Xpeng Inc. Q2 FY2021 Earnings Call

Hello, ladies and gentlemen. Thank you for standing by for the Second Quarter 2021 earnings conference call for XPeng Incorporated. At this time, all participants are in a listen-only mode. After the management's remarks, there will be a question-and-answer session. Today's conference call is being recorded. I will now turn the call over to your host, Mr. Ziling Ma, Director of Investor Relations of the company. Please go ahead, Mr. Ma.

Thank you. Hello, everyone, and welcome to XPeng's Second Quarter Earnings Conference Call. All financial and operating results were issued by our assets earlier today and are available online; you can also view the earnings press release by visiting the IR section of our website at irtokyo.com. Assistance on today's call will include our Co-Founder, Chairman and CEO, Mr. He Xiaopeng, Vice Chairman and person, Dr. Brian Gu, Finance. Mr. Dennis Lu, Managing Director of Trustee, Mr. Charles Zhang, and myself. We will begin with prepared remarks, and the call will conclude with a Q&A session. A webcast replay of this conference call will be available on the IR section of our website. Before we continue, please note that today's discussion will contain forward-looking statements made on the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's results may be materially different from views expressed today. Further information regarding these and other risks and uncertainties is included in the relevant public filings of the company as filed with the U.S. Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements, except as required under applicable law. Please also note that the earnings press release and this conference call will include a disclosure of unaudited GAAP financial measures, as well as unaudited non-GAAP financial measures; the earnings press release contains a reconciliation of unaudited non-GAAP measures to the unaudited GAAP measures. I will now turn the call over to our Co-Founder, Chairman, and CEO, Mr. He Xiaopeng. Please go ahead.

I will now turn the call over to our Co-Founder, Chairman, and CEO, Mr. He Xiaopeng. Please go ahead.

Hello, everyone. Thank you for joining XPeng's Second Quarter 2021 Earnings Conference Call.

Hello, everyone. Thank you for joining XPeng's Second Quarter 2021 Earnings Conference Call.

In the second quarter of 2021, XPeng's vehicle deliveries reached 17,398, marking a new quarterly high and representing a 439% increase compared to the same period last year. For the first half of the year ending June 30, 2021, XPeng delivered 30,738 vehicles, exceeding the total deliveries for the entire year of 2020. Additionally, in July, our monthly deliveries surpassed 8,000 units, achieving a new monthly record alongside a significant order backlog. With the rapid growth in deliveries, our profitability in the second quarter also improved, and our gross margin reached 11.9%.

Our deliveries reached 17,398, marking another quarterly high and representing a 439% increase year-over-year. For the six-month period ending June 30, 2021, we delivered 30,738 vehicles, which exceeded the total for the entire year of 2020. In July, our monthly deliveries surpassed 8,000 units, setting a new record with a substantial order backlog. As our deliveries have grown quickly, our profitability in the second quarter has also improved, with a gross margin of 11.9%.

Our record delivery growth was driven by consumers' increasing demand for Smart EVs and our leadership position and smart electric vehicle products and our product iterations. In the second quarter, the attach rate of XPILOT 3.0 software reached 25%. Among the nearly 35,000 P7s that have been delivered as of the end of June 2021, close to 8,000 units were equipped with XPILOT 3.0. Also, in June, our highway NGP mileage penetration rate exceeded 60%, and NGP assisted our customers in driving for around 1.45 million kilometers. The average monthly usage rate of NGP exceeded 65%. This is a clear demonstration of customers' increasing adoption and reliance on our advanced driver assistance systems. With the rollout of XPILOT 3.5 earlier next year and afterward, XPILOT 4.0, our future advanced driver assistance system built on our next-generation hardware platform, we'll be able to empower a broader range of end-to-end driving scenarios, including those not covered by HD maps. As a result, customer demand and reliance on the Advanced Driver Assistance System will continue to increase. As we advance in developing cutting-edge technologies, safety will always remain our top priority. We have an unwavering commitment to enhancing driver safety education and providing hardware redundancy and software iterations to ensure our customers can safely use our Advanced Driver Assistance System. To illustrate, XPeng is the first EV maker to implement a driver safety proficiency test for customers before they can activate our Advanced Driver Assistance System. In addition, we are also the first in the industry, starting from our P5 models, to equip LiDAR technology to be adopted in some of the configurations to increase redundancy of perception through hardware and sharpen its adaptability in handling corner cases to further safeguard driver safety.

