The company's recent situation

By June, we expect the market to fully anticipate the company's 2Q battery cost increase. As the impact of the epidemic has abated, the company's supply and demand have now recovered relatively well, and plans to conduct OTA for functions such as ACC-L/LCC-L and urban NGP in the near future. We expect that the smart driving progress update is expected to catalyze stock prices.

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Production and sales are expected to improve in the 2nd quarter, and attention is being paid to medium- to long-term layout opportunities. The company delivered 10,125 vehicles in May, +12.5% over the previous month. On the supply side, the Zhaoqing plant resumed double-shift production in mid-May, and the weekly insurance volume reached 3,925 vehicles at the end of May, returning to the high level before the April epidemic. We expect that it will not be very difficult to complete the previous 2Q guidelines later. On the demand side, with the exception of Beijing and Shanghai, the company's new orders have now returned to the high level at the beginning of the year, and with the adjustment of the company's software sales policy in early May, we expect the proportion of P7/P5 high-spec models to increase significantly, boosting gross profit margins. Although the 2Q company faced some month-on-month pressure on battery costs, we expect that the market has fully anticipated, and lithium carbonate prices have continued to recover since the 2nd quarter, and the cost side has improved marginally. The period of greatest pressure on profit margins in April-May has passed. Entering mid-late June, orders are expected to begin delivery after price increases. The 3rd quarter will usher in continued supply improvements and G9 listing. We expect production and sales to improve. Looking at the medium to long term, with mass production delivery of the third-generation platform and xPilot4.0 in 2023, as well as the application of new manufacturing processes such as integrated die casting, we think the company's comprehensive gross margin is expected to reach 20%, and profit margins will rise by leaps and bounds.

It is expected that the recent upgrade of smart driving functions will catalyze, from leading technology to forming competitive barriers. The company plans to upgrade the “ACC-L/LCC-L/High Speed NGP Enhanced Edition” function1 in the near future to further expand application scenarios with the support of lidar. Judging from the engineering version of the test, driving performance on complex urban roads, such as predictive judgment ability and ability to pass around the island, was very impressive. Furthermore, the company's urban NGP technology is developing smoothly. The founder, Mr. He Xiaopeng, recently reiterated at the Guangdong-Hong Kong-Macao Auto Show that the city's NGP function is expected to be upgraded to 2H22 by 2H22 and is expected to be extended to 50-100 cities in 2023. Regarding the company's leading edge in intelligent driving, we believe that mass-produced urban scene assisted driving+full-stack self-developed closed-loop capability = intelligent second-half ticket. The recent adjustment of the smart driving software sales policy has reflected the company's rethinking of smart driving tactics, with the intention of lowering the usage threshold and increasing the customer base covered by urban NGP. With the increase in urban NGP production and the number of cities covered, it is expected that algorithms to help the company accelerate iterative algorithms will also increase user stickiness, forming technological advantages and even more solid competitive barriers in the field of intelligent driving.

Profit forecasting and valuation

The current stock price corresponds to 3.6 times EV/revenue in 2022, keeping the company's outperforming industry ratings and profit forecasts unchanged, keeping the target price of US/Hong Kong stocks unchanged at 31 US dollars/HK$123. There is room for an upward trend of 13%/17% from the current stock price, respectively, corresponding to 4 times EV/revenue in 2022.

risks

The pandemic and chip shortages have affected production and sales; new car launches have fallen short of expectations.