XPENG (“XPEV”)

Chance Cooley

Abstract As we enter 2021, the future of the automotive industry is one of the hottest topics

being discussed in financial markets and among retail investors. Electric vehicle

companies are commanding massive premiums relative to traditional OEMs. In

this article, I dive into Xiaopeng Motors (“XPEV”), a Chinese EV manufacturer

valued at ~$33 billion dollars.

Contents The Global EV Industry ............................................................................................................................. 2

The Story of XPEV ..................................................................................................................................... 5

Competition ............................................................................................................................................... 10

Valuation .................................................................................................................................................... 15

Conclusion ................................................................................................................................................. 24

The Global EV Industry

Forecasts for the EV industry have always been optimistic. For years, I remember reading

that EV sales would soon overtake ICEs. While past forecasts have proven too rosy, 2020 was

the year where the EV story appears to have changed. In April of 2018, the McKinsey Center for

Future Mobility wrote that EV producers could move “4.5 million units, around 5 percent of the

overall global light-vehicle market” by 2020.1 Fast forward to the end of 2020, and EV sales

have come in at a global total of ~2.3 million deliveries. 2 These 2.3 million deliveries represent

~3.6% of total global light vehicle sales.3

I have been developing a thesis which argues that it is most prudent to invest in industries

which are backed or incentivized by the government. Government involvement in the auto

industry has proven to be a strong catalyst for EV sales. The graph below comes from the

McKinsey Electric Vehicle Index, and shows the electric vehicle penetration rate in a number of

different countries.4

The Nordic countries are currently dominating EV penetration. Of the 16 countries listed,

10/11 of the top countries by EV penetration are European. The European Union maintains strict

environmental regulations which encourages and forces OEMs to transition to EV sales.

EV bulls argue that the Brussels Effect (a brother to the California Effect) is beginning to

take hold. The argument goes that it is not financially prudent for companies to maintain less

stringent environmental standards in non-EU markets since the EU makes up such a large

proportion of OEM revenue. Over time, according to the proponents of the Brussels Effect,

1https://www.mckinsey.com/~/media/McKinsey/Industries/Automotive%20and%20Assembly/Our%20Insights/The%20global%20electric%20vehicle%20market%20is%20amped%20up%20and%20on%20the%20rise/The-global-electric-vehicle-market-is-amped-up-and-on-the-rise-web-final.pdf 2 https://www.ev-volumes.com/ 3 https://www.statista.com/statistics/200002/international-car-sales-since-1990/ 4 https://www.mckinsey.com/industries/automotive-and-assembly/our-insights/mckinsey-electric-vehicle-index-europe-cushions-a-global-plunge-in-ev-sales

OEMs seeking to do business within the EU will standardize their operations in all markets. The

net effect will be rigidity, and all vehicles will comply with the same environmental standards

regardless of where they are shipped to. This is good news for the EV industry, since the EU has

set strict future goals on carbon emissions.

EV bulls also assert that the rise of China as an economic power will boost EV sales. The

argument goes that China, in an effort to boost its image on the world stage, will take on a

leadership role in sustainability. Since the US is reluctant to abandon its traditional laissez-faire

approach to regulations (or at least reluctant to impose strict carbon emission caps like the

European Union has done), China can step up into the leadership void by grabbing the reins of its

economy and leading it into the EV future. So called China EV bulls were proven prescient after

China recently announced that it was aiming for 40% EV penetration by 2030.

The following table presents EV delivery numbers by country for the 1st quarter of 2020.5

Country EV Sales, Q1 2020

China 133,100

US 59,100

Germany 52,800

France 40,000

UK 33,600

Norway 23,300

Sweden 18,600

Netherlands 12,200

South Korea 11,500

Italy 8,500

Switzerland 5,500

60% of all vehicles sold in Norway are electric. The country has a ferocious appetite for electric

vehicles, and it will likely be the first country to do away with traditional ICE engines. Other

European countries will continue to sell more and more EVs as the charging infrastructure is

built out in each country.

