XPeng Inc. (XPEV) CEO He Xiaopeng on Q2 2021 Results – Earnings Call Transcript
XPeng Inc. Q2 2021 Earnings Conference Call August 26, 2021 8:00 AM ET.
Company Participants
- He Xiaopeng – Chairman and CEO
- Ziling Ma – Director of Investor Relations
- Dr. Brian Gu – Vice Chairman
- Dennis Lu – Vice President of Finance
- Charles Zhang – Managing Director
Conference Call Participants
- Tim Hsiao – Morgan Stanley
- Bin Wang – Credit Suisse
- Nick Lai – JP Morgan
- Ming Lee – Bank of America Securities
- Edison Yu – Deutsche Bank
- Paul Gong – UBS
- Interpreter – Participant
Operator
Hello, ladies and gentlemen. Thank you for standing by for the Second Quarter 2021 earnings conference call for XPeng Incorporated. At this time, all participants are in a listen-only mode. After the management’s remarks, there will be a question-and-answer session. Today’s conference call is being recorded. I will now turn the call over to your host, Mr. Ziling Ma, Director of Investor Relations of the company. Please go ahead, Mr. Ma.
Ziling Ma
Thank you. Hello, everyone, and welcome to XPeng ‘s Second Quarter Earnings Conference Call. All financial and operating results were issued by [Indiscernible] assets earlier today and are available online, you can also view the earning press release by visiting the IR section of our website at IR Tokyo.com. assistance on today’s call will include our Co-Founder, Chairman and CEO, Mr. He Xiaopong, Vice Chairman and person, Dr. Brian Gu. Finance. Mr. Dennis Lu, Managing Director of Trustee, Mr. Charles Zhang, and myself. [Indiscernible] will begin with prepared remarks and the call will conclude with a Q&A session.
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 on the Safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve inherent risk and uncertainties. As such, the company’s results maybe materially different from views expressed today. Further information regarding these and other risks and uncertainties is included in the relevant public filings of the company as filed with the U.S.
Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements, except as required under applicable law. Please also note that expense ending pass release and this conference call will include a disclosure of unaudited GAAP financial measures, as well as unaudited non-GAAP financial measures, expands the earning press release contains a reconciliation of your unaudited non – GAAP measures to the unaudited GAAP measures. I will now turn the call over to our Co-Founder, Chairman, and CEO, Mr. He Xiaopeng. Please go ahead.
He Xiaopeng
[Indiscernible]
Interpreter
Hello, everyone. Thank you for joining Xpeng’s Second Quarter 2021 Earnings Conference Call.
He Xiaopeng
[Indiscernible]
Interpreter
In the second quarter of 2021, XPeng’s vehicle deliveries reached 17,398, another quarterly high — record-high, representing a 439% increase year-over-year. For the six-month periods ended June the 30th 2021, XPeng delivered 30,738 vehicles, surpassing the total number of vehicles delivered for the full year of 2020.
And in July, our monthly deliveries exceeded 8,000 units, setting a new monthly records with an all-time high order backlog. With a rapid growth in deliveries, our second quarter profitability further improved and our gross margin reached 11.9%.
He Xiaopeng
[Indiscernible]
Interpreter
Our record delivery growth was driven by consumers increasing demand for Smart EVs and our leadership position and smart electric vehicle products and our [Indiscernible] product iterations. In the second quarter, the attach rate of XPILOT 3.0 software reached 25%.
Among the nearly 35,000 P7s that have been delivered as of the end of June 2021, close to 8,000 units were equipped with XPILOT 3.0. Also, in June, our highway NGP mileage penetration rate exceeded 60%, and NGP assisted our customers in driving for around 1,45 million kilometers.
The average monthly usage rate of NGP exceeded 65%. This is a clear demonstration of customers’ increasing adoption and reliance on our advanced driver assistance systems. With the rollout of XPILOT 3.5 earlier next year and afterward, XPILOT 4.0, our future advanced driver assistance system built on our next-generation hardware platform, we’ll be able to empower a broader range of end-to-end driver driving scenarios, including those not covered by HD maps.
