Xpeng Inc. Q4 FY2021 Earnings Call

Hello, ladies and gentlemen, thank you for standing by for the Fourth Quarter and Fiscal Year 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 Xie, Head of Investor Relations of the Company. Please go ahead, Alex.

Thank you. Hello, everyone, and welcome to XPeng's fourth quarter and fiscal year 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 Investment, 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 and 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 includes 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 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.

Hi, everyone. We closed 2021 with another record quarter of deliveries. We delivered 41,751 units in the fourth quarter alone, growing 222% year-over-year. And our total deliveries for the full year of 2021 increased by 263% compared with 2020 and reached 98,155 units, making us the top-ranked emerging EV maker in China. Our 2021 full year revenue exceeded RMB20 billion. Heading into 2022, we are experiencing even higher demand for our products, which continues to outpace our production. To expedite the delivery of a large volume of order backlog carried over from 2021 and our newly acquired orders earlier this year, we completed technology upgrades of our Zhaoqing plant during scheduled downtime over the Chinese New Year Holiday. By adjusting our sales and delivery schedules, new orders that came in late February and the first half of March picked up quickly and have returned to the same robust level as the peak season in last December. Starting from March 21, we raised prices across our product lineup by RMB10,000 to RMB20,000 each in order to pass through the rise in costs of batteries and raw materials. Against a backdrop of higher oil prices, driving electric vehicles typically brings increasing cost advantages over internal combustion engine vehicles, allowing for greater growth opportunities in the mid- to high-end battery electric vehicle market, which is the target segment for our Smart EVs. This market also features a very evasive ray of consumers, who attach more importance to EV quality and technologies. Therefore, 2022 will be a crucial year for each EV maker to validate their products' competitiveness. Looking ahead, as we pursue rapid technology and product iterations, we'll continue to strengthen the overall competitiveness of our products. I'm confident that our sales performance will continue to lead the industry. Even though we experienced some hiccups in terms of our sales deliveries in certain areas of China, because of our technology upgrade in our Zhaoqing plant and our newly acquired large volume of orders, we expect to welcome in a new level of large orders in March, which will be similar to our peak level last year and that will definitely help us enhance our market share and maintain our leadership position. Our confidence regarding the sales volume potential of our core EV products has extended into 2022. We delivered over 60,000 P7s in Q1, placing it in the Top 3 Class B sales volume, making it an indisputable blockbuster model and setting P7 as a new benchmark Smart EV in China. With the buildup of P7's production capacity and reputation, one of our goals in 2022 is to exceed 10,000 P7 deliveries in a single month. We officially commenced mass deliveries of our P5 family sedan model in the fourth quarter of 2021, delivering close to 8,000 units in its initial quarter debut. With supply chain improvements in our City NGP launch, we can expect a more consistent ramp-up in sales volume of the P5. As supply chain constraints ease in the coming months, I'm confident that P5 monthly sales volume will begin to approach that of the P7 in the second half of the year. Next, the EV model in line for us is our flagship SUV model, the G9. Its production vehicle has successfully rolled off the production line, and we are on track to officially launch the G9 in the third quarter. The G9 represents the most advanced technology XPeng has ever developed, building on years of in-house developed software and core hardware. Consequently, the performance of our G9 is head and shoulders above popular SUV models in the same category. I firmly believe that G9 will become a blockbuster model in the medium- to large-sized smart electric SUV market. Furthermore, we plan to launch the first production model built on our two newly established Smart EV platforms respectively in 2023. These two new platforms comprise a platform tailored for C-class vehicles and the other for B-Class vehicles, which will inherit and further advance XPeng's robust capabilities in aesthetic design, electrification, and smart technology, thus strengthening our product portfolio's competitive advantages. In addition, as we strive to make our platforms more scalable by employing more highly integrated design and state-of-the-art manufacturing processes such as ultra-large integrated die casting technology, the new platforms will also enact powerful cost control abilities as well as help us address a broader customer base in the mid- to high-end market segments, which have tremendous growth potential. Next, I would like to share some updates on R&D of our Smart EV technologies. For P7 and P5 models delivered in the fourth quarter, the attach rate of the XPILOT 3.0 software was close to 20%. Currently, the progress on the R&D of our City NGP, the key function of XPILOT 3.0, which is mainly deployed on P5, is well advanced. Its beta version is undergoing a fast iteration process, making continued improvements in safety and user experience. We also plan to complete the development of our City NGP in the second quarter of this year and plan to roll out in cities by batches once we receive the approval of the CDHD map. The XPILOT 3.5 that is built on our next-generation technology architecture has presented much higher-than-expected performance in city driving scenarios. We are extremely proud of this. Notably, among our mass-produced P5, the number of driver interventions per 100 kilometers for City NGP is approaching that of highway NGP and the level of its overall user experience can be benchmarked against domestic top robotaxi players. In some respects, we have already caught up with and even exceeded those companies' performances. Given the underlying next-generation technology architecture of our XPILOT 3.5 and our closed loop of data, we plan to officially launch the XPILOT 4.0 in 2023 to deliver advanced driving assistance experiences spanning