XPeng Inc. (NYSE:XPEV) Q1 2023 Earnings Call Transcript May 24, 2023

XPeng Inc. misses on earnings expectations. Reported EPS is $-0.32 EPS, expectations were $-0.26.

Operator: Hello ladies and gentlemen. Thank you for standing by for the first quarter 2023 earnings conference call for XPeng Inc. At this time, all participants are in listen-only mode. After management’s remarks, there will be a question and answer session. Today’s conference call is being recorded. I will now turn the call over to your host, Mr. Alex Xie, Head of Investor Relations of the company. Please go ahead, Alex.

Alex Xie: Thank you. Hello everyone and welcome to XPeng’s first quarter 2023 earnings conference call. Our financial and operating results were issued via newswire services earlier today and are available online. You can also view the earnings press release by visiting the IR section of our website at ir.xiaopeng.com. Participants on today’s call from our management will include co-Founder, Chairman and CEO, Mr. He Xiaopeng, Vice Chairman and President, Dr. Brian Gu, Vice President of Finance, Mr. Dennis Lu, Vice President of Corporate Finance and Investments, Mr. Charles Zhang, and myself. Management will begin with prepared remarks and the call will conclude with a Q&A session. A webcast replay of this conference call will be available on the IR section of our website.

Before we continue, please note that today’s discussion will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties; as such, the company’s results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in the relevant public filings of the company as filed with the U.S. Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements except as required under applicable law. Please also note that XPeng’s earnings press release and this conference call include disclosure of unaudited GAAP financial measures as well as unaudited non-GAAP financial measures.

XPeng’s earnings press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited GAAP measures. I will now turn the call over to our co-Founder, Chairman and CEO, Mr. He Xiaopeng. Please go ahead.

Xiaopeng He: [translated] Hi everyone. Beginning in the first quarter of 2023 facing future competition, XPeng has centered around change. With that in mind, I took action to make considerable changes to XPeng’s business plan, organizational structure and management team. As a result, some senior management who completed their mission on our journey from zero to one have stepped down. Nonetheless, more new talent full of energy and entrepreneurial passion have quickly stepped up and taken on leadership positions through both internal promotions and external recruitment. I’m excited to see these new team members have fit in well in a short amount of time and made remarkable changes. I’m also very encouraged to see the passion and determination of all XPeng employees to change as if today were XPeng’s day one as we shifted the focus of our innovation towards cost efficiency and customers.

It is very hard for the manufacturing industry to reverse the declining trend and set off a virtuous cycle, but we managed to start the reform with ourselves and rebuild the fundamentals of the company. Compared with competitors in the industry, such reform makes me confident that we will be able to perform well consistently in each battle and create a virtuous product sell cycle, boost team morale, increase customer satisfaction, and raise our brand reputation from the third quarter of 2023. In the face of macroeconomic challenges and more intense competition, we achieved month-on-month growth off new orders for the past four months. More excitingly, order intake for the higher end and CM versions of our new P7i model, which was just launched in March, have exceeded our expectations.

The original production capacity we planned was not enough to cover demand. Compared with the previous P7 model, the P7i offers more streamlined SKU specifications with a more efficient go-to-market strategy. Starting from June, we’ll work with supplier partners to significantly ramp up the production of P7i components and aim to accelerate deliveries of this popular new model with its esthetically pleasing style design and distinguishing smart features, further driving P7i’s sales growth. Our latest production model debuted at the Shanghai Auto Show in April, the G6, which is our first production model that is built on XPeng’s next generation technology architecture platform, SEPA 2.0, or [Chinese spoken] in Chinese. It’s debut was met with remarkable enthusiasm from attendees at the expo.