As a result, customer’s demand and reliance on Advanced Driver Assistance System will continue to increase. As we advance in developing cutting-edge technologies, safety will always remain our top priority.
We have an unwavering commitment to enhancing driver safety education and providing hardware redundancy and software iteration to ensure our customers can safely use our Advanced Driver Assistance System. To illustrate XPeng is the first EV maker to implement a driver safety proficiency test for customers before they can activate our Advanced Driver Assistance System.
In addition, we are also the first in the industry, starting from our P5 models that equipped LiDAR technology to be adopted in some of the configurations to increase redundancy of perception through hardware and sharpen its adaptability in handling corner cases to further safeguard driver safety.
He Xiaopeng
[Indiscernible]
Interpreter
Our strategic focus on advancing fast product iteration allows us to further expand our addressable markets. In the Second Quarter, we began sales and deliveries of lithium-iron phosphate or LFP battery power G3s and P7s. And their deliveries comprised more than 20% of total deliveries for each model.
These new editions expand our price range and customer base. With the growing supply of LFP cells, we’re confident with the increasing proportion of LFP models among our deliveries in the future. Moreover, the strong market response to our recently launched G3i, the new mid-cycle [Indiscernible] version of the G3, exceeded our expectations.
The production preparation and switching of G3i is expected to have impact on G3 and G3i production and delivery for a few weeks. We plan to start deliveries at the end of August and will increase delivery scale in the next quarter.
He Xiaopeng
[Indiscernible]
Operator
In July, we announced configuration details and the price range for our third production model, the P5, and its margin reception has been overwhelmingly positive. We expect to officially launch the P5 and unveil its MSRP in mid-September, and begin its deliveries in October. With P7, we have already demonstrated the unique driving experience brought by our full-stack in-house algorithm
Interpreter
For advanced driver assistance systems that is capable of handling complex driving scenarios in China. Now with P5, we’re bringing to our users a driving experience that will enable them to utilize advanced driver assistance systems in urban driving scenario with the ability to switch between different driving scenarios smoothly.
I believe this is only the start of Xpeng’s journey to accentuate the development of our leading advanced driver assistance technologies. Moreover, with the P5, we’re able to offer our industry-leading advanced driver assistance systems and smart cockpit technology to the broadest family Sedan market with an attractive pricing range from 106, 000 to 230, 000 R&D. Further accelerating the EV disruption out to traditional ICE and non-intelligent auto-mobile market.
He Xiaopeng
[Indiscernible]
Interpreter
I would like to share some of my predictions for the future. First, in China, vehicles priced between 150,000 and 400,000 R&D will constitute the largest segment in EV market and show the fastest growth rate. Furthermore, the disruptive forces that Smart EV brings to traditional mobility in this segment will also be the most vigorous and the swiftest.
Second, high-level or Advanced Driver Assistance System will trick a qualitative changes in users mobility experience. Third, as China is poised to take the leap into development of Smart EVs around the wells. China’s Smart EV makers will be an excellent position to expand globally.
In order to be able to capitalize on such opportunities, on July the 7th, XPeng completed our dual primary IPO on the Hong Kong Stock Exchange and raised 15.8 billion Hong Kong dollars. Looking ahead, we plan to further increase investment in intelligent technology innovations, branding, and marketing service facilities across our supercharging sales channel network and global expansion.
Our differentiated products and technological path we chose along with investments in human capital and global expansion, not only bolster our leading position in the current landscape, but also underscore our long-term vision and strategic deployment.
He Xiaopeng
[Indiscernible]
Interpreter
Looking forward in a few years time, we will accelerate the pace of our new product deployment, development. Starting from 2023, we plan to launch at least 2 or 3 new vehicles every year supporting XPILOT 3.0 or above. We intend to make these safer new models including hardware, software, and services simultaneously available in China and an international markets.
