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The Chinese EV space continues to recover from covid lockdowns with a big end to December. XPeng (NYSE:XPEV) was able to close out the year on a great note after a substantial slowdown earlier in Q4 sending the stock below $10 after starting 2022 around $50. My investment thesis is Bullish on the Chinese EV manufacturer and the potential for the sector in 2023 with the covid lockdowns lifted.
Over Reaction
XPeng was already having massive delivery issues when the company shocked the market with a November vehicle delivery number of only 5,811. The company faced a challenging operating environment due to covid leading to the big dip in October from the already weak 8,468 vehicles delivered in September.
Source: CnEVPost
At the time, XPeng forecast the flagship G9 production ramp-up would accelerate when operating conditions were more normal. The company surprised the market by reporting 11,292 deliveries in December for nearly 100% sequential growth. The Chinese smart EV company delivered 4,020 G9 SUVs in a strong rebound from the November weakness.
On the Q3’22 earnings call, CEO He Xiaopeng pinned a lot of the delivery problems on covid restrictions along with G9 production ramp issues:
Despite near-term challenges brought by COVID-related restrictions and production ramp up, we are confident that the G9 will soon rank among the top three in terms of monthly sales volume in a battery electric SUV segment priced above RMB300,000 and draw closer to number one next year as we continue to enhance our brand recognition.
XPeng still isn’t back to normal production, but investors have over dramatized the EV delivery slowdown as some issue with the vehicles. Investors need to remember how much problem Apple (AAPL) has faced getting the iPhone 14 produced in China with the most valuable company in the world about to report a very disappointing holiday quarter.
The China Caixin PMI fell in December to 49.0 from 49.4 in November in another sign of how the general factories in China struggled to maintain production levels. As well documented, covid has been a disaster for the communist country.
XPeng didn’t provide any guidance for January. The December deliveries were still far below the highs back in the Summer with 15,295 in June following the 15,414 record level in March, but XPeng appears to suggest production is quickly heading back to normal levels while EV peers are already reporting record numbers.
EV competitors reported the following June vehicle deliveries in comparison to the just reported December numbers:
The competitors saw at least 20% growth in the 6 month period despite covid disruptions during the Fall. XPeng will have to prove a bigger recovery is on the way in Q1 and not a scenario where deliveries were escalated just for year end.
Plenty Of Cash
XPeng ended September with a massive cash balance of $5.64 billion. Unlike a lot of the upstart US EV manufacturers that went public via SPACs, the Chinese company has plenty of cash to invest to develop the market.
The company only lost about $0.31 billion in the last quarter even with the low vehicle margins due to the limited production. XPeng only produced a 11.6% vehicle margin in Q3’22 compared to 13.6% back in Q3’21.
Source: XPeng Q3’22 earnings report
The Chinese EV maker needs to turn 2023 into a focus on margin expansion to start eliminating the losses as the year goes on with higher margin vehicle sales. Analysts have revenues jumping up to $7 billion this year and topping $10 billion in 2024 where the Chinese EV manufacturer should turn the corner towards becoming profitable.
In the current climate, the company needs to expedite the process to reach profits. In the auto industry, Tesla (TSLA) remains small potatoes, yet the company is forecast to top $110 billion next year.
XPeng is still early in the development process. Back on the Q3’22 earnings call, the CEO was confident the company would rebound in early 2023 to achieve significant revenue growth to top the Chinese EV industry:
As we continue to rollout new products and technologies, coupled with technology differentiation of our next-generation full-scenario ADAS products, we are confident that we will achieve a significant increase in sales volume and average selling price, gaining a revenue growth in 2023 that exceeds the industry average and increasing our market share.
At the time of the Q3’22 report, XPeng guided to Q4 deliveries of 20,000 to 21,000. Despite what the market saw as a huge disappointment in November, the company actually delivered 22,204 vehicles in the quarter.
Considering the vehicle delivery beat in Q4, the management comments regarding Q1 are a lot more promising.
Takeaway
The key investor takeaway is that XPeng appears on a road to recovery. The stock only trades at 1x 2023 sales targets and the multiple is poised to rebound with the improving operating environment in China.
