G9 and B-grade "Model Y", or Xiaopeng's final effort (22Q2 conference call)

Xiaopeng Motors (XPEV.N/9868.HK) released its Q2 2022 financial report after Hong Kong stock market and before the US stock market on August 23, Beijing time. The major points are as follows:

Overview of core data vs market expectations of the report:

1. Revenue: Xiaopeng US realized RMB 7.44 billion in the quarter, up by 98% YoY, with a guidance expectation of RMB 7.1-7.2 billion from Xiaopeng itself.

2. Gross margin: Xiaopeng HK was at a quarterly gross margin of 10.9%, down by 1.3 points YoY, in line with the market's expectation of 11.1%.

3. Delivery volume: 34,400 vehicles were delivered in the quarter, with Xiaopeng being guided to reach 31,000-34,000 units.

4. Q3 guidance: delivery volume is expected to be 29,000-31,000 units, down from last quarter. Revenue is expected to be between RMB 6.8-7.2 billion, down from last quarter. Based on revenue guidance, Xiaopeng's Q3 ASP is expected to be around RMB 217,000, up by RMB 15,400 (7.6%) QoQ, and gross margin is expected to rebound.

For detailed financial information, please refer to Dolphin Analyst's commentary "Xiaopeng is still far away from profitability".

1. Summary of Supplementary Information Provided:

1) New model plans: ①G9's price and delivery are expected to be announced in September 2022 and October 2022, respectively. ②B and C-segment models are planned for launch in 2023, with the B-segment model set to compete with Model Y.

2) The effect of March price adjustments: New price orders are expected to be delivered until late May (with around a two-month lag time between orders and delivery). The promotional efforts in July were less than the price increase in March, and the overall gross margin for Q3 is expected to rise QoQ.

3) Reasons for forex losses of around 900 million yuan: When the Xiaopeng went public in the US and Hong Kong, most of the funds were raised by its US subsidiaries, with the dollar as a functional currency. Through inter-company lending, the US subsidiaries lent money to domestic subsidiaries. When the company repatriated the funds, there was a significant forex loss due to the appreciation of the US dollar.

4) Competition for new energy vehicles: The competition will be fierce this year and next year, mainly in two aspects: ①the ratio of driving range, performance, and price; ②the overall design and intelligent functions of products.

2. Transcription of Conference Call:

2.1 Overview of the quarter

1. Delivery volume

In Q2 2022, the company delivered 34,422 vehicles, a YoY growth of 98%. According to the statistical registration of vehicle insurance, the company ranked first among China's emerging electric vehicle manufacturers for the fourth consecutive quarter. 2. New Products and Technologies

Starting in 2022 H2, the company will gradually introduce self-developed products and proprietary technologies that are leading in the industry, as well as a new generation of intelligent electric vehicles equipped with cutting-edge technology. These products that are about to be launched will bring customers an unparalleled driving experience through innovation in electrification and intelligent technology.

• G9

On August 10th, the company released the interior design of its new flagship G9 SUV and began accepting reservations. G9's pre-orders exceeded 22,000 within 24 hours, surpassing P7, which was launched around the same time. G9's orders continue to increase, demonstrating strong demand from customers. On August 26th, G9 will participate in the Chengdu Auto Show, and the price of G9 will be announced at the official launch event in September, with deliveries starting in October.

With outstanding design, excellent control and driving performance, superior comfort, and luxurious configuration comparable to luxury SUV models priced close to 1 million yuan, G9 has proven itself to be a true flagship model in the SUV field. G9 also demonstrates the company's leading position in electrification, technology, and innovation--it is the first model to provide pioneering end-to-end high-voltage charging technology, which consists of an in-car 800V high-voltage platform and a 480kW Supercharging Station, bringing customers the ultimate charging experience.

Based on the industry-leading CD NGP intelligent technology configuration, G9 will provide the next-generation full-scenario advanced driving assistance system to the market. G9 will greatly expand the coverage of advanced driving assistance systems, making driving easier and more enjoyable. The company believes that G9 will become one of the best-selling large SUVs under 500,000 yuan in the market.

