Xpeng Inc. Q3 FY2021 Earnings Call

Hello, ladies and gentlemen, and thank you for standing by for the Third Quarter 2021 Earnings Conference Call for XPeng Inc. 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. Alex He, Head of Investor Relations of the company. Please go ahead, Alex.

Thank you. Hello, everyone, and welcome to XPeng’s third quarter 2021 earnings conference call. Our financial and operating results were issued by our Newswire Services earlier today and are available online. You can also review the earnings press release by visiting the IR section of our website at ir.xiaopeng.com. Participants on today’s call from our management will include Co-Founder, Chairman and CEO, Mr. He Xiaopeng; Vice Chairman and President, Dr. Brian Gu; Vice President of Finance, Mr. Dennis Lu; Vice President of Corporate Finance and Investments, Mr. Charles Zhang and myself. Management 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 under 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 the 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 XPeng’s earnings press release and this conference call include the disclosure of unaudited GAAP financial measures as well as unaudited non-GAAP financial measures. XPeng’s earnings press release contains a reconciliation of the unaudited non-GAAP financial measures, unaudited GAAP financial measures. We will now turn the call over to our Co-Founder, Chairman and CEO, Mr. He Xiaopeng. Please go ahead.

In the third quarter of 2021, XPeng achieved another record with deliveries reaching 25,666 units, marking a year-on-year increase of 199%. Our total deliveries for the first three months of 2021 exceeded 56,400 units, more than doubling last year’s full year delivery. Furthermore, we consistently surpassed 10,000 units in monthly deliveries during both September and October, and we aim to reach a target of 15,000 monthly deliveries. The rapid growth in deliveries has driven our economies of scale, and the mix of P7 in our deliveries grew substantially to around 77%, leading to a gross margin increase in the third quarter to 14.4%, a rise of 250 basis points from the previous quarter. Our commitment to in-house developed full-stack autonomous driving software and core hardware supports XPeng’s ability to strengthen our technology leadership. During our annual Tech Day event, we showcased a P5 equipped with our City NGP development version, capable of navigating complex driving scenarios in downtown Guangzhou. This underscores the breakthroughs in logic and the rising popularity of advanced driver-assistance systems, which are transforming the user mobility experience rapidly. XPeng is dedicated to accelerating technology innovation and disruption in this sector. We believe our competitive advantages in advanced driver-assistance systems stem from our in-house capabilities, including passenger safety, vertical integration of hardware and software, efficient costs, and rapid global product iterations. Our ability to gather corner cases from complex, real-life driving scenarios across China represents XPeng’s core competitive edge, and we will continue to enhance our technology leadership over our peers. The attach rate of our XPILOT 3.0 software reached nearly 20% in P7s during the third quarter, with revenue from software increasing from the previous quarter. Of the over 50,000 P7s delivered by September 30, more than 11,000 units included XPILOT 3.0. In the third quarter of 2021, the average monthly utilization rate of NGP for highways and the mileage penetration rate for highway NGP each exceeded 60%. NGP assisted customers in driving about 5.51 million kilometers or 3.42 million miles on highways. As we prepare to launch XPILOT 3.0 in the second half of 2022, we will begin exploring the robotaxi business. Our short-term goal is to enhance the robustness and safety of our autonomous driving algorithms through generalization. I believe our ability to mass-produce turnkey solutions, consisting of vehicles and software for potential mobility service operators, will provide a revolutionary mobility experience for users and generate substantial business value. XPeng develops full-stack software and core hardware in-house to enable rapid technology iterations. For instance, we will be among the first in China to mass-produce an 800-volt high-voltage silicon carbide platform and 480-kilowatt high-voltage supercharging piles, allowing for 200 kilometers of driving range in just 5 minutes of charging. The domain controller and electric and electronic architecture in our fourth EV model, G9, were also developed in-house, compounding our competitive advantage in software and further solidifying our technology leadership. We are accelerating our product rollout to increase penetration in our target market with price ranges between RMB 150,000 to RMB 400,000. In the third quarter of 2022, we will begin delivering our fourth EV model, the G9, which supports XPILOT 4.0. We believe XPILOT 4.0 will fundamentally change mobility