The crowded market of Electric Vehicles sees several players competing for the control of the big and valuable markets. In the Chinese scene, Xpeng (also known as Xiaopeng Motors) is for sure a relevant firm.
While Tesla still manages to control the biggest share of the pie, Xpeng, together with NIO, Li Auto and others are improving their proportional sales.
Tesla had recently to lower the prices of its models to meet the competition and to maintain its market share: it’s a matter of time before Chinese-resident companies can benefit from economies of scale and fight the American firm on a fair level.
The market for Electric Vehicles is there and growing at an incredible pace, especially in China.
Analysts estimate a steep increase in sales from the 1.3 million of units sold in 2020, to 1.9 million. A 51% growth that is not unprecedented: the volume of sales is almost doubling year on year since 2013.
During the last two years, the growth figures decreased both due to the COVID-19 pandemic and because the industry is starting to be mature enough to allow for a slower but steady growth and a deeper penetration in all the markets.
Continue reading to learn if XPeng, as one of the major players in the EV scene, is also a good investment!
1. The Company
XPeng was founded in 2014 by Xia Heng and He Tao.
Being both of the founders from an Engineering background and former executives of the GAC group, the company started with a solid foundation of technological expertise.
The first model, called Identy X (1.0), was released in September 2016.
2017 is an important year from a financial feasibility point of view: XPeng closes a Series A financing round of 2.2 billion yuan ($USD 340M).
The development of the first models and the investments in research and development needed impact on the financial side of the company: in January 2018, the executives made a double announcement.
First of all, the first market model is finally released, the XPeng G3.
Then, the company benefits from a Series B funding, still of 2.2 billion yuan.
In this round, Alibaba Group and IDG Capital enter the shareholding structure of the automaker.
Later in the same year, Xpeng also announced another round of financing.
In the series B+ round, 4 billion yuan are provided by Primavera Capital Group, Morningside Venture Capital, and He Xiaopeng, the current Chairman and CEO of the firm.
In September 2018, XPeng received the license to start testing autonomous vehicles in California. This license will be revoked in February 2020 and renewed in March 2020.
December 2018 represents the time of deliveries: the first units of the XPeng G3 are delivered to the customers that pre-ordered them in November 2018.
XPeng presents the second model of its line, named P7, at the 2019 Auto Shanghai Show, held in April. Deliveries of this model will start more than one year later, in June 2020.
Between November 2019 and March 2021, XPeng attracted serious financing rounds: Xiaomi entered the shareholding structure as a strategic investor, leading a $USD 400M round.
In August 2020, instead, is the turn of the Alibaba Group, the Qatar Investment Authority, and Abu Dhabi’s sovereign wealth fund, also with a $USD 400M investment.
On the 27th of August 2020, XPeng debuts in the New York Stock Exchange and raises $USD 1.5B.
Then, in March 2021, XPeng raised another small investment round of $USD 76.9M, led by Guangdong Yuecai Investment Holdings Co.
During the recent Auto Shanghai Show in April 2021, XPeng presented its model P5, a smaller version of the P7, which is set to offer assisted driving features using the XPilot 3.5 proprietary technology, implementing LiDar sensors.
Let’s see now what is the overall structure of the company.
Structure of the Company
XPeng is controlled by Mr. Xiaopeng He, who, besides being the Chairman and CEO, holds 22.7% of the total of shares outstanding, with a 56.6% of aggregating voting power, as of 31st of December 2020.
Heng Xia holds 3.8% of the total amount of ordinary shares, but benefits from a 9.9% voting power.
The other co-founder, Tao He, owns only 1.2% of the equity structure and has 3.2% of the power of the vote.
As a whole, directors, and executives of the company hold 30.9% of the total shares outstanding while holding 70.5% of the decision power.
The management, then, controls actively the company.
However, other big companies are present in XPeng’s capital structure: the Alibaba Group is one of the first backers of the venture, and also the tech company Xiaomi has a relevant portion of the equity of the firm (both especially from a capital point of view).