• New B-Class and C-Class models

Based on technological innovation in the platform system architecture, the company will accelerate the pace of launching new models priced between 150,000 and 500,000 yuan. In 2023, the company plans to launch a new B-class model that will compete with Model Y, which will help expand its market share in this segment. In addition, the company plans to launch a new C-class model next year to meet the needs of customers who require more space and a more comfortable environment.

These two new models, along with G9, will drive the company's strong sales growth momentum into next year. At the same time, the company will use the top electrification and intelligent technology in the platform development system to continuously improve product performance and enhance competitiveness in the same or even higher-level models, with the average selling price and profit expected to increase significantly.

• Supercharging

Starting with G9, the company is committed to long-term investment in proprietary electrification technology to strengthen its leading advantage in this field and customer experience. Not only will G9 upgrade the company's electrification technology to the next generation, but more importantly, G9 and subsequent new models will be fully compatible with high-power supercharging systems, and the company will continuously improve charging efficiency for customers through upgrades.

New models can not only achieve the best charging speed on the company's self-operated high-power supercharging network, but also enable customers to have a better charging experience at third-party charging stations: thanks to the company's leading high-voltage platform, the new models will be able to obtain higher power distribution and more sustainable peak power at third-party charging stations compared to other electric vehicle models. In addition, the company has established motor development and production capabilities and is constantly accelerating technological innovation. Looking to the future, the company will continue to use unique methods to re-integrate power system design into a cohesive automotive architecture, using growing electrification technology innovations to provide consumers with support for longer range, faster charging, and lower cost intelligent electric vehicles.

The self-operated supercharging network will further consolidate the company's advantages in electrification and technology: the perfect self-operated supercharging network has already become one of the widest coverage and best user experience networks among China's independent electric vehicle brands.

As of early August, the number of self-operated supercharging stations reached 1,000, creating a new milestone. In order to fully support large-scale delivery of models with 800V high-power charging functions, the company independently developed a 480kW supercharging station, surpassing the industry benchmark in terms of performance and cost. Through technological innovation, the new generation of supercharging stations not only achieves a power higher than the industry mainstream of 120kW supercharging station, but also keeps the cost at the same level as the previous generation of supercharging stations.

The supercharging system can complete a 200-kilometer charge in 5 minutes, demonstrating end-to-end high-power fast charging capabilities. The system consists of electric vehicle batteries, a vehicle-mounted high-voltage platform that can be quickly charged, and supercharging stations, achieving the best charging efficiency in the industry. The company began construction of a self-operated 480kW supercharging station in August and will accelerate development in major cities and major highways nationwide.

By 2025, the company hopes to build another 2,000 high-power supercharging stations to provide customers with a first-class charging experience. In the coming years, customers' charging experiences will be thoroughly changed in all scenarios, such as vacation travel, returning home for the new year, and long-distance travel; the scenes where electric vehicles drive in the city and internal combustion off-road vehicles drive will soon be completely changed.

- Smart Technology

【1】In terms of the progress of intelligent technology, the customer acceptance and word of mouth of the company's advanced driving system have steadily increased. In 2022Q2, the penetration rate of highways and GPs exceeded 65%. Starting from early May, XPILOT software was integrated into mid-to-high-end models as standard configuration, allowing a wider range of customers to experience the industry-leading and best driving assist functions at a reasonable price.

Customers' trust in XPILOT has reshaped the driver's habits, making it a patent for human-machine co-driving, and providing hardware platform support for more innovative intelligent functions in the future. In the orders received from early May to the end of July, the proportion of buyers choosing mid-to-high-end versions equipped with XPILOT has increased significantly: more than 50%.

【2】As the company accelerates the expansion of the boundaries of intelligent driving with the launch of next-generation products that create greater value for customers. For example, in 2022Q2, the development and testing of cities and GPs were completed, and the P5 model with only 30 computing powers and sensor hardware achieved the highest level of safety and driving efficiency in challenging driving scenarios such as congested streets and rainy driving conditions. By pioneering exploration of urban driving scenarios, we have accumulated rich experience and gained profound insights into complex urban road scenarios. It is worth noting that the automated driving computing center "Fuyao", jointly developed by the Company and Alibaba Cloud, began operating in early August. "Fuyao" has a computing power of up to 600FLOPS, making it the largest autonomous driving computing center in China, providing the necessary computing power foundation for deep learning training, empowering advanced driving assistance systems in all scenarios, and promoting the future development of Level 4 autonomous driving algorithms.