XPeng is the first electric vehicle manufacturer to require customers to complete a driver safety proficiency test before activating our Advanced Driver Assistance System. Additionally, we are the first in the industry to incorporate LiDAR technology in some configurations of our P5 models, which enhances perception redundancy through hardware and improves adaptability in managing corner cases to further ensure driver safety.

Our strategic focus on advancing fast product iteration allows us to further expand our addressable markets. In the second quarter, we began sales and deliveries of lithium-iron phosphate or LFP battery powered G3s and P7s. Their deliveries comprised more than 20% of total deliveries for each model. These new editions expand our price range and customer base. With the growing supply of LFP cells, we're confident with the increasing proportion of LFP models among our deliveries in the future. Moreover, the strong market response to our recently launched G3i, the new mid-cycle version of the G3, exceeded our expectations. The production preparation and switching of G3i is expected to impact G3 and G3i production and delivery for a few weeks. We plan to start deliveries at the end of August and will increase delivery scale in the next quarter.

We are confident in the increasing proportion of LFP models among our future deliveries, thanks to the growing supply of LFP cells. Additionally, the market response to our recently launched G3i, the updated version of the G3, has surpassed our expectations. The preparations for production and the transition to the G3i will affect the production and delivery of both G3 and G3i for a few weeks. We intend to begin deliveries at the end of August and will scale up deliveries in the upcoming quarter.

In July, we announced configuration details and the price range for our third production model, the P5, and its reception has been overwhelmingly positive. We expect to officially launch the P5 and unveil its MSRP in mid-September and begin its deliveries in October. With P7, we have already demonstrated the unique driving experience brought by our full-stack in-house algorithm for advanced driver assistance systems that are capable of handling complex driving scenarios in China. Now with P5, we're bringing to our users a driving experience that will enable them to utilize advanced driver assistance systems in urban driving scenarios with the ability to switch between different driving scenarios smoothly. I believe this is only the start of XPeng's journey to accentuate the development of our leading advanced driver assistance technologies. Moreover, with the P5, we're able to offer our industry-leading advanced driver assistance systems and smart cockpit technology to the broadest family sedan market with an attractive pricing range from 106,000 to 230,000 RMB, further accelerating the EV disruption of the traditional ICE and non-intelligent automobile market.

I believe this is only the start of XPeng's journey to enhance the development of our leading advanced driver assistance technologies. Moreover, with the P5, we're able to offer our industry-leading advanced driver assistance systems and smart cockpit technology to the broadest family sedan market with an attractive pricing range from 106,000 to 230,000 RMB, further accelerating the EV disruption of the traditional ICE and non-intelligent automobile market.

I would like to share some of my predictions for the future. First, in China, vehicles priced between 150,000 and 400,000 RMB will constitute the largest segment in the EV market and show the fastest growth rate. Furthermore, the disruptive forces that Smart EVs bring to traditional mobility in this segment will also be the most vigorous and the swiftest. Second, high-level or Advanced Driver Assistance Systems will bring qualitative changes in users' mobility experience. Third, as China is poised to take the leap into the development of Smart EVs around the world, China's Smart EV makers will be in an excellent position to expand globally. In order to capitalize on such opportunities, on July 7th, XPeng completed our dual primary IPO on the Hong Kong Stock Exchange and raised 15.8 billion Hong Kong dollars. Looking ahead, we plan to further increase investment in intelligent technology innovations, branding, marketing, service facilities across our supercharging sales channel network, and global expansion. Our differentiated products and technological path we chose, along with investments in human capital and global expansion, not only bolster our leading position in the current landscape but also underscore our long-term vision and strategic deployment.

We raised 15.8 billion Hong Kong dollars. Looking ahead, we plan to further increase investment in intelligent technology innovations, branding, marketing, service facilities across our supercharging sales channel network, and global expansion. Our differentiated products and the technological path we chose, along with investments in human capital and global expansion, not only strengthen our leading position in the current landscape but also highlight our long-term vision and strategic deployment.

