Xpeng Inc. Q2 FY2022 Earnings Call

Hello, ladies and gentlemen. Thank you for joining the Second Quarter 2022 Earnings Conference Call of XPeng Inc. Today's conference call is being recorded. I will now hand it over to Mr. Alex Xie, Head of Investor Relations of the company. Please proceed, Alex.

Thank you. Hello, everyone and welcome to XPeng’s second quarter 2022 earnings conference call. Our financial and operating results were issued by our Newswire Services earlier today and are available online. You can also view 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 the prepared remarks and the call will conclude with the 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 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 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. In the second quarter of 2022, XPeng delivered 34,422 vehicles, representing 98% growth year-over-year. For the fourth consecutive quarter, we ranked number one among emerging EV makers in China as measured by vehicle insurance registration volume. Starting from the second half of this year, we will launch a suite of industry-leading products and technologies developed in-house as well as next-generation smart EV models equipped with these state-of-the-art technologies. These upcoming product launches will bring our customers an unparalleled driving experience through innovation in both electrification and smart technologies. On August 10, we unveiled the interior design of our new flagship G9 SUV and began accepting reservations. The pre-orders for the G9 exceeded 22,000 within 24 hours, which has exceeded the models that we launched previously, which were the P7 and G3. The orders for the G9 keep increasing, showing strong demand from our customers. On August 26, the G9 will join us at the Chengdu Auto show. We plan to announce the G9’s price during its official launch in September and commence deliveries in October. With a stylish design, superior control and driving performance, luxury features that benchmark against luxury SUVs priced nearly RMB1 million, the G9 has already proven itself as a veritable flagship model in the SUV segment. The G9 also showcases our leadership position in electrification, technology, and innovation, being the first model to offer our groundbreaking end-to-end high-voltage charging technology, which is comprised of an onboard 800-volt high-voltage platform and 480-kilowatt supercharging station, bringing the ultimate charging experience to our customers. With respect to smart technology configurations based on our industry-leading City Navigation Guided Pilots, or City NGP, the G9 will provide our next-generation full scenario advanced driving assistance system to market. The G9 will significantly expand the coverage of advanced level driving assistance systems, making driving easier and safer. I believe that the G9 will be the market’s best SUV under RMB500,000 and become one of the best sellers in the medium to large size SUVs. I firmly believe that based on our technological innovation in our platform systems architecture, we will accelerate the pace of our new product launches to round out our offerings with vehicles priced between RMB150,000 to RMB500,000. In 2023, we plan to launch a new B-class model, which will help us expand our market share in this segment. We will also roll out a new C-class model next year to meet customers' needs for additional cabin space with greater comfort. These two new models, in addition to the G9, will bolster our strong sales growth momentum to carry through to next year. Meanwhile, leveraging our top-tier electrification and smart technologies, we will continuously upgrade product performance, and the average selling price of our products will rise accordingly as our products' superior features boost their competitiveness among same-class and even higher-class models. With our concerted efforts to advance our platform-based vehicle architecture and multiple technological improvements in manufacturing, such as integrated die-casting techniques, we expect meaningful vehicle margin expansion for the G9 as well as our new models coming next year. Starting from G9, XPeng's commitment to long-term investment in proprietary electrification technologies has bolstered our leading edge in this area while significantly enhancing our customers’ experience. The G9 has elevated XPeng’s electrification technologies to the next generation. Furthermore, the G9 and subsequent new models will be fully compatible with our high-power supercharging system, consistently enhancing charging efficiency for customers through technological upgrades. Our new models can achieve the best charging speed on XPeng’s self-operated high-power supercharging networks and allow our customers to experience better charging at third-party charging stations. Thanks to our leading high-voltage platform, XPeng’s new models will be able to obtain a higher power allocation and longer-lasting peak power at third-party charging stations when compared to other EV models. Additionally, we have built our in-house capabilities in both the development and production of electric motors, where we have been accelerating technology innovations. Looking ahead, we will continue to incorporate powertrain system designs into one cohesive vehicle architecture, leveraging a growing suite of electrification technology innovations to provide consumers with smart EVs supporting longer range, faster charging, and lower costs. XPeng’s self-operated supercharging network will further compound our advantages in electrification technologies and establish competitive value. Our well-established self-operated supercharging network already features one of the broadest coverage and the best customer experience among China’s independent EV brands. As of early August, the number of XPeng’s self-operated supercharging stations reached 1,000, which is a new milestone. To fully support the mass delivery of our vehicle models featuring 800-volt high-power charging, we have developed in-house 480-kilowatt supercharging stations that surpass industry benchmarks in performance and costs. Through technology innovations, our new generation supercharging station not only achieves power three times higher than the industry’s mainstream 120-kilowatt supercharging station but also maintains costs at the same level as the previous generation supercharging stations. XPeng’s supercharging system can charge up to 200 kilometers range in 5 minutes. This outstanding charging performance demonstrates our end-to-end high-power fast-charging capability, consisting of an EV battery capable of fast