experiences at the next level. Our mission is to make Smart EVs accessible to a broader user group within the largest passenger vehicle market segments, providing a revolutionary Smart EV experience across our target segments. Officially launched on September 15, our third mass-produced model, the P5, began deliveries as scheduled in October. The launch of the P5 marked the first time in China that an industry-leading advanced driver-assistance system and smart cockpit system could be deployed in smart EV models priced around RMB 200,000. We believe the P5 achieves purchase cost parity with equivalent internal combustion engine vehicles. I believe the P5 will disrupt the family sedan market, which has largely remained unchanged in technology over the last decade due to traditional ICE models. Despite recent challenges from semiconductor shortages, demand for the P5 has exceeded our expectations, with deliveries scheduled well into the Chinese New Year. Last Friday, we introduced the G9, our flagship SUV, at the 2021 Guangzhou International Automobile Exhibition. The G9 will be our first mass-produced Smart EV supporting XPILOT 4.0 and will be equipped with an 800-volt high-voltage silicon carbide platform and our proprietary X-EEA 3.0 electric and electronic architecture. This design integrates hardware, software, and communication architecture to achieve powerful performance and flexibility for OTA upgrades. Notably, the G9 is designed from the ground up for both international and Chinese markets. Looking ahead, we are focused on accelerating R&D for new models and technological innovations while continuing to expand our R&D team. As of the end of the third quarter of 2021, XPeng’s R&D staff surpassed 4,000, more than double the end of 2020. Over the coming years, we expect technology breakthroughs in unexplored areas. Our sales and services network is rapidly expanding, with 271 sales centers across 95 cities as of September 30. Of these, 167 are directly operated by us, while 104 are franchises. We anticipate having over 350 sales stores by the end of 2021. The average monthly sales volume per store also saw a sequential increase in the third quarter, demonstrating improved productivity and efficiency. We continue to build our supercharging network rapidly, with 439 branded supercharging stations in 121 cities by September 30, and a total of 1,648 free supercharging stations across 221 cities. We are pioneering the deployment of supercharging capabilities along the entire Beijing, Shanghai, and Beijing, Hong Kong, Macau expressways. The 30 XPeng branded supercharging stations located alongside expressways allow ours customers to access our facilities approximately every 170 kilometers. We aim to have more than 600 branded supercharging stations by year-end, hastening our expansion into lower-tier cities. We plan to complete the infrastructure for our supercharging network in all prefecture-level cities in China this year. Moreover, we will enhance our established charging facilities to cover the majority of country-level cities and highways in 2022 and 2023. Internationally, we launched the P7 in Norway on October 25 and will seek to expand in Norway and other European markets like Sweden, Denmark, and the Netherlands while continuously enhancing our sales, delivery, and service networks. Regarding manufacturing capabilities, our first Zhaoqing plant is currently operating on a double shift, with production lines working up to 20 hours daily and ramping up rapidly. The combined production capacity of the Zhaoqing plant and the new facilities in Guangzhou and Wuhan is set to exceed 400,000 units annually. With double-shift production, we can achieve an annual output of up to 600,000 units, positioning us well for high growth over the next two years. On October 19, our urban air mobility affiliate, HT Aero, announced a definitive agreement with investors to raise over $500 million for its Series A capital funding, the largest single-tranche fundraising so far in Asia's low-altitude flying vehicle sector. XPeng remains committed to upholding high ESG standards and contributing to China’s carbon neutrality goals through the advancement of our green, eco-friendly smart mobility offerings. On October 15, we released our first ESG report, and for two consecutive years, we received an AA rating from MSCI ESG Research, leading our global automotive peers. Moving forward, we anticipate making more significant contributions to carbon neutrality through technological innovation with our in-house developed full-stack technologies. In summary, we will work diligently to address challenges arising from chip shortages and the ongoing COVID-19 pandemic. In the fourth quarter of 2021, we expect our smart EV deliveries to range between 34,500 to 36,500 units, with total revenue projected at approximately RMB 7.1 billion to RMB 7.5 billion. Thank you all. I will now turn the call over to our VP of Finance, Mr. Dennis Lu, to discuss our financial performance for the third quarter of 2021.