full scenarios of both highways and city roads. Simultaneously, we plan to progressively converge our autonomous driving hardware and software platform that enables advanced driving assistance systems for our future vehicle models. There will be at least four models, including both new models and facelift versions of existing models, to support the XPILOT 4.0 in 2023. With that, our XPILOT 4.0 will boast a clear next-generation leap against other mass-produced advanced driver assistance systems. Simply put, under the premise of offering superior safety, the XPILOT 4.0 will feature a more comprehensive set of use scenarios, even wider geographical coverage, and a better user interface and in-vehicle experience for both drivers and passengers. In addition to that, we will control the cost of production. We believe that our XPILOT 4.0 has the potential to spread high-level advanced driver assistance systems to an even broader customer base, accelerating the transformation from human driving to the era of advanced driver-assisted driving. When this becomes a reality in the future, the attach rate of the XPILOT software will naturally be significantly higher than its current level. We will continue to advance and improve product performance. Also, we will continue to be committed to our in-house full set software development and a platform architecture approach to develop and upgrade our intelligence systems and powertrain systems for Smart EVs. Applying a platform architecture approach to our system management will propel innovations in our power chain manufacturing techniques and processes as well as a BOM cost structure. I have confidence in our ability to achieve structural improvement of gross margin for our new models, including G9, and ultimately improve overall gross margin. Our medium- and long-term goal is to increase the level of our overall gross margin above 25%. At the same time, we'll remain dedicated to our vision and execute on our sound strategy and operational literacy to continuously boost operational efficiency. Going forward, as we achieve economies of scale, while improving operating leverage, I believe our operating expense ratio will continue to trend downward. With that overview, I would now like to walk you through a few of our strategic initiatives and expectations moving forward. We've rapidly expanded our sales and services network. As of the end of 2021, XPeng's physical sales network comprised 357 stores across 129 cities, of which 209 were directly operated by us and 148 were franchise stores. In particular, during 2021, we strategically increased our investment in sales channels in lower-tier areas in order to tap into pent-up demand and capture the great growth potential we see in non-Tier 1 cities. As a result, we closed the year with our non-Tier 1 stores accounting for close to 80% of total XPeng stores, and most of those performance and sales were achieved during the second half of the year. While we drove rapid network expansion throughout 2021, our monthly single store sales increased substantially on a sequential basis, reflecting our sales model's capability to make systemic enhancements as well as sustained efficiency improvements. For 2022, we'll continue to strengthen our sales network expansion and enhance same-store performance. Regarding our supercharging network, XPeng branded supercharging facilities featuring wide coverage and a better user experience have already become a critical factor in XPeng's competitive edge. As of January 17, 2022, the number of XPeng branded supercharging stations increased to 813, covering 337 cities nationwide. Beginning in the second half of 2022, we will deploy next-generation high-capacity supercharging to further shorten users' charging sessions significantly. We also plan to accentuate efforts in deploying supercharging stations alongside high-speed expressways to bring users better, more secure long-distance traveling experiences with XPeng's vehicles. Along with these upgrades, we are actively progressing our overseas expansion initiatives. To this end, we announced in February 2022 that we had established partnerships with top-tier European dealers. By leveraging the well-established market presence of respected overseas dealers, we strive to build our international business development capabilities and have established the first branded European retail experience stores for our Smart EVs in Stockholm, Sweden. We also plan to adopt a novel direct plus franchise retail model, which is what we are doing right now in China to expand our sales and service network in Europe. On February 9 of this year, XPeng was included in the Shenzhen and Shanghai-Hong Kong Stock Connect programs. We officially became the first emerging EV maker stock to be accessible for direct investment by qualified investors in Mainland, China. We're delighted to share the growth opportunities in the Smart EV industry with a broader investor base from our home country. Shortly thereafter, on March 7, XPeng was added to the Hang Seng TECH Index among 30 constituent stocks as one of the representative stocks for the autonomous tech team. Looking back on 2021, we have faced challenges stemming from industry-wide semiconductor and battery cell shortages. We would like to express our sincerest gratitude to our excellent supply partners for their great support for XPeng. Amid the challenges, we developed and qualified hundreds of alternative supply solutions to safeguard and stabilize our supply chain. Entering 2022, the ongoing chip shortage and rise in prices for raw battery materials continues to present a challenge for the whole industry. Nevertheless, these near-term obstacles cannot stop the long-term journey we are on, where Smart EVs are accelerating the disruption of internal combustion engine vehicles at an unprecedented speed. I believe this presents a good opportunity for us to continue to enhance our capabilities. I believe our ability to swiftly develop alternative supply solutions, coupled with concerted efforts with our suppliers, will help us overcome these challenges. As we have been striving to navigate market dynamics amid obstacles in the supply chain, the impact of COVID-19's recurrence and seasonal factors, we expect our Smart EV deliveries to reach approximately 33,500 to 34,000 in the first quarter of 2022, and our total revenue to be between approximately RMB7.2 billion to RMB7.3 billion. 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 fourth quarter of 2021.

