XPeng: Short-Term Headwinds Create Mispricing

XPeng (NYSE:XPEV) $XPeng Inc.(XPEV)$has reported its Q2 2022 earnings, which were acceptable, but once again provided weak guidance for the next quarter, showing that external factors continue to impact its business prospects in the short term. However, long-term prospects remain positive, and its valuation remains undemanding, thus XPeng remains a good long-term play in the EV sector.

While the past few months have been rough for the auto sector in China, due to COVID 19-related lockdowns that have affected car sales, XPeng was able to deliver more units than it was expecting when it reported Q1 earnings. Indeed, while XPeng's guidance was for 31,000-34,000 vehicle deliveries in Q2, but it was able to deliver 34,422 units, representing an increase of 98% YoY. During the quarter, XPeng reached accumulated deliveries above 200,000, a great milestone for the company.

Taking into account this backdrop, XPeng reported a relatively good set of results, considering the challenges the company had to face during the last quarter, namely factory shutdowns and the ongoing supply chain issues affecting the auto industry.

During the second quarter of 2022, XPeng delivered more than 34,000 units, almost doubling the number of deliveries compared to the same quarter of 2021. This strong growth was boosted by the launch of the P5 during 2021, reaching close to 13k units delivered in Q2, while the P7 reported an increase of 39% YoY to more than 15,000 deliveries in the quarter.

XPeng continues to expand its model line-up, having presented a few months ago a new flagship SUV (the G9), that is expected to be officially launched next September. Given that the SUV market is quite popular in China, this model should certainly be important for further unit growth in coming quarters, thus XPeng's strong unit and revenue growth is expected to remain strong in the near future.

Nevertheless, XPeng has provided somewhat downbeat guidance for Q3, expecting to reach deliveries of some 29,000-31,000, way below the consensus expectations of close to 45,000 units. It expects revenue in Q3 to be between $1.02 billion and $1.08 billion, representing a small decline compared to the previous quarter.

Due to higher raw material and battery costs, vehicle margin decreased again during the last quarter, reaching 9.1%, being the lowest level in the past few quarters (10.4% in the previous quarter and 11% in Q2 2021). This shows that XPeng has struggled to some extent to pass higher costs to its customers despite raising prices in recent months, while it has been able to offset some weakness in vehicle margin from gains in its service business, leading to an overall gross margin of 10.9% in Q2.

This negative margin trend is not ideal for the company to achieve break-even in the coming years, but is mainly related to outside factors, while XPeng needs to continue to do work on improving operating leverage both by increased production efficiency and cost synergies achieved by having a higher scale, namely in its sales and charging station network.

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