The G6 features a stylish esthetic design and best-in-class interior space, ensuring a comfortable ride. Fully equipped with world-class 800 volt high voltage SIC platform and a 3C fast charging battery, the G6 is uniquely positioned within its segment, boasting ultra-long range as high as 755 kilometers, ultra-high energy efficiency, and ultra-fast charging. More importantly, upon market delivery the G6 will be equipped with XNGP, the industry’s leading ADAS. I’m pleased to share with you that G6 test drives by media began last week. The feedback from media is that G6 is well ahead of other EV models by one generation in terms of ADAS capabilities and its 800 volt platform with faster charging and lower energy consumption, which is analogous to the 3G technology replacing 2G in mobile phones.

The G6 will be officially launched in June and begin mass deliveries in July accompanied by a fast ramp-up. We believe the G6 will emerge as one of the best selling models in China’s NEV SUV market segment within the RMB 200,000 to RMB 300,000 price range. We expect this model to drive substantial growth in XPeng’s third quarter delivery volume and significantly outperform the industry’s growth in both year-over-year and quarter-over-quarter terms. This will mark the first inflection point in our sales growth following our strategic and organizational adjustments. Additionally, in the fourth quarter we plan to launch a seven-seat electric MPV model which we call X9 internally, and roll out more clearly defined configurations for existing models in order to further boost our sales growth.

We also firmly believe that 2023 will mark an inflection point in the development of smart technology for EV and a starting point of smart technology’s widespread user adoption. We expect most of our potential customers to recognize value by 2024 to 2025. At the end of March this year, we rolled out our City NGP on max stream of multiple models for customers in Guangzhou, Shenzhen and Shanghai via OTA update. The customer feedback we received has been inspiring. In the first month following the OTA rollout, City NGP’s mileage penetration rate reached over 60% and has become assisting driver for users daily commutes. For the first time, I personally have also gotten used to driving with XNGP every day. It made me feel much more relaxed to drive.

City NGP test drives are already available at all XPeng stores in Guangzhou, Shenzhen and Shanghai. In April, the percentage of orders of the max stream of our P7i and G9 models and the total order of P7i and G9 increased substantially to more than 50%. We also plan to start the rollout of Highway NGP 2.0 in June. Highway NGP 2.0 was developed based on the framework of XNGP, though it’s code increased by five times compared to the original version. Equipped with algorithms trained in complex urban driving scenarios, Highway NGP 2.0 is able to offer a highway driver assistance experience close to that of L4, meaning high efficiency, consistent performance, no getting stuck, no disturbance, and also no intention to take over. By the end of 2023, the number of manual takeovers per 1,000 kilometers when using our Highway NGP is expected to be reduced to one or fewer.

By the end of the third quarter this year, we’ll begin nationwide roll-out of our XNGP across more cities without high definition map coverage. This will be the first time for the mass production of City NGP or equivalent without HD map in China. Based on our experience, the mass production of City NGP in cities without high definition map coverage is 100 times more difficult than the mass production of Highway NGP with high definition map. It sets a new benchmark for our R&D team’s technologies and data capabilities; however, it’s well worth it because it will considerably enhance our user experience once we achieve it. At present, our XNGP has the driving abilities equivalent to a novice driver. Moving forward and supported by the large scale data set generated in urban driving environments and strong backend closed loop data training systems, we expect to introduce quarterly OTA updates for XNGP which we expect to enrich its driving experience by one year each time, offering increased safety and [indiscernible] capability.

It incorporates some capabilities of large language models, or LLM into XNGP. I firmly believe that as we continue to make breakthroughs in XNGP’s experience, scenario coverage and ownership costs based on data in the three cities we have launched, sales of the max stream of our models with XNGP will grow significantly. Good design really matters to young consumers. Since the end of last year, I have been directly managing the styling and design department and put more effort and resources into improving our design capabilities. Recently we invited several talented designers with experience in designing top selling models to join XPeng. We also created healthy competition between external design teams and our in-house design teams to generate even more creative design ideas for new models.