Looking forward in a few years' time, we will accelerate the pace of our new product deployment. Starting from 2023, we plan to launch at least 2 or 3 new vehicles every year supporting XPILOT 3.0 or above. We intend to make these safer new models, including hardware, software, and services, simultaneously available in China and in international markets. We'll also broaden our primary price range in China from between 150,000 and 300,000 RMB to between 150,000 to 400,000 RMB, making our cutting-edge Smart EV accessible to a broader customer base.

We are focusing on accelerating our new product deployment. Beginning in 2023, we aim to introduce at least 2 or 3 new vehicles each year that support XPILOT 3.0 or higher. Our goal is to provide these safer new models—encompassing hardware, software, and services—simultaneously in both China and international markets. Additionally, we will expand our primary price range in China from 150,000 to 300,000 RMB to a range of 150,000 to 400,000 RMB, making our advanced Smart EVs more accessible to a wider customer audience.

As we accelerate our efforts in technology innovations and product design and development for more new models, we are committed to growing and developing our R&D team. As of the end of the second quarter of 2021, our R&D headcount exceeded 3%, nearly a 50% increase compared to the beginning of this year. By the end of 2021, it will increase to more than 4,500. We also plan to increase the number of engineers dedicated to the research and development of autonomous driving technology spanning software, hardware, big data, and navigation maps for international markets. We estimate that the total number of engineers working in our autonomous driving software, hardware, and relative supporting infrastructure teams will exceed 1,500 by the end of this year.

We estimate that the total number of engineers working in our autonomous driving software, hardware, and relative supporting infrastructure teams will exceed 1,500 by the end of this year.

In June, the penetration rate of EVs in China's market surpassed 10% for the first time. I believe the timing for the Smart EV market is navigating through an inflection point for the next level of growth, which arrived earlier than expected. To tap into this blooming opportunity, we will accelerate the construction of our infrastructure facilities, underpinning our long-term strategic roadmap and investments. As of the end of June, XPeng's physical sales network consisted of 200 stores across 72 cities in China. Of these stores, 110 were directly operated by us. To keep pace with our rapid development and delivery growth, we plan to lift our guidance of the number of sales stores from 300 to more than 350 stores by the end of 2021.

To tap into this blooming opportunity, we will accelerate the construction of our infrastructure facilities, underpinning our long-term strategic roadmap and investments. As of the end of June, XPeng's physical sales network consisted of 200 stores across 72 cities in China. Of these stores, 110 were directly operated by us. To keep pace with our rapid development and delivery growth, we plan to lift our guidance of the number of sales stores from 300 to more than 350 stores by the end of 2021.

We also continue to rapidly expand our supercharging network. As of June 30th, the number of XPeng branded supercharging stations grew to 231, covering some 65 cities. Recently, the first batch of 11 XPeng branded supercharging stations has been deployed on the Sandoz section of the Beijing-Shanghai expressway and the Hernan section of the Beijing-Hong Kong, Macau expressway. We'll move forward to deploy our supercharging capabilities across the entire Beijing-Shanghai, Beijing-Guangzhou, and Beijing-Hong Kong-Macau expressways, further enhancing our ability to serve our customers in long-distance driving. We plan to have more than 500 XPeng branded supercharging stations operational by the end of this year, accelerating the expansion of our charging network across lower-tier cities.

We will move forward to deploy our supercharging capabilities across the entire Beijing-Shanghai, Beijing-Guangzhou, and Beijing-Hong Kong-Macau expressways, further enhancing our ability to serve our customers in long-distance driving. We plan to have more than 500 XPeng branded supercharging stations operational by the end of this year, accelerating the expansion of our charging network across lower-tier cities.

In terms of our international expansion, as of June 30th, we had exported approximately 500 G3s to Norway. In August, we plan to export P7 to the Norwegian market as well. We'll continue our efforts in Norway and other European markets to further strengthen our local operations through sales, delivery, and customer service enhancements. Our target is to prepare ourselves for the overseas markets in both left- and right-hand drive countries within the three years from 2020 to 2022 and accelerate our penetration into international markets with our upcoming Smart EV models equipped with XPILOT 4.0 starting from 2023.

We plan to export P7 to the Norwegian market as well. We'll continue our efforts in Norway and other European markets to further strengthen our local operations through sales, delivery, and customer service enhancements. Our target is to prepare ourselves for overseas markets in both left- and right-hand drive countries within three years from 2020 to 2022 and accelerate our penetration into international markets with our upcoming Smart EV models equipped with XPILOT 4.0 starting from 2023.

