XPeng: Forecasting Its Expansion Into Robotaxi

Seeking Alpha2021-12-24

Summary XPeng is poised to disrupt the incumbent robotaxi and ride-hailing firms. Using an AI-centric approach with small sensors, XPeng will be able to operate at a substantially lower cost. Winning...

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Rudyy
2021-12-25
Rudyy
Like
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Liuliusg
2021-12-24
Liuliusg
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This announcement generated multiple positive news articles, and the company's valuation rose in response. However, most if not all articles failed to appreciate a significant implication. XPeng will be the first vehicle manufacturer to enter the autonomous ride-hailing market with its mass-market production vehicles. With this announcement, XPeng implies their privately-owned vehicles will be able to match the autonomous capabilities of robotaxi firms like Waymo, Cruise, or Baidu (BIDU), and that XPeng can generate similar revenues without the added cost of robotaxi retrofit and potentially the cost of the vehicles themselves. With its substantial cost advantages, the company is poised to capture a large portion of the ride-hailing market and realize a significant valuation upside.\nAssumptions\nHere, I make a large assumption that the pilot program will take two years to complete, and full-scale commercial operations and revenue generations will begin at the start of 2025. There exists a large degree of uncertainty with this timeline. It is largely dependent on the pace of ADAS technology development and regulatory approvals.\nXPeng has recently released the Xpilot 3.5 system with the model P5. There are multiple YouTube videos where professional reviewers ride the city NGP (Navigation Guided Pilot) 3.5 system. Here's a video clip during the XPeng Tech Day. The demonstrations consistently navigated challenging routes with few disengagements. The reviewers unanimously found the system impressive. XPeng also announced the release of the Xpilot 4.0 system with its new SUV model G9. The company expects that the 4.0 system will be live in 2023 and will be able to autonomously pilot almost all roads in China with zero disengagements. Such performance will be technologically sufficient to operate a robotaxi business.\nWe have seen past timelines with Baidu Apollo and Pony.ai services. In November, the city of Beijing granted full commercial operation licenses to robotaxi services. It had taken a little over two years from pilot debut to limited commercialization. Baidu expects other major cities to follow Beijing's lead early next year. If XPeng is to follow the timeline, it can expect to receive commercial licenses for revenue generation in early 2025. However, Baidu and regulators have been exploring a nascent industry and building a regulatory framework. I believe it is likely that the approval of XPeng robotaxis will be considerably faster, as the approval process can take advantage of existing guidelines.\nTherefore, the trends of XPeng's ADAS technology and China's regulatory framework both support the assumption of 2025 revenue realization, and this assumption may be conservative.\nRevenue and CostRobotaxi Economics\nAfter receiving commercial licenses, Baidu has announced that it is charging above-market fees. Baidu has a limited number of commercial licenses, and the demand is excessive due to the novelty factor. As it scales into larger operations, the fee structure is likely to come down and undercut the main competitor DiDi (DIDI), which charges $.7 - $2/mile depending on a variety of factors and level of service. For comparable service to Baidu Apollo cars in operation, DiDi charges about $1/mile, according to Lux Research Inc's articleThe Economics of Robotaxis.\nThe article also estimates a robotaxi costs $0.28/mile to operate in China. On paper, Baidu should be able to maintain a healthy profit margin, charge lower than DiDi, and gain significant market share. If we examine the cost trends, the advantages of robotaxi widen even further. The largest cost driver of DiDi is labor, which is rising in China and around the world. Out of the operation costs of robotaxis, maintenance cost is expected to trend down as EV quality improves. Insurance cost is expected to trend down as large robotaxi firms can insure their own operations. Added value cost is expected to trend down as the autonomous driving sensors are falling sharply in prices. Vehicle cost may rise moderately but the economy of scale should keep the rate of materials inflation under that of wage inflation. Therefore, Lux Research Inc concludes, and I agree, that robotaxi operations will be disruptive to incumbent ride-hailing companies. However, how does XPeng fit into this picture?