Thank you, Mr. He, and hello, everyone. Now, I would like to provide a brief overview of our financial results for the third quarter of 2021. I will only reference RMB in my discussion today, unless otherwise stated. Our total revenues were RMB 5.7 billion for the third quarter of 2021, an increase of 187% year-over-year and an increase of 52% quarter-over-quarter. Revenues from vehicle sales were RMB 5.5 billion for the third quarter of 2021, an increase of 188% year-over-year and an increase of 52% from last quarter. The revenue increase was mainly attributable to higher vehicle deliveries, especially of the P7, resulting from channel expansion and brand equity improvement. Revenues from service and others were RMB 0.3 billion for the third quarter of 2021, an increase of 182% year-over-year and an increase of 47% quarter-over-quarter, mainly attributed to more income from service, parts and accessory sales, in line with higher accumulated vehicle sales. Gross margin was 14.4% for the third quarter of 2021 compared with 4.6% for the same period of 2020 and 11.9% last quarter. Vehicle margin reached 13.6% for the third quarter of 2021 compared with 3.2% for the same period of 2020 and 11% last quarter. The vehicle margin improvement was primarily attributable to better product mix and manufacturing efficiency enhancement, driven by economies of scale. R&D expenses were RMB 1.3 billion for the third quarter of 2021, an increase of 99% year-over-year and an increase of 46% quarter-over-quarter, mainly due to one, increase in employee compensation as a result of expanded research and development staff; and two, higher expense relating to the development of the G9, the P5 and related software technologies to support future growth. SG&A expenses were RMB 1.5 billion for the third quarter of 2021, an increase of 28% year-over-year and an increase of 49% quarter-over-quarter, mainly due to one, higher marketing, promotional and advertising expenses to support vehicle sales; and two, expansion in our sales network and associated personnel costs, and commissions for franchised store sales. Other income was RMB 0.2 billion for the third quarter of 2021, including government subsidies of approximately RMB 0.3 billion, partially offset by relocation and disposal costs of about RMB 0.1 billion related to the Haima plant. Loss from operations was RMB 1.8 billion for the third quarter of 2021 compared with RMB 1.7 billion for the same period of 2020 and RMB 1.4 billion last quarter. Excluding share-based compensation expense, the non-GAAP loss from operations was RMB 1.7 billion for the third quarter of 2021 compared with RMB 0.2 billion for the same period of 2020 and RMB 1.3 billion last quarter. Net loss was RMB 1.6 billion for the third quarter compared with RMB 1.1 billion for the same period a year ago, and RMB 1.2 billion last quarter. Non-GAAP net loss was RMB 1.5 billion for the third quarter of 2021 compared with RMB 0.9 billion for the same period of 2020 and RMB 1.1 billion last quarter. In July, we completed a dual primary listing in Hong Kong. As of September 30, 2021, our Company had cash, cash equivalents, restricted cash, short-term and long-term investments and deposits totaling RMB 45 billion. To be mindful of the length of our earnings call, I will encourage listeners to refer to our earnings press release for further details. This concludes our prepared remarks. I will now open the call to questions. Operator, please go ahead.

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

Congratulations on the impressive results. I have two questions. First, I'd like to follow up on the development plans for the robotaxi we just mentioned in the presentation. Can you provide more details regarding the scale and business model? Is this primarily a demonstration of the capabilities of XPILOT 4.0? Will there be a different or separate model for the robotaxi fleet operation next year, or will you be utilizing P5 for the fleet operation in Guangzhou? Are there plans to implement this in other locations or provinces? That’s my first question.

Thanks for your first question. Regarding robotaxi and its development plan, we are still discussing this internally. I can share some basic initial frameworks and thoughts. Essentially, we plan to utilize our current models and implement XPILOT 3.5 to 4.0 or even more advanced OTA versions for these fleets. Our objective is to test and enhance our closed-loop capability by integrating software, hardware, and data in urban environments to support the future development of XPILOT 4.0, 5.0, and additional software upgrades. We are not focused on providing mass services; instead, we aim to collaborate with existing operators to contribute to the industry's development.