charging, an onboard high-voltage platform, and a supercharging station, ensuring the best charging efficiency in our industry. We began building our self-operated 480-kilowatt supercharging stations in August and will soon step up our development in major cities and along main highways nationwide. By 2025, we hope to build another 2,000 high-power supercharging stations to provide the best-in-class charging experience for our consumers and customers. In the upcoming years, XPeng’s customers’ charging experience will be revolutionized across all scenarios, whether it's vacation trips, returning to their hometowns for the Chinese New Year, or long-distance travels. The scenario of using EVs to drive in the city and ICE will be completely transformed very soon. Moving on to our smart technology advancements, we are thrilled to see growing customer acceptance of our advanced driver assistance system, as well as the positive influence of word-of-mouth among consumers. As a result, our highway NGP mileage penetration rate in the second quarter reached over 65%. Beginning in early May, we integrated our XPILOT software as standard configurations on mid to high-end versions of our models, allowing a broader customer base to experience our industry-leading, best-in-class advanced driver assistance functions at an affordable price. This has helped us cultivate trust in XPILOT, reshaping driver habits towards a human-machine co-pilot paradigm and providing hardware platform support for more innovative intelligent functions in the future. Among orders received from early May through the end of July, the proportion of buyers who chose mid and high-end versions of our models equipped with XPILOT grew significantly to over 50%. We are also expanding the boundaries of smart driving at an accelerated pace as we roll out next-generation products that create greater value for customers. For instance, we have completed the development and testing process for City NGPs in the second quarter, navigating various challenging driving scenarios such as crowded downtown streets and rainy nights. Our P5 model, equipped with only 30 tops of computing power and its sensor hardware, achieves the industry's highest safety and driving efficiency levels under similar conditions. By leading in exploring urban driving scenarios, we have amassed significant experience and developed deep insights into complex city road situations. Notably, the autonomous driving computing center we co-developed with Alibaba Cloud, Fuyao, began operations in early August. Fuyao’s computing power reached 600 petaflops, making it the largest domestic autonomous driving computing center in China. It provides the requisite foundation of computing power for deep learning training, empowering our full scenario advanced driving assistance system and facilitating the future development of Level 4 autonomous driving algorithms. All of these advancements strengthen our competitive advantages in smart technology. Since this year, we have been excited to observe the development of smart driving technology receiving active support from governments at all levels. The Ministry of Natural Resources recently announced a pilot project for high-definition maps applicable to smart driving vehicles in six cities, including Beijing, Shanghai, and Guangzhou. On this basis, we look forward to the public beta test of City NGP in the near future. The launch of City NGP showcases our capabilities as a pioneer in smart technology. We will leverage our competitive edges in talent, data, and system efficiency to further cement our leadership position in autonomous driving technologies, broadening our advantages in coverage, experience, safety performance, and costs. I believe the revolution in driving habits and purchase decision-making driven by technology has begun. Our next-generation technology to be unveiled next year will upgrade the architecture on all fronts, paving the way for a fast and widespread adoption of full-scenario ADAS-enabled driving nationwide, making safe and convenient intelligent driving software a reliable partner for users. I firmly believe that full-scenario ADAS will become a core deciding factor in consumers’ car purchase decisions, and consumer adoption of ADAS software will become mainstream following the increased adoption of full-scenario ADAS in the future. Additionally, we have already commenced R&D for our robotaxi software based on a full-scenario ADAS to utilize lower-cost, mass-produced smart EV models and algorithms with strong generalization capabilities to lead the innovation. Moreover, I would like to share recent developments from companies within our ecosystem. XPeng Robotics completed over $100 million in Series A fundraising in July. Upon completion of this fundraising, XPeng Robotics will accelerate its R&D of bionic robots while pursuing synergies with Smart EV technologies to create greater value. Also, XPeng Aero HT’s first manufacturing factory for production trials of flying cars officially commenced operation in July, marking a significant milestone for the development of XPeng's flying cars. According to China's passenger vehicle insurance registration data, BEV penetration rate reached nearly 20% in the second quarter of 2022, while BEV penetration rate, excluding A0 and A00 class, was only 14%, indicating vast market potential with long-term disruptive opportunities for us. Although market competition is intensifying, I believe we will reap the rewards of XPeng’s long-term investment in electrification and core smart technologies for years to come as we launch more highly competitive new products to market. With the G9, we have taken electrification, smart technology, and platform development architecture to new heights. We will continue to propel innovations across software and hardware products, offering consumers smart EVs featuring an unparalleled combination of advanced technology, design, and an exceptional smart driving experience. With the continuous advancement of our advantages in longer driving range, higher charging efficiency, and broader charging network coverage, XPeng will accelerate the transformation from RCVs and PHEVs in the mid to high-end market towards BEVs. In the third quarter, we will work to overcome the impacts of COVID-19 as well as seasonal factors. We expect to deliver a total of 29,000 to 31,000 vehicles in the third quarter of 2022 with estimated revenue of RMB6.8 billion to RMB7.2 billion. Thank you everyone. With that, I’ll now turn the call over to our VP of Finance, Mr. Dennis Lu, to discuss our financial performance for the second quarter of 2022.