All of these advancements will greatly enhance the Company's competitive advantage in intelligent technology.

Since the beginning of this year, the development of intelligent driving technology has received positive support from governments at all levels. Recently, the Ministry of Natural Resources announced a pilot project: the application of high-definition maps in intelligent driving vehicles in six cities, including Beijing, Shanghai, and Guangzhou. The company expects to conduct public testing on GP in the near future.

【3】The launch of City NGP demonstrates the company's ability as a pioneer in intelligent technology. The company will achieve competitive advantages in talent, data, and system efficiency, further consolidating its leading position in autonomous driving technology and expanding its advantages in coverage, experience, safety performance, and cost.

【4】The revolution of technology-driven driving habits and automobile decision-making has begun. Therefore, the Company's new generation of technology to be launched next year will comprehensively upgrade the architecture, paving the way for the practical and widespread application of all-scenario ADAS driving nationwide, making safe and convenient intelligent driving software a reliable partner for users. All-scenario ADAS will become the core determining factor for consumers' car purchases. In the future, with the increase in the application of two scenarios of ADAS, consumers' adoption of ADAS software will become mainstream. Additionally, the Company has begun to develop robot taxi software based on all-scenario ADAS to lead innovation with lower costs, the necessary production of intelligent electric vehicle models and algorithms with strong generalization abilities.

3. Bionic Robots and Flying Cars

Xiaopeng Motors has completed over US$100M in Series A financing. After the fund is raised, Xiaopeng Motors will accelerate the development of bionic robots, and cooperate with intelligent electric vehicle technology to create greater value. In addition, in July, Xiaopeng Aero HT's first flying car factory officially put into use, marking an important milestone in the development of Xiaopeng's flying car.

4. Overall Outlook

According to China's passenger car insurance registration data, the penetration rate of BEVs in 2022Q2 was close to 20%, while the penetration rate of BEVs excluding A0 and A00 levels was only 14%. This fully demonstrates the Company's enormous market potential and long-term disruptive opportunities. Despite increasingly fierce market competition, with the release of more highly competitive new products, the Company will reap long-term investment returns in electrification and core intelligent technology over the next few years.

The Company has elevated electrification, intelligent technology, and platform development architecture to new heights through G9. The Company will continue to promote innovation in software and hardware products, bringing advanced technology, manufacturing and design, and an unparalleled combination of excellent intelligent driving experience to consumers and intelligent electric vehicles. As the Company's advantages in battery range, charging efficiency, and charging network coverage continue to improve, the transformation from plug-in hybrid vehicles in the mid-to-high-end market to pure electric vehicles will accelerate. 2022Q3, the company will strive to overcome the impact of COVID-19 and seasonal factors, and is expected to deliver 29,000-31,000 vehicles with expected revenue of RMB 6.8-7.2 billion.

2.2 Q&A Session

Q: In the premium Volkswagen market, consumers are more concerned about price-performance ratios than technology. How does the company turn technological innovations into revenue?

A: The focus should be on the relationship between configuration and pricing rather than price-performance ratio. If the configuration of a vehicle is good at a certain price point, sales will naturally increase. The sales performance of a product during the 6-18 months after its launch must rely on brand reputation, after-sales service, product quality, and the unique competitiveness of the product itself. Taking P7 as an example, its sales volume during the first 6 months after its initial release was not very large. However, since the company introduced the NGP function and other high-quality configurations that fit the P7 model, sales have increased significantly.

