Xpeng Inc. Q4 FY2023 Earnings Call

Hello, ladies and gentlemen, thank you for standing by for the Fourth Quarter and Fiscal Year 2023 Earnings Conference Call for XPeng Inc. At this time all participants are in listen-only mode. After 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 2023 earnings conference call. Our financial and operating results were issued via 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.xpeng.com. Participants on today's call from our management team will include: Co-founder, Chairman and CEO, Mr. He Xiaopeng; Vice Chairman and President, Dr. Brian Gu; Vice President of Corporate Finance and Investment, Mr. Charles Zhang; Vice President of Finance and Accounting, Mr. James Wu, 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 US Private Security Legislation 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 US Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements except as required under applicable laws. Please also note that XPeng's earnings press release and this conference call includes a 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.

Hello everyone, I am pleased to share that XPeng experienced impressive growth in our delivery volume quarter-over-quarter in 2023, which exceeded 60,000 in Q4, up 171% year-over-year, thanks to our proactive change in business strategy and organizational structure, as well as new product launches. In total, we delivered over 140,000 units in 2023. Our focus on platform-based R&D, technology-driven cost reduction, and operational efficiency improvement has begun to yield positive results. In Q4, our gross margin improved to 6.2% with a vehicle margin expansion of 10 percentage points compared to the previous quarter. Our company achieved a positive free cash flow of more than RMB6 billion for the second half of 2023 and, for the first time, a positive full-year operating cash flow. As of the end of 2023, we had over RMB45 billion in cash, putting us in a strong financial position to deliver high-quality and rapid growth in a competitive environment. I believe this is just the beginning of change, and I look forward to improving our capabilities and operations in 2024. In 2024, we will celebrate the 10th anniversary of our founding, which will also be the first year filled with intense competition in the Chinese automobile industry. Since the first quarter of the year, there has been an industry-wide price war intensifying. Against this backdrop, several EV startups have been forced to wind down operations, and some renowned technology companies have terminated their investments in the auto business. These dynamics suggest that in the race for smart EVs amid growth and intensified price competition, we have adjusted strategies in various fields. We enhanced our organization and efficiency comprehensively, significantly improving operational quality and customer experience. We built competitiveness across products, technologies, and supply chains to support our planned larger scale. We upgraded our sales and service capabilities in both China and overseas markets. We made full scenario ADAS and autonomous driving more accessible and affordable, and we accelerated our global expansion. We are long-term oriented and do not plan for the future based on short-term or small-scale growth assumptions. As I formulate our strategies and tactics for the competitive landscape of EVs, I am excited about the strategic opportunities ahead. We have completed the framework of our organizational adjustment, which is beginning to show positive results. We are about to embark on a strong product cycle and launch more than 10 new vehicle models over the next three years. Alongside left-hand drive and right-hand drive models for international markets, as well as facelift versions, nearly 30 projects will launch in the next three years. Our strong capabilities in leveraging modules and platforms and higher efficiency in R&D mean that incremental R&D expenses for these projects are limited. We are utilizing artificial intelligence to advance our autonomous driving technology, enabling us to lower costs and deliver extraordinary experiences in more vehicle models with a new business model. Lastly, international expansion is opening new growth avenues for us. The upcoming competition is not just about gaining market share in the short term; it is also about demonstrating an automaker's ability to maintain its leadership position through high-quality and efficient growth, showcasing expertise in smart technology, expanding globally, and creating competitive advantages through innovative products and business models. To capitalize on strategic opportunities in smart technology and global markets, XPeng must continue to innovate and address organizational shortcomings. Previously, we did not show obvious shortcomings or advantages, but moving forward, we will need to address these shortcomings. By 2024, we aim to elevate our marketing strategy by establishing a new and powerful marketing team. We will enhance our marketing approaches to take advantage of mobile Internet platforms in the automotive sector. Traditionally, automobile marketing has been mainly driven by professionally generated content on centralized platforms. Our new direction will emphasize decentralized social media platforms and utilize user-generated content from a wide range of customers. For instance, we initiated a campaign during the Chinese New