17.06.2024 Issuer Call Redemption Notice

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Sandeep Rao

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XPeng's Flying Cars: Cause for Takeoff?

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In 2023, “pure play” electric vehicle (EV) company BYD stated1 that it has achieved a milestone: it sold a little over 3.02 million cars. China’s automobile association estimated that 89.5% of BYD’s sales were in the People’s Republic of China – easily making it the biggest EV maker in China’s crowded marketplace.

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Source: China Passenger Car Association

There was another very significant point of consideration: BYD was the largest overall car seller in China for the year of 2023 as well, with its nearest competitor – the FAW-Volkswagen combine – trailing a full 32% behind.

Source: China Passenger Car Association

There are two points to consider here. Firstly: EVs, even with subsidies (which are considerable in China), aren’t generally cheaper than Internal Combustion Engine (ICE)-propelled cars. This outsized preponderance of EVs in the total sales mix might be indicating that income segments below the upper/upper-middle income levels aren’t longer consuming automobiles at quite as comparable a rate as before. This might be another “proxy data” point indicating slowing overall growth for China’s economy (note: the applicability of “proxy data” towards prognosticating the Chinese economy’s “health” was discussed in an earlier article2 published near the end of the year).

Secondly: independent of the Chinese economy’s “health”, the sales figures indicates that China’s EV consumer base might be rapidly arriving at a consensus about a resilient list of choices out of China’s tangled mess of EV carmakers. This means that China’s EV stocks (be they public or private) will likely be undergoing a significant shake-up in terms of investor attractiveness.

One such stock that might be affected would be a company that didn’t make China’s Top 9 list after selling 141,601 vehicles worldwide3 in the past year: Guangzhou Xiaopeng Motors Technology Co., Ltd., more commonly known as XPeng.

Forward-Looking Conviction

Over the past four reported quarters, it can be observed4 that the Earnings Per Share (EPS) for the company’s stock have been worsening:

Source: Nasdaq

While the latest reported EPS has been a positive surprise (indicating some increasing efficiency not accounted for by forward consensus), the fiscal year EPS isn’t expected to turn positive until 2026 – most likely in Q2 or Q3.

There is some argument to the notion that traded volumes tend to boost stock prices (as exemplified in the last article5). An examination of day-over day changes (or “deltas”) in XPeng’s stock price versus traded volumes, however, indicates that volumes cannot be considered a significant driver to stock prices (or even a factor that imparts a sustained bullish trajectory) since circa Q3 2021.

Source: Leverage Shares

The stock is currently quite far from the highs of price and volume witnessed in 2020 and 2022 respectively. Through much of Q4 2023 till the present, the stock is trending downwards – with both price and daily volume a long way away from the highs witnessed in 2020 and 2022 respectively.

This isn’t just a feature for the likes of XPeng. As of last week, China’s stock markets lost nearly $6.3 trillion in market value6 since the peaks reached in 2021, with managers of benchmark-tracking funds selling a net $300 million Chinese shares in January alone.

Source: Leverage Shares

Over the past four full years, China’s market capitalization trend is near-perfect parabolic with levels in the present nearly matching that on the first traded day of 2020. Despite a nearly $278-billion market rescue plan announced by the Chinese government on the 23rd of January, neither foreign institutional investors nor China’s retail investors (who, at 220 million, account for around 60% of China’s stock market turnover) are particularly enthused by it providing a sustainable boost, given a long history of botched market rescue efforts.

In effect, XPeng is in the midst of two headwinds: one in its industry and the other in its dominant economy of operation. The company, however, does some “sky-high” ambitions that might be of interest.

The Future: A Flying Car?

In October 2022, the Xpeng’s urban air mobility division – AeroHT – reported through a video presentation during the company’s “1024 Tech Day” event in China that a flying car prototype successfully completed its maiden flight that year7.

Source: XPeng/Agencies

Weighing a little under 600 kilograms with a flight time of 35 minutes and a maximum flight speed of 130 kilometers per hour, the “flying car” (or Electric Vertical Take-Off and Landing Vehicle, “eVTOL”) can be user-driven or operated autonomously. The company started accepting pre-orders earlier this month and announced that the orders will be accepted later on in the year for delivery in 2025.

While strategy consulting firm Roland Berger expects that up to 160,000 flying vehicles will be operating around the world as air taxis by 2050, there are numerous challenges that prevent widespread adoption in the present. First, most cities around the world aren’t replete with infrastructure to make eVTOLs widely accessible. Second, the prospect of large numbers of half-ton flying machines which may or may not be robotic zipping around the skies will likely be regarded with extreme caution by administrators around the world.

For the company, there is a third factor: it isn’t alone in this space. Giants such as General Motors and Hyundai, startups such as Aeromobil as well as numerous other players in stealth mode are working on developing viable eVTOLs for a wide variety of purposes around the world. Giants such as General Motors and Hyundai, startups such as Aeromobil as well as numerous other players in stealth mode are working on developing viable eVTOLs for a wide variety of purposes around the world. As such, the announcement of pre-orders and orders generated only marginally increased attention for the company’s stock and didn’t serve to reverse bearish trends in stock valuation. A bullish trend might be imputed if there were any indications of significant cost savings becoming a sustainable trend.

In this regard, XPeng is in a significantly weaker position than current China auto champion BYD. Among the most expensive parts of an EV are its batteries. BYD started out in 1995 as a manufacturer of rechargeable batteries which it consistently built on after purchasing ailing state-owned car manufacturer Qinchuan Automobile Company to become the Berkshire Hathaway-backed monster it is today. Its in-house battery business enables it to be nimble with cutting prices and saving costs. Meanwhile, XPeng (like many others) continue to be dependent on numerous suppliers such as Contemporary Amperex Technology Co. Limited (CATL).

An argument could be made that this is a long-term growth stock due to the relative rapidity in which the company has committed to producing eVTOLs. However, the turnaround horizon for the AeroHT division becoming the company’s mainstay would likely be measurable in decades.

Exploring the unknown is a bold and visionary decision for which the company’s leadership must be commended. However, at this moment, it’s a buyer’s market both in equities as well as EVs. Expect rough weather and turbulence.


Footnotes:

  1. “BYD Concludes 2023 with Record 3 Million Annual Sales, Leading Global NEV Market”, 2 January 2024, BYD Press Team
  2. “China’s Economy: In Recession?”, 22 December 2023, Leverage Shares
  3. “XPENG Announces Vehicle Delivery Results for December and Fourth Quarter 2023″, 1 January 2024, XPeng Investor Relations
  4. “XPeng Inc. American depositary shares, each representing two Class A ordinary shares (XPEV) Earnings”, 23 January 2024, Nasdaq Market Activity
  5. “U.S. Equities vs Indian Market: Hype vs Rationale”, 18 January 2024, Leverage Shares
  6. “China’s $6.3 Trillion Stock Selloff Is Getting Uglier by the Day”, 19 January 2024, Bloomberg News
  7. “Check out video footage of XPeng AeroHT’s flying car completing its maiden flight”, 26 October 2022, Electrek

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

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