Xpeng Motors Stock Rises After Announcing a Deal with Didi
Please note that we are not authorised to provide any investment advice. The content on this page is for information purposes only.
Xpeng Motors (NYSE: XPEV) stock is trading higher in US price action today after the company announced a $744 million deal with Chinese ride-hailing app Didi which would take a 3.25% stake in Xpeng in exchange for its electric vehicle (EV) and autonomous driving assets.
As part of the agreement, Xpeng would launch a new EV brand developed under the project name “MONA” and would produce vehicles in the mass market RMB150,000 price range.
Xpeng Motors announces partnership with Didi
Commenting on the deal, He Xiaopeng, Chairman and CEO of Xpeng Motors said, “As a world’s leading mobility technology platform, DiDi shares XPENG’s vision of shaping the mobility experience of the future with technology. XPENG’s A-class Smart EV products under the new brand will not only significantly increase our scale, but also accelerate the adoption of our Smart EV technologies in the mass market segment, bringing our technologies to a much broader customer base.”
Xiaopeng added, “Furthermore, both parties will explore cooperation opportunities in various areas. XPENG will continue to create value and capture growth opportunities in the mobility ecosystem as well as in autonomous driving.”
Volkswagen has also taken a stake in Xpeng Motors
Last month, Volkswagen partnered with Xpeng Motors to build two EVs on its platform and also buy a stake in the company for a total consideration of $700 million. The deal was a pathbreaker for not only XPEV but also the Chinese EV ecosystem as it reflected the confidence of the German auto giant in a startup EV company.
Analysts on XPEV stock
Notably, after Xpeng Motors and Volkswagen announced their partnership last month, Jefferies upgraded XPEV stock from a hold to a buy, and analyst Johnson Wan said, “Harvest season for Xpeng’s AD (autonomous driving) initiatives has just started.”
Wan raised his target price on XPEV from $7.80 to $25.30 and said that the partnership signals “the start of China [original equipment manufacturers] exporting technologies to foreign players [and] will help Xpeng to increase its brand image globally.”
Bank of America also upgraded Xpeng Motors from a neutral to a buy and raised its target price to $22. Analyst Ming Hsun Lee said, that the partnership with Volkswagen would have the following advantages “(1) investors’ concerns over XPeng’s fast cash burn will be lower, which supports valuation; (2) XPeng’s AD capability is endorsed. We estimate it to record annual technology service income of RMB200-300mn per annum in 2024-25; (3) XPeng could manage cost better through larger scale procurement and stronger supply chain shared with VW.”
Xpeng Motors expects the Volkswagen deal to help lower its losses
Xpeng Motors expects the deal with Volkswagen to also help improve its margins. It reported a gross margin of -3.9% in the quarter as compared to 1.7% in Q1 2023 and 10.9% in Q2 2022. The company’s vehicle margin was -8.6% in Q2 2023 as compared to -2.5% in Q1 2023 and 9.1% in Q2 2022.
The company expects its gross margins to improve over time and said that increasing volumes would help its margins to improve in Q4. It added that “as we sell a better mix of products in the second half, we do expect our gross margin to become positive in the fourth quarter of this year.”
Speaking with CNBC, Brian Gu, vice chairman and co-president of Xpeng said, “In order to gain better profitability, we also have endeavor to spend a lot of time on cost cutting. Later next year, we expect our total vehicle BOM [bill of materials] costs to be reduced by up to 25%. That will give us a big tool to increase profitability as well.”
XPEV is lowering its costs
Gu added, “With the Volkswagen agreement, we also anticipate meaningful contribution to our bottom line starting next year. So that’s also another tool we can use to increase our profitability.”
During the Q2 earnings call, Xiaopeng said that the company made several changes to its business strategy and organization structure amid what he described as “intensified competition and rapidly evolving environment.”
Xiaopeng said that “these transformational adjustments have generated better-than-expected results internally and externally and propelled XPeng into the initial phase of a virtuous cycle.”
He added, “The G6 has become the dominant BEV model in the 200,000 RMB to 300,000 RMB price market segment, turbocharging our sales growth momentum.” Xpeng Motors is hopeful of posting positive operating cash flows in the fourth quarter of the year.
Xpeng Motors is also working to cut its cost base by 25% by the end of 2025. Xiaopeng added that he expects “even better results in some other subdivisions. These cost-saving initiatives will strengthen our product competitiveness and substantially drive gross margin improvement in 2024.”
The company is also working on lower-priced models and is expanding in tier 2 cities in China to drive its volumes.
China EV price war
Notably, in July, Xpeng Motors began the deliveries of its G6 SUV. The car is based on Xpeng Motors’ new production platform called SEPA2.0 (Smart Electric Platform Architecture) which the company unveiled in April. The company priced the model 20% below Tesla’s Model Y. However, Tesla has since lowered its car prices in China and intensified the price war.
Last month, Tesla along with over a dozen Chinese automakers pledged to avoid “abnormal pricing” and promote “core socialist values.” The deal however fell apart within a few days as the country’s automotive association feared that it violated the antitrust laws.
Xpeng Motors expects its production to rise in the back half of the year
Xpeng Motors is ramping up G6 production and forecast total deliveries between 39,000-41,000 in the third quarter. While it is below the average monthly deliveries of 15,000 that it had previously forecast, the company said that rising G6 deliveries would help its deliveries to surpass 15,000 in September.
Previously, XPEV said that its monthly deliveries would average 20,000 in the fourth quarter and now it is targeting “peak monthly deliveries of 20,000” in Q4. The company is optimistic about G6 and its SEPA2.0 platform though and Xiaopeng said, “I believe the success of the G6 is just the beginning. Moving forward, we plan to introduce an even wider range of SEPA2.0-enabled top-selling models.”