Turning to our production, with our GCI and P5 commencing production, our Jiaoxin factory is now able to produce the G3i, P7, and P5 concurrently. In August, we added a second production shift at the Jiaoxin factory. With the increasing production output, we expect our monthly delivery volume to potentially reach 15,000 in the fourth quarter. That said, supply chain challenges, particularly those pertaining to chip shortage, remain the biggest production hurdle we are facing. With the support of the Zhaoqing municipal government, in August, we kicked off the Phase 2 expansion of our Zhaoqing factory, which we expect to increase annual design production capacity at the site from 100,000 to 200,000 by the end of the first half of 2022. Construction for our Guangzhou factory remains on track, and we expect the main structure to be completed in the first quarter of next year with mass production to begin in the third quarter of 2022.

We are currently dealing with a significant production challenge. Thanks to the support of the Zhaoqing municipal government, we launched the Phase 2 expansion of our Zhaoqing factory in August. We anticipate that this expansion will boost our annual design production capacity at the site from 100,000 to 200,000 by the end of the first half of 2022. The construction of our Guangzhou factory is progressing as planned, and we expect the main structure to be finished in the first quarter of next year, with mass production set to commence in the third quarter of 2022.

In summary, we'll continue to strive to overcome the various challenges before us, stemming from chip shortages, supply chain shortage, COVID-19 resurgence in some parts of the world, and production transition from G3 to G3i. In the third quarter of 2021, we expect our smart EV deliveries to be between approximately 21,500 and 22,500 units, and our total revenue to be between approximately 4.85 billion and 5 billion RMB. I look forward to sharing with you our latest progress on technology innovations on our third XPeng Technology Day on October 24th this year.

In the third quarter of 2021, we expect our smart EV deliveries to be between approximately 21,500 and 22,500 units, and our total revenue to be between approximately 4.85 billion and 5 billion RMB. I look forward to sharing with you our latest progress on technology innovations on our third XPeng Technology Day on October 24th this year.

Thank you, everyone. With that, I will now turn the call over to our VP of Finance, Mr. Dennis Lu, to discuss our financial performance for the second quarter of 2021.

