XPeng Earnings: Revenue in Line; Vehicle Margin Remains Under Pressure Despite Volume Recovery

XPeng’s second-quarter revenue was 3% above the midpoint of its guidance. Thanks to a better product mix and lower battery cost, the vehicle margin further recovered to 6.4% from negative 8.6% in the second quarter of last year. But the margin improvement was weaker than we expected due likely to pressure from price promotions amid competition. Management is confident the company will continue to record margin recovery for the rest of the year. However, with lower volume, softer vehicle margin, and higher operating expense assumptions, we increase our net loss forecast for 2024-25 and cut net profit estimates for outer years. As a result, we reduce our fair value estimate to USD 12.20 per ADS (HKD 47.30 per share), from USD 14.00 per ADS (HKD 54.90 per share), which implies a forward 2025 price/sales ratio of 1.8 times. XPeng is undervalued, but our preferred pick in the China auto space is Geely, based on valuation grounds and market share gains from its new energy vehicle product, Zeekr.