I find these Q1 numbers particularly interesting for two reasons. First, Tesla boasts a

market capitalization of nearly $1 trillion dollars when fully diluted shares outstanding are taken

into account. Tesla delivered ~88,000 cars in Q1, and only 59,100 EVs were delivered in the

entire United States during this same time period. Investors defending Tesla’s outsized valuation

are obviously banking on Tesla’s continued dominance of the Chinese and European EV

markets. Just for fun, contrast Tesla’s Q1 deliveries of 88,000 units with GM’s Q1 deliveries of

618,335 units (also compare Tesla’s trillion-dollar valuation to GM’s valuation of a measly $80

billion).6 Second, it is interesting to see China’s sheer dominance in EV deliveries. It is clear that

5 https://www.mckinsey.com/industries/automotive-and-assembly/our-insights/mckinsey-electric-vehicle-index-europe-cushions-a-global-plunge-in-ev-sales 6 https://gmauthority.com/blog/2020/04/gm-sales-figures-numbers-results-united-states-q1-2020/

China is moving swiftly towards strong EV penetration. I wanted to cash in on the Chinese shift

to EVs, and this desire led me to Xiaopeng Motors (“XPEV”).

The Story of XPEV

Xpeng (pronounced “Ex-pung”) was founded in 2014. The company was backed by He

Xiaopeng, the 43-year-old internet entrepreneur who now serves as chairman. Part of the reason

that I like Xpeng is its financial backers. The risk of failure is mitigated by its parent investors

which include Alibaba, Foxconn, the Qatar government, and He Xiaopeng himself.

Unlike many EV startups, Xpeng aims to cater to the mass market consumer. The company

currently produces two vehicles, although it is expected to come out with a third model in 2021.

The Xpeng G3 is an all-electric SUV, while the Xpeng P7 is an all-electric sedan.

Before reading on, I recommend watching this interview with Dr. Brian Gu, the President of

Xpeng Motors. Gu begins with a brief commentary on the Chinese industrial revolution, and

even attributes part of China’s EV advantage to the widespread digital wallet adoption that was

detailed in my last post (Gu begins this discussion around 13:55).

https://www.youtube.com/watch?v=JT6Nc1t_whA&feature=emb_title

Note that Xpeng develops “Smart EVs.” These vehicles are very responsive to voice commands

and can store information just like a computer. You can tell the vehicle where to go, what

temperature you prefer, how to adjust your seat, what song to play, what volume to adjust to, and

many more options. The whole concept is very cool, and part of the reason that Xpeng

commands such a strong valuation.

The P7

The P7 is one of two vehicles that Xpeng is currently manufacturing. Here is a link to the debut

of the P7. I understand that it is not entertaining to read a blog post inundated with YouTube

links, so I think you will get the gist of the video if you only watch from 4:00 on.

https://www.youtube.com/watch?v=xOXU3oXeY0U

I find the design of the P7 to be much cooler than the design of the Tesla Model 3. It is a sharp

vehicle. Even more appealing is the price of the P7 which starts at $33,396 after subsidies in

China. 7

7 https://cleantechnica.com/2020/08/27/xpeng-p7-33396-to-50828-sports-sedan-in-china/

The P7 infotainment includes:

• 4G Wi-Fi

• 15-inch touchscreen

• Bluetooth

• 128 GB of storage

• In-car games

• App store

• AI Voice Assistant

• Ability to change color of ambience lights.8

Additionally, the P7 can receive remote software updates. Xpeng vehicles and Tesla vehicles are

the only vehicles on the market that have this capability. This ability will serve as a potential

revenue driver when we come to valuing Xpeng.

Finally, just to highlight Xpeng’s technological capabilities and superiority over many EV

manufacturers, refer to the 1:45 mark of the following YouTube clip.

https://www.youtube.com/watch?v=P6oDoavCxxY

The G3

I am not very enamored with the G3. I know that we must stay objective as investors, and so I

will be honest when I say that I do not like the design very much. However, part of staying

objective is recognizing that others might like what you do not. The G3 is Xpeng’s second

vehicle offered and is the SUV alternative to the P7 sedan. The G3 comes with all the sleek and

futuristic technological capabilities of the P7. Part of the reason I am able to get past my initial

8 https://cleantechnica.com/2020/08/27/xpeng-p7-33396-to-50828-sports-sedan-in-china/

dislike of the G3 design is its low price. The G3 starts at 146,800 Chinese Yuan, or ~$22,700.

