Deal focus: China's Xpeng moves into top gear

The deal 

Chinese electric car manufacturer Xpeng Motors said on July 20 that it has raised nearly $500 million in its Series C-plus funding round from Aspex Management, Coatue Management, Hillhouse Capital, and Sequoia Capital China. This was quickly followed by investments of $100 million from Qatar Investment Authority, $225 million from e-commerce giant Alibaba Group, and $100 million from Mubadala Investment. The company filed for a US listing on August 10. The size and timeline of the offering have yet to be determined.

While the Series C extension amounts to more than $900 million, the Series C round itself was more difficult to raise and took over six months to close, according to one investor.

When Xpeng announced it had secured $400 million for the Series C round in November 2019, Xiaomi Group was the only investor mentioned. However, according to the IPO filing, Xiaomi contributed $50 million. Xiaopeng He, Xpeng’s founder, was the biggest investor in the Series C, putting in $164 million. A further $40 million came from Primavera Capital Group. These commitments were dated December 2019. 

The remainder comprised smaller contributions – also dated December – from approximately half a dozen investors, including re-ups from existing backers like GGV Capital, Matrix Partners China, and Shunwei Capital. Shunwei was established by Lei Jun, a co-founder of Xiaomi. Four months later, several renminbi-denominated funds managed by IDG Capital invested $98.5 million.

The strategy

The stark difference in investor appetite between the Series C and the Series C extension reflects improved industry and capital market sentiment, the investor said.

“China’s EV sector has recovered. Last year was the most difficult time. Chinese maker Nio had a really challenging time raising capital, but now it is on the rise and set a company record for deliveries and revenue during the second quarter. Tesla has become the most valuable automaker in the world. There is renewed optimism that electric vehicle start-ups can succeed in China,” said Xiaoqin Lin, an executive director at Centurium Capital, which invested in Xpeng in 2017.

Nio was established in 2013 as China’s EV subsidy scheme took off. It became the first domestic EV manufacturer to list in the US in 2018, but then struggled with cost controls. However, following a USD 1bn bailout by the Hefei provincial government – conditional on relocating its headquarters to Hefei – Nio’s stock has climbed from an October 2019 low of $1.32 to a high of $14.98 in July 2020.  

This coincided with Li Auto, another EV manufacturer that has recovered from early missteps, completing a $1.1 billion IPO in the US. As of August 19, the company was trading at a 30% premium to its offering price.

Another Xpeng investor noted that EVs have become a key component of the Chinese government’s national strategy. Meanwhile, with global automakers such as Volkswagen and Toyota are now aggressively targeting the country’s EV market, there are relatively few local independent operators with the scale to attract private equity and venture capital support, the investor observed. 

“We missed Nio because its valuation jumped so fast and it was a hot investee chased by everyone. We then approached Xpeng. Now it’s quite clear that the leading players in the EV space are Nio, Xpeng, and Li Auto. Those that don’t yet have exposure to China EVs want to grasp the opportunity,” the investor said, explaining the popularity of Xpeng's Series C-plus round.

Herry Han, a partner and co-founder at Lightspeed China Partners, offered a different reason for backing Xpeng: a belief that only entrepreneurs with an internet or software industry background can succeed in EVs.

“Tesla is well-known for its hardware advantage, but if you analyze Tesla’s financial statements, you’ll conclude that it makes bigger profits from software updates than from selling hardware. The human-vehicle interaction and autonomous driving will create future profits,” Han said.

The first and second investors said several investors planned to exit Xpeng following the IPO, although no specific timelines were given. The company had held long discussions with key investors before submitting its US IPO documents, they said.

The US is the optimal listing route given several EV manufacturers already trade there and investors are familiar with the industry. Hong Kong is another choice. Even though it is suggested that valuations wouldn’t match those available in the US, potential action from US regulators against Chinese companies is a consideration.

“The trade tensions are a concern, especially as US regulators are getting tougher on accounting standards. If Xpeng can list smoothly, that’s good; if there are any issues or the desired valuation cannot be achieved, it will list in Hong Kong. That's Plan B. The Star Market is another option but there is a lot of policy uncertainty. For companies with VIE [variable interest entity] structures, listing onshore is theoretically feasible, but it’s not guaranteed to be successful,” the first investor said.   