Great. My second question is about P5. I think we already touched on the topics a little bit during the presentation, but if we have more updates on P5's order intake and backlog at the moment, probably just some rough quantitative guidance would be great. And roughly what percentage of consumers are willing to take the cars first without radar? And in the meantime, could we have a rough idea about the order mix of 550P and 600P, the two models with integrated LiDARs?

Hi Tim, it’s Brian. Let me just, first of all, respond. We never give guidance or forecast on our specific orders and backlog. So, that has been our policy since our listing. But just to give you some color on P5, we actually saw a very robust demand as Mr. He stated in the opening speech. We actually saw the backlog now stands to post the Chinese New Year. So on average, in some models, we have up to 4 months of backlog wait time. So, that’s also a very robust demand. In terms of the mix, the only thing I can tell you just a few facts. One is that, more than 50% of the orders that we received are for software subscribing models, which incorporate XPILOT 3.0 or 3.5 hardware architecture. And also regarding your question, what’s the percentage of orders that choose to take delivery and have future installation of the radar, actually, more than 80% of people have chosen that option. So, we actually see very strong favorable reception to our P5.

Our next question comes from Jeff Chung from Citi. Your line is open.

Okay. So, let me summarize that. The first question is about the robotaxi. Can we quantify how our solution compares to robotaxis from Baidu and other competitors in terms of cost? The second question pertains to our autopilot penetration rate for the first half of next year, especially since we will soon activate the OTA for the urban version of autopilot 3.5. Also, for the P5 model, three out of five will offer this function, which is a much higher ratio compared to the P7, where only one out of three includes it. My last question is about the guidance for monthly sales run rate for November and December. Thank you.

Thank you. Let me address the first question. Regarding robotaxi, we plan to use all of our mass-produced models, which means that their costs will be significantly lower than those of our competitors. On average, we anticipate accumulating between 8,000 and 10,000 kilometers of driving mileage each month from our fleet. The goal of utilizing these fleets as robotaxis is to enhance our knowledge base and gather corner cases in our database, enabling us to improve our overall integration of software, data, and hardware. This approach will also help us achieve higher safety levels and further reduce costs. Thank you.

And Tim, this is Brian. Let me address your next two questions. First of all, on the question of P5 software subscription, again, I don’t want to offer any guidance and forecast, but I want to point to a few facts. First of all, right now, we’re seeing more than 50% of the orders for P5 for the software subscription-ready hardware model. So definitely, you can see the mix is higher than the P7, which we actually see in terms of the software capable models. Secondly, delivery of the software subscribing model is also subject to some supply chain bottlenecks. As you saw earlier, we actually need to install some of the radars post-delivery. So, as a result, we’ve also offered software free to some of these customers. In the short term, you will see the impact due to these factors. But in the long run, we are confident that P5 will see higher software subscription rates for both XPILOT 3.0 and XPILOT 3.5 software. As you know, XPILOT 3.5 software is priced higher than XPILOT 3.0. Your third question on the guidance. Again, I don’t want to give additional color on specific monthly delivery, but I want to reiterate two things. One is that we are still striving to hit a monthly peak delivery of 15,000 per month in the next two months. So, that’s our goal. I think we have a good chance of hitting that. The second thing I want to mention is that the supply chain constraint is still very severe. So, the visibility to the chip shortage as well as some other constraining factors is -the forecast is very short and not reliable in the coming months. So, that’s why I think we provided the guidance with the best knowledge that we see today. But, I think this is where we see, and how we feel about the monthly delivery peak will arrive.

Our next question comes from Ming Lee from Bank of America. Your line is open.

My first question is about G3. In the third quarter, you began producing G3 in your own plant. How do you anticipate margin improvements once you manufacture the car in-house? Additionally, when do you plan to introduce a faster lift or a new generation of G3 to enhance the product's margins? My second question concerns the differences between XPILOT 3.5 and 4.0.

