Q1 Sales were in line with expectations, and platform and software revenue exceeded expectations. Xiaopeng Motor's Q1 revenue was 6.55 billion yuan, an increase of 62% over the previous year.

1) In terms of automobile sales, thanks to the launch and popularity of the X9, 21,821 vehicles were delivered in Q1, in line with the guidelines; 2) Service and other revenue reached 1 billion, up 93.1%/22.1% year over month, mainly due to the increase in technology R&D service revenue related to mass platforms and software strategic technical cooperation, which exceeded expectations. Gross margin of 13% was recorded, in line with overall expectations, with gross margins of 5%/54% for vehicles/services and others, respectively. The overall expense ratio for the off-season sales was high. Q1 non-GAAP net loss to mother was $1.41 billion, and the non-GAAP net loss ratio was 21.5%. Looking ahead to Q2, the company's guidance was to deliver 29,000-32,000 vehicles, up 25%-38% year on year; revenue was 75-8.3 billion yuan, up 48-64% year over year. In addition, the company has abundant cash reserves, totaling $41.4 billion in cash and cash equivalents, restricted cash, short-term investments and time deposits as of the end of Q1.

The company entered a strong product cycle in Q3, and sales growth can be expected. 1) In terms of models, the company expects the first A-class electric sedan 2C model of the new MONA brand to be unveiled in June and delivered in Q3. The main selling points are appearance and intelligent driving.

In addition, the F57, another new B-class pure electric sedan from the Xiaopeng brand, is expected to be delivered in Q4, and this model is expected to meet the previous goal of reducing costs by 25%. Based on MONA and F57 contributions, the company expects the number of monthly deliveries at the end of the year to significantly exceed the same period last year. Starting in 2024Q3, this strong product cycle will last about 18 to 24 months, and we expect the company to launch more than 10 new models in 2024-2026. 2) In terms of channels, the company continues to expand, sink and optimize channels. As of the end of 2024Q1, Xiaopeng Motor's physical sales network had 574 stores, covering 178 cities. The company expects the number of stores to increase to 600 in 2024Q3, which is in line with previous plans. 3) In terms of smart driving, on May 20, Xiaopeng released an AI Tianji system incorporating large models. It was the first in the Chinese automotive industry to achieve mass production of large models of end-to-end autonomous driving, leading the technical architecture. Currently, the X9/G9/P7i/G6 has fully launched the AI Tianji system, and other models have begun testing one after another. We believe that the increase in models such as MONA will help Xiaopeng continue to iterate smart driving, thereby bringing a better user experience, feeding back sales, and forming a virtuous cycle between smart driving ability and sales.

Public cooperation continued to deepen, and performance contributions exceeded expectations. According to the results conference, Volkswagen and Xiaopeng have already recorded hundreds of millions of yuan in Q1 technology R&D service fees related to platforms and software, and have continued to increase over the next few quarters. Therefore, we expect VW related technical services to bring Xiaopeng Motor more than 1 billion dollars in revenue in 2024, and the profitability is very impressive. In addition to this, close cooperation between Volkswagen and Xiaopeng is also reflected in the supply chain, EEA, etc. At the end of February, Xiaopeng announced that it had signed a strategic technical cooperation joint development agreement and a joint procurement plan with Volkswagen. On April 17, Xiaopeng announced that it had reached a further strategic cooperation with Volkswagen on electronic and electrical architecture. The two will be based on Xiaopeng Motor's latest generation EEA, jointly developed and integrated into Volkswagen's CMP platform in China. The EEA, which was jointly developed by the two parties, is expected to be fully applied to electric models of Volkswagen brands manufactured in China from 2026. The company expects revenue related to the EEA to be recognized starting from H2.

Accelerate overseas and improve profitability. 1) In terms of models, in early April 2024, Xiaopeng successfully shipped nearly 1,000 G9s to Europe, with a total export value of over 500 million yuan. In May, the G6 left-hand rudder version was released in European and other markets, and pre-orders began. It is expected that the G6 right-hand rudder version will be launched in Q3. Also, the X9 right-hand drive version is likely to launch at the end of the year or early next year. 2) In terms of sales network, the company plans to expand its overseas sales network from the Nordic countries to more than 20 countries. 2024H1, the company has established cooperative relationships with leading dealer groups in Western Europe, Southeast Asia, the Middle East, Australia, etc., and will open new sales stores one after another.

Investment advice: We expect the company to sell around 17/37/420,000 vehicles in 2024-2026. Considering the intense price competition in the industry, we have adjusted our profit forecast appropriately. We expect total revenue of $412/746/85.7 billion yuan in 2024-2026, and a non-GAAP net profit margin of -16%/-5%/-0.3%. Considering that the company has entered a strong product cycle, accelerated overseas, and successful cooperation with Volkswagen, we gave Xiaopeng Motor a target valuation of 11.4 billion US dollars, corresponding to 2x 2024e P/S, and gave the target price (9868.HK) 47 HKD and (XPEV.N) 12 US dollars, maintaining a “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 autonomous driving capabilities and implementation of functions falling short of expectations, risk of falling short of expected risk of gross margin increase.