In addition to that, the LMM also is very helpful to our design improvement. I believe these changes will enable our new models and future [indiscernible] versions to be equipped with market-leading interior and exterior styling and design. Since the first quarter, our sales, marketing and service capabilities have been upgraded in a concerted effort under the leadership of our President, Wang Fengying, and also the whole company is making external and internal customer-centric transformation quickly. By enhancing our customer experience throughout the entire sales and service process and speeding up our response to customer demand, since early this year through April we have achieved considered improvement in our NPS, one of our core customer satisfaction indicators.

As of April, our NPS has rebounded to Tier 1 level in the industry. Looking ahead into the next quarters, our top priority will remain keenly focused on rapid acceleration of our sales and EV market share growth. We have already implemented measures to fatten the management structure across our sales organization and establish a middle office that is more efficient and can more quickly respond to requests that come from the front lines. The next step will be to take a more selective approach on our existing sales network in order to strengthen the competitiveness of our channels as a whole. In addition to increasing operational efficiency across our Tier 1 and Tier 2 cities, the sales network will also introduce more high quality dealers in Tier 3 and Tier 4 cities to bolster our product road map and sales targets over the next few years in the RMB 150,000 to RMB 350,000 price range market segment.

We believe the automotive industry landscape will be transformed by technology innovation and fierce competition over the next three years. In addition to great product proposition and new technology, the key to success also lies in cost reduction to the greatest extent and efficient involvement in R&D and operations. Our next-generation technology architecture, SEPA 2.0 boasts powerful competitive strength in R&D efficiency and technology innovation. With G6 mass production, the SEPA 2.0 architecture represents platform-based technology capabilities that we’ve built through consistent intensive R&D efforts over the past five years which will strengthen our leadership in technology over the next three years. We are rolling out new products that offer more competitive cost and consistent customer experience based on SEPA 2.0. The new models in our R&D pipeline, which covers the RMB 150,000 to RMB 350,000 price segment and a variety of new car types will be built on a suite of shared technology platforms spanning power train systems, electronic and electrical architecture, smart cabins and ADAS, will shorten future models’ R&D cycles by 20%, and up to 80% of architectural components will be compatible between different models, both of which enable XPeng to substantially reduce R&D spending on new models and [indiscernible] costs.

Over the second half of 2023 through 2024, we are planning to map out a clear and practical plan to achieve our target of a 25% cost reduction by the end of 2024, and we expect to realize some benefit of cost reduction initiatives in power design, power train and vehicle hardware as soon as this year. In this round of industry revolution, I believe that cost control both for hardware and software and efficiency enhancements for both operations and products will be among the core competitive edges to win the ultimate competition. Nowadays, the competition is mainly around volume or scale, but the next round of competition requires comprehensive competitiveness in scale, innovation, design, cost efficiency, quality, and global markets, all of which are indispensable.

In terms of our cash flow, our cash on hand at the end of the first quarter of 2023 amounted to over RMB 34 billion. Our effort to simplify our operations concentrates our R&D investment on what customers recognize and builds our long term competitive position by advancing our platform-based technology approach. At the same time, we’ll continue to optimize our organizational structure and management process significantly to further improve our operating efficiency across the company. Beginning in July with the mass delivery of G6 along with other new product launches that will fuel our rapid sales growth, I expect our monthly deliveries to increase significantly in the third quarter compared with that in the second quarter. Furthermore, as our monthly delivery targets exceed 20,000 vehicles in the fourth quarter of 2023, I expect our cash flow generated from operations to turn positive accordingly.

Now moving to our guidance, we expect our total vehicle deliveries to be between 21,000 and 22,000 units in the second quarter of 2023, representing 15% to 21% quarter-over-quarter growth, and the revenue to be between RMB 4.5 billion and RMB 4.7 billion. From the third quarter of 2022, even though we underwent four consecutive quarters of pain in terms of deliveries, I always believed that in every challenge lies an opportunity. It prompted us to reflect earlier on how to win the knock-out phase in 2025 and how to get into the semi-finals in 2027. Drawing on our more competitive new products and more effective sales channels, we will achieve substantial sales volume growth on a sequential quarterly basis in the third and fourth quarters of 2023.

