Leading NEV Player With Strong Autonomous Driving Technology Capability

Equity Analyst

Vincent Sun

Vehicle Deliveries

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XPeng is a leading electric vehicle, or EV, manufacturer in China, targeting the midrange to high-end segment and tech-savvy consumers. It is mass producing five pure electric models: the G3/G3i compact sport utility vehicle, or SUV; P7 midsize sedan; P5 compact sedan; G9 midsize SUV, and G6 compact SUV. Retail prices of the current model portfolio range from CNY 150,000 to CNY 350,000 for popular trims, which offer a driving range of roughly 460-700 km. For its new model pipeline, XPeng plans to launch 2-3 new cars each year from 2023 onward.

XPeng has put a lot of effort into research and development for its in-house developed full-stack autonomous driving technology, which has become a key selling point for its models. The Xpilot software is China’s first Level 3 autonomous driving system, featuring a navigation guided pilot for highway driving and advanced automated parking functions.

We see rapid new energy vehicle, or NEV adoption in China, being stimulated by regulatory push and improving charging infrastructure, among others. By 2025, we expect passenger NEVs to account for more than 40% of total passenger car sales, from 16% in 2021. Riding on the vehicle electrification tailwind, we forecast XPeng’s vehicle delivery to reach over 270,000 units in 2025 from 120,757 units in 2022, taking about 2% share in China’s passenger NEV market. 

XPeng is still loss-making, but we forecast improving vehicle sales profit driven mainly by increased vehicle deliveries and lower unit production cost. As such, we expect it to turn profitable in 2026 and generate positive free cash flow starting the same year.

Its contract manufacturing arrangement with Haima Auto expired in 2021, so production was relocated to XPeng’s own Zhaoqing plant in Guangdong with annual designed capacity of 100,000 units. The firm targets to expand Zhaoqing capacity to 200,000 units this year and is also building two additional production plants in Guangzhou and Wuhan, each with annual designed capacity of 100,000 units. By 2023, XPeng would have total production capacity of 400,000 units, with a maximum of 600,000 by adding shifts.

Business Strategy & Outlook

While we like XPeng’s current technology leadership, we are not convinced yet that this will allow it to maintain premium pricing over its competitors’ products over at least a 10-year period. As such, we think XPeng has no moat. Generally, we see two moat sources in the auto sector from intangible assets such as brand equity, best exemplified by Ferrari, and from cost advantage. At this stage we do not yet see either moat source to be retained by XPeng. 

We expect technology to play an increasingly important role for NEV makers to attract consumers from internal combustion engine, or ICE, vehicles and to differentiate themselves in competition among NEV models. XPeng leads its domestic peers in developing full-stack technology. Capitalizing on in-house research and development capabilities, the company rolled out Xpilot 3.0 through over-the-air firmware updates in 2021. Xpilot 3.0 is China’s first Level 3 autonomous driving system, featuring navigation guided pilot, or NGP, for highway driving and advanced automated parking functions.

We like XPeng’s proprietary autonomous driving algorithm and data capability. Instead of relying on third-party software suppliers for autonomous driving algorithms like other original equipment manufacturers, or OEMs, XPeng had dedicated a great amount of resources and effort in related R&D since inception. It is currently the only Chinese NEV maker that has developed full-stack proprietary autonomous driving software. Leveraging its in-house development approach, Xpilot is tailored to specific road conditions in China, enabling better customer experience and higher adaptiveness to unique driving behavior, compared with solutions from global OEMs and autonomous driving suppliers.

The first-mover advantage also benefits XPeng in terms of road-testing data accumulation for algorithm iteration, which in turn will enhance its autonomous driving software capability. As a result, the improving technology experience would help XPeng sell more EVs for data and corner (unusual) case collection, which forms a closed loop for faster algorithm updates.

However, as the industry becomes increasingly competitive, it is still uncertain whether the technological lead that XPeng has will be retained over the long run to underpin a moat. Most of the elements of the technological advantages are likely to be replicated with time, given we are still in the early days of the industry. Legacy ICE manufacturing is highly competitive and capital-intensive. We expect the same in the NEV market over time. In addition, the company is still burning cash and we expect it is likely to do that for at least a couple more years, so the risk for the need to raise additional capital for capital-intensive investment is high, in our view.

None

Economic Moat

XPeng

XPeng, Inc. designs, develops, manufactures, and markets smart electric vehicles. It produces environmental friendly vehicles, namely SUVs (the G3), and a four-door sports sedan (the P7). The company was founded by Xiao Peng He, Heng Xia, and Tao He in 2015 and is headquartered in Guangzhou, China.

Earnings data Q4 2023

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