Thank you, Xiaopeng, and hello, everyone. Now I would like to provide a brief overview of our financial results for the fourth quarter of 2021. I will reference RMB only in my discussion today, unless otherwise stated. Our total revenues were RMB8.6 billion for the first quarter of 2021, an increase of 200% year-over-year and an increase of 50% quarter-over-quarter. Revenue from vehicle sales was RMB8.2 billion for the first quarter of 2021, an increase of 199% year-over-year and an increase of 50% from the last quarter, mainly attributable to higher vehicle deliveries, especially for the P7 and P5. Our gross margin was 12% for the first quarter of 2021 compared with 17% for the same period of 2020 and 14.4% for the last quarter. Full-year gross margin reached 12.5%, an increase of 7.9 percentage points year-over-year. Vehicle margin reached 10.9% for the first quarter of 2021 compared with 6.8% for the same period of 2020 and 13.6% for the last quarter. The quarter-over-quarter margin reduction was primarily attributable to product mix changes. R&D expenses were RMB1.5 billion for the fourth quarter of 2021, an increase of 216% year-over-year and an increase of 14.8% quarter-over-quarter, mainly due to: one, the increase in employee compensation as expanded research and development staff; and two, higher expenses relating to the development of new vehicles to support future goals. SG&A expenses were RMB2 billion for the fourth quarter of 2021, an increase of 120% year-over-year and an increase of 31% quarter-over-quarter. The year-over-year increase was mainly due to; one, higher marketing and advertising expenses to support vehicle sales; and two, the expansion of our sales network and associated personnel costs and commission for franchise store sales. The quarter-over-quarter increase was mainly driven by the expansion of our sales network and more sales commissions in line with the higher vehicle sales. As a result of the foregoing, loss from operations was RMB2.4 billion for the fourth quarter of 2021 compared with RMB1.1 billion for the same period of 2020 and RMB1.8 billion for the last quarter. Fair value gain on long-term investments was RMB0.6 billion for the fourth quarter of 2021, reflecting the fair value assessment on our assessment on HT Flying Car Incorporation or Huitian after its Series A capital funding. As of December 31, 2021, we invested approximately RMB0.6 billion and own approximately 18.8% of the equity interest in Huitian. Net loss was RMB1.3 billion for the fourth quarter compared with RMB0.8 billion for the same period a year ago and RMB1.6 billion for the last quarter. As of December 31, 2021, our company had cash and cash equivalents, restricted cash, short-term deposits, short-term investment and long-term deposits totaling RMB43.5 billion. We achieved positive operating cash flow in the second half of 2021, and in the first quarter of 2021, our operating cash inflow was RMB1.3 billion. To be mindful of the length of our earnings call, I encourage listeners to refer to our earnings press release for the 2021 full-year financial results and further details. This concludes our prepared remarks. We will now open the call to questions. Operator, please go ahead.

Your first question comes from the line of Tim Hsiao.

So my first question is about the price hike because XPeng is one of the early movers and now seeing to reach the prices. Could we get a sense about how did the Company lay the foundation of 10,000 to 20,000 or 5% to 9% price hikes? What kind of cost inflation in batteries, raw material chips and have been pricing? So if the price increased just the right amount to cover the contracts or also reflect XPeng's adjustment of more price hikes in the supply chain later this year?