Thank you everyone. With that, I’ll now turn the call over to our VP of Finance, Mr. Dennis Lu to discuss our financial performance for the first quarter of 2023.

Dennis Lu: Thank you Mr. He, and hello everyone. Now I would like to provide a brief overview of our financial results for the first quarter of 2023. I will reference RMB only in my discussion tonight unless otherwise stated. Our total revenues were RMB 4.03 billion for the first quarter of 2023, a decrease of 45.9% year-over-year and a decrease of 21.5% quarter-over-quarter. Revenues from vehicle sales were RMB 3.5 billion for the first quarter of 2023, a decrease of 49.8% year-over-year and a decrease of 24.6% from the last quarter. The year-over-year and quarter-over-quarter decreases were mainly attributable to lower vehicle deliveries and discontinuation of new NH vehicle subsidies. Gross margin was 1.7% for the first quarter of 2023 compared with 12.2% for the same period of 2022 and 8.7% for the first quarter of 2022.

Vehicle margin was minus-2.5% for the first quarter of 2023 compared with 10.4% for the same period in 2022 and 5.7% for the first quarter of 2022. The year-over-year and quarter-over-quarter decreases were mainly explained by increased sales promotions and the expiry of new NH vehicle subsidies mentioned above. R&D expenses were RMB 1.3 billion for the first quarter of 2023, representing an increase of 6.1% from RMB 1.2 billion for the same period of 2022 and an increase of 5.3% from RMB 1.2 billion for the first quarter of 2022. The year-over-year and quarter-over-quarter increases were mainly due to higher expenses relating to the development of new vehicle models. SG&A expenses were RMB 1.4 billion for the first quarter of 2023, representing a decrease of 15.5% from RMB 1.6 billion for the same period of 2022 and a decrease of 21% from RMB 1.8 billion for the first quarter of 2022.

The year-over-year and quarter-over-quarter decreases were mainly due to lower commissions paid to franchise dealer stores and lower marketing and advertising expenses. As a result of the foregoing, loss from operations was RMB 2.6 billion for the first quarter of 2023 compared with RMB 1.9 billion for the same period of 2022 and RMB 2.5 billion for the last quarter. Net loss was RMB 2.3 billion for the first quarter of 2023 compared with RMB 1.7 billion for the same period a year ago and RMB 2.4 billion for the last quarter. As of March 31, 2023, our company had cash, cash equivalents, restricted cash, short term investments and time deposits in total of RMB 34.1 billion. To be mindful [indiscernible] of our earnings call, I would encourage listeners to refer to our earnings press release for more details on our first quarter financial results.

This concludes our prepared remarks. We will now open the call to questions. Operator, please go ahead.

Q&A Session

Operator: Thank you. [Operator instructions] Today’s first question comes from Tim Hsaio with Morgan Stanley. Please go ahead.

Tim Hsaio: My first question is about the price strategy. How should we think about XPeng’s price strategy for G6 and the upcoming models? Given the severe pricing competition, will XPeng tend to price the models more aggressively when bringing models to the market to ensure the company can stay much ahead of peers in terms of price performance ratio, especially I think Mr. He just mentioned the group has been focused on the volume growth, or the company would prefer to leave some room for a cheaper version to follow on after the volume taking off in order to effectively respond to peers’ pricing adjustments and to better balance our near term profitability? That’s my first question, thank you.

Xiaopeng He: [translated] Thank you for your question. We’ve considered internally these two possibilities. First of all, we will prioritize scale before considering pricing, and we definitely expect to have a long term stable pricing. Now, also we would take into consideration the cost structure of our products, including the inflation of, for example, the LFP batteries and other parts. Taken into consideration those factors together with our cost control measures, we definitely consider long term stable pricing at a more competitive level for G6 and also other upcoming models, but in a nutshell, we will prioritize scale.