While I am not in love with the SUV, I do think that you get much more bang for your buck

driving a G3 than other comparatively priced EVs. Many traditional OEM EVs start at $30,000

or more, and come equipped with far less technology.

One of the G3’s coolest features is “Summons Mode” in which the driver can cause the car to

move forward or backwards by 1-2 car links by clicking a button on the key fob. This feature is

demonstrated at 1:00 in the video below.

https://www.youtube.com/watch?v=z0T_yiMYVFU

The G3 has cameras on all sides which assist with parking. As you drive, cameras will scan the

sides of the vehicle and alert the driver to available parking spots. This type of technology is

really unheard of on a vehicle which starts at $22,000. For me, the technology is well worth the

less than optimal design.

Competition

P7 Competition

In Xpeng’s SEC filing for the listing of its ADRs, the company listed the Tesla Model 3, BYD

Han, Mercedes-Benz EQC, BMW iX3, and Audi A4 as its competitor vehicles.9 Below I have

itemized some important specs to compare the different vehicles.

Xpeng P7 Model 3 BYD Han Mercedes EQC BMW iX3 Audi A4

Base Price (USD) 39,485 45,214 40,724 89,809 83,615 47,382

Fully Equipped Price (USD) 57,602 65,034 46,917 96,468 83,615 72,777

Base Range (miles) 349 276 314 254 308 431

Max Range (Miles) 439 415 376 415 308 580

Video, streaming capability Yes Yes Yes No No No

AI Assistant Yes Yes Yes Yes Yes Yes

Enhanced Parking Assist Available Available Available Available Available Available

Traffic Sign Recognition Standard Standard Available Available Available Available

Of all these competitor vehicles, I think that the P7 looks the best. Its design is futuristic, and

even compared with the Model 3, I find it to be a more attractive sedan.

9https://www.sec.gov/Archives/edgar/data/1810997/000119312520233600/d890887d424b4.htm#

rom890887_1

Its elongated size reminds me of the Fisker Karma vehicle that was in production some years

ago. The Model 3 looks like a bubble car, and the P7 looks like a fashionable, sporty luxury

sedan. Nonetheless, Tesla’s fans are die-hard, and slight design differences will not push Tesla

fans to start buying P7s in China.

Other specs might, however. The P7 is more affordable than the Model 3, and it is able to go

further on a single charge. These advantages coupled with the awesome infotainment features

lead me to believe that the P7 will rapidly gain market share. I also think that from a geopolitical

perspective, it is infeasible that Tesla will continue to dominate the EV market in China. China is

hyper protective of its burgeoning economy, and I am sure that it would prefer its own company

to dominate the EV sedan market over a foreign competitor like Tesla. I do not know how these

sentiments will translate into subsidies or incentives for Xpeng, but I think my logic here is

sound. No one would argue that the United States would let a Chinese OEM dominate American

car sales, would they? Therefore, I am betting on Xpeng to organically gain market share, and

then chip away at Tesla’s market share over time.

The BYD Han is slightly more expensive, offers less technology, and less range. However, it is

currently beating the P7 in sales. The BYD Han launched in mid-2019, so it is unclear if it will

continue to best the P7.

Finally, Audi’s planned all electric A4 will not be coming out until 2022-2023. This is a great

looking car, but it is more expensive and in a different ballpark than the Model 3, P7, or BYD

Han. By the time it is released, the P7, Model 3, and BYD will likely be cheaper still. The A4 is

a true luxury sedan and if subsidies are not available, the price tag will be much higher than

$50,000 for an A4 equipped with the bare minimum features.

G3 Competition

In Xpeng’s SEC filing for the listing of its ADRs, the company listed the Audi Q2L e-tron, BYD

Song Pro EV, Toyota C-HR EV, and Toyota C-HR as its competitor vehicles for the G3 SUV.