We’ll also broaden our primary price range in China from between 150,000 and 300,000 R&D to between 150,000 to 400,000 R&D, making our cutting-edge Smart EV accessible to a broader customer base.
He Xiaopeng
[Indiscernible]
Interpreter
As we accelerate our efforts in technology innovations and product design and development for more new models, we are committed to growing and developing our R&D team. As of the end of second quarter 2021, our R&D headcount exceeded 3%, a nearly 50% increase compared to the beginning of this year.
And by the end of 2021, it will increase to more than 4,500. We also plan to increase the number of engineers dedicated to research and development of autonomous driving technology spanning software, hardware, big data, and navigation maps for international markets. We estimate that the total number of engineers working in our autonomous driving software, hardware, and relative supporting infrastructure teams to exceed 1500 by the end of this year.
He Xiaopeng
[Indiscernible]
Interpreter
In this June, the penetration rate of the EVs in China’s market has surpassed 10% for the first time. I believe the timing Smart EV market is navigating through any inflection point for the next level of growth, which arrived earlier than expected.
To tap into this blooming opportunities, we will accelerate the construction of how infrastructure facilities, underpinning our long-term strategic roadmap and investments. As of the end of June Xpeng’s physical sales network consisted of 200-cell stores across 72 cities in China.
Of these cell stores, 110 were directly operated by us. To keep pace with our rapid development and delivery growth, we plan to lift our guidance of the number of sales stores from 300 to more than 350 stores by the end of 2021.
He Xiaopeng
[Indiscernible]
Interpreter
We also continue to rapidly expand our supercharging network. As of June 30th, the number of XPeng branded supercharging station grew to 231, covering some 65 cities. Recently, the first batch of 11 XPeng branded supercharging stations has been deployed on the Sandoz section of the Beijing Shanghai expressway and the Hernan section of the Beijing Hong Kong, Macau expressway.
We’ll move forward to deploy our supercharging capabilities across the entire Beijing – Shanghai, Beijing – Guangzhou, and Beijing – Hong Kong – Macau Expressways, further enhancing our ability to serve our customers in long-distance driving. We plan to have more than 500 Xpeng branded supercharging stations operational by the end of this year, accelerating the expansion of our charging network across lower-tier cities.
He Xiaopeng
[Indiscernible]
Interpreter
In terms of our international expansion, as of this June 30th, we had explored approximately 500 G3 to Norway. And in August, we plan to exports P7 to the Norwegian market as well. We’ll continue our efforts in Norway and other European markets to further strengthen. our local operations through self, delivery, and customer service enhancements.
Our target is to prepare ourselves for the overseas markets in both left and right-hand drive countries within the three years time of 2020 to 2022, and accelerate our penetration into international markets with our upcoming Smart EV models equipped with XPILOT 4.0 starting from 2023.
He Xiaopeng
[Indiscernible]
Interpreter
Turning to our production, with our GCI and P5 commencing production, our Jiaoxin factory is now able to produce the G3i, P7, and P5 concurrently. And in August, we added a second production shift at the Jiaoxin factory with the increasing production output, we expect our monthly delivery volume to potentially reach 15,000 in the Fourth Quarter.
That said, supply chain challenges, particularly those pertaining to chip shortage, remain the biggest production hurdle we are facing. With the support of disappointed out the Zhaoqing municipal government, in August, we kicked off the Phase 2 expansion of our Zhaoqing factory, which we expect to increase annual design production capacity at the site from 100,000 to 200,000 by the end of the first half of 2022. Construction for our Guangzhou factory remains on track and we expect the main structure to be completed in the first quarter next year, and mass production to begin in the third quarter 2022.
