In 2Q24, total revenue rose by 23.9% QoQ, slightly beat on higher VW technical service revenue. Despite a substantial QoQ pullback of vehicle ASP on weaker product mix, 2Q24 vehicle margin beat our estimate by improving c.1ppt QoQ, while blended gross margin recovered to historic high of 14%. We expect further upside for vehicle margin in 2H24. On the other hand, the cash flow in 2Q24 was below expectation with cash burn of c.RMB4bn for the quarter, while 3Q24 revenue guidance implies QoQ plunge up to RMB50k in revenue per vehicle, below expectation given the escalated entry-level MONA sales mix as well as changeover of overseas distribution mode. In light of lower visibility of new model picture next year, we trim TP to US$12.00/HK$46.00 by adopting 2x 2024E P/S. Maintain BUY, but we feel investors may not regain confidence until getting definite information regarding new order intake for new products and sales recovery momentum.

Key Factors for Rating

2Q24 revenue slightly beat on greater Volkswagen technical service revenue. 2Q24 revenue rose 23.9% QoQ to RMB7.98bn, slightly beating our original forecast on higher service revenue which climbed 28.8% QoQ to RMB1.3bn, mostly related to Volkswagen technical service on G9 platform technology (RMB500m vs. RMB300m in 1Q24). Vehicle sales were largely in line with ASP down by 11.2% QoQ at RMB226k, due to the lower sales proportion of high-priced X9 MPV sales mix. Heading into 2H24, we expect a steady growth of service revenue with the addition of VW technical service revenue from E/E architecture technology on top of current G9 platform revenue.

Vehicle margin beat expectation in 2Q24 driven by cost reduction benefits and enhanced economies of scale. The vehicle margin extended improvement QoQ at 6.4% in 2Q24. If adding back the continued inventory provision and losses on purchase commitment related to P5's EOP close to RMB200m, we estimate the adjusted vehicle margin could reach c.9% in 2Q24, above our estimate, with further cost reduction benefits and stronger economies of scale more than offsetting the adverse impacts from weakening product mix with much lower X9 proportion (17% in 2Q24 vs.36% in 1Q24).

We expect to see further upside for vehicle margin improvement in 2H24. Despite potential margin dilution from increasing entry-level MONA sales mix that featured with meager margin, we see potential further upside for vehicle margin improvement in 2H24 given the escalated lucrative exports mix (i.e. G6/G9 global delivery), improving economies of scale, ramp-up of P7+ model with fine-tuned cost structure as well as the removal of P5 EOP impacts. Moreover, we expect overall gross margin set to hold steady at low-to-mid teens level in 2H24, with the help of vehicle margin improvement and constant increase in technical service's gross profit scale.

Net loss moderately declined QoQ whereas cash burn persisted against improving delivery scale. Despite larger revenue scale and stronger gross margin, 2Q24 operating losses slightly narrowed QoQ to RMB1.6bn as overall OPEX input increased slightly QoQ to RMB3bn. The mixed picture from stronger GPM and higher OPEX outlay led to a moderate QoQ decline of non-GAAP net loss from RMB1.4bn in 1Q24 to RMB1.2bn in 2Q24. In addition, the company continued to burn cash with a decrease of net cash by RMB4bn in 2Q24 (vs. a decrease of RMB5.8bn in 1Q24) against improving delivery scale. Management guided cash flow would be significantly improved in 2H24 with year-end cash higher than that as of end-2Q24, implying a positive free cash flow in 2H24.

3Q24 delivery guidance largely in line but QoQ plunge in revenue per vehicle missed expectations. For 3Q24, the company guided a wider range of quarterly deliveries at 41k-45k units, implying monthly average sales of 15k- 17k in Aug/Sep, largely in line. Nonetheless, the revenue guidance indicated QoQ plunge by up to RMB50k in revenue per vehicle, from RMB269k in 2Q24. This could be explained by deteriorated product structure with escalated entry- level MONA M03 mix that may tag RMB100k lower than XPeng's existing blended vehicle ASP, and the changeover of overseas distribution mode from dealer mode to general agency mode. According to the mgmt., they have switched the distribution mode for exports from previous dealer mode to simple agency mode under FOB trade, for which the agreements are cheaper and cost-effective.

Valuation

We slightly trim our sales volume forecasts for 2024-25E to 170k/300k units, from prior 175k/330k units in light of the weaker demand on current XPeng lineups and lower visibility for new launches next year. To reflect higher gross margin, we lower non-GAAP net loss forecast for 2024 from RMB5bn to RMB4.8bn, while leaving that for 2025 largely intact at RMB3.3bn.

During the earnings call, the mgmt. conveyed confidence over the strong product cycle with fine-tuned cost structure and ungraded AD functionalities ahead, led by the massive deliveries of MONA 03 and P7+ in 4Q24. Yet, they did not give specific color on future pipelines for 2025-26. Witnessing the weakening demand on XPeng's existing lineups and intensifying competition dynamics in mainstream and entry-level NEV segments, we feel investors may not regain confidence in the company's future prospects until getting definite information regarding new order intake for new products and sales recovery momentum.

In light of lower visibility of new model picture next year, we revise down our TP from US$18.00/HK$80.00 to US$12.00/HK$46.00, by adopting 2x 2024E P/S ratio vs. 2x 2025E P/S multiple before. Maintain BUY. The upcoming catalysts include the official release of MONA 03 next week and subsequent delivery ramp- up trend in 4Q24.