Hello, ladies and gentlemen, thank you for standing by for the Third Quarter 2020 Earnings Conference Call for XPeng, Inc. [Operator Instructions] Today's conference call is being recorded. I will now turn the call over to your host, [ Mr. Charles Zhang,] Managing Director of Strategy of the company. Please go ahead, [ Mr. Zhang ].

Thank you. Hello, everyone, and welcome to the Third Quarter 2020 Earnings Conference Call of XPeng, Inc. The company's financial and operating results were issued by 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 will include our Co-Founder, Chairman and CEO, Mr. He Xiaopeng; Vice Chairman and President, Dr. Brian Gu; Vice President of Finance, Mr. Dennis Lu and myself. Management will begin with prepared remarks, and the call will conclude with the Q&A session. As a reminder, this conference is being recorded. 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 far with U.S. Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements, except as required under the applicable law. Please also note that XPeng's earnings press release and this conference call include discussions of unaudited GAAP financial measures as well as unaudited non-GAAP financial measures. XPeng's 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. Xiaopeng. Please go ahead.

[Interpreted] Hello, everyone. Thank you for joining XPeng's Inaugural Earnings Conference Call today. On August 27, 2020, XPeng successfully listed on the New York Stock Exchange, a significant milestone marking the start of our new journey as a public company. On behalf of all the employees and myself, I'd like to extend our sincere gratitude and appreciation to all of the long time and new shareholders who have been supporting us. Today marks another milestone for XPeng as we reported our first quarterly results following our successful IPO. We're pleased to be speaking with you today about our strong operating and financial performance in the third quarter, in which total vehicle deliveries increased by 266% year-over-year to 8,578 units. In addition, we achieved positive gross margin of 4.6%, bolstered by significant revenue growth and mass deliveries of the P7. The P7 is our Smart Sports sedan, which is also our second in mass production level model. Deliveries of the P7 have maintained fast growth momentum since our mass delivery began in late June. During the third quarter, we delivered 6,210 P7s, of which 98% can support XPILOT 2.5 or XPILOT 3.0, our advanced autonomous driving systems. It is worth noting that on October ‘20, the 10,000th P7 rode off our production line in our own Zhaoqing facility. We now hold the record as the fastest emerging smart EV company to surpass the 10,000 vehicle production mark. All these achievements demonstrate our ever stronger capabilities across the entire EV spectrum in research and development, manufacturing, branding and sales and services. I believe XPeng is the only Chinese car-making company that is developing full-stack autonomous driving software and smart in-car operating system in-house. On the second XPeng Tech Day, which was held on October 24 this year, we showcased our first of…

Thank you, Xiaopeng. And hello, everyone. As noted, we delivered strong top notch performance in the first quarter -- in the third quarter and post the [ positive ] gross profit for the first time in our company history. We have reached this milestone in large part due to our successful launch in mass delivery of P7, which also carries an increased average selling price compared with our prior model. Our August IPO and the New York Stock Exchange, this did not only provide the funding for our long-term sustainable growth, but also further strengthened our brand and our influence in the electric vehicle industry. Now I would like to walk you through our detailed financial results for the third quarter of 2020. Total revenues were RMB 2 billion for the third quarter, representing an increase of 343% from RMB 450 million for the same period of 2019. And an increase of 237% from RMB 591 million for the second quarter of this year. Revenues from vehicle sales were RMB 1.9 billion for the third quarter representing an increase of 376% from RMB 399 million for the same period of 2019. And an increase of 251% from RMB 541 million for the second quarter this year. The year-over-year and quarter-over-quarter increases were mainly due to the acceleration of deliveries of the P7 since we began its mass delivery in late June this year. Gross margin was 4.6% for the third quarter compared with negative 10.1% for the same period last year and also negative 2.7% for the second quarter this year. Vehicle margin was 3.2% for the third quarter compared to negative 10.8% for the same period a year ago and negative 5.6% for the second quarter this year. The increase was primarily due to better product mix, decrease in…

[Operator Instructions] Your first question comes from the line of Bin Wang from Crédit Suisse.

[Interpreted] Okay. Actually, my question is about time of capability. After you launched the NGP and memory parking in the first quarter next year, what be the next big step in the second half 2021 or 2022?