He Xiaopeng
[Indiscernible]
Interpreter
In summary, we’ll continue to strive to overcome the various challenges before us, stemming from chip shortage, sound structural shortage, COVID-19 research in some parts of the world, and production transition from G3 to J3I. In the third quarter of 2021, we expect our smart EV deliveries to be between approximately 21,500 and 22,500 units, and our total revenue to be between approximately 4.85 billion and 5 billion RMB. I look forward to sharing with you our latest progress on technology innovations on our third Xpeng technology day on October 24th this year.
He Xiaopeng
[Indiscernible]
Operator
Thank you, everyone. With that, I will now turn the call over to our VP of Finance, Mr. Dennis Lu, to discuss our financial performance for the second quarter of 2021.
Dennis Lu
Thank you, Xiaopeng, and hello, everyone. Our outstanding performance in the second quarter continued to experience leadership in the China’s booming Smart EV industry. Where we continue to introduce innovative technology, differentiating products, and premium service.
Feel there was strong delivery performance, our revenues in the second quarter grew 537% compared with the same period of 2020. We also witnessed further improvement in our financials. In particular, our gross margin continued the upward trend and reached 11.9% in the second quarter.
Now I would like to walk you through our detailed financial results for the second quarter of 2021. I will reference R&D only in my discussion today, unless otherwise stated. Total revenues were RMB 3.8 billion for the second quarter of 2021, representing an increase of 537% from RMB, 591 million for the second same period of 2020 and an increase of 28% from RMB 2.95 billion for the first quarter of 2021.
Revenues from vehicle sales were RMB 3.6 billion for the second quarter of 2021, representing an increase of 562% from RMB 541 million for the same period of 2020. And an increase of 28% from RMB 2.8 billion for the first quarter of 2021. the year-over-year increase were mainly due to higher vehicle delivery, especially for the P7.
The quarter-over-quarter increase was also attributable to higher P7 sales, as a result of seasonality, channel expansion, and increasing [Indiscernible] equity. Revenues from service and others were RMB 177 million for the Second Quarter of 2021, representing an increase of 256% from RMB 49.7 million for the same period of 2020 and an increase of 26% from R and D 141 million. For the first quarter of 2021, the year-over-year and quarter-over-quarter increases were mainly due to more income from service parts and accessories sales in our higher accumulative vehicle sales.
Gross margin was 11.9% for the second quarter of 2021 compared with negative 2.7% for the same period a year ago and 11.2% for the first quarter of 2021 respectively. [Indiscernible] margin was 11% for the second quarter of 2021 compared with negative 5.6% for the same period of 2020 and 10.1% for the first quarter of 2021, the improvement was primarily attributable to better product mix and material cost reductions.
Research and development expenses were RMB 864 million for the second quarter of 2021, representing an increase of 170% from RMB 319 million for the same period of 2020, and an increase of 61% from RMB 535 million for the first quarter of 2021. The year-over-year and quarter-over-quarter increase were mainly due to, one, the increase in employee compensation as a result of expanded research & development steps.
And two, higher expenses related to the development of vehicles and related software technologies. Selling, general and administrative expenses were RMB 1 billion for the second quarter of 2021, representing an increase of 116% from RMB 477 million for the same period of 2020, and an increase of 43% from RMB 721 million for the first quarter of 2021.
the year-over-year and quarter-over-quarter increases were mainly due to, one, higher-marketing promotional and advertising expenses to support vehicle sales And two, the expansion of sales network and associated personnel costs and commission for the franchise store sales. Loss from operation was RMB 1.4 billion for the second quarter of 2021 compared with RMB 779 million for the first quarter of 20 — for the same period of 2020 and RMB 904 million for the first quarter of 2021.
Excluding share-based compensation expense, non-GAAP -loss from operations was RMB 1.3 billion for the second quarter of 2020, compared with RMB 779 million for the same period of 2020 and RMB 814 million for the First Quarter of 2021. Net loss was RMB 1.2 billion for the Second Quarter, compared with RMB 146 million for the same period a year ago, and RMB 787 million for the first quarter of 2021, excluding share-based compensation expense and fair value change on derivative liabilities related to the retention dry of the approval shares.
