Comparisons

 Comparisons

I have gathered the interesting information/indicators from the companies which I have valued. More analysis is on the way.

Revenue growth

Figure 1 displays the revenue growth rate for the five companies. It is worthy noting that the revenue of BYD's automobile business for the first half year in 2022 (109 billion RMB) has grown nearly 180% compared with the sales from the first 6 months in 2021 (39 billion RMB). 

Figure 1 Revenue growth rate

NIO, XPeng and Li Auto shows the strongest growth rate but the absolute revenue is much smaller than that of the others (Figure 2).

Figure 2 Revenue comparison among the three companies

Gross profit margin

The automotive companies have different sources of revenue besides auto segment. Auto segment takes the largest part of revenue. Generally speaking, the auto segment from these three companies shows a tendency of improvement.

 Figure 3 Gross profit margin - NIO

The other segments of NIO show an increasing contribution to the total revenue. The other gross profit margin has been improved but it is still far below the auto segment. 

Figure 4 Gross profit margin - XPeng

Xpeng shows an increase in the other profit margin. However, it is quite alarming regarding its auto gross profit margin as low as 11%.

Why is Xpengs auto gross profit margin so low?

     1.      The structure of the products – low price strategy

Low price with good quality is one of Xpengs primary strategy which differentiates Xpeng from the other new EV competitors and attracts consumers very much. However, the other side of this double-edged sword leads to the inferior profit especially when Xpeng is far below its economy of scale.

 From 2019 to 2021, the auto profit margin has grown significantly which is attributed to the launch of P7. Consumers always compare P7 with Tesla 3. The price of P7 is the highest among Xpengs other vehicles.  The more expensive model G9, SUV, is expected to be launched soon. Furthermore, two new more expensive models priced closed to or over 400,000 RBM will be released next year.  We can expect an increase in gross profit margin in the very near future.

     2.      The increasing prices of the raw materials

The increased prices of raw materials have also affected Xpengs profit negatively.  Xpeng has raised the price by 10,000 -20,000 at the beginning of this year.

XPeng has also worked on supply side. CATL has been the solo battery supplier.  To weaken the bargain power of suppliers, Xpeng started to negotiate with different battery suppliers last year. Xpeng claimed that it has started to corporate with multiple suppliers since 2022Q2.

      3.      Production process

 Xpeng has begun to follow Teslas single-piece casting production. According to the data on internet, it is supposed to reduce manufacturing costs by 40%.

4.      Software income

 Compared with the other EV companies, Xpeng is nearly the only one which charges software and hardware separately. However, Xpeng claimed that the bundles of hardware and software will be more beneficial during 2022Q1 conference call. It is highly likely the embedded price strategy will be carried out which will probably result in a higher profit margin.

Figure 5 Gross profit margin - Tesla

With respect to total gross profit margin, Tesla displays a much larger competitive advantage over the other two. Elon Musk always strives to improve the efficiency with the innovative production process. I think new factories under construction can achieve higher margin.

 

Figure 6 Gross profit margin - BYD

The gross profit margin of BYD's automobile business was quite low in 2021. I think it is partly due to increases in the prices of raw materials and partly due to the high expenses on R&D and expansion of distribution channels.  With the highly growth of sales, the gross profit is expected to converge to the industry level.

Figure 7: Gross profit margin – Li Auto

The gross profit margin of Li Auto is much better than its rivals, NIO and XPeng. It is attributed to its product, Li One. Li One is extended-range electric SUV. The process of manufacturing XREVs is easier than BEVs. SUVs normally have larger margin than other small cars. Li One has announced its first BEV model will be launched in 2023. It is likely to lead to changes in its profit margin.

The economic moat: R&D and PP&E

Research and Development (R&D) and Property, Plant and Equipment (PP&E) are foundations to develop and maintain the economic moat, the core competence. R&D improves the functions of the products as well as the efficiency of production which will lead to a larger revenue and lower cost. To materialize products and increase the production capacity, the expansion of PP&E is essential.

 Table 1 The ratio of R&D to the total revenue

NIO, Xpeng and Li Auto maintains a quite high R&D expenses compared to their revenue. R&D expenses of Tesla were also above 50% of the revenue at the first several years after IPO. With the high revenue figure, the percentage of R&D has been reduced in response. 

Table 2 PP&E (in thousands)

The three EV companies are investing largely in PP&E in the recent years. The significant increasing in production capacity can be expected in the very near future. The high growth of revenue is expected. Li Auto is expanding factories very fast recently. Mr. Li, CEO of Li Auto aims at 4 million production capacity by 2030.

The efficiency of the organization

The expense of SG&A is an indicator of the efficiency of the organization.  

Table 3 The ratio of SG&A to the total revenue

note:  Besides Selling and distribution costs and administrative expenses, I have incorporated other operating expenses to SG&A for  BYD* due to different accounting method between China and IFRS/GAAP. 

The percentages of SG&A of Revenue for Tesla were as high as 72%, 51% and 36% from 2010 to 2012. NIO and XPeng is still at the early stage compared with Tesla. The high SG&A of NIO and XPeng is expected to decrease as revenue grows to achieve economies of scale. BYD presents a relative low SG&A. SG&A of Li Auto is more efficient than NIO and XPeng.

Marking, promotional and advertising expenses

Tesla spends $0 on advertising. The ratio of marketing and promotional expenses to revenue for NIO has been reduced to 4% in 2021 from 10.5% in 2019. The advertising expenses for XPeng takes only account for 4.2% of the total revenue in 2021 compared with 8.8% in 2020.

 

Accounting policies

Depreciation of PP&E

NIO: Property and equipment are depreciated at rates sufficient to write off their costs less impairment and residual value, if any, over their estimated useful lives on a straight-line basis.

Xpeng: PP&E are depreciated primarily using the straight-line method over the estimated useful life of the asset.

Tesla: Depreciation is generally computed using the straight-line method over the estimated useful lives of the respective assets, as follows:

Table 4 PP&E Estimated useful lives

Generally, XPeng displays a stricter rule regarding depreciation.