Executive Summary / Key Takeaways

• XPeng Inc. is undergoing a profound transformation, shifting from an EV manufacturer to an AI-defined global automotive company, leveraging full-stack in-house R&D and proprietary Turing AI SoCs to establish a "generational lead" in smart driving technology.
• The company has demonstrated robust financial and operational improvements, achieving record deliveries of 103,181 units in Q2 2025 and an eighth consecutive quarter of vehicle gross margin improvement, reaching 14.3%, with overall gross margin at 17.3%.
• XPeng projects significant growth, forecasting Q3 2025 deliveries between 113,000 and 118,000 units and revenue between RMB 19.6 billion and RMB 21 billion, while maintaining a target of achieving overall profitability and high-teens gross margins by Q4 2025.
• Strategic initiatives, including the democratization of AI-assisted driving through models like the MONA M03 Max, the introduction of dual-energy Kunpeng Super Electric Vehicles, and aggressive global expansion, are poised to significantly broaden XPeng's addressable market and accelerate sales growth.
• Key risks include intense price competition in the EV market, macro uncertainties, and potential impacts from international tariffs, though XPeng is actively implementing strategies to mitigate these challenges through technological differentiation, cost control, and localized operations.

XPeng's AI-Driven Evolution: Reshaping the Smart EV Landscape

XPeng Inc. is rapidly redefining its position within the fiercely competitive electric vehicle (EV) industry, transitioning from a promising EV manufacturer to an ambitious AI-defined global automotive and smart technology brand. Founded in late 2018, with operational roots tracing back to around 2015, XPeng has consistently focused on designing, developing, and delivering smart EVs, primarily in China. This journey has been marked by a foundational commitment to in-house technological development, strategic capital raises, and an evolving product portfolio, all against a backdrop of initial operating losses and an accumulated deficit of RMB42.74 billion as of June 30, 2025. The company's ability to sustain operations has historically relied on increasing market acceptance, boosting sales volume, and securing external financing, including significant IPOs and follow-on offerings on the NYSE and HKEX, and a strategic investment from Volkswagen (VWAGY) in December 2023.

The global automotive industry is on the cusp of a profound transformation, with the next decade heralded as the "era of AI." This shift is expected to revolutionize autonomous driving, leading to a "knockout phase" in the Chinese automobile industry between 2025 and 2027, where the penetration rate of new energy vehicles could exceed 85%. In this evolving landscape, success hinges on in-depth, full-scale self-development capabilities, moving beyond traditional cooperative supply chain models. XPeng's strategy directly addresses this, aiming to harness AI as a data engine, integrating software and hardware across the entire vehicle, from advanced driver-assistance systems (ADAS) to smart cabins and powertrains. This approach is designed to enable unprecedented iteration speed and create a substantial advantage over competitors relying on conventional R&D models.

Technological Leadership: The Core of XPeng's Moat

At the heart of XPeng's investment thesis lies its profound technological differentiation, particularly in AI and smart driving. The company's commitment to full-stack in-house development of core hardware and software technologies distinguishes it from many traditional automakers and even some software-centric companies. This dedication has enabled XPeng to co-develop high-performance AI chips and foundational models for the physical world, achieving true cross-domain integration and speeding up iterations through extensive data sets and computing infrastructure.

XPeng's core differentiated technology includes its Turing AI SoCs and the Hawkeye Pure Vision ADAS solution. The Turing AI SoCs, developed in-house, are critical to its advanced capabilities. All Ultra trims across XPeng's entire model lineup will feature three of these Turing AI SoCs, providing a total computing power of 2,250 TOPS. This positions XPeng as a global leader among mass-produced vehicles, boasting over 3x the computing power of its latest flagship competitors. The tangible benefit is a significantly more powerful and responsive AI system. Furthermore, the company's VLA (Vision-Language-Action) models, driven by these Turing AI SoCs, are designed to run at twice the frame rate of competitors, exemplifying "smarter brain, agile control" and elevating the safety and user experience of ADAS. This translates to quicker, more precise decision-making and smoother vehicle control.

XPeng's R&D initiatives are aggressively pushing the boundaries of AI in mobility. The company has been committed to in-house chip development since 2021, with its self-developed Turing chip succeeding in its first tape-out in 2024. This chip delivers three to seven times the effective compute power of mainstream automotive chips. The stated goal is not only cost control but also customization and performance enhancement, allowing for unparalleled self-development capability and efficient data iteration. For smart cabins, XPeng has introduced the industry's first AI chip dedicated to foundation models, providing over 12x the effective computing power of leading cabin processors. This enables a multimodal large model that functions locally on Turing chips, facilitating smarter voice interactions and a more personalized, globally scalable user experience.