Year encouraging video sharing related to experiences from XPeng customers. This campaign saw participation from over 20,000 customers, enhancing the reputation of XPeng's ADAS from Tier 1 cities to numerous cities nationwide. In recent months, customer interest on major social platforms has surged by over 100%. Through our marketing innovations, we expect to see a significant rise in word-of-mouth referrals and sales leads, while also reinforcing XPeng's brand recognition as a leader in autonomous driving technology. As part of our sales growth plan for 2024, we need to expand and transform our sales channel network. In 2023, we made considerable upgrades and optimizations to our sales channels, which involved closing more than 130 underperforming locations and adding over 160 strong franchise partners through our Jupiter Project. Although these closures and reorganizations affected our sales in Q4 of last year and Q1 of this year, we believe these changes have improved our sales channel capabilities and will support our expansion into 14 new lower-tier cities. In 2024, while we foster our new stores, we will also continue to enhance our sales network coverage and expedite channel expansion in lower-tier markets such as the fifth and sixth-tier cities. Our target is to increase the number of sales outlets to 600 by the third quarter of 2024. Our sales network will keep growing alongside the launch of our new brand products. Starting in the second quarter of this year, as our new sales locations begin operations, we will introduce an innovative franchise model. We will require our franchise partners to maintain inventory equivalent to their sales over a two-week period. We anticipate this model will greatly accelerate deliveries and motivate franchisees to boost sales. We will manage inventory closely using our systems and monitoring mechanisms to ensure a consistent customer experience across all locations. This will also help us resolve issues associated with traditional franchise sales models. We have integrated our smart technologies, powertrain and vehicle platforms into a unified intelligent platform to maximize compatibility among different models. By utilizing a platform-based research and development strategy and leveraging economies of scale, we can decrease costs in our supply chain and manufacturing processes, moving us closer to our goal of achieving over 25% cost reduction. Furthermore, this strategy significantly enhances the efficiency of technological iteration. From a product planning perspective, both Fengying and I will continue to drive product innovation as we believe that it is the best way to maximize value creation. We understand that the differentiation factor brought by innovative products is a far greater advantage than any competitive advantage among homogeneous products could ever be. For example, with the X9, we have created a new category that suits both four and seven-seater vehicles which appeals to customers who are looking for MPVs and large SUVs. The X9 became the best-selling model of BEV with three rows of seats in just the first two months of delivery. We expect that the delivery of the X9 in March and April will continue to increase significantly month-on-month. Furthermore, we are officially launching a new brand targeting the RMB100,000 to RMB150,000 price range during the Beijing Auto Show next month. The market of the RMB100,000 to RMB150,000 price range has huge market potential, but it is extremely difficult to provide great products with all-around competitiveness, including high level ADAS in this price range, and even more difficult to achieve profitability at the same time. It takes comprehensive capabilities at scale to realize this goal. Many of our peers are also exploring this price range, but still none can provide excellent ADAS experience at this range. After 10 years of preparation, today we are finally ready. Our new brand is committed to building the first AI-powered smart car for the young generation. This brand will be a new species of innovation. The first vehicle model under this new brand will officially launch and commence deliveries in the third quarter. We are confident that it will be the most striking and sought-after A Class BEV model in this segment. Furthermore, we will introduce multiple models on this platform in China and overseas markets in the coming future. In addition to this new brand, in the second half of this year, we will deliver a new XPeng branded model, bringing the number of new products that we launched this year to three and will unveil more new products. We all know that the last decade was the decade of new energy and the next decade would be the decade of smart technology. AI powered smart EV technology and architecture are no longer just a mid to long term goal. At XPeng, we have already begun the process of AI-defined cars that are centered on autonomous driving. The vast differentiation edges stemming from AI R&D capabilities and AI product experiences will determine how quickly the transition from traditional ICE to smart EVs occurs and shape the auto industry's long-term competitive landscape. This presents a tremendous opportunity for us. That is why we have been increasing our long-term investment in AI and recruited a number of top talents for AI with an international vision. In Q2 of this year, we will achieve the mass production of AI-enabled ADAS with large model capabilities. This