\nXPeng Disruptions\nThe cost analysis shows XPeng's robotaxis will further disrupt the nascent robotaxi companies. XPeng vehicles with Xpilot 4.0 do not require retrofit to operate as a robotaxi. Lux Research estimates the robotaxis like the Baidu Apollo cost about $0.15/mile to operate in terms of vehicle and added value retrofit costs. In June 2021, Baidu announced its Apollo Moon robotaxi will cost 480,000 yuan ($75,000) to produce, according to thisNikkei articleand other publications. On the other hand, the XPeng G9 with XPilot 4.0 is expected to cost between 350,000 to 400,000 yuan to the consumers. If we roughly estimate 15% profit margin and 15% selling and marketing costs, the G9 costs XPeng approximately between 245,000 to 280,000 yuan to produce. Therefore, XPeng will be able to operate with 42-49% less vehicle cost compared to Baidu Apollo.\nFurthermore, XPeng robotaxi can potentially operate without a vehicle cost at all. By 2025, there are expected to be hundreds of thousands of XPeng EVs on the road that can operate as robotaxi with an OTA update. Just as Uber and DiDi hire gig drivers, XPeng can theoretically hire private autonomous cars and pay the owners a share of the revenue.\nFinally, robotaxi companies like Baidu must maintain high margins to bear its significant overhead costs in R&D and SGA. XPeng Motors vehicle sales bear the majority of the R&D and SGA costs. Additional indirect costs from robotaxi business should be a small fraction of the cost structure of incumbent ride-hailing companies. If XPeng is to launch robotaxi today, it can theoretically charge $0.50/mile at a cost of $0.205/mile. (Its vehicle cost is $0.075/mile cheaper than Baidu, which cost about $0.28/mile to operate.) Such a price point cannot be matched by Baidu or DiDi and will substantially displace their market share. In fact, DiDi's breakeven price point is most likely higher than $0.90/mile. Therefore, I conclude it is likely that XPeng will be charge half of the fees of Baidu and DiDi and still maintain healthy profit margins.\nMarket Trends and Projections\nRobotaxis are expected to disrupt the ride-hailing industry. Major players like DiDi and Uber (UBER) are aware of this future trend and have spent billions developing autonomy technology themselves. As technologies mature, autonomous vehicles will also be able to encroach into the food delivery business. As a side note, XPeng holds a unique advantage with its advanced robotics division. It is in the process of bringing to market a robotic pony with autonomous terrain navigation capabilities. An online video shows it is currently able to deliver objects around XPeng's office by voice command. Robotics can enable a robotaxi to bridge the gap between the road and the delivery destination.\nFollowing is a graph of the estimated Total Addressable Market of ride-hailing and food delivery in China, according to statista.com.With the assumption that XPeng gains regulatory licenses in 2025, I estimate XPeng Robotaxi business will grow rapidly and hold significant market share in the ride-hailing market and substantial market share in the food delivery market by 2028. Thereafter, XPeng may experience slower growth once other vehicle systems reach sufficient autonomy. I expect XPeng Robotaxi's profit margins will be lower than DiDi's as XPeng pushes a low-cost strategy to displace incumbents. I expect as much as 90% of earnings after taxes will be pure free cash flow, as R&D and SGA costs attributed to the robotaxi division will be low.\nI use the following assumptions for a valuation projection. There are high degrees of uncertainty and conjecture, as I forecast the first business of its kind in 2025, in an industry that is still nascent today. I expect XPeng to gain a 5% market share in robotaxi and a 2.5% market share in food delivery in 2025. It will grow at a 30% CAGR through 2028. Thereafter, the growth slows gradually to 10% by 2031 and continues at the terminal growth rate of 5%. I assume XPeng will capture 50% of sales as FCF. I use a 13% discount rate to arrive at the discounted present value of future cash flow.The critical assumptions in market shares and a 30% CAGR, I believe, are conservative. I arrive at a $133.5B USD valuation for the XPeng Robotaxi business, a 350% upside to its current valuations and in addition to its vehicle sales business. I would argue that only $9B is priced in when the stock appreciated after the robotaxi announcement. Long-term investors can consider attractive points to enter. As we approach the pilot launch in 2022, more and more of the upside may be priced in with additional announcements.