Over the past 4 years, the company has attracted a large number of high-quality customers interested in the configuration and price of new energy vehicles. Since last year, the company has noticed that customers are becoming more interested in the driving range, driving safety, and charging experience of new energy vehicles. The company's efforts in these areas over the past 4 years have won the trust of loyal customers. In the future, especially with the development of intelligent technology and electrification, such as expanding driving range, driving safety, charging network, and charging convenience, the company will benefit from economies of scale. Looking ahead, especially after the launch of G9, scene ADAS technology will elevate product performance to a new level. From then on, the company will attract more and more users and convert them into sales.

In addition, by investing in R&D technology, the company can further reduce manufacturing and R&D costs, adopt platform-based vehicle architectures, and new generations of intelligent and electrification technology. For example, the first flagship product P9 adopted three mature technologies, thereby reducing manufacturing and R&D costs. In the past few years, every product launched by the company has focused on advanced and next-generation technology. In the future, the company will begin to reap the benefits of R&D investment, and R&D and manufacturing costs will be greatly reduced. This will also help improve the overall quality, manufacturing efficiency, and R&D efficiency of future products. Since 2019, the company has been investing in improving manufacturing processes. Therefore, in the next 2-3 years, a new generation of quality improvement will be ushered in. For example, more and more comprehensive direct cost calculation technologies will be used in the internal and external aspects of vehicles.

In the future, the company's R&D and manufacturing costs will decrease, overall product quality will improve, and better sales performance will be achieved.

Q: After the launch of the G9 platform, the company will launch new models based on 2 platforms next year. Considering faster iterations and fiercer competition, what is the reasonable lifecycle of the next-generation platforms? How many models will be built on each platform throughout the entire lifecycle?

A: The goal for 2023 is to launch 2 new platforms based on existing platforms, with a total of 6 new models developed. It is estimated that the average lifecycle of each platform or any system upgrades to these platforms is 3 years. There have also been internal discussions about upgrading existing platforms to enable them to support various possibilities of next-generation intelligent and electrification technologies in the future. Therefore, the company's product has entered a very good growth period, and the platform's vehicle architecture technology with a life cycle of at least 3-6 years will continue to drive the development of future products.

Q: The company will launch 4 new products: updated P7, G9, B-level, and C-level new products. Can the annual sales delivery volume reach 300,000 vehicles? If feasible, what are the proportions of old and new products? Can the monthly delivery volume of mature product P7 be maintained at 12,000 vehicles?

A: Specific guidance cannot be provided at this time, but we can share how the company views the positioning and competition of new models within the product line.

First, the company's core products, such as the P7, are still steadily growing. With the update next year, the P7 will continue its strong performance. The company hopes that the G9 will exceed the monthly delivery volume of the P7 next year.

In the first half of next year, a B-level product will be launched for a larger segment market. It is a strong competitor to the widely used models in the market and will also be a model that can be delivered and sold in large quantities.

The fourth new product, C-level product, will be launched in the second half of the year. Given its positioning as high-end and large, its contribution to sales volume is limited. However, it will also target a completely new segment market.

Q: The sales of high-profit product P7 decreased by 3,500 vehicles month-on-month, and the cost of batteries increased month-on-month. What is the gross profit margin of P7 in 2022Q2? What is the expected trend of P7 gross profit margin in 2022Q3?

A: Your statement is correct.

In 2022Q1, the gross profit margin of automobiles is 10.4%, and in 2022Q2, the gross profit margin of automobiles is 9.1%, a decrease of about 1.3 percentage points from the previous month. The decrease is better than expected because the pricing can cover the increased cost of batteries.

However, there are two differences:

- Due to order accumulation, new price orders will not be delivered until late May (approximately 2 months difference). Therefore, companies cannot fully recover costs through price adjustments.

- The proportion of P7 in the product mix in 2022Q2 is less than 50%.

In summary, the main reason for the decline in profit margin in 2022Q2 is (1) the unrecovered additional cost in Q2; (2) the change in product mix proportion.

Looking ahead to 2022Q3, the company will begin to deliver new price orders in July. More importantly, the product mix, that is, the percentage of P7 in the total delivery volume, will be better. Therefore, it is expected that the gross profit margin will achieve month-on-month growth.

Q: Analyze the product cycle and current situation from the perspective of profitability and growth rate.