[Interpreted] So thank you for your question. Actually, after launching NGP and the memory parking next year, we have several big moves that we're going to launch in the coming future. Those are based on XPILOT 3.0. And first thing is the memory parking within a parking lot, which means that when your car arrives the parking lot, it will automatically take you to the available spots for parking. Now the second big launch will be for major cities. First tier and second-tier cities during the peak rush hours in the morning and in the evening, and that is called the autonomous following. So the autonomous driving technology will allow your car to follow closely to the vehicles before you to make sure that you are not behind. Coming on, we also will launch an identification feature of traffic light within Chinese City Roads and also an upgrade version of the NGP functions that allows us to transfer from highway scenarios to city roads. Coming up, we also have more autonomous features that will allow us to be more advanced in terms of the autonomous driving technology in China.

Can I have a question about the network expansion plan? What's your number, can you guide in the end of this year and 2021? And what's the breakdown between the self-owned and third party? [Interpreted]

[Interpreted] So I'll take these questions. By end of the year, we forecast that we'll have 150 stores covering 72 cities. And by end of this year, we will have 68 service centers.

[Interpreted]

[Interpreted] For the guidance for next year, we are still in the process of making the guidance. So we'll give you updates as we have them.

Our next question comes from the line of Ming Lee from Bank of America.

[Interpreted] And my question is regarding our sales store expansion strategy in Guangdong province and also outside Guangdong province, especially nowadays your store expansion is very aggressive. And I also want to know what's your long-term expectation regarding your sales breakdown between Tier 1 cities and low tier cities?

[Interpreted] Because Xpeng is headquartered in Guangzhou, that's why a lot of people believe that we are mainly focused of our sales in Guangdong. However, we have recognized that the situation, and we are quickly expanding other first tier cities such as Beijing and Shanghai also to other tier cities, second-tier and third tier cities. And that is part of our strategic road map of expansion in the future. And this year, we are doing a lot better in terms of sales performance in other provinces outside of Guangdong. So our next step for us is to continue on improving and producing a product quality and through our marketing and our marketing and sales will be able to reach more -- a greater extent, a greater -- higher level -- higher quantity of users. And outside of Guangdong, we are quickly expanding to first tier cities, second-tier cities and third tier cities through our expansion of stores number, service centers numbers and our supercharging network. And those are -- those will remain part of our priorities in the coming quarter and next year. And after IPO, we'll be able to reorganize our company in a systematic manner and make our procedures production more efficient, and those will be reflected in our sales performance in the coming quarters.

Your next question comes from the line of Jeff Chung from Citigroup.

[Interpreted] So I got 3 questions. My first 2 question is the battery bottleneck issue. So how -- do we have a battery bottleneck supply issue? And how do you see this improve going forward? And my second question is about the same-store sales growth between the new store and the old store. So could you give us a breakdown in the third quarter on the total sales volume from new stores and old stores before June and after June opening? And then also, what is that ratio into October?

[Interpreted] Thank you for your question. Regarding your first question about the battery the bottleneck. I think after pandemic, the new vehicle -- new energy vehicle industry is on the rise. Also, in the European market, we see sales recovery in terms of the whole of European market. Also, since end of last year and earlier this year as a result of the pandemic, a lot of the battery makers are doing their best to expand their capacity of production. And so right now we are encountering a very temporary supply bottleneck in terms of battery supplies. And lately, we are indeed restricted in terms of production as a result of the battery supply bottleneck. However, in the future, with our active very proactive communication with all the battery makers and our good relationship with -- a good partnership with the battery makers and with better planning coming forward in terms of production, I believe we can resolve this bottleneck in a very quickly manner. And in the coming 6 months to 12 months, a lot of people have apprehensions about this battery supply and thinking that we are facing a risk of shortage in supply. However, I disagree with that. I'm actually very confident in the battery supply because a lot of the battery makers are now preparing very actively in their production capacity. And I believe, as a result of the fierce competition amongst these battery makers, we'll be able to benefit from it in terms of supply. Regarding your second question about the breakdown on Q3 sales. Actually, I would like to give you a little bit of context. All of our sales are made after our customers signed -- all of the vehicles are produced after the customers sign the agreement or the sales contract. So basically all of the numbers -- all of the deliveries that you saw in Q3 are the result of the previous contract that we signed about a month or 2.5 months ago. And from our development, actually, we observed something interesting. We used to think that it usually takes maybe 6 months for a new store to mature, but now we realize that it's actually much, much quicker. And as we develop more self-owned factories of production as we solve the battery supply problems and optimization in that area, we believe from Q4 forward, we'll be able to achieve an even higher efficiency in our product deliveries.

