IPO Update: XPeng Proposes Terms For $1 Billion IPO (Pending:XPEV)


Quick Take

XPeng (XPEV) has filed to raise $1.0 billion from the sale of ADSs representing underlying Class A shares in an IPO, according to an amended registration statement.

The company is a designer and manufacturer of all-electric vehicles in China.

XPEV is asking a high price for the IPO while generating large operating losses in a very competitive market, so I’ll watch the IPO from the sidelines.

Company & Technology

Guangzhou, China-based XPeng was founded to develop and sell premium all-electric vehicles in China. XPeng aims its products at technology-savvy middle-class consumers, with prices ranging from $22,000 to $45,000 after government subsidies.

Management is headed by co-founder, Chairman and CEO Mr. Xiaopeng He, who was previously Chairman of Alibaba Games and president of Tudou.

Below is a brief overview video of the G3 electric SUV:

Source: Pandaily

The company’s primary offerings include:

XPeng has received at least $1.6 billion from investors including Simplicity Holding, Taobao China, IDG entities, Efficiency Investment, GGV Capital and others.

Customer Acquisition

The company markets to customers via an omni-channel sales model, with online marketing as well as through a network of sales service centers.

XPEV locates many of its stores in Tier 1 and Tier 2 cities within shopping malls to both increase brand awareness and attract customer traffic.

Selling, G&A expenses as a percentage of total revenue have been dropping as revenues have increased, as the figures below indicate:

Selling, G&A

Expenses vs. Revenue

Period

Percentage

Six Mos. Ended June 30, 2020

79.7%

2019

50.2%

2018

6620.0%

Source: Company registration statement

The Selling, G&A efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Selling, G&A spend, fell to negative (0.3x) in the most recent reporting period, as shown in the table below:

Selling, G&A

Efficiency Rate

Period

Multiple

Six Mos. Ended June 30, 2020

-0.3

2019

2.0

Source: Company registration statement

Market & Competition

According to a 2019 market research report by TechSci Research, the Chinese market for electric vehicles of all types was valued at approximately $74 billion in 2018 and is expected to reach $330 billion by 2024.

This represents a forecast CAGR of more than 28% from 2019 to 2024.

The main drivers for this expected growth are a growing concern over environmental pollution and increasing affordability of electric vehicles on offer.

Also, the chart below shows the historical and future forecast growth trajectory for various electric vehicle types:

Major competitive or other industry participants include:

  • Yadea Group

  • AIMA Technology Group

  • Zhejiang Luyuan Electric Vehicle

  • Geely Automobile

  • Dongguan Tailing Electric Vehicle

  • Jiangsu Xinri E-Vehicle Co.

  • Shandong Incalcu Electric Vehicle

  • Tesla (TSLA)

  • BAIC International

  • NIO (NIO)

Financial Performance

XPeng’s recent financial results can be summarized as follows:

  • Uneven topline revenue in the most recent period

  • Nearing breakeven gross profit

  • High operating losses but reduced negative operating margin

  • Uneven but high cash used in operations

Below are relevant financial results derived from the firm’s registration statement:

Total Revenue

Period

Total Revenue

% Variance vs. Prior

Six Mos. Ended June 30, 2020

$ 141,944,000

-21.6%

2019

$ 328,547,000

22917.9%

2018

$ 1,427,353

Gross Profit (Loss)

Period

Gross Profit (Loss)

% Variance vs. Prior

Six Mos. Ended June 30, 2020

$ (5,112,000)

-92.6%

2019

$ (79,000,000)

22653.1%

2018

$ (347,206)

Gross Margin

Period

Gross Margin

Six Mos. Ended June 30, 2020

-3.60%

2019

-24.05%

2018

-24.33%

Operating Profit (Loss)

Period

Operating Profit (Loss)

Operating Margin

Six Mos. Ended June 30, 2020

$ (202,174,000)

-142.4%

2019

$ (535,106,000)

-162.9%

2018

$ (249,210,882)

-17459.7%

Net Income (Loss)

Period

Net Income (Loss)

Six Mos. Ended June 30, 2020

$ (112,639,000)

2019

$ (522,523,000)

2018

$ (205,709,265)

Cash Flow From Operations

Period

Cash Flow From Operations

Six Mos. Ended June 30, 2020

$ (171,643,000)

2019

$ (504,274,000)

2018

$ (231,281,618)

(Glossary Of Terms)

Source: Company registration statement

As of June 30, 2020, XPeng had $299.9 million in cash and $886.2 million in total liabilities.

Free cash flow during the twelve months ended June 30, 2020, was negative ($582.5 million).

IPO Details

XPEV intends to sell 85 million ADSs representing underlying Class A shares at a midpoint price of $12.00 per ADS for gross proceeds of approximately $1.0 billion, not including the sale of customary underwriter options.

Certain investors have indicated an interest to purchase shares in the aggregate of up to $500 million of the IPO at the IPO price.

Class A shareholders will be entitled to one vote per share. Class B shareholders will be entitled to ten votes per share. Class C shareholders will be entitled to five votes per share.

The S&P 500 Index no longer admits firms with multiple classes of stock into its index.

Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO would approximate $8.4 billion.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 12.06%.

Per the firm’s most recent regulatory filing, the firm plans to use the net proceeds as follows:

50% of the net proceeds (approximately US$486.0 million) for research and development of our Smart EVs and technologies;

30% of the net proceeds (approximately US$291.6 million) for selling and marketing and expansion of sales channels; and

20% of the net proceeds (approximately US$194.4 million) for general corporate purposes, including working capital needs.

Management’s presentation of the company roadshow is available here.

Listed underwriters of the IPO are Credit Suisse, J.P. Morgan, BofA Securities, ABCI, BOC International, Futu, Haitong International, and Tiger Brokers.

Commentary

XPEV is seeking U.S. public capital market investment to continue development and commercialization efforts for its new energy vehicles.

The firm’s financials indicate a drop in revenue in the most recent reporting period, which management said was negatively affected by the Covid-19 pandemic in China, hampering demand as well as production and deliveries.

I suspect as the negative effects of the pandemic diminish over time, the firm will see higher sales growth results return.

Selling, G&A expenses as a percentage of total revenue have fluctuated due to the pandemic, as has its efficiency rate, which has turned negative in the most recent reporting period.

The market opportunity for electric vehicles in China is large but severe price competition is an important factor and may be a major factor reducing the firm’s ability to achieve even operating breakeven, much less produce profits any time soon.

As a comparable-based valuation, Chinese EV SUV maker NIO currently receives almost half of the proposed Enterprise Value / Revenue multiple that XPEV is asking IPO investors to pay, while NIO is growing revenue and is producing four times the revenue that XPEV is.

So, the valuation at IPO looks pricey.

While I expect the firm’s revenue numbers to bounce back as the pandemic is brought under control in the quarters ahead, an expensive IPO combined with high operating losses in a sharply competitive environment doesn’t sound like the kind of investment that gets me interested.

Expected IPO Pricing Date: August 26, 2020.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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