will be the first mass-produced automotive artificial intelligence and automotive cognitive engine in the China Automobile Industry, making our software smarter. Furthermore, we are firmly committed to promoting equity and inclusion in advanced autonomous driving. We will continue to lead the innovation of autonomous driving technology, making it affordable and accessible to a much broader customer base and enter into international markets. We will continue to expand our scale and strengthen our technology leadership as well as accelerate the commercialization of our industry-leading technologies. Earlier this year, we introduced the XNGP ADAS to all our product users across 200 cities nationwide. XNGP ADAS enables intelligent driving on urban roads. In February, XNGP's monthly active user penetration rate reached an impressive 83%. We are proud to be the industry leader in terms of active user scale, user experience and mileage penetration rate. During the Chinese New Year travel rush, XNGP helped our car owners drive over 7 billion kilometers. The average daily utilization rate of XNGP on highways and in urban areas reached 67% and 49%, respectively. To take our XNGP assisted driving experience to the next level, we have set a challenging goal for ourselves. We want to benchmark our XNGP assisted driving experience in core cities, such as Beijing, Shanghai, Guangzhou, and Shenzhen against the best-in-class and robotaxi experiences in San Francisco. As our ADAS approaches the inflection point of experience, significant cost reduction will emerge as another key driver to accelerate its further penetration. We plan to employ innovative technology solutions to reduce XNGP-related hardware costs by 50%, starting with the new model to be launched in the second half of this year. Our aim is to significantly boost our smart EV's competitiveness in terms of cost, accelerating the widespread adoption of advanced smart technologies. We have ambitious plans to expand our business globally by taking advantage of the increasing adoption of electric vehicles in international markets, and we plan to significantly accelerate the expansion of overseas business in 2024. In the second half of 2023, we launched the G9 into the Northern European market, and we were thrilled to receive a tremendous response. Within just two months of its launch in Norway and Denmark, the XPeng G9 became the best-selling mid to large BEV SUV in this category, which clearly shows that our smart EVs with advanced technology offer exceptional value to customers worldwide. In the second quarter of 2024, we plan to introduce an international left-hand drive G6 model, which will be followed by the right-hand drive version in the second half of the year. We believe that the G6 will be even more successful than the G9 in terms of global sales potential and will become a bestseller worldwide. To expand our sales channels, we will concentrate on collaborating with high-quality dealers to efficiently enter key global markets, including Western Europe, Middle East, Southeast Asia, and Commonwealth Nations. We have achieved significant milestones in our strategic cooperation with the Volkswagen Group. Recently, we entered into a master agreement with them for platform and software strategic technical collaboration, and the joint sourcing program has also been launched. We are happy to see that strategic synergies have started to materialize. By 2024, we expect revenue generated from platform and software services to become a meaningful and ongoing contributor to our financial results, especially to gross margin. We have created an innovative business model in the automotive industry, generating excellent returns on our R&D investment in electrification, intelligent driving, and AI technology. XPeng and Volkswagen have formed a long-term strategic alliance with complementary strength and mutual benefits. Going forward, we will work together to unleash greater strategic synergies and address industry shifts and challenges. We have proactively started a new round of transformation to strengthen our competitiveness since the fourth quarter of 2023. We focus more on marketing on short video platforms, while cutting inefficient marketing spending on sales leads. We phased out a number of underperforming sales stores, and we adapt our supply chain and production to an intensive product launch cycle for a large number of models. We faced intensified competition and the above-mentioned adjustments in marketing and sales channel in the first quarter. Taking challenges both internally and externally into consideration, we now expect our total vehicle deliveries to be between 21,000 and 22,500 units in the first quarter of 2024, up 15.2% to 23.4% year-over-year. We expect our first quarter revenue to be between RMB5.8 billion and RMB6.2 billion, up 43.8% to 53.7% year-over-year. Although there would be challenges due to transformation in the near term, I have seen the initial positive results in March. I believe that the positive effects of these changes will be evident starting from the second quarter and the second half of the year. We expect the growth in deliveries in the second quarter of 2024 to increase significantly on both quarter-on-quarter and year-on-year terms. Thank you, everyone. With that, I will now turn the call over to our VP of Finance, Mr. James Wu, to discuss our financial performance for the fourth quarter of 2023.