Below I have itemized some important specs to compare the different vehicles.10

Xpeng G3 Q2L e-tron Song Pro C-HR EV C-HR

Base Price (USD) 26,169 36,543 31,279 38,866 22,607

Fully Equipped Price (USD) 34,375 38,092 41,808 42,118 27,407

Base Range (miles) 286 165 252 249 545

Max Range (Miles) 323 165 312 249 545

Video, streaming capability Yes No Yes No No

AI Assistant Yes No Yes No No

Enhanced Parking Assist Available Available N/A N/A N/A

Traffic Sign Recognition Available Available Available N/A N/A

10 The Toyota C-HR is an Internal Combustion Engine.

To begin, the Xpeng model beats out all competitors on price except the Toyota C-HR. I have

already noted that I am not a fan of the G3 design, but the design of the competitor vehicles are

not much better.

The Audi Q2L e-tron is a cool SUV, but this is not a starter car. With a base price of $36,000 it is

still inaccessible to most consumers as a mass market SUV. The G3 offers much better range and

technological capabilities, with a lower starting price as well.

The BYD Song Pro looks similar to the Xpeng G3 and offers similar features. It is still more

expensive and offers a lower driving range. The exteriors of the Song Pro and the G3 strike me

as very similar.

The Toyotas are great vehicles but are not actually competing with the G3. As a pure EV play,

the G3 is a better vehicle. That isn’t to say that the C-HR will not continue to outsell EVs for

years to come.

Valuation

It is difficult to value these young EV start-ups. Many people argue that they are incredibly

overvalued, and others argue that we will be talking about these companies for the next 50 years.

If I had to guess, I would bet that the reality is somewhere in the middle. BYD, NIO, XPEV, Li

Auto, and TSLA will not all be able to command massive valuations forever (well, maybe TSLA

can). Some of these companies might change the world with their connective, Smart EV

capabilities, and others will crash and burn. I think that it is tough to bet against a company with

superior technology, and that is why I am betting on Xpeng to continue to grow its market share

in the Chinese EV space.

Valuing a company in a private transaction and determining how a publicly traded company will

likely be priced are two different things. Below I go over two different methods of valuation that

I have used to arrive at a price target for Xpeng.

First, let’s take a look at some of the levers which will drive our valuation of Xpeng.

(1) Revenue Growth

Xpeng is growing revenue at a rapid pace. The company has increased production capacity and is

selling as many vehicles as it is able to produce (similar to the situation Tesla found itself in

during its early production days). The table below outlines certain key operating metrics of

relevant OEMs.

Company 2020 Deliveries Market Cap 2020 Revenues Operating Margin EBITDA Margin

Toyota 9,530,000 248,780.0 250,673.0 7.21% 13.38%

VW 9,305,400 110,690.0 200,920.0 6.07% 17.96%

Ford 4,200,000 44,670.0 127,144.0 -3.46% 6.28%

GM 2,500,000 75,158.0 122,485.0 5.42% 17.97%

Tesla 499,550 755,769.0 31,536.0 6.30% 14.35%

NIO 36,721 85,610.0 2,049.0 -22.17% -16.20%

Tesla boasts the largest market capitalization of auto manufacturers at $755 billion. Despite its

market capitalization Tesla does not compare to other large OEMS in regard to deliveries,

revenues, or profits. Toyota led the world with over 9.5 million units delivered. Toyota also

maintains the best operating margin out of any OEMs. General Motors and VW have the best

EBITDA margins out of the OEMs listed above largely due to massive depreciation taken on

factories and equipment.

Generally, I do not like estimating revenue based purely on growth rates. This method of revenue

estimation leads to errors, and I find it more prudent to consider the TAM of the company being

valued, and how long it might take a company to arrive at a certain market share. To give an

example of the error in estimation phenomenon I mentioned, consider Tesla bulls who argue that

Tesla is going to continue to grow at 50% a year.