Despite having eight different locations around the world, XPeng claims to have four main spots: the Guangzhou Headquarters, and the offices of Shanghai, Beijing, and the Silicon Valley (where the group conducts R&D activities on autonomous driving vehicles through the subsidiary XMotors.ai).
Let’s quickly go through the curricula of the top four individuals that manage XPeng through difficulties and challenges, in the next paragraph.
Mr. Xiaopeng He is the Co-founder, Chairman, and ChiefExecutiveOfficer of XPeng.
Prior to founding XPeng, Mr. He served at Alibaba Group, a public company listed on the NYSE (symbol: BABA) and the HKEx (stock code: 9988), from June 2014 to August 2017, including serving as the president of Alibaba mobile business group, chairman of Alibaba Games and president of Tudou.com.
In 2004, Mr. He co-founded UCWeb Inc. and served as the president of the production from 2004 to 2014. In June 2014, UCWeb Inc. was acquired by Alibaba Group. Mr. He received his bachelor’s degree in computer science from the South China University of Technology in 1999.
Mr. Xiaopeng He is the largest shareholder and controls the company with more than 50% of the voting power rights.
Mr. Heng (Henry) Xia is the Co-founder, Director, and President.
Prior to founding XPeng, Mr. Xia worked at the research and development center of Guangzhou Automobile Group Co., Ltd., or GAC, a China-based automotive manufacturing company listed on the HKEx (stock code: 2238) from 2008 to 2015, where he was responsible for the development of control systems for NEVs and smart vehicles.
Mr. Xia received his master’s degree in mechanical engineering and bachelor’s degree in automotive engineering from Tsinghua University in 2008 and 2006, respectively.
Mr. Tao He, apart from being a Co-founder, serves as Director and Senior Vice President.
Prior to founding XPeng, Mr. He worked at the research and development center of GAC from 2011 to 2015, where he built an autonomous driving team, and he was responsible for the development of new energy control systems and involved in the development of GAC’s first model of NEV.
Mr. He received his master’s and bachelor’s degrees in automotive engineering from Tsinghua University in 2010 and 2008, respectively.
Mr. Brian Hongdi Gu represents XPeng as a Vice Chairman and President.
Prior to joining XPeng, Dr. Gu worked at J.P. Morgan Chase from 2004 to 2018 and served as the managing director and chairman of J.P. Morgan Chase Asia Pacific Investment Bank.
Dr. Gu received a Ph.D. in biochemistry from the University of Washington in 1997, a master’s degree in business administration from Yale University in 1999, and a bachelor’s degree in chemistry from the University of Oregon in 1993.
What is the business model of XPeng? Let’s see it in the next paragraph!
2. Qualitative Analysis
The industry of Electric Vehicles is experiencing an outstanding growth, as more and more people decide to switch to electric cars, given the increased affordability and reliability of the cars produced by the main manufacturers, led by the leadership of Tesla.
Inside Mainland China, the volume of sales of EV suffered a contraction during 2019 due to the months of complete closure of the country, but despite that, the numbers are growing on average at a double digit.
The chart below shows the sales for the 2015-2020 period, and also gives an indication of the forecasted unit sales for 2021 on which the most analysts agree: 1.9 million cars.
The figures regarding EV Sales are considered in million units.
Electric Vehicles still have a lot of room to grow, especially in China: in 2020, the sales related to this segment were only 6.3% of the total passenger car sales in the country.
Around 3.3 people over a thousand have an EV in the Celestial Kingdom: a low figure if compared with the value of 6.1% reported in Europe and 5.4% in the US.
Analysts estimate XPeng having still a rather small share of the Chinese Market, if compared with Tesla, the BAIC group and BYD.
XPeng, in fact, only sold 27,041 units: a mere 2% of the total Chinese EV sales.
However, the relative young age of the brand and of the chain of production make XPeng an interesting player to consider for the EV race of 2021.
Let’s see what are the main competitors of XPeng and what are the threats that the company will presumably have to face in the near future.
Competitors and Threats
XPeng has numerous competitors, especially in Mainland China. In fact, while in the US the number of EV manufacturers is limited to a handful of players, the People Republic can count on dozens, of which several have been pursuing EV expansion for years.