The "so what" for investors is clear: this technological prowess forms a robust competitive moat. It allows XPeng to differentiate its products, command potentially higher average selling prices (ASPs) for its advanced models, and achieve lower costs through vertical integration and efficient R&D. This technological edge is foundational to its market positioning as a leader in AI-defined vehicles and underpins its long-term growth strategy, particularly as it aims for L3-like intelligent driving by Q4 2025, targeting less than one takeover per 100 kilometers, and L4 capable vehicles and pilot robotaxi services by 2026.

Financial Trajectory and Operational Momentum

XPeng's strategic and technological advancements are translating into tangible financial and operational improvements. The company has demonstrated remarkable growth in deliveries, reaching a record high of 103,181 units in Q2 2025, a 242% increase year-over-year. This follows strong performances in Q1 2025 (94,008 units, a 331% increase year-over-year) and Q4 2024 (91,507 units). This consistent volume growth is a direct reflection of increasing market acceptance and effective product launches.

Profitability metrics are also showing a positive trend. Vehicle gross margin improved for the eighth consecutive quarter, reaching 14.3% in Q2 2025, up from 10.5% in Q1 2025 and 6.4% in Q2 2024. The company's overall gross margin rose to 17.3% in Q2 2025, a significant improvement from 15.6% in Q1 2025. This margin expansion is primarily driven by ongoing cost reduction efforts, a favorable shift in product mix towards higher-margin models like the new G6 and G9, and the benefits of economies of scale. Net loss has also narrowed significantly, reaching RMB1.14 billion in the six months ended June 30, 2025, compared to RMB2.65 billion in the prior year. Non-GAAP net loss similarly narrowed to RMB0.81 billion.

Operating cash flow has seen a dramatic turnaround, with net cash provided by operating activities of approximately RMB7.64 billion for the six months ended June 30, 2025, a substantial improvement from net cash used of RMB7.39 billion in the same period of 2024. Free cash flow in Q2 2025 exceeded RMB2 billion, building on the RMB3 billion generated in Q1 2025.

This enhanced cash generation strengthens XPeng's liquidity position, with total cash and cash equivalents, restricted cash, short-term investments, and time deposits amounting to RMB40.39 billion as of June 30, 2025. Management has concluded that this is sufficient to meet working capital and contractual obligations for the next twelve months. The gearing ratio also improved to 37.10% as of June 30, 2025, from 38.80% at the end of 2024.

R&D expenses, a critical investment for XPeng's AI strategy, increased to RMB4.19 billion in the six months ended June 30, 2025, from RMB2.82 billion in the prior year, reflecting higher expenses related to new vehicle models and technologies. Selling, general, and administrative expenses also rose to RMB4.11 billion, driven by higher commissions from increased sales volume and marketing efforts. While these investments impact short-term profitability, they are crucial for securing long-term competitive advantages.

Competitive Positioning and Strategic Responses

XPeng operates in a highly dynamic and competitive EV market. Its primary direct competitors include global EV leader Tesla (TSLA), and China-based rivals such as NIO (NIO), Li Auto (LI), and BYD (BYDDY).

XPeng's core competitive advantage lies in its proprietary AI technology for autonomous driving and smart cabins. While Tesla leads in global scale and technological maturity, XPeng differentiates itself by offering advanced AI-driven features tailored to the Chinese market, with a focus on democratizing this technology across a wider price range. The company's Turing AI SoCs, with their superior computing power and VLA models running at twice the frame rate of competitors, provide a distinct edge in ADAS performance. This technological leadership is expected to widen the gap with peers, with management anticipating XPeng's products to lead by "10x or even more" in the coming year.

Against NIO, XPeng competes in the premium EV segment, offering comparable performance with a focus on cost-effective smart technology, while NIO emphasizes its battery-swapping ecosystem. XPeng's market positioning as a more accessible premium brand, combined with its rapid innovation in AI software updates, gives it a unique value proposition. Compared to Li Auto, which prioritizes practicality and extended range for family buyers, XPeng's vehicles stand out for their deeper AI integration and dynamic user experience. In the mass-market segment, where BYD holds a strong position due to cost leadership and scale, XPeng's smart features offer a technological edge, targeting tech-savvy consumers.

Financially, XPeng's growth trajectory appears faster in certain emerging segments due to aggressive expansion and product innovation. However, it currently lags Tesla and BYD in sustained profitability and cash flow generation, as these larger players benefit from established efficiencies and scale. XPeng's gross profit margin of 15.75% (TTM) is lower than BYD's 19% (2024), and its operating profit margin of -8.92% (TTM) indicates ongoing investment in growth, contrasting with BYD's positive 6% (2024). XPeng's debt/equity ratio of 1.01 (TTM) is higher than BYD's 0.16 (2024), reflecting its reliance on financing for expansion.