Base Year 2021 2022 2023 2024 2025 2026 2027

Revenue 31,536.0 47,304.0 70,956.0 106,434.0 159,651.0 239,476.5 359,214.8 538,822.1

Growth Rate 50.0% 50.0% 50.0% 50.0% 50.0% 50.0% 50.0%

If Tesla grew revenue at this rate, in 4-5 years it would be the biggest OEM in the world by

revenue. The company literally does not have the capability to achieve this type of revenue

growth when current production capacity and consumer demand are taken into account. None of

this, however, factors into Tesla’s valuation. Tesla revenue growth has dropped down to 30-40%

a year, and keeping growth up only gets harder as the company gets larger. Additionally, other

pure EV players like Xpeng are entering the market and will chip away at Tesla’s market share

over time. This is not an indictment of Tesla’s valuation; rather, it is an opinion about the

impossibility of prolonged ~50% revenue growth after a company reaches a certain size.

So, where does this leave Xpeng? The company delivered 21,542 vehicles in the second half of

2020. It delivered 8,578 vehicles in Q3 and 12,964 vehicles in Q4, for a quarterly growth rate of

51%. It is currently delivering over 6,000 vehicles a month. Monthly deliveries will grow, but

current production capacity is 100,000 vehicles. More factories are being built, but the company

will soon be selling out all vehicles it is capable of manufacturing.

An MIT study estimates that new vehicle sales in China will grow to 30 million vehicles by

2030.11 The Chinese government has mandated that 40% of all sales be EVs by this date. 9 years

from now, the government expects that EV sales make up just under half of all sales, yet most

OEMs are unable to meet this mandate. Analysts argue that divesting from traditional ICE

operations will be a long, cumbersome, and expensive process, thereby hindering traditional

OEMs from translating their ICE market share over into the EV space. In contrast, pure EV

players will dominate the EV space given that they do not have to worry about winding down

ICE operations. I don’t know how true this thesis is. It is certainly true that pure EV players like

Tesla, Nio, and Xpeng have a head start, but I wouldn’t count out traditional OEMs. Regardless,

it is easier to justify sky-high EV company valuations with all of the aforementioned taken into

account.

The following representations show the current state of the EV market in China by OEM.1213

11 http://energy.mit.edu/news/chinas-transition-to-electric-vehicles/ 12 • China: electric vehicle sales by OEM 2020 | Statista 13 https://theicct.org/sites/default/files/publications/ICCT_US-China_EV-mkt-%20comp_20190523.pdf

Xpeng has burst onto the scene in the second half of 2021, delivering over 21,500 vehicles. This

delivery number would give Xpeng just over 8% of Chinese EV market share if we calculated

market share based off H1 2020 delivery numbers. Xpeng’s market share will continue to grow,

and I estimate that by 2030, the company will be maintaining 7-8% market share in the Chinese

EV market. I make this assumption based on the following factors:

a. Mass Market Vehicles

BYD23%

Tesla19%

VW11%

SAIC9%

GM8%

GAC8%

BAIC7%

BMW6%

NIO5%

Chery4%

EV Market Share by OEM in China, 1st Half of 2020

BYD Tesla VW SAIC GM GAC BAIC BMW NIO Chery

Unlike Tesla, Nio, and many other EV manufacturers, Xpeng is catering to the average

consumer. The G3 begins at ~$22,000 after subsidies. The average consumer in China cannot

afford a $50,000 Tesla. Therefore, as China moves more and more into the EV future, price point

will be one of the most important factors taken into account when purchasing a vehicle. Xpeng is

the bang-for-your-buck leader in the Chinese EV market.

b. Superior technology

Xpeng’s vehicles have awesome technology (let alone for the price). The range of its EVs leads

almost all other competitors, and even the base models are equipped with AI assistants, autopilot

capabilities, self-parking capabilities, video streaming/gaming capabilities, and more. If the

company continues to lead the pack on technology, there is no reason that the G3 and P7 will not

be the go-to EV for the budget conscious Chinese buyer.