So Jeff, this is Brian. Let me just add on this point on the battery situation. It is not a bottleneck in a way that we don't have sort of access to the battery capacity. It is actually when you have certain jump in demand, in the short term, you need to revise up your production, it will actually be very difficult. But at given time, I think the capacity issue will be digested very quickly. So I just want to give you this context. It's not like we don't have access. Just like if -- you don't have the flexibility to really change capacity dramatically in the near term.

[Interpreted] Yes. So my question is about the software income. So how is our accounting treatment on the software income into 2021? And how do we transfer the pent-up revenue from the software income into 2021? And then if this pent-up revenue overlap with the new software revenue income in the first half next year, so would that be an inflection point to see massive increase in the revenue and net profit going forward?

Jeff, this is Dennis. Let me answer your question. Yes, so far, we have received some orders for example, the hardware vehicle has facility or equipment to support the autonomous driving on the 3.0. We’ve received some orders, the payment of the software. But that's our kind of prepaid customer -- prepaid money. That's not in our revenue. We need to wait until we OTA the functionality, then we can book that into our revenue. And the plan is to book loss into revenue starting from next year. And we actually -- we have, for example, as of today, we have about 40% of our customer, they pick up the hardware and among the hardware they have about 60% to 70% of customer, they buy the software. So this will translate a significant amount of the software revenue starting from next year. But I need to clarify, so far, we have XPILOT 2.5 and 3.0. The 2.5 is free of charge. We only charge customer with the 3.0, the Autonomous driving 3.0. And going forward, in all 4 models, we will have more modernization of the software. For example, we may upgrade to 3.5 or even 4.0. The software package. At that time, we probably will evaluate pricing, maybe we'll increase the software revenue but all in all, the revenue -- the software revenue will be a kind of a considerable portion of our overall revenue going forward.

Your next question comes from the line of Paul Gong from UBS.

[Interpreted] So my first question is regarding the gross margin. Is it right that Q3 GP margin improvement is mainly a result of the product mix where P7 GP margin is significantly higher than P3? Is P3 is still in negative gross margins only in the Q3? So my second question is regarding the actual pricing of XPILOT 3.0. My understanding, if I recall correctly, that is priced at RMB 30,000. Is that -- how do we think about the split between the hardware cost coverage versus software revenue? And how do we foresee the hardware cost going forward?

Okay. Let me handle the margin question. Yes, we have the quarter-over-quarter margin improvement. The major contributor is from the better product mix, which means more P7 in the third quarter compared with the second quarter, only minimum volume. And then we have the reduction in mature cost including the battery and non battery material cost reduction. And we also have manufacturing efficiency improvement due to the scale -- the economy of scale. We don't disclose individual margin, but we are seeing improvement on both models. We don't disclose individual model, but the overall -- both models margin are improving. So that's the first one. And then a second one on the autopilot. So far, we charge customer with one-off RMB 20,000 for the XPILOT 3.0. One-off. If customer chooses to pay that in installments, they will need to pay RMB 12,000 a year for 3 years, then they can get their life time, the kind of service. We are seeing opportunity on the hardware because of the technology improvement and also the more volume, more scale. So both hardware and software will have the efficiency in terms of the cost and that will further improve the margin for the software as well as the vehicle margin going forward.

Yes, Paul, you're right. I mean, I think our hardware on the XPILOT 3.0 has more expensive than the version that has only the XPILOT 2.5. And also the price difference covers the hardware costs as well as having some margin there as well. And we expect the cost of those hardware continue to go down as we produce more and more of these XPILOT 3.0 equipped vehicles.

Our next question comes from the line of [ Ji Lu ] from Bank of China.

