XPeng

XPeng's second-quarter revenue was at the low end of guidance. Vehicle margin was largely flat sequentially but narrowed to 12% from 14% a year ago, which we attribute to higher raw material costs and retail discounts ahead of next-generation model launches.

Why it matters: Despite exports contributing a higher 19% of volume, vehicle margin missed expectations. Much of the earnings call focused on humanoid robots, with limited discussion of automotive margins. Management expects robotics to enter mass production by the end of 2026, with rapid commercialization in 2027 targeting retail and service sectors. The firm anticipates monthly capacity reaching several thousand units in 2027 to support large-scale humanoid robot deployment. We cut our 2026-30 vehicle volume forecasts by 4%-8% and gross profit by 6%-7% to reflect softer volume guidance and lower vehicle margin. We raise research expense assumptions and now forecast a net loss of CNY 4.7 billion in 2026, compared with CNY 519 million net profit previously.

The bottom line: We lower our fair value estimate to USD 18.00 per ADS (HKD 70.00 per share) from USD 19.00 (HKD 73.50), implying 1.3 times 2027 price/sales. With the stock price down nearly 40% year-to-date, shares are undervalued. We do not forecast revenue from the robotics business because it lacks a clear monetization path. However, we include the segment’s valuation based on the latest external financing round announced today. Our fair value for the automotive business is about USD 13 per ADS.

Between the lines: For the third quarter, management guided vehicle volume to recover 11%-17% sequentially to 115,000-121,000 units. The guidance implies monthly sales of around 40,000 units in August and September, below market expectations. The company plans to launch two new vehicles in the second half. Together with the production ramp-up of GX and Mona L03, the firm expects monthly vehicle volume to reach 60,000 units in the fourth quarter.

Our fair value estimate is USD 18 per ADS, based on our expectation that XPeng will continue to gain share from legacy automakers. Riding on the industry electrification trend and increasing consumer adoption of NEVs, we anticipate rising demand for the company’s NEV models and improving profitability on economies of scale over the next few years. Our fair value estimate implies a forward 2027 price/sales ratio of 1.3 times.

We expect the company’s revenue to expand at a CAGR of 12% in 2025-30, mainly driven by an expansion in vehicle delivery volume. We estimate an increasing NEV penetration rate, coupled with a demand shift to Chinese local brands, should lead to total volume growth of 8% CAGR over the next five years. Despite international and local automakers continuing to aggressively bring new NEV models to market, we believe XPeng enjoys clear leadership in vehicle autonomy technology. In light of competition in the mass market segment but offset by a change in product mix, we anticipate an average 3% growth in average selling price yearly over the next five years.

An increasing scale effect would improve the company’s profitability, in our view. We project the group’s operating margin to expand to 4.0% in 2030, from negative 5.8% in 2025. While vehicle margins are under pressure in the short term, the diffusion of NEV technology and battery energy density will result in higher profitability over the longer term, reaffirming our improving margin assumptions. As a result, we anticipate the company’s net loss to narrow and reach breakeven in 2027 with CNY 136 million in net profit.

While we like XPeng’s current technology leadership, we are not convinced 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 much resources and effort in related R&D since inception. It is currently the only Chinese NEV maker to develop full-stack proprietary autonomous driving software. Leveraging its in-house development approach, Xpilot is tailored to specific road conditions in China. It enables 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 regarding road-testing data accumulation for algorithm iteration, which 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 the company 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.

XPeng’s leadership in autonomous driving technology will differentiate the firm and help it defend its market share in the mass market segment amid intensifying competition.

Chinese consumers’ soaring demand for EV cars will benefit NEV carmakers such as XPeng. Advancing battery technology and charging solutions will ease range anxiety on electric cars and enable EVs to achieve cost parity with gasoline cars in the midterm.

The strategic collaboration and share purchase agreement from Volkswagen Group removes investors’ concern around the company’s near-term liquidity.

Rising competition among mass-market NEV models will place heavy pricing pressure on the company. As a mass-market brand, it will need to offer aggressive promotions and discounts to consumers, which will weigh on its vehicle margin outlook.

Rising competition in China’s NEV market indicates legacy OEMs will defend their market share with aggressive new model launches.

A higher level of vehicle autonomy still has a very long way to commercialize, considering regulations, infrastructure and technology development.