Thank you, Mr. He, and hello, everyone. Now I would like to provide a brief overview of our financial results for the second quarter of 2022. I will reference RMB only in my discussion today unless otherwise stated. Our total revenues were RMB7.4 billion for the second quarter of 2022, an increase of 98% year-over-year and equivalent to the level of the last quarter. Revenues from vehicle sales were RMB6.9 billion for the second quarter of 2022, an increase of 94% year-over-year and a decrease of 0.9% from the last quarter. The year-over-year increase was mainly due to higher vehicle deliveries, especially for the P7 and P5. Gross margin was 10.9% for the second quarter of 2022 compared with 11.9% for the same period of 2021 and 12.2% for the last quarter. Vehicle margin reached 9.1% for the second quarter of 2022 compared with 11% for the same period of 2021 and 10.4% for the last quarter. The quarter-over-quarter decrease was mainly due to battery cost increases, offset partially by revenue increases from selling price adjustments. Our R&D expenses were RMB1.3 billion for the second quarter of 2022, representing a 46.5% year-over-year increase and a 3.6% quarter-over-quarter increase. The year-over-year and quarter-over-quarter increases were mainly due to one, the increase in employee compensation as a result of expanded research and development staff; and number two, higher expenses related to the development of new vehicles to support our future growth. SG&A expenses were RMB1.7 billion for the second quarter of 2022, which represents a 61.5% year-over-year increase and is equivalent to the level of the last quarter. The year-over-year increase was primarily due to higher marketing, promotional, and advertising expenses to support vehicle sales and the expansion of our sales network along with personnel costs and commissions for the franchise store sales. As a result of the foregoing, loss from operations was RMB2.1 billion for the second quarter of 2022 compared with RMB1.4 billion for the same period of 2021 and RMB1.9 billion for the last quarter. A change in loss from foreign currency transactions was RMB0.9 billion for the second quarter of 2022, primarily resulting from the revaluation impact of RMB-denominated assets held in the U.S. functional currency subsidiaries and the rapid depreciation of the RMB against the U.S. dollar in the second quarter of 2022. Net loans were RMB2.7 billion for the second quarter, compared with RMB1.2 billion for the same period a year ago and RMB1.7 billion for the last quarter. As of June 30, 2022, our company had cash, cash equivalents, restricted cash, short-term deposits, short-term investments, and long-term deposits totaling RMB41.3 billion. To be mindful of the length of our earnings call, I encourage listeners to refer to our earnings press release for more details on our second quarter financial results. This concludes our prepared remarks. We will now open the call to questions. Operator, please go ahead.