[Interpreted] Management. I have a question in terms of our sales distribution. Different from other 2 peers, we have the sales modes of [self-built ] and dealership. And how do we compare these 2 modes in terms of marketing efficiency and customer experience? And could you give us the breakdown of these 2 modes and what our plan in future?

[Interpreted] Currently, we have 116 sales points -- sale stores. Amongst them 46 are self-owned, 70 are partners with other dealership or franchise stores. Now in my understanding, as we begin to build a brand, it is more efficient to have your own self-owned stores so that you can educate the market and do more branding in terms of your development. And as you mature, as the brands get more and more well-known in the market, it is more efficient to have partnerships with other dealerships so that you can have a high-efficiency in generating sales. And right now, we believe that both of those channels are very important in contributing to our sales. And so in the future, we are going to set up different kind of stores according to the location according to the type of cities that we are in.

[Interpreted] Can I explain this by this way that in Tier 1 cities, in Tier 1 city, we will have development more -- depends on our own self [ built ] stores and in low-tier city, we will use dealerships. And with the expansion of our brand names, and we will use more in [ self built ].

[Interpreted] So as I mentioned before, we have to take into consideration many different elements, for example, the brand awareness, the acceptance level of new energy vehicles of the market and of our customers. So right now, we don't have any preference over which kind of stores that we are setting up for first tier cities or to third tier cities. It all depends on specific situations.

[Interpreted] I have seen that. So SG&A expenses in Q3 surged substantially. Could you give us some reasons about the increase in SG&A expenses and the guidance in future for SG&A.

Okay. [Interpreted] I use English. Yes, we have the quarter-over-quarter increase in SG&A and the increase is primarily for the branding spending, the channel expansion, channel development and also kind of advertisement to supporting vehicle sales. That is the primary higher spending on the SG&A. And going forward, as you are aware, we are still in the in kind of in the middle or in early phase in terms of channel development to build more strength in our brand to support higher volume target next year. So we foresee the marketing and sales expense will continue to maintain at this kind of level or slightly increase in the near future. We -- at the same time, we will also to manage other, for example, for some spending, we don't need to grow in line with volume, we will definitely control that. But for some spending, that is to investment for future. We will continue to spend a little bit money on that area to support our future growth.

Your next question comes from the line of Nick Lai from JPMorgan.

[Interpreted] So okay, let me translate my question in English. The first question is the level of backlog order. And currently, you have waiting time of about 4 to 5 weeks. And what's our strategy to shorten that waiting time? And the second question is really regards to the new factory in Guangzhou. And what is the capacity and the CapEx? Can we give us -- can management give us some guidance?

So Nick, first of all, we -- as you probably heard during our IPO process, we don't disclose backlog information as a policy. But I think in terms of the wait time, actually, it depends on the specific model you are ordering. My understanding is that 4 weeks to 6 weeks are the standard sort of delivery time these days for our P7 but we're actually trying very hard to shorten that delivery time because I think, obviously, that will improve user experience, our customer satisfaction. We actually are stepping up our production as we speak. Also, at the same time, we're reducing the time lag in terms of transportation and logistics as well as delivery cycle. So I think hopefully, we can actually control the delivery time to shorten that within the 4 weeks as we think.

[Interpreted] So let me just add to that. Actually for some hot models, we're going to do really short time or a quick preproduction of those models to increase -- to shorten the wait time and also through our optimization of our delivery procedures of process, we believe in the coming quarters or 2, we will be able to greatly shorten the wait time.

Yes. And your question on Guangzhou plant. Right now, the design capacity for the second plant, we are planning to have 100k annual production. In terms of the cost of building that, we estimate this to be close to RMB 3 billion in terms of total costs, including the equipment. And the -- obviously, as you heard from our previous announcement that the government supported financing package is more than enough to cover the construction and equipment cost of that plant expansion. In terms of your question on HIMA relationship, our counter manufacturing agreement with HIMA will end by the end of next year. We're obviously maintaining a very frequent and dialogue with HIMA how to best optimize that relationship. So if there's any decision or conclusion, we'll obviously disclose to the public.

As there are no further questions now, I'd like to turn the call back over to the company for closing remarks.

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 the TPG Investor Relations. Thank you.

This concludes today's conference call. You may now disconnect. [Portion of this transcript that are marked Interpreted were spoken by an interpreter present on the live call.]