Thank you, Xiaopeng, and hello, everyone. Our outstanding performance in the second quarter continued to experience leadership in the booming Smart EV industry in China, where we continue to introduce innovative technology, differentiated products, and premium service. Following strong delivery performance, our revenues in the second quarter grew 537% compared with the same period of 2020. We also witnessed further improvement in our financials. In particular, our gross margin continued the upward trend and reached 11.9% in the second quarter. Now I would like to walk you through our detailed financial results for the second quarter of 2021. I will reference R&D only in my discussion today, unless otherwise stated. Total revenues were RMB 3.8 billion for the second quarter of 2021, representing an increase of 537% from RMB 591 million for the same period of 2020 and an increase of 28% from RMB 2.95 billion for the first quarter of 2021. Revenues from vehicle sales were RMB 3.6 billion for the second quarter of 2021, representing an increase of 562% from RMB 541 million for the same period of 2020 and an increase of 28% from RMB 2.8 billion for the first quarter of 2021. The year-over-year increase was mainly due to higher vehicle delivery, especially for the P7. The quarter-over-quarter increase was also attributable to higher P7 sales as a result of seasonality, channel expansion, and increasing sales volume. Revenues from service and others were RMB 177 million for the second quarter of 2021, representing an increase of 256% from RMB 49.7 million for the same period of 2020 and an increase of 26% from RMB 141 million for the first quarter of 2021. The year-over-year and quarter-over-quarter increases were mainly due to more income from service parts and accessories sales in our higher accumulative vehicle sales. Gross margin was 11.9% for the second quarter of 2021, compared with negative 2.7% for the same period a year ago and 11.2% for the first quarter of 2021 respectively. Vehicle gross margin was 11% for the second quarter of 2021, compared with negative 5.6% for the same period of 2020 and 10.1% for the first quarter of 2021; the improvement was primarily attributable to better product mix and material cost reductions. Research and development expenses were RMB 864 million for the second quarter of 2021, representing an increase of 170% from RMB 319 million for the same period of 2020, and an increase of 61% from RMB 535 million for the first quarter of 2021. The year-over-year and quarter-over-quarter increase were mainly due to, one, the increase in employee compensation as a result of expanded research and development steps; and two, higher expenses related to the development of vehicles and related software technologies. Selling, general, and administrative expenses were RMB 1 billion for the second quarter of 2021, representing an increase of 116% from RMB 477 million for the same period of 2020, and an increase of 43% from RMB 721 million for the first quarter of 2021. The year-over-year and quarter-over-quarter increases were mainly due to, one, higher marketing, promotional, and advertising expenses to support vehicle sales; and two, the expansion of the sales network and associated personnel costs and commission for franchise store sales. Loss from operations was RMB 1.4 billion for the second quarter of 2021 compared with RMB 779 million for the same period of 2020 and RMB 904 million for the first quarter of 2021. Excluding share-based compensation expense, non-GAAP loss from operations was RMB 1.3 billion for the second quarter of 2020, compared with RMB 779 million for the same period of 2020 and RMB 814 million for the first quarter of 2021. Net loss was RMB 1.2 billion for the second quarter, compared with RMB 146 million for the same period a year ago and RMB 787 million for the first quarter of 2021. Excluding share-based compensation expense and fair value change on derivative liabilities related to the retention value of the approval shares, the non-GAAP adjusted net loss was RMB 1.1 billion for the second quarter of 2021, compared with RMB 770 million for the same period of 2020 and RMB 696 million for the first quarter. Although 2021 net loss attributable to ordinary shareholders of XPeng Inc. was RMB 1.2 billion for the second quarter, compared with RMB 1.1 billion for the same period of 2020, and compared with RMB 787 million for the first quarter of 2021. Excluding share-based compensation expense and fair value changes on derivative liabilities related to the retention value of shares and accretion on the preferred shares to the retention value, the non-GAAP net loss attributable to ordinary shareholders of XPeng Inc. was RMB 1.1 billion for the second quarter of 2021 compared with RMB 769 million for the same period of 2020 and RMB 696 million for the first quarter of 2021. Basic and diluted net loss per ADS was RMB 1.5 for the second quarter of 2021; the non-GAAP basic and diluted net loss per ADS was RMB 1.38 for the second quarter of 2021. Each ADS represents two Class A ordinary shares. Turning back to the balance sheet, as of June 30th, 2021, our company had cash and cash equivalents, restricted cash, short-term deposits, short-term investments, and long-term deposits totaling RMB 32.9 billion, which excludes the Hong Kong IPO funds of RMB 13 billion. Compared with RMB 35.3 billion as of 12/31/2020. With that, now I would like to turn the call to Ziling Ma.

To be mindful of the length of our earnings call for our Second Quarter financial results, I would encourage listeners to refer to our earnings press release for further details. This concludes our prepared remarks; we will now open the call to the questions. Operator, please go ahead.

Your first question comes from Tim Hsiao with Morgan Stanley. Your line is open.

Thanks for taking my questions and congratulations on the great results. I've got two questions. The first question is about the component supply. I think the near-term chip shortage is well anticipated…

Thank you for taking my questions and congratulations on the great results. I've got two questions. The first question is about the component supply. I think the near-term chip shortage is well anticipated…

So regarding core components and the shortage, I think we have to view it from two perspectives. One is the expected shortages that we can prepare for, and the other is the unexpected ones. The expected ones primarily refer to the chip shortage; the unexpected ones reference pandemic resurgence. For example, lately, we saw this emergency happening in Nanjing where we faced a serious lockdown. And as it so happens that one of your Tier 1 or Tier 2 suppliers is located in one of those lockdown cities, there's nothing we could do about it, and those will be considered as unexpected elements that affect our shortages.

We can prepare for certain challenges, while others take us by surprise. The expected challenges mainly involve the chip shortage, whereas the unexpected ones relate to pandemic resurgences. Recently, there was an emergency in Nanjing that resulted in a significant lockdown. If one of our Tier 1 or Tier 2 suppliers is based in a city under lockdown, there's little we can do to mitigate the impact, and these situations are regarded as unforeseen factors contributing to our shortages.

