XPeng: Long-Term Growth AND Negative Earnings Potentially

$XPeng Inc.(XPEV)$ is at a bit of a crossroads today: the company's agreement with state-owned Haima Automobile, which manufactured its G3 SUV, ended as of the 31st of December 2021. In the meantime, XPeng's Zhaoqing facility rolled out its 100,000th P7 sedan in March this year. The P7 is frequently compared to the Tesla Model 3 (and for good reason, going by its specs):

Most consumers don't use top-line specs; they're more interested in the median, which is nearly at par.

Construction of XPeng's second factory in Guangzhou was announced in September 2020 with production expected to start by the end of this year. Meanwhile, its third factory in the now-familiar city of Wuhan is expected to go online sometime around 2023 - to bring up around 400,000 vehicles in annual production capacity.

Now, the details of this expansion are rather interesting: the vast bulk of the financing for setting up facilities come directly from the Government. In the case of its Guangzhou plant, the company has to repay the the State-owned investment agency after seven years and take ownership. A similar agreement can be assumed in its other facilities, given the nature of its backers for its Zhaoqing facility as well as its upcoming Wuhan facility.

This is rather pertinent when it comes to existing trends in the company's fiscals over the past two full years' audited results vis-à-vis its most recent quarter's unaudited results:

Current Year Trends aren't looking great on the cost side

Note: The 2021 FY report didn't report its yearly numbers in US$. Hence, all figures are laid out in RMB to maintain consistency.

The trends that are apparent indicate:

1. At first blush, the current year's fiscals seem to be more in line with the past year's rather than 2020.
2. In the current year, revenue is trending to close out the year much higher than in the previous year. However, so are cost of sales as well as operating losses.
3. Net Loss Per Ordinary Share (which the company's American Depositary Share is equivalent to two of) is trending to be nearly 25% higher than in the previous year.

So, simply on the face of fiscal trends, the company's bottom line doesn't make its ticker very attractive. Added to this is the fact that the company's impending expenses during asset transfer from the Government would be rather substantial - thus making future net earnings potentially even more frayed.

However, the company's trends in market share add further depth to the matter.

Market Share Trends

In terms of total vehicles, 2021 was a stalwart year for the company: it registered a 263% increase in sales over the past year:

A massive jump in tune with the launch of the P7

In sales over the first five months of the year alone, the company's sales are nearly half of 2021's total sales. Furthermore, in June, the company sold 51% more vehicles than in May. If this trend continues, 2022 will be the company's brand-new stalwart year.

Long-time watchers of China's Electric Vehicle (EV) market will recognize the fact that the EV share in total car sales has seen a consistent uptrend. Consolidated EV sales in China for the month of June that can be confirmed against multiple sources aren't available yet. However, total "Plugin Car" sales in the first five months of the year are already 45% of that sold over the entirety of 2021.

The company's share of sales in this segment continues to trend seemingly-ever upward:

Ratios and Recent Price Trajectory

An analysis of the 3 ratios similar to that executed in recent articles indicates that, as would be deducible for a company that is still in its growth phase, the ratios aren't particularly encouraging:

Seemingly spurred by its June sales data, the company's ratios do seem to have arrested their fall as of July 4th. Now, the ticker's PE Ratio trajectory since its listing is particularly interesting:

Historically, the ticker has been highly prized, leading the PE ratio to go south of negative 60 for quite some time. As "ratio cool-offs" began to manifest themselves in the U.S. market (home to the most overvalued equities in the world), the ticker had a precipitous fall until the June delivery data came in to push this ratio southward again (remember: earnings are negative; therefore the ratio goes down and not up if the stock price increases).

Since the company's products do find frequent comparison with Tesla (TSLA), lets consider the Year Till Date (YTD) performance of the company's ticker as well as Tesla's versus the benchmark "tech-heavy" Nasdaq-100 (NDX).

Heightened sensisitvity to swings in the broad market is a problem.

What's apparent in trends for both EV stocks are:

1. Both stocks are particularly sensitive to broader "tech" market trends in both the upside as well as the downside. The company's ticker has been a little more sensitive to the downside until recently.
2. While neither stock nor the benchmark have drawn par to levels at the dawn of the new year, the company's ticker has been gaining steadily higher bullish sentiment since mid-June that has recently edged it past Tesla's performance.

Final Thoughts and Recommendation

Given its growth status, this is a very interesting company to watch. In terms of product range (and even financials), XPeng shares a lot of characteristics with Li Auto and NIO (the latter was recently covered). All three companies offer attractive products aimed at the mid- to high-end spectrum of the Chinese BEV market, which is increasingly being spoilt for choice.

Now, the company's Q2 results are expected sometime in the latter half of August. Two items of particular interest to watch for would be:

1. Whether the company announces a mass-market marque, just like NIO, in a bid to take its high-quality engineering expertise to the "budget" end of the BEV market in China. While the P5 is billed as being precisely that, the company's increased production capacity certainly has room to attempt a deeper foray by introducing more models.
2. Whether there is an improvement in earnings attributable per ordinary share to bring the trend for the year below that of the past two years' recorded metrics.

The company's President Mr. Brian Gu had recently stated that he hopes the company will break even by the end of 2023. While plans were announced by the company that it would go deeper into Europe (i.e. beyond its modest market share in Norway) by entering the German, Swedish and Dutch markets later this year, no timetable has been announced yet. This could be another facet of information to consider, if further light is shed on it in the upcoming earnings call.

Long-term investors intending with the wherewithal to hold the stock over a long period of time might see their investment bear decent gains after a period of 2-3 years. In the immediate term, however, the stock’s relation to the broader “tech” market’s weakness is a hurdle. However, another interesting facet to keep in mind is the recent boom in Emerging Markets stocks – which the likes of XPeng and NIO could be considered to gain from, since most of their business is in China.

The East Shall Rise! (Note: I include India in this slogan as well)

The interplay between these two sources of momentum in opposite directions will be fascinating to watch over the next couple of quarters. Despite crude oil prices falling recently, there is no indication that the inflationary/recessionary cycle has halted or that consumption in the West will pick up. Continuing declines in consumption could have all sorts of pass-through effects on the export-oriented ecosystem within the Chinese economic engine which, in turn, has a palpable effect on the spending power of many buyers in the company's customer segments.

Given that a massive turnaround in stock performance to surpass the price levels at the dawn of the year cannot be reliably expected, disciplined tactical investors in Asia can utilize leveraged and leverage inverse products based on the stock’s daily price trajectory in the form of Daily Leveraged Certificates (DLCs) and Exchange-Traded Products (ETPs).

For instance, to make quick gains on the upside, use $LS 3X LONG XPENG ETP(XPE3.UK)$ and to make quick gains on the downside, use $LS -3X SHORT XPENG ETP(XP3S.UK)$) - both of which are available on the Tiger Brokers platform. Furthermore, just as mentioned in the Tesla article, a disciplined investor can devise a conviction-agnostic investment strategy using both products to boost investor gains or pad portflio value.

All in all, it's a player's market in Asia. Stay sharp!