Thank you. Today's first question is from Tim Hsiao with Morgan Stanley. Please…

So my first question is about the technology innovation and how we are going to translate that into our legal sales because XPeng is the leader in server technology domains, for example like a City NGP and A100-volt supercharging. So how could we maximize the traction of the technological innovation, especially in the premium mass market, where we notice consumers might be less tech-savvy and care more about their pricing performance ratio and how we expect? So that’s my first question.

Thank you for the question. We do not talk about performance over price ratio that much. Rather, we place more emphasis on the configuration versus pricing. If the configuration for a particular pricing is good for our vehicle, then the sales will naturally increase. However, if you look at the sales performance for the subsequent 6 months and 18 months after the launch of a particular product, you have to rely on branding, after-sales services, product quality, and the unique competitiveness of our products themselves. Let’s take P7 as an example. If you assess the first 6 months of sales performance after its first launch, the sales weren't that great. However, ever since we introduced the City NGP function along with other high-quality configurations, we have definitely seen a significant increase in sales. Over the past four years, we have been able to attract a large quantity of customers interested in that configuration versus price ratio balance in new entry vehicles. Over the past year, we have noticed that customers increasingly focus on the driving range of new entry vehicles, as well as driving safety and the charging experience. Due to our commitment to enhancing performance in those areas over the past four years, we have gained substantial trust, love, and support from our loyal customers. Looking ahead, as we continue to develop our smart technologies and electrification, we will expand driving range, driving safety, the charging network, and convenience of charging, enabling us to enjoy the economies of scale from our prior R&D efforts. As a result, we believe we can gradually win over customers who may have previously been unhappy with aspects like charging experience as we transition them towards adopting more new energy vehicles. Furthermore, with the launch of the G9, we believe that the adoption of full-scenario ADAS technology will elevate our product performance to a whole new level, allowing us to attract more users, which will subsequently translate into enhanced sales performance. Thank you. Additionally, I’d like to highlight that due to our commitment and investment in R&D technology, we will significantly reduce our manufacturing and R&D costs with the adoption of our platform-based vehicle architecture along with our new generation of smartification and electrification technologies. For example, the P9 is our inaugural flagship product that adopts the mature level of these three technology areas, which will result in lowered manufacturing and R&D costs. For years, we have focused on advancing next-generation technologies, and soon we will begin reaping the rewards of our prior R&D investment, leading to further reductions in our R&D and manufacturing costs. This will also enhance the overall quality of our future products while boosting manufacturing and R&D efficiency. Since 2019, we have been investing in our manufacturing craftsmanship, and we anticipate a new generation of quality improvement in both interior and exterior aspects of our vehicles in the coming two to three years. Furthermore, the use of more integrated direct costing technologies will enable us to achieve future product quality upgrades. In summary, we believe better sales performance will emerge as a direct result of these strategic improvements. Thank you.