Chinese Vehicle Sales in 2030 30,000,000

EV penetration 40.0%

Chinese EV Sales in 2030 12,000,000

Xpeng Market Share 7.5%

Xpeng Total Deliveries 900,000.0

P7 % Sold 67.5%

G3 % Sold 32.5%

P7 Average Sales Price 36,000

G3 Average Sales Price 26,000

Total Revenue FY 2030 29,475,000,000

At 7.5% market share, Xpeng will be generating just shy of $30 billion in revenue. Xpeng

generated close to $700 million in revenue in H2 2020; annualized, the company would have

generated close to $1.4 billion dollars. This means we are assuming that Xpeng can grow

revenue 21 times in the next ten years. This seems tougher than reality given that Xpeng is at the

beginning of its growth runway. The company is growing, but so is its TAM.

Base Year Deliveries 43,084

Deliveries FY 2030 900,000

CAGR 35.52%

Base Year Revenues 715,447

FY 2030 Revenues 29,475,000

CAGR 45.04%

Xpeng will have to compound revenue at 45% annually over the next ten years. This is a

formidable goal, but it is well within Xpeng’s reach. To give some context, Tesla generated ~$2

billion in revenue in 2013, and ~$32 billion in 2020.14 Xpeng’s next ten years will occur in the

largest EV market in the world, and will likely be the best ten years of Xpeng’s life as a

14 https://www.sec.gov/Archives/edgar/data/1318605/000119312514069681/d668062d10k.htm#tx668062_12

company. After this, Xpeng’s revenue growth in the automotive industry will drastically decline

as its competitive advantages start to fade over time. In my model, you can see that I have

adjusted for revenue in 2021 by entering analyst forecasts. Here is where we are so far:

Base Year 1 2 3 4 5 6 7 8 9 10 End Year

Revenue Growth Rate 91.1% 30.2% 30.2% 30.2% 30.2% 30.2% 30.2% 30.2% 30.2% 30.2% 3.5%

Revenue Growth Rate 1,431 2,735 3,562 4,639 6,042 7,868 10,247 13,345 17,380 22,634 29,477 30,509

EBIT Margin

EBIT (Op. Income)

Tax Rate

EBIT (1-t)

- Capex/Reinvestment

FCFF

(2) Profit Margins

The next step in our valuation is estimating what type of profit margins Xpeng will maintain

after it has finished its large growth stage. Recall the operating margins of certain OEMs listed

earlier:

Company Operating Margin EBITDA Margin

Toyota 7.21% 13.38%

Tesla 6.30% 14.35%

VW 6.07% 17.96%

GM 5.42% 17.97%

Ford -3.46% 6.28%

NIO -22.17% -16.20%

My thesis is that Xpeng will generate profit margins between 10% and 11% after it has finished

its rapid growth stage. Xpeng will not be hampered down by union obligations or other expenses

unique to American OEMs. Additionally, it will not have to spend as much money on safety

regulations since it is selling the majority of its vehicles in China. Over time, Xpeng will

generate revenue through software updates delivered to vehicle owners over the cloud. All of

these factors lead me to conclude that Xpeng will be more profitable than most OEMs.

I estimate that Xpeng can achieve this operating margin in its ninth year, or 2028, and that its

negative profit margin will slowly evaporate over time as it begins to sell more vehicles.

(3) Sales to Invested Capital Ratio

Xpeng has to diligently reinvest its earnings to continue its growth trajectory. Capital

expenditures come directly out of free cash flow to the firm, so it is important to estimate how

much revenue can be generated by adding one additional dollar of investment.

Company Revenue Past Year's Revenue Revenue Increase Capex Sales/Invested Capital

Nio (RMB 000s) 7,824,904 4,951,171 2,873,733 1,706,787 1.684

Tesla 31,536 24,578 6,958 3,157 2.20

As you can see, in the past year Tesla invested more efficiently than NIO in their respective

efforts to grow revenues. I have assumed that Xpeng will maintain a sales/invested capital ratio

of 2.5 over the next ten years. This ratio is higher than most auto manufacturers, but it is again

not out of reach. Xpeng has been public about its plans to integrate robots into vehicle

production at the factory, with an end goal of heavily reducing human capital. Additionally, I

have elected not to capitalize Xpeng’s R&D expenditures (which are substantial). Part of its

operating expenses are focused on R&D; therefore, additional revenue will be generated from

R&D expense that is not represented in the “Capex/Reinvestment” section of my valuation.

