XPeng, Inc. Stock Valuation

XPENG, INC.

Ticker:                           XPEVNature of Business:    AutomotiveLocation :                                China
Recent Price:           $43.7452-Week High/Low: $74.49/17.11Estimated Fair Value:      $32.76-$42.90
Expected Return:      15.8%Consider Buy:                  Below $42.90Business Risk:                     High
Financial Risk:      MediumEconomic Moat:             WeakCorporate Governance: Strong

Company Overview
XPeng Inc. (XPENG)began manufacturing smart electric vehicles in China as Chengxing Zhidong in 2015. It was listed on the New York Stock Exchange (NYSE) in August 2020. Prior to the NYSE listing, a holding company structure was adopted and XPeng Inc. was incorporated in Cayman Islands (North America). The subsidiaries of XPeng include XPeng Limited (British Virgin Islands), XPeng (Hong Kong) Limited, Guangdong Xiaopeng Motors Technology Co. Limited (China), and Chengxing Zhidong. Its first smart electric vehicle, G3 SUV, was produced in 2018; a second model, a four-door sports sedan P7, was made in the year 2020. The company is working on introducing more products in order to increase its offerings.

In addition to vehicle sales, the company provides services such as supercharging, vehicle leasing, ride-hailing and maintenance services. XPENG has its headquarters in China where its manufacturing facilities are sited. Additional manufacturing bases are expected in Wuhan and Guangzhou (China). The company has a Research & Development facility (R &D) in the USA. XPENG’s cars are being sold and serviced in company-owned and franchised centres across China. The European version of its G3 SUV was exported to Norway in December 2020, paving way for the company to explore foreign markets.

Xiaopeng He, Heng Xia and Tao He founded  XPENG. Xiaopeng doubles as chairman and chief executive officer; he has been occupying the positions since August 2017. Heng and Tao were named president and senior vice president respectively in 2015.

Investment Thesis
The increasing environmental awareness campaigns, by international organisations, governments and private institutions, is creating consumer consciousness around the globe. In response to this, technologies that can revolutionise transportation and produce new energy vehicles are being developed. XPENG is tapping into it soon enough as demand for alternative fuel vehicles will continue to increase.

XPENG targets the mid-to-high-end of the market with its smart electric vehicles. And China remains its main market. China’s high population is a boon to the company. XPENG has a finance lease programme that provides vehicle leasing directly to customers. It also partnered financial institutions to provide vehicle financing products to facilitate the acquisition of its electric vehicles.

The electric vehicle manufacturing business is capital-intensive. A lot of money has to be spent on manufacturing facilities, software development, superchargers and service centres. Capital expenditure amounted to 21.1% of turnover in the year 2020 as against 82.2% in the 2019 fiscal year. Though it has been finding it hard to make a profit,  XPENG’s investment in capital should pay off going forward.

Losses and huge capital requirement have made it impossible for the company to pay dividends to stockholders. Returns to shareholders have also not been encouraging. But investors could benefit from the appreciation of the share price of XPENG as performance improves. Debt level may rise due to the need to continuously spend on technology in order to keep pace with technological advances in new energy vehicle engineering.

XPENG can boost its revenue and profit margins by penetrating more markets outside China. Its ride-hailing service which is being trialled in the City of Guangzhou (China) will contribute to earnings if successful.

Valuation
A share of XPENG should trade at a value ranging from RMB212.06 to RMB277.69 ($US32.76 to $US42.90). XPENG trades around our fair value estimate.

Financial Overview
XPENG posted revenue of RMB5.8 billion (US$895.7 million) at the end of the 2020 financial period. The revenue was more than doubled the previous year’s figure. The business is organised into two segments namely vehicle sales, and services and others. Vehicle sales accounted for 94.9% of total revenue while services and others produced the remaining 5.1%. The was similar to the year before when vehicle sales revenue was 93.5% of the total revenue while 6.5% could be traced to services and others business segment.

A gross profit of RMB266 million (US$40.8 million) was declared in 2020 in contrast to 2019 when a gross loss of RMB558.1 million was announced. The company has not made an operating profit due to the high cost of operations. There was a 67.2% hike in total cost from RMB6.1 billion to RMB10.2 billion (US$1.6 billion). The cost of revenue was 54.6% of the total cost as against 47.1% in the earlier year (2019).  R&D was 16.9% of total cost and 29.9% of total revenue. Therefore, operating loss was RMB4.3 billion (US$658 million) in 2020 compared to the RMB3.8 loss declared a year ago. Ordinary stockholders had to bear a net loss of RMB4.9 billion (US$ 749.4 million) or RMB6.48 (US$0.99) per share. The accumulated deficit was over RMB11 billion (over US$1 billion) owing to losses accumulated by XPENG.

The gross profit margin was 4.6%, up from -24.1% of the preceding year. Operating profit and Profit After Tax (PAT) margins were negative figures of 73.5% and 46.8% respectively. Return on Equity (RoE) was -10% while Return on Assets (RoA) closed at -7.7% as at 31st December 2020.  Shareholders’ fund grew from -RMB6.8 billion to RMB34.4 billion (US$5.3 billion) due to the issue of additional shares. Total borrowings amounted to RMB1.8 billion as at 2020 year-end (US$278.6 million). Proceeds of RMB27.4 billion (US$4.2 million) from public offers on NYSE during the year have bolstered cash flow and liquidity; cash and cash equivalents stood at RMB29.2 billion (US$4.5 billion) or 65.3% of total assets. Capital investment has taken its toll on free cash flow. Operating cash flow and operating profit could not cover interests on loans. But current and acid test ratios look good since working capital management is not poor. Total borrowing was 4.1% of total assets and 5.3% of shareholders’ fund. We are of the opinion that XPENG is not overburdened by debt.

Business Risk
XPENG is not only facing competition from electric vehicle manufacturers; it is competing against car producers who are developing vehicles powered by alternative fuel sources such as ethanol, natural gas and fuel cells. Moreover, technologies for alternative energy are rapidly changing thereby subjecting XPENG to technological risk.

Recommendation:  Fairly priced

Earnings Chart of XPeng, Inc.

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