Brian Gu: Tim, let me just add here – it’s Brian. I think first of all, the scale we believe will lead to better profitability ultimately, because obviously a number of costs can be amortized and reduced in a more efficient manner. Also, as you heard in our previous description, is that we aim to significantly lower the overall costs and BOM for our vehicles in the coming months or the coming year, so with better scale and our aim of achieving better cost savings on these products, I think the probability will naturally return. That’s how we view the sequence of events in our strategy.

Tim Hsaio: Got it, super clear. Thank you Brian. My second question is the supply risk. The P7i supply bottleneck will be resolved in June, but is there’s any [indiscernible] across to the supply ramp-up to G6? In the meantime, G6 will be the first model built on the new architecture with unibody aluminum die casting. Will that result in a slower pace of production ramp-up after the June launch, so should we take that into consideration? Thank you.

Xiaopeng He: [translated] Thank you for your question. G6 is different from G9 in the sense that we actually are well prepared for its delivery. We have given two months between the SOP to the final delivery, so we made the announcement in January, we expect to have the deliveries in July, and so in Q3 definitely we expect a much faster ramp-up for the delivery of G6 compared to P7 or G9 in the past. Also, G6 is different from P7i in the sense that we have a really well prepared supply chain to support the future delivery. In terms of the technology application for the integrated aluminum die casting technology, definitely it’s been a challenge for the whole industry facing the low yield rate of that particular technology; however, we’ve been using this technology for over a year and right now the development has been very satisfactory, and we expect to have no severe challenge in using this technology on G6. Thank you.

Tim Hsaio: [Chinese spoken]

Operator: Thank you. Our next question today comes from Bin Wang with Credit Suisse. Please go ahead.

Bin Wang: My first question is about the battery. Recently [indiscernible] pricing has declined, so what’s the impact for your battery sourcing and the margin in the second quarter? Thank you.

Dennis Lu: Hey Bin, this is Dennis. Thank you for the question. Actually in the first quarter, we see the battery cost reduction compared with quarter four last year, we have about 5% reduction, and then in the second quarter we see further reduction, about 10% to 12% over the quarter four last year, so that’s about 5 to 7 percentage point increase compared with quarter one. Having said that, we also have the marketing spending, available marketing spending, so in terms of material cost especially for the battery cost will improve the margin by, for example, the battery cost would account for about 40% of the total cost, so 7 percentage points would translate into 3 to 4 percentage margin improvement – that’s from the material side, but the other big chunk would be the revenue side, and that will also impact the margin as well. This is the brief answer to your questions.

Bin Wang: Thank you. My second and last question is about the full year volume guidance. [Indiscernible] guidance this year, you were talking more or less 30% growth. Did you maintain the same target? If you maintained in price in the second half this year, the on average monthly volume would be 22, so I just want to know if the full year volume target changed or not. Thank you.

Alex Xie: [Chinese]

Bin Wang: [Chinese spoken]

Brian Gu: Hey Bin. Regarding the volume growth, we still expect we’re going to be growing faster than market this year. Obviously the market growth this year is going to be tempered, given what’s going on in the industry, but what we see most importantly is that the third and fourth quarters, we expect our growth will be significantly higher than the market growth, and also we believe that with the G6 deliveries starting in the third quarter, we would like to aim to achieve monthly deliveries over 15,000 vehicles per month in the third quarter as what are the targets, and then the fourth quarter, given the continuous growth and also additional model mix favorable changes, we think we can actually also target over 20,000 per month in the fourth quarter as our peak sales. These are our goals in the second half.

Bin Wang: Thank you so much. Thank you, that’s all my questions.

Operator: Thank you. Our next question comes from Paul Gong with UBS. Please go ahead.

Paul Gong: Thanks for taking my questions. Two questions as well. The first question is regarding the new order intake on the P7i, as well as our preparation. [Chinese] My first question is regarding the P7i, the orders versus our preparation on the supply chain. Can you quantify a little bit what was the order implied, like the monthly level, what is our production preparation for that, and why we have over-estimated the G9 demand while underestimating the P7i demand? Thank you.

