XPeng Earnings: Vehicle Margin Still Negative, Expected To Remain Under Pressure

XPeng XPEV reported second-quarter revenue above the high end of its guidance. However, vehicle margin of negative 8.6% was much weaker than expected due to price promotions amid industry competition and inventory write-off. With enlarged losses on softer vehicle margin and rising operating expense ratios in the quarter compared with the prior-year period, we increase our 2023-24 net loss forecasts and delay our breakeven year forecast to 2026. As a result, we reduce our fair value estimate to USD 14.50 per ADS (HKD 56 per share) from USD 15.00 (HKD 58), which implies a forward 2024 price/sales ratio of 1.7 times. Shares are in Morningstar 3-star territory and fairly valued, in our view. We suggest investors wait for a better entry point to accumulate XPeng shares.

For the third quarter, management guided vehicle delivery to recover 32%-39% year over year to 39,000-41,000 units and total revenue to grow 25%-32% year over year to CNY 8.5 billion-CNY 9.0 billion. The midpoint of the delivery guidance implies a monthly sales volume of around 14,500 units for August and September, which we believe slightly missed market expectations. Looking beyond the third quarter, the company believes monthly vehicle delivery will reach 20,000 units in the fourth quarter with half of the volume from the G6 sport utility vehicle, which would be positive for investor sentiment if realized.

While the company’s cautious outlook for third-quarter vehicle margin and vehicle delivery is likely to weigh on share price performance in the near term, we believe growth momentum has bottomed out and expect sales volume to improve for the second half on the ramp-up of the G6 SUV. Management expects delivery of the G6 to pick up meaningfully in September after resolving the supply constraint. However, we anticipate the results announcement could trigger a consensus earnings downgrade due to the miss on vehicle margin and expect profitability will remain depressed this year on price competition.