Q2 Performance slightly exceeded expectations, and technical cooperation revenue increased further. The company's Q2 revenue was 8.11 billion yuan, a sharp increase of 60% year over year. In terms of automobile sales, the average price of Q2 bikes declined month-on-month due to competition, but sales increased to more than 0.03 million vehicles, and the final vehicle sales revenue recorded 6.8 billion yuan, an increase of 54% over the previous year. Service and other revenue reached 1.29 billion yuan, a further increase of 0.29 billion yuan over the previous month, mainly due to 1) the increase in car ownership, 2) the increase in sales of technology research and development services related to the VW platform's software strategy and technical cooperation. Q2 gross margin reversed losses year over year and increased 1.1 pct to 14% month over month, in line with expectations. Due to economies of scale brought about by increased sales volume, the expense ratio narrowed. Q2 non-GAAP net loss to mother was 1.22 billion yuan, a loss rate of 15%. Looking ahead to Q3, the company guided the delivery of 0.041-0.045 million vehicles, up 2.5%-12.5% year on year; revenue of 9.1-9.8 billion yuan, up 6.7-14.9% year on year. In addition, the company's cash reserves were sufficient, totaling $37.3 billion in cash and cash equivalents, restricted cash, short-term investments and term deposits as of the end of Q2.

Going overseas is speeding up, which is expected to improve profits. 1) In terms of sales, the overseas sales volume of Xiaopeng Motor Q2 exceeded 10% for the first time. According to Xiaopeng's public performance meeting, the G9 became the number one medium and large pure electric SUV in Norway, Denmark, and Israel, and also entered the top three in Sweden, the Netherlands and other places. Looking ahead to Q3, Xiaopeng will launch the launch and delivery of the left and right steering versions of the G6 in August, which is expected to further boost overseas sales. The company expects overseas car sales to account for more than 15% in Q3. 2) At the channel level, the company is gradually expanding to other markets outside of Europe. By the end of July, Xiaopeng had entered 30+ countries and 70+ stores. The number of overseas stores is expected to double in the second half of the year. 3) At the level of profitability, due to the company's high-end positioning in overseas markets, overall profitability is good. The gradual expansion of overseas markets in the future will help the company improve its overall profit level.

Q3 has begun to enter a strong product cycle, and the next generation of products can be expected to be profitable. 1) In terms of models, pre-sale of the MONA M03 will begin on August 8 and will be officially released on August 27th. In Q4 this year, the company will release P7+, which is based on a next-generation autonomous driving hardware platform. In 2025-2026, the company will continue to launch new models at a faster pace. We expect the company to launch more than 8 new models next year. 2) In terms of channels, the company further expanded its physical sales network in Q2. The number of stores grew from 574 at the end of Q1 to 611 stores at the end of Q2, completing the target of 600 stores one quarter ahead of schedule. 3) In terms of profitability, the company guides gross profit to maintain a medium to low double-digit level in the second half of the year, with vehicle gross margin expected to increase sequentially. Looking at future new cars, the company has exceeded the BOM cost reduction target for autonomous driving hardware on the P7+ model. We expect its gross margin to reach double digits, and the new models next year are also expected to benefit from reduced technology costs, reduced costs from joint procurement by Volkswagen, and internal cost control.

The scope of cooperation between Xiaopeng and Volkswagen has been expanded, and revenue can be expected to be monetized. According to the company announcement on July 22, Xiaopeng Motor and Volkswagen Group signed a strategic cooperation and joint development agreement on electronic and electrical architecture technology. The scope of joint development between the two parties expanded from the previous CMP platform to CMP and MEB platforms produced in China. We believe that the addition of the MEB platform in addition to the CMP platform is significant. 1) It shows that the cooperation between the two parties covers a wider range of models; 2) MEB is a strategic platform for the global market, and the joint development of this platform also lays the foundation for possible future overseas market cooperation between the two sides. Considering the domestic market only, we expect the company to achieve hundreds of millions of yuan in revenue every quarter over the next 3 years through platform software cooperation and EEA joint development cooperation with Volkswagen.

Investment advice: Considering that competition in the automotive industry is still fierce, we adjust the profit forecast appropriately. We expect the company to sell about 0.16/0.35/0.4 million vehicles in 2024-2026, total revenue of 38.7/71.1/85.4 billion yuan, and a non-GAAP net profit margin of -16%/-7%/-2%. Considering the continued deepening of mass cooperation, we split the business forecast. The main business revenue is expected to be RMB 36.8 billion in 2024, and the net profit from mass cooperation in 2024 is RMB 1.1 billion. For mass cooperative businesses, considering high gross profit and growth, we gave a valuation of 3.9 billion dollars, corresponding to 25x 2024e Volkswagen Cooperation Division P/E (at the August 20 exchange rate, same below); even if we gave the main business a conservative valuation of 5.2 billion dollars, corresponding to 1x 2024e main business P/S, the target price still reached (9868.HK) 37.3 HKD and (XPEV.N) 9.6 dollars, maintaining the “buy” rating.

Risk warning: Risk of sales of new models falling short of expectations, risk of product launch falling short of expectations, risk of improving intelligent driving capabilities and implementation of functions falling short of expectations, risk of intense competition, cost improvement and gross margin growth falling short of expectations.