My second question is about the platform strategy. Following the launch of G9 powered by the hardware platform, I believe XPeng is going to launch two new models next year based on two platforms. In light of faster iteration and more intense competition, what would be the reasonable life cycle of our next-generation platform and how many models do we plan to build on each platform throughout their life cycle? So, that’s my second question. Thank you.

Thank you for your question. Indeed, in 2023, we aim to launch two new platforms to develop a total of six new vehicles. We estimate an average lifecycle of three years for each platform, including any system upgrades. We have also had extensive internal discussions about possibilities for upgrading our existing platforms to enable them to support a new generation of smartification and electrification technologies. Consequently, we estimate that our products will enter a favorable development cycle based on our platform-based vehicle architecture technology, allowing for a lifecycle of at least three to six years for these platforms, fueling our future product development.

And our next question today comes from Jeff Chung with Citi. Please go ahead.

So my first question is about the strong motorcycle ahead in ‘22/23. We are going to launch our four new brand-new products, the P7 and the G9, as well as the midterm facelift P7. Could you provide some insight on whether we can challenge the annual sales run rate at about 300,000 units? If yes, could you break down the portion between the old products and the new products? And can the current old products, P7, G3, and G5, maintain their matured sustainable monthly run rate at 12,000 units? Thank you.

Hey, Jeff, this is Brian. Let me answer your question. First of all, as you know, we don’t provide guidance that far out, so I cannot give you a specific number. However, I can share some context regarding how we see the new models positioned and competing in our lineup. First, we anticipate continued growth in our core product, the P7. With the update next year, we believe the P7 will see renewed and strong performance. We hope that the G9 will exceed the monthly delivery of the P7. By calculating those numbers, you can get a sense of the possible figures. In the first half of the next year, we plan to launch a B-class model targeting an even larger market segment, which could be considered a strong competitor to the current models in the market. We believe that this will also be a model that can generate substantial delivery and sales numbers. The fourth new product, the C-class model, will be launched in the second half of the year. Given its premium and large format positioning, the number may be limited regarding contributions but will still be targeting a brand-new segment that we didn’t previously cover. Hence, you can gauge what the likely peak monthly delivery levels may resemble. We are very confident about our strong growth.

So my second question is about NGP margin in the second quarter. It seems a little bit better than consensus. On the negative side, we had P7 sales volume decline by 3,500 units Q-on-Q, and this was a high-margin product. After factoring in the battery cost hike Q-on-Q, it seems that NGP margin was still quite resilient. Could you break down the details a bit on the second quarter? Also, how do we see the margin trend for the third quarter? Thank you.

Jeff, let me address your questions, and Brian or Charles can supplement later. You’re correct. In the first quarter, our vehicle margin was 10.4%. In the second quarter, it dropped to 9.1%. So we decreased by about 1.3 points. This was better than our originally projected expectations because we were able to adjust pricing to accommodate the battery cost increase. However, some orders were delayed, meaning that the new priced orders were delivered until late May, preventing us from fully recovering the battery costs through price adjustments. Additionally, the second quarter's P7 mix was lower than 50%, impacting the margin as well. To provide more detailed numbers, while the margin reduction was primarily due to cost increases that we could not recover in the second quarter, there were also modifications to the mix. Looking forward to the third quarter, we believe we will effectively deliver the new priced orders starting in July. That’s good news compared with the second quarter. Most significantly, we expect a better product mix in terms of the P7 as a percent of total deliveries relative to the second quarter.

Yes. And to add to Jeff's points regarding our product cycle and current situation regarding margin, as Dennis indicated, we have observed changes due to mix and stabilization of battery costs. We anticipate that third quarter margins will stabilize and improve from the second quarter. As we begin to launch new products, particularly the G9, which will be delivered in October, we expect to see growth from these launches. Additionally, as the seasonality favored the fourth quarter, we believe there is a strong possibility and confidence that we will enter a growth cycle due to our new product launches this end of the year. Furthermore, we expect these new models to have better margins due to their platform designs and higher price points relative to our ASP. Those are my comments at the moment.