Tim, this is Dennis. Let me respond to your questions regarding the price realignment. Actually, we increased our price by about 10,000 to 20,000 for the old car lines starting from March 21. This reflects the projected component costs, especially the increase in battery costs. We haven't finalized the battery price negotiations with our suppliers. But according to the Chairman and also the components, we anticipate we will have a cost increase in raw materials as well as the battery. So we tactically increased the price to cover the cost increase as the main driver of the price increase.

So my second question is about XPILOT take rate because I think that during the presentation, the Chairman has mentioned just mentioned about a 20% take rate of XPILOT. It seems still relatively low. Obviously, this is mainly due to more low spec models we saw during the past quarter. But when do we expect more increase in the adoption rate of XPILOT? And what would be a more ideal cap rate in your view in the next one to two years? Is it likely to up 50%?

On my end, the connection is not perfect, but I get the gist of your question. So here is my response. Now in regards to the attach rate of XPILOT 3.0, actually, it all depends on the chip supply. So when the chip supply recovers to the normal level, we believe that the attach rate will increase as well. I actually have more confidence in the attach rate improvement of XPILOT 4.0. According to our data, our users have it and their satisfaction rate of using our XPILOT is high as they get used to the navigation systems with the help of our City NGP function in their daily life from one destination to another, for example, from their home to their offices or from their offices to a shopping mall, etc. That definitely will give them the trend of keeping the habit of using this sort of assistance from the XPILOT. So by that time, the attach rate of our XPILOT will be even higher than the current level. In my understanding, the XPILOT 4.0 attach rate will exceed 50%. But again, that will depend on future market statistics and we'll see.

And your next question comes from the line of Jeff Chung with Citi.

So my first question is about the worst-case scenario of this year's full year sales volume and production capacity, if we assume further disruptions in the chip shortages. Second question is about the G9 and P7 G3 margins. And is it necessary for us to also set a monthly sales target for G9 going forward?

Jeff, this is Brian. Let me answer the question for you. Can you hear me? First of all, we obviously don't give guidance on the sales numbers as well as individual model numbers. But I would say that this quarter represents a low season and also faces disruptions from COVID measures in China. I would consider this as an appropriate base for extrapolating for the full year. We're confident with our new model launch as well as further market momentum. The sales number should be higher than the first quarter. So that's the first answer to your question. Second question is that on G9, we have high hopes. This will be a blockbuster in its class, with the premium SUV class, and you could also find benchmark models in that class. We think it should be one of the top players in that category. And I believe the short approach shift might see the P7 level. The third question is whether the P7 and G9 is interchangeable from a supply chain perspective, I hope by the time the G9 has started volume delivery towards the second half or the fourth quarter, the supply chain issue will get alleviated. Right now, both models represent high gross margin products for us in the high teens.

So it is about the order backlog. After we raised the MSRP price, we saw a significant surge in new orders. Roughly speaking, right now, the waiting time to get a car is from 16 months to 20 months, which implies around four to five months before the order backlog, so I just want to clarify these numbers.

I think there is a mix of good and bad news with what's happening right now. Obviously, the bad news is the resurgence of the pandemic, which really affects our supply chain, especially in cities such as Shanghai because this is really the headquarters of all of the key suppliers of our company. The good side of the story is that we are actually improving our overall capability in enhancing our battery cell supply. Obviously, there's a lot of disruption in the market and risk, but we will do our best and be fully committed to speeding up the delivery lead time. Overall, I believe that the actual outcome will be better than expected.

And your next question comes from the line of Ming Lee with Bank of America.

So my first question is regarding the battery supply situation. Currently, you have three suppliers but you are still looking at LFP battery supply. You also delayed some vehicle deliveries. What is the current situation?

In response to your first question, first of all, we are very different from other new energy vehicle makers in that we collaborate with multiple battery suppliers. In the past, we experienced high demand for our ST batteries. The market demand for LFP batteries actually surpassed our suppliers' capacity for battery supply, which is why we faced challenges in the supply chain. Going forward, we have been able to gradually alleviate this problem and we are very confident that we can continue to improve the situation. For the second half of this year and the coming year, we are confident that overall supply chain shortages can be relieved to a certain extent. Regarding your second question, we differentiate between planned capacity and the actual deliveries or executed capacity. We have planned capacity for each plant, and through multiple shifts of working, we can maximize that capacity. We are currently working to coordinate different plans in producing different models on different platforms. We aren't in a position to announce the exact capacity of each plant yet, but I can give you a rough idea that the single plant capacity will surpass 0.5 million.