So for the first kind of challenge, which is the core components or chip shortage, we can prepare in several ways. First, we can make orders well ahead of time so that we can better handle chip shortages. The second thing is we can work with some top-tier suppliers in terms of chip-set production and development. We can collaborate with them in several ways: firstly, we can sign collaboration deals; also, we can invest in some of those core suppliers; and we can work with local governments in terms of bulk purchasing or pre-ordering the chipsets to meet our needs. The chip shortage is a big challenge for the whole industry, but as a company equipped with leading technology, XPeng actually has a very favorable position to play in this supply chain because a lot of the chip suppliers consider us as their VIPs, thanks to our fast development and fast iteration of our models. Additionally, we are very flexible as we don’t have a large delivery backlog yet, which allows us the flexibility in selecting different suppliers to fulfill our chip demands. We can also look to overseas markets for more chip supplies.

XPeng has a favorable position in the supply chain due to our leading technology, as many chip suppliers see us as valuable partners because of our rapid development and iteration of models. Additionally, our relatively small delivery backlog gives us the flexibility to choose various suppliers for our chip needs, and we can explore overseas markets for additional chip supplies.

Regarding your second question, which is about the demand for the P5. If you ask me to compare it with the P7, I would say we see an even stronger demand compared to the P7 at the same stage. We are also able to plan ahead better for the pre-ordering of P5. Currently, the pre-order has been open for two months, and every month we're seeing demand come in more strongly than expected. This allows us to guarantee delivery by the fourth quarter of this year.

Regarding your second question about the demand for the P5, I would say we see an even stronger demand compared to the P7 at the same stage. We are also able to plan ahead better for the pre-ordering of P5. Currently, the pre-order has been open for two months, and every month we're seeing demand come in more strongly than expected. This allows us to guarantee delivery by the fourth quarter of this year.

Thank you.

Thanks for sharing your insight.

And your next question comes from Bin Wang with Credit Suisse. Your line is open.

Actually, I got three questions; and number one is about new products…

Hey, Bin, it's Brian. Let me just address your first question. Obviously, we can't detail the fifth or the sixth product at the moment. But what we can share with you is that we are intending to develop a new platform for the business fixed products. This platform aims to be probably the largest in terms of the quantity and addressable market. It will be a platform that targets mid to high-end segments that we're selling right now. At the same time, we plan to also roll out a high-end product in the same year that will probably be priced above the current range, increasing to over 400,000 RMB. So that's another product we aim to launch in that 2023 timeframe. In addition to the G3, the P7, and the P5, we will have a new platform that will have both right-hand and left-hand driving capabilities aiming for both domestic and international markets that will be a significant volume driver.

Yes, Bin, you are right. If we consider excluding the software margin impact, we had about 2.3% gross margin improvement quarter-over-quarter. Among that, around 1.1 to 1.2% was driven by better product mix. In the second quarter, we had more P7 in our total sales. In the first quarter, our P7 accounted for about 60% of total sales; in the second quarter, that increased to about 66%. So, we had a mix improvement. Another significant factor was material cost reduction. As we mentioned in the previous earnings call, we reached cost reductions and negotiations starting from the first quarter. However, in the first quarter, we also had some inventory that we purchased in the previous year, meaning that the cost reduction's impact wasn’t 100% in the first quarter. In the second quarter, we basically had a full benefit from the reduced battery costs, which accounted for about 1.1 to 1.2 percentage points in terms of margin contribution as well.

Charles here to address your third question regarding the software attach rate. In Q2, our software attach rate increased from around 20% last quarter to around 25% this quarter, and we believe that the increasing software attach rate was mainly driven by high utilization rates, and overwhelmingly positive feedback from our customers. For example, in June, our monthly NGP utilization rate exceeded 65%, and the NGP managed penetration rate in June also exceeded 60%. Looking forward, starting from Q4, we will start to recognize revenue from the XPILOT 3.0 on our P5.

Second half guidance. Thank you.

And your next question comes from Nick Lai with JP Morgan. Your line is open.