Thank you, Xiaopeng. Now let me provide a brief overview of our financial results for the fourth quarter of 2023. I'll reference RMB only in my discussion today unless otherwise stated. Our total revenues were RMB13.05 billion for the fourth quarter of 2023, an increase of 153.9% year-over-year and an increase of 53% quarter-over-quarter. Revenues from vehicle sales were RMB12.23 billion for the fourth quarter of 2023, representing an increase of 162.3% year-over-year and an increase of 55.9% quarter-over-quarter. The year-over-year and quarter-over-quarter increases were mainly attributable to the accelerating sales growth of the G6 and G9 in the fourth quarter of 2023. Gross margin was 6.2% for the fourth quarter of 2023 compared with 8.7% for the same period of 2022 and negative 2.7% for the third quarter of 2023. Vehicle margin was 4.1% for the fourth quarter of 2023 compared with 5.7% for the same period of 2022 and negative 6.1% for the third quarter of 2023. The year-over-year decrease was explained by: first, the inventory provisions and losses on purchase commitments as a result of upgrades of existing models with a negative impact of 1.9 percentage points; and secondly, increased sales promotions and the expiry of new energy vehicle subsidies, offset partially by cost reduction and improvements in product mix. The quarter-over-quarter increase was primarily attributable to cost reduction and better product mix. R&D expenses were RMB1.31 billion for the fourth quarter of 2023, representing an increase of 6.3% year-over-year and an increase of 0.1% quarter-over-quarter. The year-over-year increase was mainly in line with the development timing and progress of new vehicle programs. SG&A expenses were RMB1.94 billion for the fourth quarter of 2023, representing an increase of 10.3% year-over-year and an increase of 14.4% quarter-over-quarter. The year-over-year and quarter-over-quarter increases were primarily attributable to the higher commissions paid to the franchise stores, driven by higher sales volume. Furthermore, the quarter-over-quarter increase was also due to higher marketing, promotional and advertising expenses to support vehicle sales. As a result of the foregoing, loss from operations was RMB2.05 billion for the fourth quarter of 2023 compared with RMB2.52 billion for the same period of 2022 and RMB3.16 billion for the third quarter of 2023. Fair value gain on derivative liability was RMB0.56 billion for the fourth quarter of 2023. This is due to our share purchase agreement with Volkswagen Group entered in Q3. Until the transaction closes, the fluctuations in the fair value of the forward share purchase agreement were measured through profit or loss, resulting in a noncash gain of RMB0.56 billion in this quarter. On December 6, 2023, the transaction was successfully completed. Net loss was RMB1.35 billion for the fourth quarter of 2023 compared with RMB2.36 billion for the same period of 2022 and RMB3.89 billion for the third quarter of 2023. On the cash front, we've achieved an important milestone of operating cash flow positive for the full year of 2023. This, together with the strategic investment from Volkswagen helped bolster our liquidity. As of December 31, 2023, our company had cash and cash equivalents, restricted cash, short term investments and time deposits in total of RMB45.70 billion. This will be a strong foundation to support our growth strategy in the years to come. To be mindful of the length of our earnings call, I would encourage listeners to refer to our earnings press release for more details on our fourth quarter and full year 2023 financial results. This concludes our prepared remarks. We'll now open the call to questions. Operator, please go ahead.

