter, Xiaopeng Motors will work to overcome the adverse impact of the epidemic and make internal process adjustments based on more medium- to long-term development. Affected by the climbing of the G9 production line, the delivery volume in November is expected to be no less than 5,800 vehicles. Currently, full efforts are being made to solve the production capacity problem to realize faster delivery of the existing orders on hand. There will be a significant rebound in delivery volume in December, with a total delivery volume of approximately 20,000 to 21,000 vehicles and revenue of approximately RMB 4.8 billion to 5.1 billion in 4Q22. With the acceleration of internal organizational changes and management improvements in the coming quarters, Xiaopeng will achieve the medium- to long-term goal of becoming the leader in the intelligent automotive industry.

2.2 Analyst Q&A

1. Internal organizational adjustments

Q: When will the organizational adjustments affect sales; are the G9 sales target of 10,000 and the P7 delivery target after next year's facelift adjusted according to market conditions?

A: (1) Organizational Adjustment

Organizational adjustment is long-term, and its impact will gradually become apparent over the long-term.

(2) G9 and P7 sales and new models

• It is expected that the delivery volume of G9 will reach 10,000 vehicles in December, becoming one of the top 3 pure electric SUVs with more than 300,000 sales volume; the target for 2023 is to further narrow the gap with the first place with the accumulation of G9's reputation and the implementation of XNGP.
• The competitiveness of the facelifted P7 will be significantly improved, driving sales of the P7 series.
• By the end of 2023, a new model of low- to mid-level SUV priced between RMB 200,000 and 300,000 will be launched, and it is expected that the sales volume of this model will exceed Xiaopeng's current models. A: First, in the past, Xiaopeng's brand marketing team focused more on "sales", and in the future, innovative methods will be developed in "sales", "marketing", and "customer service". Specifically, the cost of "sales" will be reduced, and the investment in "marketing" and "customer service" will be increased.

1. Introduce more excellent talents, develop strategies with both offense and defense, and better meet customer needs.

In summary, the changes in brand marketing strategy are:

1. Clearer positioning;
2. Develop long-term plans for clearer positioning;
3. The plan changes from defensive to offensive;
4. The core is customer-oriented.

2. Cash flow situation and future prospects

Q: Will the change in the supplier payment cycle and the investment in 2 new platforms in 2023 cause pressure on quarterly or annual operating cash flow; capital expenditure expectations for 2023; reasons for significant increase in short-term debt in 3Q22

A: (1) Supplier payment cycle

There is no significant change in the supplier payment cycle, and in fact, very favorable payment terms have always been provided to suppliers.

1. Capital expenditure

• As of 3Q22, operating cash flow outflow was RMB 6 billion, and the full-year capital expenditure for 2022 is expected to be RMB 4.5 billion, which is lower than the planned capital expenditure.
• Due to the completion of capacity layout and the construction of 2 new platforms, capital expenditure in 2023 will be significantly reduced, and it is expected to be lower than RMB 3 billion.
• In 2023, sales and general administrative expenses will decrease due to structural organizational adjustments.

In summary, net cash spending in 2023 will be significantly improved compared to this year. The current cash on hand is sufficient to support business development. Positive cash flow is expected to be achieved in 2024.

(3) Significant increase in short-term debt in 3Q22

The increase in short-term debt is due to cash management, and it is part of the adjustment made with banks to enhance good relationship with them.

Q: Reason for the 8% to 9% difference between sales growth rate and sales amount growth rate guidance for 4Q22; expectations for gross margin in 4Q22 and 2023 amid rising raw material and battery prices

A: (1) Proportion of car deliveries and its impact on ASP for 4Q22

P7 and G9 will account for 55% to 60% of total deliveries, so ASP will increase slightly.

(2) Expectations for gross margin in 4Q22 and 2023

• Compared with 3Q22, the decline in sales volume and the launch of G9 will exert some pressure on 4Q22 gross margin.
• The cancellation of subsidies will have a certain impact on low-priced models, affecting gross margin in 1Q23.
• But as sales rebound in 2Q23 and battery prices stabilize or even decrease, gross margin in 2H23 will significantly rebound.

3. Products and technology

Q: Differences and strategic partnership plans for XNGP

A: (1) Differences of XNGP

Based on the body sensation of automatic driving, the company has generated strong customer perception in the following four areas: less than 10% of the usage scenarios are for high-speed and parking, and over 90% of the usage scenarios are in urban areas. Costs are expected to drop by 20% to 30%, and safety performance will be improved. How to help customers generate real value.

First of all, XNGP expands 90% of the use cases.

In addition, XNGP guarantees that the driving experience and safety performance will be consistent with or without high-precision maps, that is, the driving experience and safety performance of the entire scene and range are consistent, bringing real value to customers. When 1 technology system is used for the entire scene, customers can feel the value of ease, naturalness, safety, and high efficiency it brings.

(2) Strategic cooperation

Evaluate potential cooperation opportunities in new technologies such as intelligent driving and intelligent cockpit, provided it does not affect the company's own product development pace.

Q: G9's November monthly new orders and cumulative outstanding orders

A: Specific figures will not be disclosed, but the following 2 points can explain G9's strong demand:

Firstly, delivery is delayed until 1Q23, with a few deliverables in December.

Secondly, G9 will be one of the top 3 in the pure electric SUV market with a price tag above 300,000.

Q: Is the estimated delivery time on Xiaopeng's website updated in real-time?

A: Yes. The change in estimated delivery time is related to demand and capacity improvement.

Q: How to define real demand and how to find real demand through organizational adjustments

A: (1) Define the demand

In the industry, there are 2 logics in the automotive manufacturing industry.

1. In the barrel theory, is the longboard satisfying current or future customer needs?

Every company needs to improve safety, quality, service, cost, styling, space, and other different shortboards, and each company needs to find its own longboard. Companies need to consider whether this longboard satisfies current or future customer needs.

1. Target customer groups and regions.

Xiaopeng hopes to gain longer-term global customers and develop future strategic layouts based on this.

Details cannot be shared at the moment, but we can guarantee that intelligent driving will be a standard feature of all Xiaopeng models, and the capabilities of all models will be consistent. This is one of Xiaopeng's next-generation demand positioning focuses, and it will construct new technology capabilities around this while achieving significant cost reductions.

(2) Find the demand

The organizational structure has made changes in the following 2 directions,

1. Focus on real needs in planning, products, and technology and do a good job of new single-electric engine power, vehicle platform, and intelligent platform.
2. Realize that the 3 engines in the car matrix product can meet customer needs end-to-end in different models.

Q: Cost changes caused by the P7 facelift and whether sales volume or maintaining gross profit is more important

A: The P7 facelift is following in G9's footsteps. After the facelift, intelligent driving capabilities, fast charging capabilities, cabin comfort, and intelligence will be greatly improved, and current customer feedback issues will be improved.

Thanks to platformization and modular construction, the cost of the redesigned P7 can be well controlled, and its gross profit will be similar to the current version. In the future, benefiting from platformization and modular construction, the company can launch more technologically competitive models while maintaining prices and profitability.

**Risk Disclosure and Statement in This Article: ** Dolphin Analyst Disclaimer and General Disclosure