The non – GAAP adjusted net loss was RMB 1.1 billion for the Second Quarter of 2021, compared with RMB 770 million for the same period of 2020 and RMB 696 million for the First Quarter.
Dennis Lu
Although 2021 net loss attributable to ordinary shareholders of excellent ink was RMB 1.2b billion for the second quarter, compared with RMB 1.1 billion for the same period of 2020, and compared with RMB 787 million for the first quarter of 2021. Excluding share-based compensation expense [Indiscernible] change on derivative liabilities related to the retention value [Indiscernible] shares and accretion on the preferred shares to retention value.
The non – GAAP net loss attributable to ordinary shareholders of XPeng Inc. was RMB 1.1 billion for the second quarter of 2021 compared with RMB 769 million for the same period of 2020 and RMB 696 million for the first quarter of 2021.
Basic and diluted net loss per ADS was RMB 1.5 yen for the second quarter of 2021, the non-GAAP basic and diluted net loss per ADS was RMB 1.38 for the second quarter of 2021. Each ADS represents two Class A ordinary shares.
Turning back to the balance sheet, as of June 30th, 2021, our company had cash and cash equivalent restricted cash, short-term deposits, short-term investments, and long-term deposit in total R&D, 32.9 billion, which excludes the Hong Kong IPO because of RMB 13 billion. Compared with RMB 35.3 billion for the — as of 12/31/2020. With that, now I would like to turn the call to Ziling Ma.
Ziling Ma
To be mindful of the length our earnings call for our Second Quarter financial results, I would encourage listeners to refer to our earnings press release for further details. This concludes our prepared remarks, we will now open the call to the questions. Operator, please go ahead.
Question-and-Answer Session
Operator
[Operator Instructions] Your first question comes from Tim Hsiao with Morgan Stanley. Your line is open.
Tim Hsiao
Thanks for taking my questions and congratulations on the great re-sales. I’ve got two questions. The first question is about the component supply. I think the near-term chip shortage, that is well anticipated. But should we concerned about similar supply closeups into next year, especially Xpeng will need to secure the key component supply for [Indiscernible] in total with small on likely doubling. So, I just want to know that how the XPeng Company such challenge yet to next year, we had a Company considered investing, or forming strategic alliances with some of the parts makers like Florida Chief Ford batteries.
To show, we can guess sufficient supply. My second question is that demand of P5, because I think Mr. He already mentioned that the demand is pretty strong. But could you share more information about the progress in collecting the orders during pre -sell. Understand we might not be able to share too much detail, but how should we think about that evolving scale relatively to, for example, data for flagship modern P7, and with [Indiscernible]
He Xiaopeng
[Indiscernible]
Interpreter
So in regards to core components and to the shortage, I think we have to look at it from 2 ways. The one — the first way is, there are some expected shortages that we can deal with and prepare for, and the other kind is the unexpected ones. Now for the expected ones are mainly talking about the chipset — or chip shortage. For the unexpected ones are mainly referring to pandemic resurgence. For example, lately, we saw this emergency happening in Nanjing where we face a serious lockdown. And as it so happens that one of your Tier 1 or Tier 2 suppliers is located in one of those lockdown cities, there’s nothing we could do about it, and those will be considered as unexpected elements that affect our shortage and — as to our challenge
He Xiaopeng
[Indiscernible]
Interpreter
So, for the first kind of challenge, which is the core components or chip shortage, we can do several things to prepare for it. For example, the first one is, we can make orders way ahead of time so that we can better prepare for chip shortage. The second thing is we can work with some top tier suppliers in terms of chip-set production and development, we can work with them in several ways. First of all, we can sign collaboration deals. Also, we can invest in some of those core suppliers and also leak and work with local governments in terms of bulk purchasing or pre-ordering of the chipsets or chips that we need basically chip shortage, is a big talent-based by the whole industry.
