Xpeng Inc (NYSE: XPEV) is another Chinese electric vehicle (EV) manufacturer revving up production and getting noticed in the EV space. While it’s a lot smaller, by market cap, than EV heavyweights Tesla Inc (NASDAQ: TSLA) and NIO Inc (NYSE: NIO), it’s enjoying a wild ride. Xpeng’s share price has overtaken NIO’s in the last few days, illustrating how intensely competitive the space is becoming.
After last week’s positive earnings report for Q3, Xpeng’s share price surged. The report showed Xpeng Motors to be demonstrating growth, increasing production, and reducing costs. This resulted in a stream of bullish analyst remarks.
Xpeng completed production of 10,000 of its P7 smart EV sports sedan in October. This was ahead of schedule and boosts its credibility as a strong contender in the space. It manufactured them at the Zhaoqing factory, where production began in May. These cars are elegant and comfortable to drive. It equips them with innovative technology, and consumers are taking notice.
Also in October, they announced the building of a second factory in Guangzhou. This is due to be ready in December and combined with the Zhaoqing factory will create an annual production capacity of 250,000 vehicles.
Our next-generation autonomous driving architecture will deliver major enhancements, including Lidar, an enhanced integrated control unit, improved high-precision positioning, enhanced perception fusion, and more computing power: https://t.co/rGbnZApRCo #XPeng #ElectricVehicles pic.twitter.com/6BhEQgdMRo
— Xpeng Motors (@XpengMotors) November 20, 2020
Can Xpeng’s share price surge be maintained?
At a time when the Chinese EV sector is trading at, or near, all-time highs, it would be wise to ask if Xpeng’s share price escalation can continue?
China is getting onboard with reducing emissions and has begun an aggressive campaign to reduce air pollution. It’s encouraging the use of electric vehicles, which is encouraging manufacturing to expand. While Xpeng and NIO currently share a similar share price, NIO’s market cap is twice the size of Xpeng’s. This gives it room to climb if it can boost its sales targets and scale up.
Xpeng has government support and is backed by Alibaba (NYSE:BABA). Xpeng’s CEO is He Xiaopeng, a 43-year-old entrepreneur. He took the position in 2017 and gives the impression of genuine leadership with a sound track record. He became a Billionaire after selling UCWeb, his Chinese mobile Internet software and service provider, to Alibaba Group for over $4 billion in 2014.
Vehicle sales in China grew 12.5% in October year-on-year. While sales of battery-powered electric, plug-in petrol-electric hybrid and hydrogen fuel-cell vehicles skyrocketed. These clean energy vehicles rose for the fourth consecutive month to 160,000 sales. Tesla is expanding in China, and its home-grown companies like NIO and Xpeng are getting noticed.
Xpeng is not just optimistic about its chances at EV sales in China. It shipped 100 G3 SUVs to Norway in September for November delivery. These start at an asking price of US$37,667. Norway is big on pushing electric car sales and wants all new cars to be electric by 2025, which is sooner than most European countries. After heavily incentivizing its electric car sales, EV sales in Norway fully outperformed fossil fuel-powered ones for the first-time last year.
While this is excellent news, investors still need to watch for pitfalls. Competition is fierce. It’s an area with such lucrative potential that new EV start-ups are vulnerable to being pushed out. Without predictive powers it’s impossible to tell what’s coming next but for now, they’re all enjoying a bullish run. Xpeng is trading at 10X its book value while Tesla trades at 28X and NIO at 9.5X.
US-China Trade War and Distrust
President Trump has fuelled the fire with distrust of Chinese companies. First there was the Huawei commotion, followed by the TikTok debacle. The ongoing US-China trade war has eroded international relations, which will take time to shake off.
Distrust of foreign countries is deeply ingrained in society and with national security being of critical importance, this may continue to cause difficulties for foreign entities trading in the US. The China-US tension may be slightly diffused when Biden comes to power, but it’s unlikely to disappear. Biden wants to bring jobs back to America and will attempt to reduce reliance on foreign industry.
Forget Oil and Gas, Electricity is the Future!
Think tank Carbon Tracker released a report that says China forging ahead with electric vehicle adoption could be another nail in the oil and gas industry coffin. In fact, it could reduce oil demand by 70% by 2030. It will also save China over $80 billion annually in oil importing costs.
Battery prices have been falling at 20% annually since 2010. When they fall below $100/kWh, its break-even point for EVs vs old-school carbon burning vehicles. Within the next decade Bloomberg New Energy Finance forecasts a battery price of $61/kWh, while Volkswagen (ETR: VOW3) and Tesla expect $50/kWh. At this point, EVs will become much more affordable for everyday consumers.
Can Xpeng compete in the big leagues?
Whether Xpeng can hold its own in the big leagues remains to be seen. It’s off to a phenomenal start and its recent results are encouraging. Nevertheless, it’s a relatively new and highly competitive arena, where only the strong will survive. Consumers can be brutal and if they’re not in love with the vehicles the company won’t stand a chance. Xpeng looks to be doing all the right things to please customers so far, but as a Chinese company listed in the US, it does carry additional investor risk.