A: In terms of profit margin, due to the change in product mix proportion and stable batteries, as well as orders reflecting changes in fuel prices and incentive combinations, the profit margin in 2022Q3 should be stable and better than in 2022Q2. In addition, as new products begin to be launched, it is obvious that the G9 to be delivered in October will be the first of the few new products that the company can launch. The launch of new products will gradually become apparent and continue until 2022Q4, and the seasonality will actually be favorable for the company. The company will enter a growth period driven by new products launched by the end of this year and next year, which also boast better profit margins due to platform design and higher prices compared to ASP.

Q: The company started its promotion in mid-July. Why is the 2022Q3 sales guidance relatively low? Does this mean the guidance is conservative? Or has the plan to cancel the promotion in August already been made?

In addition, the profit margin guidance for 2022Q3 is quite positive and will return to the same level as 2022Q1. Does this mean that the promotion will stop in August or September?

A: Firstly, the 2022Q3 delivery guidance is based on all the information the company has collected so far. Therefore, it includes all the promotions and price adjustments the company has made in the past. The guidance reflects a relatively sluggish season as the pandemic has reduced store traffic below normal levels. Additionally, some customers are waiting for the new models to be delivered and compared with the existing models.

Regarding profit margins, the July promotions were actually less price-inflated than 2022Q2. Therefore, the profit margins are slightly better than the current pricing environment or a combination of pricing. The company has not provided guidance to return to 2022Q1 levels, but only believes that the profit margin will improve or stabilize compared to 2022Q2.

Q: Will the new model in 2023 be a comparable product to the existing model? Will this model be slightly smaller, cheaper, and have a larger potential market than G9?

A: Yes.

Q: Does the company or the supplier own the battery technology patent? Can the supplier provide this type of battery to other OEM manufacturers? What is the reason for the company's own battery production?

A: Supercharging technology involves the battery itself, battery management, battery packs, vehicle manufacturing and design, and charging piles.

Currently, the company is cooperating with suppliers and partners in battery research and development and sharing some patents in these areas. The company also has the ability to develop batteries and battery management, design, and manufacture of vehicles and charging pilots.

Independently developing high-quality battery control is critical to achieving the highest standards, such as product quality and maintaining the technological level the company aims to achieve. Additionally, independent research allows the company to achieve higher driving mileage using very compact designs and efficiency better than the market.

Q: Is the 2022Q3 guidance based on (supply-side) supply chain or (demand-side) seasonal demand weakness?

A: As previously answered, seasonal demand is weak, the pandemic has reduced traffic, and customers have a cautious attitude toward new models. Additionally, some of this is due to mismatches between old model orders and the supply chain.

Q: The company will launch B-class SUVs and C-class models next year. In view of the existing mid-size cars and SUV--P7 and G9, how do you view the competition between models?

A: Firstly, there is very little overlap. As previously answered, the size, price, and positioning of the new B-class model are different from G9, which are in different market segments. The new model next year is not a sedan and will not be competing with P7. Therefore, from the perspective of vehicle positioning and lineup, there is little impact.

Q: What is the latest situation regarding chip supply?

A: Since last year, the company's supply chain has been greatly affected by chip and battery shortages. However, the company believes that raw material shortages will be greatly alleviated in early next year. In the first half of this year, there were about 10 types of chips in high-risk shortage. So far, the number of high-risk shortage types has decreased. There are a total of 5,000 different types of chips in each car, so chip shortage will still be a major problem. However, the supply shortage is being alleviated and the impact will be greatly reduced in early next year.

Q: What is the impact of power restriction in Sichuan province on production?

A: It did not cause any impact since the company had communicated with the supply chain enterprises in advance, and is not worried about power shortage problems.

Q: What is the reason for the exchange loss of about 890 million yuan in Q2 2022?