The “veteran” of the Chinese EV industry is BYD (Build Your Dreams) but in the years the number of competitors grew strongly, also due to the government’s commitment to contribute to the acquisition of financial means to develop stable projects.
In particular, the public government commitment towards the construction of charging stations and battery exchange facilities has been and still is strong: at the beginning of April 2021, for example, government officials announced support for the construction of said services on the island province of Hainan, which was designated a “free trade port” last year.
However, the Chinese Government’s positioning towards EV popularization hasn’t always been clear: last year, for example, the subsidies for buying an electric car were largely cut, while this year, the approach of the party is shifting towards infrastructural support.
The big competitors for XPeng are mainly: Tesla, NIO, Li Auto, BYD, SAIC-GM-Wuling (the partnership between two Chinese companies and the American General Motors) and BAIC.
The list is not extensive and is constantly enriching of really powerful competitors, often joint ventures of big technological groups and car manufacturers.
While in the US, in fact, EV manufacturing is mainly in Tesla’s hands, in China the control over the market is largely spread over some of the biggest players, with the smaller ones trying to conquer niches of the market (i.e. crossover or luxury sedans).
BAIC is trying to penetrate the micro and cheap sedan sector, while Li Auto is all about high-end SUVs, and BYD is specializing in mid-sized SUVs and small vans.
Instead, NIO, Tesla and XPeng seem interested in the same market segment: luxury sedans and mid-to-small sized SUVs.
Competition is intense, but Tesla is encountering difficulties in keeping up with the prices of its Chinese peers, and NIO is still a company in development, which could give XPeng enough space to expand.
However, it has to be noticed that several new companies will be introducing their cars to the market in the next 1-2 years and the main difference from now will be that the software will be provided by some of the most important Chinese technology groups.
These companies have the gold of the new millennium: data. We are confident that, leveraging information, those companies will be able to conquer the market in a highly timely manner.
XPeng doesn’t have to fear necessarily the companies that are already operating in the market, but especially the ones that will operate in Mainland China soon.
Let’s go on and examine the numbers behind the rise of XPeng!
3. Quantitative Analysis
Here is an overview of XPeng Inc.’s full-year 19-20 income statement. The figures from the financial statements have been converted in USD for better understanding and comparability at the exchange rate of USD/CNY=6.52. All the numbers, then, are in USD$ million.
XPeng is a relatively young company and has been listed on the New York Stock Exchange only since last year.
That is why, for better reference, only 2019 and 2020 are displayed: the precedent years were irrelevant from a financial point of view.
An immediately noticeable factor is that the company is not profitable, with a negative Net income bottom line. This is attributable to the mentioned above the short operating time of the actual car manufacturing department.
This means that XPeng has not yet enjoyed strong scale economies. That said, one particular piece of data is relevant: the gross profit became positive during last year, a good sign for a company trying to achieve profitability.
However, it’s not a good idea to cherish since the road to break even is still long and possibly uncertain. Moreover, other reasons of concern are the Selling and Administrative and Non-Operating Expenses. The first account grew three-fold between 2019 and 2020, while the latter went from constituting a tiny part of the income statement to representing almost 25% of the total revenues.
When it comes to Non-Operating Expenses, the financial statements don’t give us further information, while Selling and Administrative Expenses’ increase is fairly documented: the main expenses in which the company incurred were for strong advertisement campaigns (approx. a hundred million USD), and grown management and non-manufacturing employee structure that increased the costs by around two hundred million USD.
The balance sheet figures show a rather fair expansion, caused by inflows of capital from financing activities (IPO and new capital raises). Current liabilities grew proportionally to the revenue figures and the company continues to have, in general, a rather liquid structure, especially for a car manufacturer.
This has several interpretations possible, but the most probable is that the firm is currently undergoing a transformation to make its cars available at cheaper prices, through infrastructural investments that are now possible thanks to the large cash position available.
The “cash intense” position can be seen even better from the Cash Flow Statement highlights.
Here, the great involvement of XPeng in financing activities is clear.