Ming, this is Dennis. Let me address the first question. We moved our G3 production to our Zhaoqing home plant in August to start with the first model, the G7i. As you pointed out, we can see the scale improvement. We’re experiencing better labor and overhead efficiency compared to when we had Haima handling contract manufacturing. We are already seeing margin improvement on the G7i, which we have launched and are currently selling. That's number one. Now, what’s the second question?

Thank you. For your second question, we will not be sharing any further details about the differences between XPILOT 3.5 and XPILOT 4.0, as we plan to launch and discuss XPILOT 4.0 next year. However, I can provide a general overview of the differences. XPILOT 3.5 currently supports the urban NGP function in a limited number of cities and urban roads. In contrast, we anticipate that XPILOT 4.0 will support a much larger range of roads and cities, not only in China but also across Europe. Additionally, XPILOT 4.0 will feature enhanced sensing capabilities, improved electric and electronic architecture, and superior algorithmic computing power.

Our next question comes from Bin Wang from Credit Suisse. Your line is open.

Thank you. I got two questions. Number one is about margin improvement. Can you break down the different factors regarding the gross margin increase? For example, how much came from the higher lift of XPILOT? How much came from efficiency and how much came from the product mix? Thank you. That’s number one. Number two, more technology question, because you actually have migrated to the 800 voltage system. Does that mean for the current supercharge network to have a dramatic rebuild, what’s the cost from rebuild from current maybe 350 voltage to the 800? Thank you.

Hey Bin, this is Dennis. Let me address your first question. The improvement in margins from quarter to quarter was primarily due to a better product mix. In the second quarter, our total P7 made up about 66% of sales. In the third quarter, due to the P3 migration, P7's share increased to approximately 77% of total sales, which is the main driver of margin improvement. Additionally, we experienced gains in labor and overhead efficiency as a result of our scale and the economic benefits of producing all vehicles in our Zhaoqing plant. However, we also faced some cost increases, such as rising raw material prices and the chip shortage, which partially offset these gains. I hope I addressed your first question.

Let me take the second question. For the G9 and future models, we will implement 800-volt high-voltage charging. We plan to upgrade our existing charging stations to 260 kilowatts and eventually to 480 kilowatts. As we expand our supercharging network, the newer stations will feature high-voltage charging capabilities, including 380 kilowatts and 480 kilowatts. There will be no waste in this process, as we will gradually execute our plan for establishing charging facilities.

We are planning to upgrade our current charging piles to 260 kilowatts and eventually 480 kilowatts. As we deploy our supercharging stations, the newer ones will definitely include high-voltage charging facilities, specifically 380 kilowatts and 480 kilowatts. This approach ensures that there won’t be any waste, as we will gradually implement our plans and construct the necessary charging facilities.

Yes. Each charging station includes various piles with different voltages. This allows us to diversify the types of piles at each station.

Our next question comes from Nick Lai from JP Morgan. Your line is open.

There won’t be any waste because we will gradually roll out our plan and network building for construction of the charging facilities. Yes. Each charging station consists of different piles of varying voltages. Therefore, we will be able to diversify the types of piles at each station.

Our next question will be from Edison Yu from Deutsche Bank. Your line is open.

I have just one question. Could you discuss the long-term opportunities you see in Europe? While I don't expect specific details, what potential volume or market percentage do you think you could target or anticipate in the long run?

Hi Edison, this is Brian. To answer your question, I want to emphasize that our current plan in Europe is primarily focused on establishing our presence, building our capabilities, and ensuring we develop the right network and brand awareness. So, we are not prioritizing delivery numbers in the short term. Looking towards the long term, we envision ourselves as a global company, with about half of our volume coming from outside of China and half from within. That’s our ultimate goal. While it’s a multiyear objective, that’s what we are working towards.

Our next question comes from Paul Gong from UBS. Your line is open.

I have two questions. The first one is about autonomous driving. I understand that moving from XPILOT 3.0 to 3.5 is not possible in terms of hardware due to different configurations. Will the transition from 3.5 to 4.0 allow for hardware upgrades for previous buyers of the system?