Hi, thanks. It's Nick from JP Morgan. Thank you for taking my question. I have two simple questions…

Thank you. This is Brian. Let me just address your first question regarding our cash reserve and future use of that cash. Including the Hong Kong IPO proceeds, our cash balance exceeds 14.6 billion at the moment. As we stated in our Hong Kong IPO prospectus, we intend to use the proceeds mostly for R&D, as well as sales and marketing expansion. What I can say at this moment is that we see a tremendous opportunity in China. The acceleration in the market is actually faster than what we expected at the beginning of the year. As the leading company in this segment, we want to maintain our leadership by further investing into R&D infrastructure, sales and marketing, brand-building, and other related efforts. We plan to increase the pace of investment in these areas. For example, in R&D, we expect our expenses for the year to approach about 4 billion RMB, which will be increased from earlier in the year. Also, in sales and marketing, given the expected launch of our new models, we will also increase spending on marketing, sales infrastructure build-out, branding, and related facilities, etc. We intend to increase the delivery target for our business, aiming to achieve a monthly delivery key number of above 15,000 vehicles per month in the fourth quarter.

In regards to your second question about data security, we are very, very happy to see this deregulation coming out from the Chinese government because it is going to be beneficial, not just for the whole industry but especially for XPeng, as we have always been stringent on data protection and safety. Since our inception, we've invested a lot in the R&D of data security and safety. We not only fulfill regulations in China but also in Europe and worldwide. We believe that many of the OEMs and other competitors out there are focusing on building their advantages on different modules. However, the real challenge lies in the integration of different modules to ensure that the entire system fulfills all of those safety requirements. The most challenging part actually involves safety and security, which requires a full in-house R&D capability, which XPeng possesses. Moreover, regarding OTA updates, we are cutting edge in this area too. For example, we are the first OEM in the industry to conduct a driver proficiency test before allowing usage of our driver assistance system, and we are also the first company of its kind that adopted LiDAR technology on top of our visual technology for enhanced safety. We view this new regulation as beneficial news for the whole industry, especially for OEMs like us that possess in-house full security R&D capability.

All right. Our next question comes from Ming Lee with Bank of America Securities. Your line is open.

Well, thank you. So I have two questions. The first question is regarding your international expansion plan. I think yesterday, we saw news that you will start to ship P7 to Norway…

Currently, we intend to try both methods for our sales — working with distributors locally as well as opening our own brand stores. In Norway, we are working with leading distributors; however, we also plan to open our stores in larger cities or capital areas in European countries. So, we are experimenting with a hybrid model for our strategy. Obviously, we will analyze and decide which model best fits us moving forward. Regarding your second question about OTA updates and data security, as has been pointed out in previous responses, we see this increased regulatory attention as beneficial for market leaders. It does not hinder our innovation quality or pace, nor does it narrow our lead; it actually strengthens the barriers between us and our latecomers in the industry.

And your next question comes from Edison Yu with Deutsche Bank. Your line is open.

Thank you for taking my questions. First, I am curious how you will differentiate your new premium offerings compared to existing mass-market models, and second, can you provide details regarding XPILOT 3.5 pricing…

To answer your second question, we intend to price XPILOT 3.5 at a premium to the current XPILOT 3.0. Obviously, XPILOT 3.0 will still be available for vehicles that utilize it. In the foreseeable future, vehicles will have a maintained price for XPILOT 3.0 and a slight premium for XPILOT 3.5 reflecting the additional features.

To answer your second question, we plan to price XPILOT 3.5 at a premium compared to the current XPILOT 3.0. However, XPILOT 3.0 will still be available for vehicles that use it. In the near future, vehicles will maintain the price for XPILOT 3.0, while XPILOT 3.5 will have a slight premium due to the additional features.

In response to your first question, I think P7 has already proven our capability of entering premium markets, particularly with a price close to 300,000 RMB. Last month, our delivery of P7 surpassed that of all competitors in its class. This speaks volumes about our potential in the premium market. We target an even higher price range from 400,000 to 500,000 RMB. By entering these premium markets, we plan to offer differentiated, technology-driven services that set us apart from our competition.

In response to your first question, I think P7 has already proven our capability of entering premium markets, particularly with a price close to 300,000 RMB. Last month, our delivery of P7 surpassed that of all competitors in its class. This speaks volumes about our potential in the premium market. We target an even higher price range from 400,000 to 500,000 RMB. By entering these premium markets, we plan to offer differentiated, technology-driven services that set us apart from our competition.

This concludes our conference call; you may now disconnect your lines. Thank you.