A: When the company was listed in the United States and Hong Kong, most of the funds were raised by the American subsidiary, and the functional currency was the US dollar. Through inter-company borrowing, the American subsidiary lent money to domestic subsidiaries. Therefore, the assets held by the American subsidiary are mainly denominated in RMB. In the future, this money should be returned to the United States and converted into US dollars. When the RMB appreciates, it will benefit from the appreciation. However, the rapid depreciation of the RMB against the US dollar in Q2 2022 caused a depreciation impact. In the future, if there is any change in the exchange rate, it will be revalued on a monthly basis.

It should be noted that this is just an estimation, not a cash conversion. Currency exchange rate differences cause fluctuations, so valuations need to be conducted every quarter.

Q: Compared with the peer model, how do you view the competition, patents, and consumer preferences in the market of 200,000 yuan? What are the main advantages and disadvantages of the company? Will a new version of G5 be launched next year? What is the expected monthly sales volume?

A: Competition will be very intense this year and next. There are two types of competition: (1) the ratio of mileage, performance and price; (2) the overall design and intelligent functions of the product.

Due to the immersion and huge cabin space of P5, its overall advantage is very prominent, and its sales performance is also very stable. The update of P7 will have a small impact on the sales performance of P5, but overall, P5's overall sales performance is expected to be very good in 2023.

With the promotion of NGP introduced in the new P7, the company expects that sales performance of P5 equipped with higher-level intelligent functions, such as urban-level NGP, will also increase.

Q: Will the Super Charge technology be widely popularized soon, or will it take a few years to gradually penetrate? How will the Super Charge technology affect procurement costs? Can it penetrate into lower price models?

A: The construction and adoption of the supercharging network is developing faster than expected. It started actively constructing the network from Q2 2022, and it is expected that there will be another new station equipped with supercharging facilities in Q4 2022. The supercharging network will be built at a higher speed in 2023.

The highest configuration model of G9 is fully compatible with 4C, and other configurations of G9 also support 3C. Since the existing platform will support this high-voltage and high-power supercharging facility, all future models will be equipped with this function. This means that the company can have better control over the supply chain of its products and achieve better economies of scale and cost control effects.

Super charging needs to focus on two points: (1) the development and design of vehicles to support this high-voltage super charging function; (2) the construction of super charging networks and charging stations. By the second half of 2023, the company hopes to have a very complete super charging network, fully promoting the use of fast charging facilities.

Here is Dolphin Analyst's in-depth research and comments on Xiaopeng Automobile, including:

Comparison study with Tesla - Part 1 "New Forces in Car Making (Part 1): Investing in People and Doing the Right Thing"

Comparison study with Tesla - Part 2 "New Forces in Car Making (Part 2): Market Enthusiasm Subsides, What Does Xiaopeng Rely on to Consolidate Its Position?"

Comparison study with Tesla - Part 3 "New Forces in Car Making (Part 3): 50-Day Doubling, Can Xiaopeng Continue to Sprint?"

Comments on Q1 2021 report "Xiaopeng Automobile: Negative Tesla and Super Expectations, Who Do You Pick?"

Comments on Q2 2021 report "Xiaopeng Automobile: Healthy Financial Report, Full of "Smart" Heart"

Q2 2021 report conference "Xiaopeng Automobile: Roll Up Your Sleeves and Work Hard"

Comments on Q3 2021 report "Reserving the New Forces Yearly Championship, How Far is Xiaopeng from the "Chinese Version of Tesla"?"

Q3 2021 report conference minutes "Xiaopeng: Exploring the Robotaxi Business, Advancing Intelligence Again? (Conference Call Minutes)"

Comments on Q4 2021 report "Selling More and More but Losing More, Is Xiaopeng Awkward or Awesome?"

Q4 2021 report conference minutes "Rapid Channel Sink Opens the Ceiling for Xiaopeng Automobile's Delivery Volume (Q4 2021 Report Conference Minutes)" 2022 Q1 Review: "Sales King, Loss Leader, Will the Market Still Buy Into XPENG?"

Q1 Earnings Conference Summary: "XPENG: Q3 is when the price hike will be reflected and gross profit margin will rebound significantly (Conference Summary)"

2022 Q2 Review: "XPENG is still far from 'making money'"

Risk Disclosure and Statement of this Article: "Dolphin Research Disclaimer and General Disclosure"