Three bankers and one industry executive noted that the US is unlikely to be the primary listing venue for Chinese EV manufacturers given more stringent regulatory oversight of US-listed Chinese companies.

The asset  

Xpeng was established by Xiaopeng He in 2015 after he sold web browser UCWeb to Alibaba. A longstanding Tesla fan, He backed an EV development team that spun out from Guangzhou Automotive Industry Group, which led to the creation of Xpeng.

His background in the internet industry is believed to have helped Xpeng excel in smart functions and over-the-air (OTA) updates. The company set itself a goal to bring new features to users every month through OTA iteration. Its first model, the G3, achieved a utilization rate of 51% for the assisted parking function as of March. Xpeng claims this is much higher than the single-digit industry average.

“I like Tesla, but I don’t think Tesla is in line with China’s local conditions,” he told an automobile summit in Guangzhou in January. “In China’s large cities, parking spaces are often small and difficult to park in. Car companies can continuously improve the success rate and ease of use of automatic parking through OTA iteration. On this, Tesla did not actually do much.”

Xpeng launched the G3, an SUV, in November 2018. The P7, a four-door sports sedan with a longer single-charge driving range than any other China-made EV, followed in May. As of July, Xpeng had delivered 18,741 units of the G3 with a retail price of about RMB150,000 ($21,700) and 1,966 units of the P7, priced at about RMB300,000. It owns and operates more than 170 car dealerships in China.

The company’s revenue rose from RMB9.7 million in 2018 to RMB2.32 billion in 2019. For the first half of 2020, revenue came to RMB1 billion, down 17% year-on-year. This was attributed in part to the COVID-19 outbreak curtailing deliveries. Its net loss widened from RMB1.4 billion in 2018 to RMB3.7 billion in 2019. For the first six months of 2020, the loss was RMB795.8 million.

One of the bankers said that the company’s valuation is estimated within or above the $4-5 billion range. The banker observed that the P7 is a worthy competitor to Tesla’s Model 3. He added that Xpeng is alone among Chinese smart car manufacturers in having developed autonomous driving technologies – algorithms and visual sensing functionality – closest to Tesla. Of the company’s 3,676 employees in China and the US, 43% are focused on R&D, as per the IPO filing.

A strategic alignment with Alibaba potentially gives Xpeng an edge in terms of access to big data technology and internet-driven software applications, the first banker said.  The company has already built a customized smart navigation system based on Alibaba’s Amap engine. Xpeng also has a tie-up US-based chip maker Nvidia to develop autonomous driving technologies.

The industry

Only eight of over 100 Chinese EV manufacturers achieved sales in the first half of 2020, according to the China Automobile Dealers Association. Nio, Li Auto, and Xpeng were among the eight, alongside WM Motor, Guoji Zhijun Automotive, Hozon Auto, Sitech, and Yudo New Energy Automobile. 

There is an unstated industry rule that correlates volume and profitability potential. Companies with annual sales volume of 30,000-40,000 units survive; those with 70,000-100,000 units will generate a profit; and those with more than 150,000 units will become financially sustainable, the second banker said. A report by Soochow Securities noted that only Nio has reached 30,000 in annual production volume.

Centurium Capital’s Lin argues that this rule is valid for traditional automakers entering the EV space. In contrast, the “new force” EV manufacturers are comfortable with low profit margins – or even zero profit – in the near term in the expectation that data will drive profit in the long term. As such, they need to deliver more vehicles to break-even, Lin said. These new force players also primarily target the mid to high-end segment of the EV market.

Being able to tap public market funding sources will help Xpeng address its capital expenditure needs, the first banker said.

No EV manufacturer in China is profitable because of the huge capital expenditure requirements, the second banker noted. The industry is also challenged by a phasing out of subsidies for end-consumers and a still underdeveloped EV charging infrastructure. These factors are responsible for slowing sales growth since mid-2018 and COVID-19 will intensify the pressure, the banker added.   

China remains the world’s largest EV market, with 2.3 million EVs in active use. This represents 45% of global stock, according to the International Energy Agency’s Global EV Outlook 2020.

Xpeng Motors declined to comment.

This is part of a series of deal focus stories produced by AVCJ and sister title Mergermarket.

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