Base Year 1 2 3 4 5 6 7 8 9 10 End Year

Revenue Growth Rate 91.1% 30.2% 30.2% 30.2% 30.2% 30.2% 30.2% 30.2% 30.2% 30.2% 3.0%

Revenue Growth Rate 1,431 2,735 3,562 4,639 6,042 7,868 10,247 13,345 17,380 22,634 29,477 30,361

EBIT Margin -87.8% -30.0% -10.0% -5.0% 1.0% 6.0% 8.0% 10.0% 10.5% 10.5% 10.5% 10.5%

EBIT (Op. Income) (1,257) (821) (356) (232) 60 472 820 1,334 1,825 2,377 3,095 3,188

Tax Rate 25% 25% 25% 25% 25% 25% 25% 25% 25% 25% 25% 25%

EBIT (1-t) (1,257) (821) (356) (232) 45 354 615 1,001 1,369 1,782 2,321 2,391

- Capex/Reinvestment 522 331 431 561 731 952 1239 1614 2102 2737 354

FCFF (1,342) (687) (663) (516) (377) (337) (238) (245) (319) (416) 2,037

Cost of Capital 9.9% 9.0% 8.5% 8.3% 8.0% 7.8% 7.5% 7.5% 7.5% 7.5%

Cumulated Discount 0.91 0.83 0.77 0.71 0.66 0.61 0.57 0.53 0.49 0.46

PV FCFF (1,221) (574) (510) (367) (248) (206) (135) (130) (157) (190)

Finally, I used Xpeng’s cost of capital as the discount rate. I estimated that Xpeng’s cost of

capital would decrease to the industry average as the company grew and stabilized. Below you’ll

find the final valuation.

Interest Expense (2,312) Risk Free Rate 0.75%

Total Debt 245,595 Equity Risk Premium 5.40%

Tax Rate 25% Beta 2.131017216

Cost of Debt 0.70604% Cost of Equity 10.66%

Book Value of Debt 245,595

Book Value of Equity 2,905,622

Weight of Debt 7.794%

Weight of Equity 92.206%

WACC 9.884%

Terminal Cash Flow 2,037

Terminal Cost of Capital 7.5%

Terminal Value 50,925

Present Value 23,426

Present Value of Cash Flows (3,738)

Sum of Present Values 19,688

Enterprise Value 19,688

- Debt 246

- Minority Interests 0

+ Cash 2,945

Value of Equity 22,387

Market Capitalization 32,500

Upside (Downside) -31.12%

Did we just go down that massive rabbit hole for nothing? I don’t believe so. An intrinsic

valuation on any long-term growth company will inevitably lead to disappointing results. But in

2021, I believe it is important to recognize that different methods of valuation can lead to

different results, and this is okay.

Second Approach

Company 2020 Revenues EBITDA Margin EBITDA Market Cap Cash Debt EV EV/EBITDA

Toyota 250,673.0 13.38% 33,540.0 248,780.0 53,931.0 101,205.0 296,054.0 8.83

VW 200,920.0 17.96% 36,085.2 110,690.0 55,120.0 187,379.0 242,949.0 6.73

Ford 127,144.0 6.28% 7,984.6 44,670.0 49,964.0 110,050.0 104,756.0 13.12

GM 122,485.0 17.97% 22,010.6 75,158.0 29,038.0 72,981.0 119,101.0 5.41

Tesla 31,536.0 14.35% 4,525.4 755,769.0 19,384.0 12,886.0 749,271.0 165.6

NIO 2,049.0 -16.20% (331.9) 85,610.0 N/A

A comparative approach might be more suitable for a fast-growing company. The thought

process is that it is very difficult to estimate cash flows, but over time, EBITDA margins will

begin to level off. Additionally, an intrinsic valuation is backward looking in the sense that the

valuation is beaten down by many years of negative free cash flow. Looking at what a company

trades at relative to its EBITDA and Enterprise Value is forward looking in the sense that I

visualize what I think the stock will trade at on my target date. In other words, I am not

concerned with the company losing money; so long as margins are improving and revenue is

growing, I know that my valuation will continue to improve too. I would not want to value a

company in this manner if I was going to be the sole owner in a private market; however, it is

certainly a rule that public companies are valued on a comparative basis.