Thank you. Your first question comes from Tim Hsiao with Morgan Stanley. Please go ahead.

My first question is about the product strategy because XPeng plans to launch around 13 new models and facelifts in the next three years, meaning there will be new models entering the market nearly every quarter, starting in the second half of this year. With such a busy launch schedule, how do you plan to prevent cannibalization from the new products and maintain sales momentum for the entire lineup? We've observed that whenever XPeng introduces new cars, the sales of older models tend to decline. How can we avoid this? That's my first question. Thank you.

Thank you very much for your question; it's a great question. At the beginning of this year, Fengying and I made planning our top priority. It is essential to plan for products, technology, supply chain, manufacturing, and product launches well in advance, ideally starting two to three years prior. This involves considering price ranges, sizes of different vehicles, capabilities, and timelines, particularly for new products where we previously had low volume. Since Q1 of last year, we have organized our product team to develop a product that fits the new technology. Currently, we only require one architecture, two powertrains, and two autonomous driving systems to support our product. In the past, we faced challenges when a product launched but the supply chain couldn't meet delivery demands. This time, we have thoroughly addressed supply chain management and manufacturing challenges. We are also implementing digital processes to ensure that our procedures are consistent, which will enhance quality, production efficiency, and reduce costs. After Q3 of this year, you will see various product launches, which have been in preparation for the past 12 to 18 months, considering vehicle pricing and models for both China and the global market. As the market evolves, we observe our competitors adjusting quickly, often on a quarterly basis. As I mentioned earlier in my financial statements, a focus on both short-term and long-term strategies, along with flexibility to adapt to changes, is critical. A strong team is essential in achieving this. Regarding the second part of your question about avoiding cannibalization from a marketing perspective, we established the XNGP process at the end of last year to ensure compliance and uniform procedures. Additionally, we are committed to differentiating our products in terms of price and capabilities to further prevent cannibalization.

My second question is about the competition. We have observed that competition regarding vehicle prices and new products has become more intense this year. With the introduction of new models in the second half of this year, how will XPeng respond to the price war and simultaneously boost sales of existing models? That's my second question. Thank you.

Thank you for your question. To be honest, this is quite a challenging question, and I believe that different automobile companies will approach competition in various ways. To address your question, I will consider two perspectives: first, from a macro perspective, it is crucial to establish a solid foundation systematically. The second perspective centers on innovation. Developing innovative products is essential to standing out in the market. We prioritize quality before scaling because starting with scale makes it difficult to enhance quality. Regarding our short-term strategy, there are several areas to focus on: first, marketing, where we continuously seek ways to minimize expenditures while improving results. Second, enhancing sales and service capabilities. As I mentioned earlier, in the last quarter of 2023, we terminated 130 underperforming dealers. By the second quarter of this year, we anticipate that our new dealer partners will be well-prepared to help promote our vehicles in third and fourth-tier cities. Lastly, we need to focus on the functionality and capabilities of our products. So on a micro level, it's all about marketing, sales, service, and product quality.

Thank you for sharing all the details.

Your next question comes from Ming Hsun Lee with Bank of America. Please go ahead.

My first question is about your partnership with Volkswagen. Can you provide a more detailed response regarding this collaboration? Specifically, how many components are you able to co-purchase with Volkswagen, and what cost savings do you anticipate?

Hi, Ming, this is Charles. I think a few weeks ago, we announced that we have entered into the master agreement for the platform and the software services. That is a major development milestone for the projects we're working together based on our G9 platform. In the meantime, we're also entering into the joint procurement program that we will jointly procure the components for both our models on top of the G9 platform and also the Volkswagen models building on our G9 platform. I would say that there's a very high degree of the platform and component sharing. Through the joint procurement program, also leveraging Volkswagen's world-class supply chain capabilities, we have seen initial good results coming out from the joint sourcing program. We believe that such a joint sourcing program will continue to allow us to optimize our cost structure and also quickly bring our own cost structure to the competitive level in the market. Also, I think last point is that, as Xiaopeng mentioned in his remark, the revenue generated from the platform software services will start to kick in from 2024. Once it starts to be recorded in our P&L, it will be recurring revenue and will have a meaningfully positive impact on our GP margin. It will continue to give us positive contributions to our profitability.

My second question is about your MONA project. How do you view the integration between the XPeng brand and the MONA mono project brand? Can you provide more details about the progress on launching the 2B model and the 2C model? Lastly, are the autonomous driving functions offered by MONA comparable to those of other brands?

Hi, Ming, it's Brian. Let me address your question on this MONA project. Yes, we're very excited that we'll be launching the MONA sub-brand in a very short time. We think it will be, I would say, one of the blockbuster products in this category. The reason we think there's potential is because: one, we think it's a very well-designed product; it has, I think, best-in-class design as well as some of the functions, especially as it relates to smart functions. We think it will have differentiation compared to similar products in this category. At the same time, we have done a lot of effort to ensure the product is also very competitive in both cost and competitiveness in terms of focusing on both 2C and 2B channels. So needless to say, we have high hopes for this MONA product. In terms of strategy, we think it will start from the 2C channel first to make sure it will be received as a premium product and then followed by sales through the 2B channel. So that's likely to be the sequence of our marketing. From the specific product functions and capabilities, I will probably leave that to the launch event to give the full details. But needless to say, again, we think it's a very competitive product. We also have plans to steadily improve on this product based on an additional development plan for later this year as well as early next year. So this is also going to be improving as a platform in this A class. So again, I mean, I think this is a lot to expect for, and I think I would love all of you to wait until our launch event, which will happen probably very soon.