Xiaopeng He: [translated] Thank you for your question. Regarding our supply chain preparation for P7i, definitely we experienced some challenges due to, for example, the supply chain and also, for example, the ups and downs of the pricing for NCM batteries. But right now, we have well prepared because for May and June, we already expect ramp-up in battery production capacity to supply–to prepare for our deliveries of P7i in the future. Now looking back for the past several quarters, basically the whole industry experienced challenges in terms of estimating their deliveries and preparing for that kind of market demand due to a number of factors, including the supply of different parts, the cost of different parts, and also the overall environment of the industry.

As a result, starting from Q4 going into Q1 this year, we have actually started a series of policies in our guidance and also estimates that is more cautious and reserved, in order to work better with our suppliers to reduce the gap between the estimate of the deliveries and the actual preparation of the capacity. Going forward, we also will do better in optimizing the matching of the future delivery estimates with our suppliers and also our production capacity overall, so that we can actually do better in integrating these several aspects. Thank you.

Brian Gu: Hey Paul, just to–you know, obviously your question on the color of P7i, clearly our order momentum far exceeds our capacity increases in the last couple months. We think you can actually tell by the average wait time for the product in our stores is stretched to over six weeks or even longer. We actually think with now hopefully the supply chain ramping up by June, that will alleviate some of these wait time pressures which also in turn will help generate further momentum for the sales. That’s what we see today.

Paul Gong: My second question is regarding the branding needs. We understand XPeng is pretty popular among young people, and right now we are facing the young people with unemployment rates over 20%, does that impact our demand, and also will you come out with MPV end of this year? Normally MPVs are either for the commercial use or for the older families, the more mature families, so how should we match the young branding needs of XPeng versus the MPV launch? Thank you.

Xiaopeng He: [translated] Thank you for your question. XPeng’s positioning is to really target young consumers who are also tech oriented, and our sweet spot is really consumers between 25 years old to 35 years old. Right now, if I remember this correctly, the unemployment rate is really talking about fresh graduates from colleges that is over 20%. I don’t recall reading anywhere that it’s 20% unemployment rate for young people, so that is the differentiation here I would like to point out. Another thing is that right now among the targeted group, 25 to 35 years old, we really don’t see a lot of impact on our sales towards this particular consumer group regarding the overall market environment. The second part of your question, how do we really connect the seven-seater MPV with younger consumers?

This is a very good question. We have done a lot of thinking and discussion internally, and by the end of this year when we roll out this new model, you can expect to hear about our answer by that time. Thank you.

Paul Gong: Thank you very much. Thank you.

Operator: Thank you. Our next question comes from Nick Lai with JP Morgan. Please go ahead.

Nick Lai: The first question is really about the sales and marketing and the channel strategy. Given we have a new model G3 in the third quarter ramping up and also new MPV starting to ramp up in 4Q, we talk about the new product strategy [indiscernible], can you–is there a bit more on the [indiscernible] and strategy? The second question is really about GP margin trend in all of your second half. I understand you not provide any guidance, but how should we think about the margin level in second half given competition and given the whole pricing and volume strategy? Thank you.

Xiaopeng He: [translated] Thank you for your question. Let me take the first one. Regarding the changes that have been brought about by President Wang since end of January, it has been really tremendous. She joined us as of the end of January and it’s been about four months now, and she’s done of a lot of changes. For example, starting from the organization, we’ve grouped together the trading team and also the sales team together, and we have also changed our big middle office into a more swift and adaptable smaller front office that allows us to be more agile. The second change is that we used to have multiple lines running different operations, and right now we have one big line of business operational team that actually coordinates different projects and different lines of business that allowed us to actually improve our net promoter score, or NPS for several months in a row.

Another big change happened actually to our marketing team – we have been doing a lot of things to improve the overall efficiency by using multiple newer tools, doing different project base operations and also flattening our organizational structure overall. Also in our sales end, we have done a lot of training to really improve the skill of our sales people, especially in terms of introducing the different SKUs and different variations of our models in the market. Another big change also happened in–or to be expected is on our channel, sales channel and distribution, both in China and also in the overseas market, and in Q3 you can expect to hear more about those big changes to come. Also in terms of our branding as well, we are going to actually instill more of warmth and also the youth into our brand so that you can hear more about XPeng and be more clear about our positioning.