And our next question today comes from Bin Wang with Credit Suisse. Please go ahead.

My question is all about a promotion that started from mid-July. What’s the low inflow in terms of both the volume guidance in the third quarter? If you have a bigger promotion, you should have better volume. Did it mean that you are a little bit conservative on the guidance as you plan to cancel the promotion this month? Meanwhile, you also provided a pretty positive guidance on the margin in the third quarter, which is expected to return to the last quarter level. Could you also assume your promotion will disappear starting this month and for the next month? Thank you.

So Bin, this is Brian. To answer your question, first of all, the third quarter delivery guidance considers all of the information to-date and includes all of the promotions and price adjustments we made in the past. I think the guidance reflects that we are entering a relatively slow season. We see that some store traffic is less than before, likely due to post-COVID conditions, and people are waiting to compare with existing purchases before new model launches. You’ll see similar trends with our experience compared to our peers. On the margin front, the promotions we offered for our models are actually lower than the price increases made in the second quarter. Therefore, net-net, the margin on products is slightly better in the current pricing environment. We foresee improvement in third-quarter margins compared to the second quarter, though we have not guided them back to first-quarter levels yet.

Our next question today comes from Ming Lee at BoA. Please go ahead.

So, my question is regarding battery technology. You just mentioned that the charging speed is much faster than the current battery. Do you own the patent and the technology, or is it with your supplier? Can they supply such batteries to other OEMs? Also, what is the reason for you to manufacture those batteries in-house?

Thank you for your question. In regards to supercharging, we consider several aspects of the technology behind it. First, you need to look at the battery itself, battery management, the battery pack, whole vehicle manufacturing, and design along with the charging piles. We collaborate on R&D of battery development with our suppliers. We share some of those patents in those areas, but we also have in-house R&D capabilities. We own the patent for our battery management and for the design and manufacturing of the entire vehicle and the charging piles as well. Now addressing your second question about the rationale behind in-house development and research of our motors: it’s crucial for us to control quality and uphold the highest standards associated with our products, hence the need for R&D in-house. Thank you.

Hey Ming. To add onto your query regarding the reasoning, it's all about better performance. Our self-designed models exhibit a very compact design with higher efficiency, prolonging the range of our vehicles more effectively than market available options.

Thank you, guys. Sorry, a quick follow-up question. Regarding the new model in 2023, Brian mentioned that the product will be comparative to model-wide. Can I assume it will be slightly smaller than the G9, and price-wise, will it be slightly lower? So, it has a large addressable market. Thank you.

Yes, that's something we likely are expecting.

Thank you. Our next question today comes from Paul Gong with UBS. Please go ahead.

Yes. Hi. Thanks for taking my question. Just two questions. The first one still want to discuss a little bit more on the Q3 guidance. Do you see it being more of a supply-side constraint or a demand-side constraint? Is it regarding the supply chain, or do you see it as demand-side temporary due to seasonality? The second question is regarding potential cannibalization. You are going to have B-segment SUV as well as C-segment model next year. Given you already have the medium-sized sedan and SUV, P7 and G9, how do you see the cannibalization between these products?

Hey Paul. On your first question, as I mentioned earlier, we see the weakness mostly due to seasonal factors, but also from post-COVID control measures, which led to a decrease in traffic. We also point out that ahead of new model launches, there is a bit of a comparison and waiting period from potential buyers. Regarding cannibalization, we feel there’s minimal overlap between new models and our current lineup. The new B-class product and C-class product will be sized and priced differently from the G9, and they are not sedan models competing with the P7 as well. Therefore, we expect minimal cannibalization among our model lineup.

And our next question today comes from Nick Lai with JPMorgan. Please go ahead.