Thank you, Brian.

Your next question comes from Bin Wang with Deutsche Bank. Please go ahead.

My question is about the full year 2024 volume target. The media report states that your target is between 260,000 and 280,000 units. Is that the range you are considering? If so, does that mean you need to sell around 75,000 units each quarter based on prior months? How do you plan to achieve the additional 25,000 units if that's the case? Also, have you received any commitments from DiDi regarding the volume expected from MONA and the export? Thank you.

Hi Bin, it's Brian again. I appreciate the attempt, but we typically do not provide specific annual guidance on delivery numbers; that’s our policy. However, I can share that we are very optimistic about this year considering our product lineup and launch schedule. We believe we can achieve a growth rate significantly higher than the market average, and we expect to gain substantial market share. We anticipate this year will resemble last year in that the first half may be slow due to industry dynamics and our product launch schedules. However, we expect to gain momentum in the second quarter and the second half as a result of the adjustments we are making in our sales and marketing strategies, along with the launches scheduled for the third and fourth quarters. Regarding MONA, I think it’s an exciting product. We plan to launch in the 2C channel first, which we expect will occur in the third quarter. The 2B channel will likely follow a few months later. While I can't provide specific numbers for MONA's expected performance, to be successful in the A class category, it’s likely that we should aim for around 10,000 units per month. We believe MONA should reach that sales level at a steady state. Again, while I don’t have exact figures, this is how we foresee our delivery for the full year. Additionally, this year, we will be making significant expansion efforts into many new markets, and we expect to see delivery results from those efforts. From a volume standpoint, we anticipate generating tens of thousands of deliveries from international sales.

In the recent conference over the weekend, Huawei expressed their intention to transform the autonomous driving landscape. Can you explain the technological differences between XPeng's technology and Huawei's, and how you maintain your leadership in this area? Thank you.

Thank you very much for your question. When Mr. Yu Chengdong from Huawei made his statement, I was in the audience. Both Huawei and XPeng are collaborating and putting in efforts toward a common goal that we believe in. Huawei is an outstanding Chinese technology company, and we hold them in high regard. Both companies have distinct advantages. For XPeng, we have been enhancing our brand and marketing efforts since late last year. Regarding autonomous driving, I see four crucial areas: the capability and functionality of the vehicle, safety, vehicle cost, and the potential for international expansion to increase revenue and profit. In China, there is significant enthusiasm for autonomous driving, but public demand has not yet been fully satisfied, and this is an area we need to invest effort in over the next 18 months. We recognize the need for broader applications and more marketing initiatives. I believe substantial changes will arise with larger models in autonomous driving, which could greatly benefit the industry. Since the first quarter of last year, we've been focused on reducing costs and improving marketing, similar to Huawei. Our goal is to become a top-notch company. However, returning to autonomous driving, I want to emphasize that our specialization is in vehicles, and this field is our core strength and uniqueness. Thank you.

Thank you very much.

Your next question comes from Tina Hou with Goldman Sachs. Please go ahead.

Thank you, management, for addressing my question. My first inquiry is regarding our new brand. Since its pricing segment is quite distinct from the XPeng brand, will our sales channels be the same as the current ones, or will there be a separate channel given that the target customer segments are different? Additionally, considering the lower price range for the new brand, what is the intended gross margin level, and will it be lower than that of the XPeng brand? Thank you.

Thank you very much for your question about the new brand. We will be launching it in our existing stores, and we will also have independent exhibition halls for the new brand. In the future, we plan to build more dealerships and independent stores specifically for these new brands, with a goal of reaching 100 dedicated independent stores. Regarding your other question, I will invite our Finance VP Mr. James Wu to address it.