Overall, I would say that definitely we have done a lot of changes overall, and it all originated from our DNA of XPeng, but at the same time you are seeing a new facelift version of our brand as well.

Brian Gu: Nick, this is Brian. For your question on the margin, for the second quarter we think given the modest volume increase, as well as the older product mix continues to be selling, I think there’s still going to be margin pressure despite some of the battery cost savings that Dennis mentioned. But with the second half, the increased delivery volume increase with P7i, G6, as well as new MPV by the end of this year, we think the overall gross margin will improve gradually with obviously changing of this product mix. But the most significant margin increase will happen, I think next year given all these cost reduction measures, as well as further volume and scalability coming into play. That’s where we see the trend.

Nick Lai: Yes, thank you.

Operator: Thank you. Our next question comes from Ming Lee with BofA. Please go ahead.

Alex Xie: Ming, we cannot hear you. Can you speak louder, please?

Ming Lee: [Chinese]

Alex Xie: Okay.

Ming Lee: My first question is regarding your expectation on the reasonable listing company price in next one to two years if supply is more than demand. Will you consider to change your battery re-pricing frequency to follow closely to the spot raw material price, and also what is your current volume sales breakdown by LFP and NCM battery? Do you think that LFP battery sale cars will continue to increase?

Xiaopeng He: [translated] Thank you for your question. It’s really hard to estimate the future ups and downs of the lithium pricing, but in the short term I believe that the inflation of the lithium pricing should be temporary, and by the second half of the year we expect to have lower pricing for this material. But what is going to be the targeted or the right range, price range for this material, it’s very hard to say; but personally I believe that within RMB 200,000 should be a reasonable range for it. Right now, we are working with our supplier partners in a very flexible manner, meaning that we actually take into consideration the inflation or the fluctuation of raw material pricing in the market before determining the sourcing price of our products, which can really help us to optimize our cost structure.

Going into the future, definitely we will launch a series of technological innovations to actually reduce the use of batteries but supporting wider or longer driving range, which means that we are going to use more of LFD or other similar battery technologies in order to reduce our overall raw material costs while increasing or enhancing the safety of our products and driving up the driving range of our products to a satisfactory level of our customers.

Ming Lee: My second question is regarding your new software, the XNGP, how it helps to increase your mall foot traffic to your stores, and besides that, since you mentioned that you will roll out the XNGP service to more than 10 cities in second half this year, do you think you can also get the approval from each city government very quickly or there still could be some potential bottleneck?

Charles Zhang: Hi Ming, this is Charles here. I will address the question. First of all, I think that you know that we launched the City NGP in three cities in China at the end of March, namely Shenzhen, Guangzhou and Shanghai, so I think that’s why I think if you visit our stores in those cities, right now our customers can all drive the XNGP and also we heard that also customers actually requested to test drive the XNGP, which drives up the penetration rate of the max stream of our P7i and G9 to more than 50% in those three cities in April. We believe that as we’re rolling out XNGP to more cities and also we continue to improve our XNGP customer experience recorder and we continue to see the upside of the penetration rate of the max stream of our new models.

To answer the second half of your question, I think our plan is to decouple our XNGP from HDMF [ph] starting from the end of Q3, so therefore I think that because our ability to decouple our XNGP from the HDMF, so therefore I think that we are able to roll out our XNGP without the requirements of the government approval, etc., so therefore I think we are expecting that towards the end of the year, we can offer XNGP services probably [indiscernible] cities in China and most of these over the next couple quarters.

Ming Lee: Thank you Charles.

Operator: Thank you. Our next question comes from Ping Yu Wu [ph] from CITIC Securities. Please go ahead.