Your next question comes from the line of Nick Lai with JPMorgan.

My question is really about the cash. By the end of last year, we had about RMB43 billion cash on balance sheet. And how should we think about the use of cash in terms of CapEx on the expenses, on the spending and the sales marketing? That's the first question.

Nick, this is Dennis. Let me respond to your first question. Yes, you're right. We actually have about RMB43 billion cash on hand at the end of last year. Our plan is to improve efficiency and capital spending. We are projecting to continue positive operating cash flow this year. In addition, we will have some spending on CapEx, such as for new products and facility and equipment for new production capacity. This is our plan for the usage of our cash on hand. Operating-wise, we will try to be breakeven positive, and capital expenditure will continue to include efficiency spending while supporting product development and capacity development for this year.

My second question is really about a quick update on the box initiative that management mentioned in the previous conference call.

Now we actually plan to test the robotaxi capability and performance by Q4 this year on P9. We didn't announce or make any statement regarding achieving Level 4 by 2024. Our estimate is that we can work towards the goal of autonomous driving by 2026. In terms of the exploration of the robotaxi model, we need to conduct more testing to understand the business logic behind robotaxi and gather more data from actual execution of the capability while understanding the regulatory environment. But currently, with our observations in the expo development and data gathering, we are confident and very excited about the future of robotaxi, and we estimate that we can achieve a high level of autonomous driving sooner than expected.

And your next question comes from the line of Bin Wang with Credit Suisse.

Okay. My question is about new products for 2023 because you mentioned that we have some products from the new technology platform. Does that mean one product from each platform or one product from two platforms? Meanwhile, just to mention the four-plus will be available for the city and G3. That means that you can upgrade P5 and P7 upcoming for the upcoming City NGP with the hardware upgrade?

This is He Xiaopeng. Next year, we plan to launch two new products on two platforms, and both of them will support the deployment of XPILOT 4.0.

And your next question comes from the line of Xinchi Yin with CITIC Securities.

My two questions are about G9 and CapEx. The first question is, could you please provide more details about G9 and what's the wheelbase of G9? And will there be a six-seater or seven-seater version? And my second question is about CapEx. What's the CapEx budget for the Guangzhou and Wuhan factory, respectively? What's the progress of these two factories?

In terms of G9, I can announce right now that G9 is going to be a five-seat medium to large size SUV. It won't be a six-seater or seven-seater. In terms of the details such as wheelbase, we will provide more details in our official announcement when we have the information.

Let me handle this. In our Guangzhou plant, our total capital expenditure is somewhere around RMB2.5 billion to RMB3 billion. The construction and land are funded by the government, which provided a free-interest loan to us. In terms of facilities, the government is funding 50% of the interest costs. Our plan is to complete the construction and now we are in the process of equipping the new plant for new production. In the Wuhan plant, the total capital expenditure is about RMB4 billion, with around RMB3 billion funded by the government and the rest by XPeng. The plant is currently under construction to support new production.

And your final question comes from the line of Jing Chang with CICC.

So my first question is about our debt rate or supplier matters this year? What are the positive or negative effects of the multiple supplier method, especially concerning maintaining our supply and purchase costs? My second question is about the gross profit margin and the expected expense ratio guidance this year. Considering the current cost and our product price increase, how can you expect our gross margin this year and our expense ratio? Will our expectation of R&D and SG&A ratios reflect a stronger scale effect?

Having multiple suppliers for our battery cells gives us two main advantages: first, ensuring we have enough supply, and second, enhancing our cost control capability. We experienced high demand for our popular models last year, but due to the supply shortages, we couldn't fulfill many orders. This year, with our concerted efforts with our supplier partners, we are very confident we can alleviate the situation. The second benefit enhances our cost control capability as the raw materials continue to increase in price. Our multiple supplier network helps relieve this pressure. Thank you.

For the margin, we do not provide specific future margin guidance. However, we anticipate some good news regarding battery costs, as our first quarter primarily used stock acquired at a lower price. We expect the margin in Q1 and Q2 to be equivalent or slightly better than in Q4. Starting in June, we should benefit from the new pricing, enabling us to cover costs better. The introduction of G9 in the second half will further help improve margins.

As there are no further questions, I'd like to turn the call back over to the Company for closing remarks.

So, 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 IR website.

This concludes today's conference call. You may now disconnect your line. Thank you for your participation.