To hypothesis of usage of the new cash raised, we can examine the amount involved in investing activities, which represented, together with Capital Expenditure, a big source of cash consumption.
While the examination of the financial structure is really important, our main objective is to understand what is the worth of XPeng.
As often happens in the analysis of high-tech companies, the real value doesn’t lie necessarily in the finances of the firm: it is dependent on a mix of assumptions, forecasts, immaterial attributes and key people.
Even though it’s a difficult process, data helps us to understand the possible outcomes from the future of a company like XPeng. Let’s go see the valuation of the Chinese EV firm!
A company valuation’s objective is always to understand the intrinsic value, making consistent assumptions that can be relatively safe in the middle term.
In the case of XPeng, the optimal valuation methods possible are two: competitor analysis and precedent transaction analysis.
Past transactions in this industry have shown a quite large variance in valuations, based on several factors. For this reason, the choice of this method can be perceived as risky due to the relatively young age of most of the companies operating in Electric Vehicle production.
Instead, a competitor analysis can yield a better understanding of XPeng’s value.
XPeng’s competitors were selected based on several criteria:
Listed in the United States, Hong Kong or China;
Same industry (or a large/prevalent part of the sales attributable to EVs);
Large size (over $USD 10B+ market cap).
The chose companies were: NIO, Tesla, Li Auto, BYD and Geely.
The outcome of the competitor analysis is reported in the tables below:
Unfortunately, several of these companies do not have positive EBITDA and EBIT figures, making Enterprise Value multiples that use those margins not calculable with sufficient confidence.
An interesting output is given especially from the P/Sales, which in the time demonstrated to be the optimal multiple to be used when evaluating an EV company, especially when most of them are non-profitable.
Price on Sales’ value resulting from the competitor analysis is to be found between 9.27 and 9.35. For calculation simplicity, a value of 9.3 will be used.
Using P/Sales, the target price for XPeng’s shares is 22.05.
This value signals a current overvaluation of the stock.
However, if considered the estimated TTM revenue figure that analysts agree on (included us) of around $USD 470M, which will be announced in the next earnings report, the stock price gets closer to the current level, reaching 28.65.
If our valuation is made on perspective earning figures, there is no doubt that XPeng can appreciate more and more during the following years.
Let’s see together what are the risks of investing in this company and if it would be a good buy or not.
Global Political Relations
China doesn’t have precisely the best relations with all the countries worldwide. In particular, the relationship with the US has been complicated by the Trump mandate. The new President of the United States, Joe Biden, is perceived as more peaceful towards the Celestial Kingdom.
However, Biden recently said to be “prepared to act and impose costs” over the Chinese government’s intervention on Hong Kong’s pro-democracy movement and Taiwan’s heightened intimidation.
The European Union is in the middle, mediating between the need for democracy worldwide and trade freedom.
It could be the European Union to help resolve the destructive conflicts between the US and China.
The error here could lay on the US imposing China tariffs and blocking the export of the oriental power, primarily directed to the States. That could lead the US in a prolonged and intense correction phase, together with the EU, both terribly hit from the perpetrating of COVID-19.
The continuous uncertainty around the political themes gives the global supply chains of lots of companies great troubles in understanding what will happen next.
On the other hand, XPeng has its strong focus on the internal market, so the risks related to these political tensions, impacting its business are relatively low.
5. Conclusion& Investment Strategies
So, is XPeng a buy?
Yes. The company, despite its young age of constitution, has the potential to be a strong actor in the EV market race.
From a technical point of view, XPeng’s shares have entered a ranging phase started at the beginning of March 2021.
There’s currently a strong confluence tension around the Pivot Point situated at the 32.85 level.
We believe that the investors are waiting patiently for the Earnings Release expected this May to understand if to retry a bull run or if to set the start of a downtrend.
The stock price is overpriced for the current financials, but makes total sense if seen in perspective of a possible (and fairly probable) revenue growth in the next months.
Thus, a buy order can be placed by more intrepid investors before the Earnings Release, or immediately after, if the news effectively show a sustained revenue growth around the $USD 470M area.
In the short to middle term is advised, however, a buy only until the Pivot Point area of 32.85.
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