Industry EV/EBITDA multiples are diverse and do not appear to show a strong correlation.

Tesla’s EBITDA just recently turned positive, and it is commanding a massive valuation as

always. I was surprised to see how levered Toyota, VW and Ford were. A large portion of their

debt consisted of pension liabilities (VW owes over $50 billion in pension liabilities alone). I

understand why $50 billion in pension liabilities does not get an analyst excited.

Let’s assume that Xpeng will trade at a modest EV/EBITDA multiple in 2030 of 25x, when it is

coming off a year of ~30% revenue growth. At this point in time, recurring revenue will be

kicking in as more and more consumers take advantage of the connectivity features on their

Smart Xpeng EVs.

Estimated EV sales by 2030 in China 12,000,000

XPEV 2024 Market Share of EV sales 7.5%

P7 Sales 607,500

G3 Sales 292,500

Total Sales 900,000

P7 Revenue 21,870,000

G3 Revenue 7,605,000

Total Vehicle Revenue 29,475,000

EBITDA Margin 17.0%

EBITDA 5,010,750.0

EBITDA multiple 25x

EV 125,268,750.0

Net Debt 2,688,887.0

Equity Value 127,957,637.0

Cumulated Discount 0.457

Present Value of Equity 58,476,640.1

Market Capitalization 32,500,000.0

Upside (Downside) 79.93%

While it might disappoint value investors, I think that Xpeng will trade towards the higher end of

our valuation estimates. Publicly traded companies specializing in disruptive industries always

get a premium, and I doubt Xpeng will be any different.

Final Justifications

At first glance, my model does not seem conservative. However, for three reasons I would

actually argue that my assumptions might be on the lighter side.

First, my valuation only focused on Xpeng in the Chinese EV market. While I do not see Xpeng

entering the United States market, Xpeng is the only Chinese EV manufacturer entering Europe.

Xpeng has sent over two shipments of P7s and G3s to Norway, and it plans on doing more

business within the EU (recall from the beginning that EV penetration rates are highest in

Europe).15 Xpeng’s revenue and valuation could certainly grow if it is able to expand into other

markets outside of China.

Second, my valuation did not take into account the numerous possibilities that EV bulls love to

talk about, i.e. autonomous driving, fleets of taxi cabs, ride sharing, etc. I am skeptical as to

many of these concepts, but I do think that Xpeng (and other EV manufacturers in the future)

will generate revenue by making remote software updates available to their customers. I did

discuss briefly software updates, but I did not actually account for them in my revenue

estimation.

Finally, I do not think that Xpeng is at risk of failure in the near term. Since its secondary

offering, Xpeng holds over $2.9 billion in cash. Tesla was in serious jeopardy at one point and

truly did run the risk of failure. It seems unfathomable in hindsight given the deification of Elon

Musk, but the company was crippling under a high debt load and negative cash flow before it

turned the corner and never looked back. If the EV story is true, investors should put a premium

on Xpeng’s valuation given that it is well capitalized and backed by influential entities that are

unlikely to let the company go down in flames.

15 https://www.businesswire.com/news/home/20210204005547/en/XPeng-Ships-Second-Batch-of-G3-Smart-

Electric-SUV-for-Customers-in-Norway

Conclusion

There are too many catalysts in the EV space not to buy Xpeng. To name a few:

• The company is well capitalized, so its risk of failure (assuming no accounting fraud) is

close to zero.

• The Chinese government is mandating that a certain amount of EVs be produced and sold

by 2025 and 2030. These goals will be met by a mix of infrastructure investment and

consumer subsidies.

• The company is growing revenue at a rapid clip. In 2021, it plans on coming out with a

new EV model.

• Production capacity is increasing as the company breaks ground on additional factories

around China.

• Finally, and perhaps most importantly, the P7 and G3 are good looking cars that offer a

ton of technology for their price. Regardless of the financials, Xpeng makes a superior

EV to the countless other OEMs entering the EV space.

I believe that this company is a long-term buy, and that its stock will continue to rise as revenues

and deliveries grow.