Let me quickly translate my question. The first question is really an update on chip supply condition and any production impact from partial lockdowns in China. That’s the first question related to production and supply. The second question is related to the second quarter where we booked about RMB890 million FSOs, can you elaborate on that? Thank you.

Let me address your questions. First, regarding the chip and battery shortage, since last year, we have faced significant challenges due to these issues in the supply chain. However, we believe that by the beginning of next year, these shortages will considerably ease. For the first half of this year, around ten types of chips were at high risk of shortage. So far, we have seen a decrease in the number of chip types facing high risk. It should be noted that every vehicle includes about 5,000 different types of chips. Thus, while chip shortages remain an issue, we are optimistic about its relief starting next year. Regarding your second question, through early measures and communication, we are not currently challenged by power shortages in provinces like Guangdong.

Hey Nick, this is Dennis. To clarify the currency exchange loss from the foreign currency transaction: upon our U.S. IPO and Hong Kong IPO, large amounts of capital were raised and retained in our U.S. subsidiaries, which operate under the U.S. dollar. In intercompany lending, the U.S. subsidiary extends loans to domestic units, which are RMB-denominated assets held by the U.S. subsidiaries. Moving forward, the money should ideally return to the U.S., converting back to the U.S. dollar. Due to the rapid depreciation of the RMB against the U.S. dollar in the second quarter of 2022, we experienced a negative revaluation impact. In the future, as the currency fluctuates, we will assess this on a monthly basis. If the RMB appreciates against the U.S. dollar, this will yield positive gains on foreign currency transactions. You're correct in identifying this trend.

Yes. Just to clarify, it's a non-cash item. This doesn’t mean we’ve converted the cash yet; it relates to valuation resulting from currency exchange rate differences, which fluctuated greatly in the last quarter.

And our next question today comes from Jing Chang with CICC. Please go ahead.

My first question is how do we view the competition, patents, and consumer preferences in the market priced around RMB300,000 compared with peer models. Could you share what we believe are our major advantages and disadvantages and whether there would be a new version of the P7 next year? How should we expect the monthly sales volume to trend?

Thank you for your question. Regarding the competitive landscape within the RMB200,000 price range, we believe the competition will remain intense this year and into the next. There are two types of competition at play: one focuses on driving range and performance versus pricing; the other involves overall design and smart features for those products. For the P5, its advantages are in its outstanding design, features, and spacious cabin. We have observed steady sales performance for the P5. Regarding P5 sales expectations for 2023, we cannot provide specific guidance regarding sales volume as there may be new updates on the P7 that impact performance. Overall, we expect strong sales for the P5. We have seen that the newly launched City NGP led to a sales boost for the P7, and we anticipate a similar scenario for the P5, where the introduction of higher-level smart features like city-level NGP will enhance sales.

My second question is about the timing of the mass usage of supercharging. Will it become popular quickly, or will it need several years to penetrate the market gradually? Additionally, how does the high-voltage platform affect the manufacturing cost of the vehicle? Can it be adapted to lower-priced models?

Regarding the construction and adoption of our supercharging network, it is developing more rapidly than anticipated. This quarter, we commenced aggressive network construction. By Q4 this year, we believe we will have new stations equipped with supercharging facilities. By 2023, the pace of constructing our supercharging network will increase significantly. The G9 with its highest configuration model will be fully compatible with the 4C supercharging facility, while the other versions support 3C supercharging functions. As our current platforms support high-voltage and high-power supercharging, we expect all future models to come equipped with this functionality, which will empower better supply chain control. Furthermore, this will allow us to achieve improved economies of scale and cost control efficiencies. We need to focus on two elements regarding supercharging construction: the development and design of vehicles to utilize high voltage supercharging, and the construction of our supercharging network and charging piles. By the second half of 2023, we expect a robust supercharging network that promotes quick charging adoption.

And ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to the company for closing remarks.

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

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