Yes. On the margin front for MONA, typically, we won't give specific margin for a particular car line. As Brian and Xiaopeng mentioned, MONA will be focusing on the A Class segment. Obviously, we won't imagine that A segment product to make the highest profit in our portfolio. But overall, our expectation is that MONA will achieve a healthy positive margin for this brand overall. As Brian mentioned, MONA will be launched at the Beijing Auto Show; this will just be the first model. There will be additional models coming through the platform. The other thing that over the long term we might be thinking about is a different commercialization strategy in terms of our software, and we'll give more guidance and information in the next couple of quarters. In terms of MONA, because of its large scale and the target customer base and our partnership with DiDi, they will help us to market the product. Eventually, we expect relatively lower sales associated with MONA compared to XPeng brand overall.

My second question is about the supply chain bottlenecks related to X9 that we mentioned in the February delivery report before the Chinese New Year. The company anticipates that these issues will be resolved after the holiday, leading to an increase in X9 delivery volume. Can you explain what specific bottlenecks we encountered? Additionally, what measures will we implement to avoid similar situations in the future? Thank you.

That is a great question, and I appreciate you bringing it up. Regarding the supply chain issues we faced with the X9 at the end of February following the Chinese New Year, I can confirm that those problems have been resolved. In the past, we have dealt with similar challenges, and we've been reflecting internally on how to overcome them. Since I took over supply chain management in October, we have implemented a new management system, reduced the number of suppliers, and are now focusing mainly on high-quality, publicly-listed Chinese companies that can offer us certain flexibilities. Looking ahead, I don’t foresee any issues with this, as we have established long-term strategic partnerships. Additionally, concerning our product lineup, we now have standardized modules. We generally work with one to two partners who supply these modules, which can be utilized across a wide range of vehicle models, enhancing efficiency, cutting costs, and ensuring quality. These partners are also very flexible. Lastly, we've made adjustments to our supply chain management team and revamped our organizational structure. Our company is now prepared to launch all these products within the first three months, and we are aiming for significant sales scale.

We are working on reducing costs while maintaining quality. Our partners are very adaptable. Additionally, we have made adjustments to our supply chain management team and implemented a new organizational structure. Internally, we have confirmed that we are prepared to launch all of these products within the first three months, and we aim to achieve strong sales performance.

Your next question comes from Xinchi Yin with CITIC Securities. Please go ahead.

Last year, you indicated that 2027 would be a pivotal year for autonomous driving in China, where it's expected that around 30% of vehicles will implement this technology. I would like to know your current perspective on this, as well as the reasoning behind your forecast. Thank you.

Thank you very much for your question. Yes, I believe that we will be able to complete the task ahead of schedule this year, as I mentioned last year. First, regarding the large model being incorporated into the ADAS system, our testing has shown that it significantly accelerates the realization of generic intelligence and smart autonomous driving, which is definitely an advantage. We have already conducted tests that confirm this. Secondly, concerning hardware costs, we want to reduce them and support our systems at a larger scale, not just for ADAS; XPeng aims to see cost reductions. We also observe that there are competitors offering even cheaper solutions in the market. Our findings indicate that with large model OEMs, we can achieve greater computing power and CPU capabilities, which will facilitate faster and better outcomes in our vehicles and market success. Additionally, in certain restricted scenarios with many limitations, we have seen that the large model has effectively accelerated the path to fully autonomous driving, and we are focusing on this with confidence. Lastly, we initially expected that the non-HD map would speed up the process linearly; however, it ramped up much more quickly than anticipated. We believe that having this data and seeing how the non-HD map performs in practice will help advance the adoption and progress of the large model in ADAS and autonomous driving. Thank you.

In terms of the non-HD map, we initially thought that it would speed up the process in a linear manner. However, it wasn't linear; it actually ramped up extremely fast. We believe that having this data and witnessing how the non-HD map works in reality will help with the large model, its adoption, and further advancements in ADAS and autonomous driving. Thank you.

Thank you. That is all the time we have for questions. Now I'd like to turn the call 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 XPeng's Investor Relations through the contact information provided on our website or the Piacente Financial Communications.

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