\nAdditional Bull Notes\nXPeng's core business is currently undervalued relative to its peers. As of 12/9/2021, Tesla is valued at 25 times XPeng and is on track to delivery approximately 7 times more car than XPeng in Q4. Tesla in Q3 grew at a pace of 73% YoY, which XPeng in Q3 grew 199% YoY. Considering XPeng's exceptional growth rate, it is clear XPeng is trading at a substantial discount.\nFurthermore, the robotaxi business and vehicle manufacturing are complementary businesses. Ride-hailing revenue share can incentivize more sales. If forced to own the vehicles, XPeng Motors can sell to XPeng Robotaxi at cost, giving it a substantial cost advantage over competitors.\nIn addition to valuations from vehicle sales and robotaxi revenue, other potential valuation upsides exist. XPeng users currently pay monthly subscription fees to use its NGP system. We can expect the subscription uptake rate to improve as more autonomous functions are introduced. With a growing user base and its highly profitable margins, NGP subscription cash flows may grow to rival vehicle sales. We can also expect revenues from eVOTL and robotic pony sales by 2024. These revenues can be significant and are not currently priced in.\nRisks and Challenges\nWhile I believe the technology and cost structure support my bull thesis, uncertainties exist. The revenue is largely dependent on the number of vehicle licenses Chinese regulators will be willing to authorize. Regulatory approvals may be slowed to reduce disruptions to the labor market.\nIn the most bearish case, regulators may decline to grant ride-hailing licenses to private autonomous vehicles. This case is highly unlikely. China would be stifling one of its leading-edge industries. There is little rationale for denying XPeng, as both private ride-hailing vehicles and autonomous ride-hailing vehicles are already authorized. However, some cities may require XPeng to own its robotaxi fleet, which will reduce its competitive advantage.\nTiger Securities gave a bearish review of XPeng, citing that the current laws prohibit autonomous operations, and other players \"might have time to catch up.\" It is important to study the autonomy capabilities of other players and estimate that likelihood. Judging from FSD beta tester videos, Tesla (TSLA) autonomy is somewhat behind that of XPeng's. Though with its wealth of data, Tesla may be able to quickly catch up. Regardless, Tesla FSD and XPeng NGP are coded for different driving environments. They most likely will not directly compete in robotaxi until later in the decade and in other markets than US or China. In China, Huawei Harmony intelligent driving system has also demonstrated a high level of autonomy. Huawei however is not a vehicle manufacturer. Its EV partner BAIC Arcfox is lagging quite far behind in sales compared to other EV peers. Current robotaxi firms like Baidu and Pony.ai may be able to substantially reduce the retrofit cost and may even adapt their system to a mass-market vehicle. It is unclear if it is possible for a hardware-centric robotaxi system based on powerful roof sensors to adapt to an array of weaker sensors that require greater AI logic.\nCapturing a share of the ride-hailing and delivery market in China is highly dependent upon XPeng maintaining technology and cost advantage. It would be fair to attribute a large risk discount to the valuation. Though any shortfall in market share can be supplemented by international markets.\nFinally, there are geopolitical and specific delisting risks to investing in Chinese stocks in the form of ADRs. XPeng and some other US-listed ADRs have also listed in Hong Kong to hedge against the possibilities of delisting. In the event of delisting, US shareholders will be able to trade their shares for Hong Kong-listed shares. Those who cannot or are not willing to bank in Hong Kong will exist long positions. Share prices may be moderately depressed in the short and medium-term. It is fair to attribute some risk premium to Chinese ADRs. Though I would argue that such discounts are already priced, and in fact, the market has overreacted to recent news.\nTo Conclude\nXPEV has earned an average consensus of \"Buy\" recommendations from analysts. XPeng is also one of the fastest-growing pure-play EV companies in the world, growing at the rate of 188% YoY for Q3 2021 and 270% YoY for the month of November 2021. Considering its tremendous growth rate, its share price is undervalued and attractive to own. Furthermore, I argue in this article that XPeng is poised to realize an additional 350% upside to its valuation, as the company enters the ride-hailing market through its autonomous driving technology. While it may take several years for XPeng to fully realize its robotaxi ambitions, time may be running out to buy XPEV at a cheap price. 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