XPeng's strategic responses to competition include:

• Democratizing AI Technology: The MONA M03 Max, launching in May 2025, will bring urban AI smart driving to the RMB150,000 price sector, expanding market reach and challenging competitors who limit advanced features to high-end models.
• Dual Energy Approach: The introduction of Kunpeng Super Electric Models in Q4 2025, offering both pure electric and extended-range options, will significantly broaden its addressable market, particularly in regions with less developed charging infrastructure.
• Global Expansion: Overseas deliveries exceeded 18,000 units in H1 2025, a 200% year-over-year increase. XPeng aims to double overseas sales in 2025 and expand its international sales network to over 300 stores. The delivery of the first locally produced XPeng X9 in Indonesia in July 2025 marks a key step towards global local manufacturing. This strategy helps mitigate market concentration risks in China and diversifies revenue streams.
• Strategic Partnerships: The expanded collaboration with Volkswagen, now including Electrical and Electronic Architecture (EEA) for ICE and PHEV models, provides a third recurring revenue stream and validates XPeng's technological capabilities.

Outlook and Guidance

XPeng's management is highly optimistic about its future trajectory, projecting continued robust growth and a path to profitability. For Q3 2025, the company forecasts deliveries to be between 113,000 and 118,000 units, representing a year-over-year growth of 142.8% to 153.6%. Revenue is projected to reach between RMB 19.6 billion and RMB 21 billion, an increase of 94% to 107.9% year-over-year.

Crucially, XPeng reiterates its target of achieving overall profitability and high-teens gross margins by Q4 2025. This is underpinned by assumptions of continued cost reduction, an improving product mix, and the realization of economies of scale from higher sales volumes. The full-year 2025 R&D expense guidance remains around RMB8.5 billion, with a significant portion allocated to AI-related activities, reflecting the company's commitment to maintaining its technological lead.

XPeng plans to launch at least four new models in 2025, including Super Electric Vehicles, and several updated existing models, with new models or refreshments potentially every quarter. The new P7, launching soon, is expected to achieve monthly sales exceeding 40,000 units starting in September. The X9 Kunpeng Super Electric Edition, introduced in Q4 2025, will mark the beginning of a "one vehicle dual energy era" with impressive range capabilities. Management is confident that total sales in 2025 will more than double that of 2024, significantly increasing market share in both Chinese and global smart EV sectors.

Risks and Challenges

Despite the compelling growth narrative, XPeng faces several pertinent risks. Intense price competition in the EV market, particularly in China, could pressure margins and market share. While XPeng emphasizes technological differentiation and cost control as "competitive moats," sustained aggressive pricing by rivals could still impact profitability. Macro uncertainties persist into the second half of 2025, which could affect consumer demand and economic stability.

Foreign exchange risk arises from the company's exposure to U.S. dollar and Renminbi fluctuations, particularly with overseas financing and operations. While hedging transactions are an option, they were not utilized in the recent reporting period. Interest rate risk from investments and borrowings also exists. Furthermore, the company's historical losses from operations since inception and accumulated deficit highlight the ongoing need for successful execution of its business plan and continued access to external financing.

International expansion, while a key growth driver, introduces tariff impacts, such as those in Europe, which can affect profitability. XPeng is actively exploring mitigation strategies, including collaboration with partners, product mix adjustments, and potential local investments. The highly competitive and rapidly consolidating Chinese automobile industry (a "knockout phase" anticipated between 2025 and 2027) demands continuous innovation and operational efficiency to avoid being outpaced.

Conclusion

XPeng Inc. stands at a pivotal juncture, transforming into an AI-defined global automotive powerhouse. The company's unwavering commitment to full-stack in-house AI development, exemplified by its proprietary Turing AI SoCs and Hawkeye Pure Vision ADAS, is creating a significant technological lead, driving both product differentiation and cost efficiencies. This technological edge, coupled with a robust product pipeline and aggressive global expansion, underpins a compelling investment thesis centered on accelerated growth and a clear path to profitability.

While the journey is not without challenges, including intense market competition and macroeconomic headwinds, XPeng's strategic initiatives, such as the democratization of AI technology and the introduction of dual-energy vehicles, are designed to broaden its market reach and solidify its competitive standing. The consistent improvement in financial metrics, strong delivery forecasts, and a firm commitment to achieving overall profitability by Q4 2025 signal a company poised to capitalize on the evolving smart EV landscape. Investors should closely monitor XPeng's execution on its AI roadmap, its ability to scale international operations, and its continued margin expansion as key indicators of its long-term success in leading the AI mobility revolution.