Headline: XPeng Goes Public, the Biggest IPO in the Electric Vehicle Industry

author: iAsk   

According to the latest news, XPeng's US IPO is priced at $15 per ADS, which is higher than the previously announced range of $11-13 per ADS. Due to the extremely hot orders, XPeng plans to issue 99.73 million ADSs at this time and also grants the underwriters 14.96 million over-allotment rights.

Based on the issuance price of $15 and excluding over-allotment rights, XPeng's IPO size is $1.5 billion, with a market cap of $11.2 billion, both higher than Li Auto and NIO at their IPOs. Tonight, XPeng made history with the largest IPO size among global EV companies and has attracted the strong interest and pursuit of many top institutional investors.

Celebrated Investors

On August 8, XPeng Inc. filed with the U.S. Securities and Exchange Commission, for an initial public offering (IPO) on the New York Stock Exchange under the symbol "XPEV". It is the third Chinese carmaker going public in the U.S. right after Nio Inc. and Li Auto Inc.

On August 27, XPeng Inc, a Chinese smart electric vehicle company, announced the issuance of 99,733,334 ADSs (Each ADS represents two Class A ordinary shares) in the initial public offering at the offering price of $15.00 per ADS. In addition, XPeng also granted the underwriters a 30-day option to purchase up to a maximum of 14,959,999 ADSs. The aggregate amount of funds raised by XPeng Inc. in this offering is approximately $1.5-1.72 billion. 

Founded in 2015, XPeng Inc. has completed 10 rounds of financing, with accumulated financing amount of over 20 billion yuan ($2.6 billion), surpassing the total financing amount of Nio Inc. before IPO at more than 14.6 billion yuan ($2.1 billion), and that of Li Auto Inc. at 15.3 billion yuan ($2.2 billion).

The major institutional shareholders of XPeng before the IPO include Alibaba, IDG, Morningside Venture Capital, GGV, Primavera Capital, among others. Alibaba holds 14.4% of shares as the largest external institute shareholder and the second largest shareholder after XPeng CEO He Xiaopeng. The recent participation of Hillhouse, Sequoia, Sovereign Wealth Funds and other leading international investment companies, has also strengthened the board of shareholders.

Since last year, XPeng Inc. has adjusted its equity structure to prepare for the IPO. The month prior to IPO, it efficiently completed a Series C+ round of financing at over $900 million. Together with the 1,895 million yuan of cash, cash equivalents and restricted cash in the company's books, its cash reserves worth over 8.5 billion yuan ($1.23 billion), higher than that of Nio Inc. and Li Auto Inc.

Figure 1: XPeng Inc. major shareholders before the IPO

R&D Strength

However, the biggest strength of XPeng Inc. is not cash reserves, but its research and development (R & D) and intelligent systems.

As one of China's leading electric-vehicle (EV) makers, XPeng Inc. is the only company in China's new car-making force, who has launched two flexible manufacturing models — the self-built plant and the contract manufacturing. It is also the only EV company that develops the two platforms at the same time, based on which it produced two car models — G3 SUV and P7 four-door sports sedan.

Compared with domestic competitors, XPeng Inc. is the first EV enterprise in China to successfully develop a commercial self-driving software system and realize mass production.

Figure 2: XPeng self-built Zhaoqing plant

XPeng Inc. positioned itself as a high-end electric vehicle maker, with two cars G3 and P7 respectively sold in the markets of SUV and sedan. G3 SUV can be regarded as the foundation for the sales and branding of XPeng Inc. XPeng P7 sports sedan which is a rival to Tesla's Model 3 is intelligently designed to offer an NEDC range of up to 760 km (439 miles) on a single charge, which is the longest among EVs that are available in China. It also has a new battery co-developed with CATL and has become as a new growth point.

Figure 3: The parameters of the two models of XPeng Inc.

Since November 2018, the intelligent SUV XPeng G3 started to put into production at the Zhengzhou plant, Haima in November 2018. As of July 2020, it has delivered a total of 18,741 units to customers. The new P7 sports sedan was launched in April 2020 and rolled out at the Zhaoqing plant in May 2020. Since its delivery in June, 2020, the accumulated delivery units has reached 1,966.

Figure 4: The sales performance of XPeng G3 and P7

Up to now, the cumulative delivery units of the two models of XPeng Inc. has reached 20,707, leading in the rank of Chinese EV makers. The company said in the prospectus that it plans to launch an intelligent electric Class A model in 2021, and a new intelligent EV model every year in the future.

Different from the user-centered service by Nio Inc. and Li Auto's focus on prolonging the range, Xpeng emphasizes that its core differentiated competitiveness is on intelligence, including the independent research and development of all software and the core hardware. Its autopilot system XPILOT and on-board intelligent operating system XmartOS can also be upgraded via OTA (Over the Air).

According to the official statistics of XPeng Inc., 90% of XPeng car owners have bought models with the auxiliary driving function, and 50% of the P7 buyers have ordered the 2021 model with the advanced autopilot system XPILOT3.0. 

Apparently, the users have wildly recognized the XPeng intelligent driving system.