Ping Yu Wu: Thank you for the question. I have a question for autonomous driving. A lot of Chinese and foreign OEMs are doing the research to produce autonomous driving. How do we see the leadership of XPeng? Also, we know that data is very important, and will the short term sales pressure [indiscernible] on our technology improvement? Thank you.

Xiaopeng He: [translated] Thank you for your question. One thing that I would like to make clear is that for XNGP when it’s used within a city, an urban scenario, it’s actually quite different than Highway NGP when it’s used on a highway setting, especially within the cities we are talking about, areas without high definition maps. It’s very hard to really judge how much ahead in the competition we are compared to our peers because right now within the industry, we only see a couple of companies that are able to claim that they have similar technologies, but they are really limited to scenarios where there is high definition maps available, whereas for XPeng, we are actually able to roll out our XNGP software in areas without high definition maps.

We also have the capability to actually roll out it further to 50 to 200 cities, so that is definitely very, very advanced. That’s the only thing I can say. Typically it takes about 12 to 18 months to be able to use the XNGP [indiscernible] functionality from the testing phase of the greyscale testing to the actual rollout, so it’s quite challenging to reach that milestone of the actual rollout. I believe that definitely for XPeng, we have very solid technology in our architecture that actually supports multiple sales cycles, including data cycles within the XNPG software itself, and so I would say XNGP on average is leading ahead the competition by about 12 months time. The second part of your question is about the significance of data to the actual performance of the technology.

Now, I would say data definitely means a lot and it’s very valuable to autonomous driving; however right now, based on our current sales scale and adoption rate and also the deliveries in the near term, we believe that data here is not going to cause a big issue or really pose a lot of difference, because right now we are still doing vision-based or vision-centric data gathering, and in the future we expect to have actually more data coming from, for example, language positing and language input, and that will also help us to actually have better performance in the software execution. I think that right now, our capabilities to support that kind of data processing is proficient. Definitely in the longer term, data will really mean more when you have more autonomous driving cars on the road that can actually contribute to your data set, but it’s in a much longer future, and so right now it’s very hard to say where or when the inflection point will be.

Thank you.

Ping Yu Wu: [Chinese]

Operator: Thank you. Our next question today comes from Jing Chang with CICC. Please go ahead.

Jing Chang: My first question is about, as Mr. He Xiaopeng has just mentioned, that we hope to sell more than 20,000 units per month in the first quarter, so can you help us to break down our major model structure, including the sales percentage of G6, G7, and G9? What do we think is the successful sales volume of G6 and how to further improve the sales performance of G7 and G9? My second question is about can you help us to further explain the overall product planning by 2025, so how many models are planned [indiscernible] and the main focus price range, and what are new ideas about the premium market above RMB 300,000 and the market below RMB 150,000? Thank you.

Xiaopeng He: [translated] Thank you for your question, but it’s really hard to provide a very definitive or clear answer since it has something to do with our future planning. What I can only say about Q4 is that I think I would only be satisfied if we can achieve, for example, for G6 deliveries we expect to be two times of P7, and also we expect to wrap up our G9 deliveries as well, so right now we really cannot provide a clear sales breakdown for the monthly sales target of 20,000. Now going forward into 2025, we definitely already have the pipeline in place. We have very clear plans for our future portfolio. What I can only say for now is that we are going to optimize our cost structure and also we are going to launch a lot of modulized development on the same platform, and we expect to have about 10 models in our 2025 line-up.

We still really prioritize the RMB 200,000 to RMB 300,000 price range and that will be our main market segment. We will have very limited number of offerings below RMB 200,000 and also above RMB 300,000 price segment. Thank you.

Jing Chang: Thank you.

Operator: Thank you. This concludes our question and answer session. I’d now like to turn the call back over to the company for closing remarks.

Alex Xie: Thank you once again for joining us today. If you have further questions, please feel free to contact XPeng’s investor relations through the contact information provided on our website or [indiscernible] in the financial communications.

Operator: Thank you. This concludes today’s conference call. You may now disconnect your lines. Thank you.