Actually, the hardware cannot be migrated to XPILOT 4.0 due to a significant upgrade in computing power and sensing capability. We have also upgraded the entire electronic and electric system. Essentially, these two XPILOT systems are built on distinct infrastructures. Additionally, we are establishing the groundwork for future advancements in Level 4 autonomous driving. Therefore, you will notice significant changes in the ACC, LCC, and APA programs.

Okay. My second question is regarding the lower operation. I think Q3 has been available there for over 1 year and P7 was available since last month. So far, how have you been trading the learning process in Norway, like what lessons have you learned? And what has been preventing you from selling more vehicles over there given the cost advantage and some of the smart features of XPeng’s cars are pretty competitive in that market?

Our international strategy aims to establish a solid foundation for global expansion from 2020 to 2022. This includes advancements in software and hardware, research and development, safety and data protection, as well as restructuring our team and organization. In Norway and other international markets, we will focus on restructuring and exploring our products, technology, and organizational structure. Currently, sales in the international market are not our priority. However, from 2021 to 2025, we plan to develop models tailored not only for the Chinese market but also for the international market, ensuring compliance with all safety and environmental regulations to the highest standards in Europe and globally. By that time, we believe we will be better positioned to achieve our sales targets and expand further into international markets.

Hi, operator. We are ready for the closing remarks.

Okay.

Operator, Nick, you still have one more question left for JP Morgan.

Okay. Our next question again is from Nick Lai. Your line is open.

Okay. Can you hear me?

Yes.

Okay. Now, I have a few questions that I’ll ask briefly as I know time is limited. The first is about the profit margin outlook and the second is about the G9 sales outlook. I'll pose the questions quickly in English and then translate them into Chinese. Regarding profit margins, we had great results in the third quarter. As we look ahead to the first half of next year, how should we consider profitability given the positive aspects and potential challenges in the industry? On the positive side, the P5 should provide a significant boost, but a large part of the P5 component is served by G3. However, we are also facing an increase in material costs, and the P5 carries a lower profit margin, which could negatively impact our margins as we sell more of it in the first half of next year. That covers my first question about margins. For the second question regarding G9 sales, given the potential market size, what should we expect the monthly run rate to be when G9 reaches full capacity? Is it appropriate to compare China's performance with similar competitors or other products?

Hey Nick, this is Dennis. Let me address the first question regarding the margin. As I mentioned previously, our quarter 3 margin improvement compared with quarter 2 is primarily due to the product mix improvement, more P7. You’re right; going into the first quarter, we will deliver P5, and then the G3i volume will be better than the old model. So, the mix will have an impact. I mean, the P7 percentage in terms of total sales will reduce. But having said that, we are actually, in our future products, including G9 and for the future model, we will have better margins; for example, bigger cars, we have seen better margins for future models. You will see the near-term impact due to the mix change. But going into next year, we actually will see more good news from the better product mix, including the new product introduction.

So Nick, it’s Brian. Again, no forecast on G9, unfortunately. But I just want to tell you that we are very confident that G9 will be a flagship product that will deliver results similar to our top-selling models for a number of reasons. First of all, the G9 is positioned and sized more similarly to the ES6 than ES8. So, the addressable market is actually much bigger. Secondly, upon the launch of G9 at the time, it will offer superior capability in a number of areas in terms of autonomous driving capabilities, as well as fast charging capabilities and leading electric architecture components for much faster upgrades, etc. So, we think it will be probably one of the most technologically superior products coupled with the attractive design and also by the leading infrastructure of the XPeng network. So, we’re very actually confident that we will achieve a strong debut. Also, you know that G9 is designed for the global market, so that product will not only be sold in China. It will also be designed and sold in international markets, with Europe specifically in mind. So, we think it’s going to be a very important product for XPeng going forward.

There are no further questions at this time. You may continue.

Thank you once again for joining us today. If you have further questions, please feel free to contact XPeng’s Investor Relations through the contact information provided on our website.

This concludes today’s conference call. You may now disconnect your lines. Thank you.