He Xiaopeng, the founder of XPeng Inc. once spoke to the public:" The car industry should meet three standards in software and hardware. Firstly, the annual sales totals over 1 million units; secondly, the code includes over 1 million lines; thirdly, there are more than 10,000 parts ." He said that a single Internet project may cover more than 1 million users and over 1 million lines of code, and generally no more than 10,000 parts, with the aircraft as an exception requiring over 10,000 parts and over 1 million lines of code. But the annual sales of aircraft is often less than 1 million units. Therefore, how to build a qualified car is a great challenge.

In order to achieve the ultimate in detail, XPeng Inc. has invested a lot of talent and funds in technology research and development.

The prospectus shows as of June 30, 2020, XPeng Inc. has 3,676 employees in China and the United States, including more than 1,580 R & D technicians. Of the R&D team, 66% of the members are responsible for automotive design and engineering, while the rest are responsible for autonomous driving and intelligent operating systems.

Figure 5: R & D investments by XPeng Inc., Tesla, Nio Inc. and Li Auto Inc. (The data of Li Auto Inc. only shows the performance in the first quarter of 2020). The data is from each company's prospectus.

In 2019, the R & D investment of XPeng Inc. reached 2.07 billion yuan (about $293 million), which is nearly double than 1.05 billion yuan ($152 million) in 2018. It also makes XPeng the first company to develop and commercialize self-driving software (hardware based on Nvidia Xavier, which supports L3 self-driving) on its own. The XPeng P7 is also far superior to similar models from rival companies in terms of the number of hardware and sensors, which is even competitive with Tesla.

Figure 6: The comparison of intelligent driving technologies of XPeng Inc., Tesla, Nio Inc., Weltmeister Motor, and Li Auto Inc. The data is from public information.

For the technology-intensive industry such as automobiles, the level of R & D investment determines the future technological autonomy and leadership. Thus the short-term losses caused by high R & D investment can be accepted by the capital market.

Creating intelligent travel experience for customers is the long-term corporate mission of XPeng Inc. In the future, the company will continue to talk up investment in research, development and technology. With the transformation to produce technology and data-driven intelligent electric vehicles, XPeng Inc. will create a better mobility experience for customers, and also provide a strong driving force and technical support for the future development of XPeng Inc.

Good Performance 

The automotive industry requires a high level of initial R & D and technology accumulation. About four years since its inception, XPeng Inc. started to generate revenue from car sales when delivering its first electronic vehicle G3 SUV in the fourth quarter of 2018. Affected by the COVID-19 pandemic in the first half of this year, the production and output volume have seen a slight decline, and the overall performance is also inevitably under the influence

Figure 7:  The income statement of XPeng Inc. for the first six months 2018-2020

The two major revenue sources of XPeng Inc.  are sales of intelligent electric vehicles and car related services, which mainly include ride service, finance lease, turbocharging and maintenance service, among others. According to the income statement, the operating income of XPeng Inc. in 2018, 2019 and the first half of 2020 was 9.706 million yuan, 2.321 billion yuan and 1.003 billion yuan respectively, of which car sales contributed the most.

The gross margin of XPeng Inc. has been greatly improved due to the increase of output volume of G3 and P7 after delivery. In the first half of 2020, its gross margin was -3.6%, up 34.6 % from -38.2% in the same period of 2019. XPeng Inc. is the only company among  "China's TOP 3 new forces of Internet car makers" that has already set up its own plant and put into operation. Although the initial capital and technology investment is huge, it can control the key issues such as product quality and core technologies in its own hands. Furthermore, with the boost of sales volume and production capacity in the future, XPeng Inc. will enjoy much more room to improve the gross margin of its self-built factory than rival companies. 

As for net profit, Xpeng's net loss in 2018 and 2019 was 1.399 billion yuan and 3.692 billion yuan; in the first half of 2020, its net loss was 796 million yuan, compared with 1.918 billion yuan in the same period last year, which is in a narrow range of losses.

The prospectus said, affected by the COVID-19 pandemic, the G3 output volume in the first half of 2020 was impacted, with the revenue slightly reduced. As the pandemic stabilizes, and the company's new model P7 started the mass production, the company's output volume has been growing steadily in the second half of this year. The revenue is expected to increase significantly, with higher profits.

According to the IHS Markit report, China's electric vehicle sales are expected to grow at a compound annual growth rate of 29.4%, from 900,000 units in 2019 to 4.2 million units in 2025. The penetration rate of electric vehicle in the Chinese market is expected to reach 16.2% by 2025.

Figure 8: Electric vehicle sales and penetration rate in China, 2019 - 2025, IHS Markit Report

Wang Xing, the founder of Meituan, predicted that "only three EV makers will survive". By the second quarter of 2020, the cumulative market share of the top five EV companies has risen from 43% in 2018 to 90%, according to the Joint Advisory Committee of China Passenger Car Market.

The future EV marking forces have a broader market, but the competition is also increasingly fierce.

Old shareholders continue to increase investment and the new participants are optimistic about the market. With cash reserves of 8.2 billion yuan ($1.19 billion), and the constant increase in R & D investment, XPeng Inc. has strong backing and stamina for future development. However, XPeng Inc. will also usher in a more cruel competition after the IPO. What will happen to the new forces of Chinese EV makers by then? Looking forward to Xiaopeng's next move.