But as a Company, every Company equipped with leading technology of its kind, XPeng, actually has a very, very favorable position to play in this LB chain, because a lot of the chip suppliers consider us as their VIPs, thanks to our fast development and fast iteration of our models and also, we are actually very flexible in a sense that we don’t have a large deliveries backlog yet. So that allow us to be really flexible in selecting different suppliers in order to fulfill our chip demands. We also can look to the overseas market for more chips supply.
He Xiaopeng
[Indiscernible]
Interpreter
In regards to your second question, which is about the market amount of P5. If you ask me to compare it with P7, I would say that actually we see an even stronger demand compared to P7 of the same will stage. And also, we are able to actually better plan ahead for the P-ordering of P5. And right now, the P-order has started for two months ago, and every month, we are seeing the demand come in more and more as expected. That allow us to actually deliver what we guarantee by 4Q this year.
He Xiaopeng
[Indiscernible]
Interpreter
So, in order for — in order to fulfill the core component or core parts demand for P5, we actually have prepared for this since the beginning of this year. So that is why, by comparison, we actually face a smaller challenge compared to the fulfillment of the order for P7 and G3.
He Xiaopeng
[Indiscernible]
Interpreter
Thank you.
Tim Hsiao
Thanks for sharing your insight. [Indiscernible]
Operator
And your next question comes from Bin Wang with Credit Suisse. Your line is open.
Bin Wang
[Indiscernible] Actually I got 3 questions, and number 1 is about new products. And actually, I want to note a number 5, number 6 protest, given your competitors actually has been announced, pretty aggressive new product plan. For example, [Indiscernible] actually offer three products next year, and [Indiscernible] more than 10 products the next few years. So, detail part of number 5, number 6 products. And second question is about the margin because it seems that if you excluding operating 2020, actually Q&Q in the second quarter actually increased around 2.7% according to my calculation.
Can you break down the driver for the 2.7% gross margin increase? And meanwhile, what’s your guidance for the second half this year about gross margin chip. And last, the questions about link to the second question about software attachment [Indiscernible] rate, [Indiscernible] rate, in the first quarter, second quarter, and the second-half guidance. Thank you.
Dr. Brian Gu
Hey, Bin, it’s Brian. Let me just address your first question. Obviously, we can’t detail the fifth or the sixth product at the moment. But what we can share with you is that we are intending to develop a new platform for the business fixed products. That platform we aim to be probably the largest in terms of the quantity and addressable market. It will be a platform that is targeted in the mid to high-end that we’re selling right now.
At the same time, I think around the same time that we will be also rolling out a high-end product in the same year that will probably be above the current price range, increasing to over 400,000 or even above. So that’s another product that we aim to launch in that 2023 timeframe. So, you can see that in addition to the G3, the P7, the P5, we will have a new platform that we’ll have both the right-hand and Latin driving capability target as both domestic and international markets will be a very large volume driver. The same time will be launching a product that will be actually higher than our current high-end, 400, 000 and above. So let me turn to Dennis to talk about the margins.
Dennis Lu
Yes. Ben, you are right. If we take out the software margin impact, we actually, we had about 2.3% deploying the margin improvement quarter-over-quarter. Among that, around 1.1 to 1.2 was driven by better product mix. In the second quarter, we had more P7 in our total sales. In the first quarter, our P7 accounted for about 60% of the total sales. But in the second quarter, the P7 increased to about 66%. So, we had the mix improvement. The other big pies, the material cost reduction, as we mentioned in the previous earnings call, we have reached the [Indiscernible] cost and negotiations starting from the First Quarter.
But in the First Quarter, we also have some inventory which we purchased in quarter for last year. So, the cost reduction impact for the First Quarter was not 100%. But in the Second Quarter, we basically have the 100% usage for the low battery cost. So that accounted for about 1.1 to 1.2% points in terms of margin contribution as well. So, this is a big part of the margin improvement by the causal factors.
Charles Zhang
[Indiscernible] Charles here to address your third question regarding the software attach rate. In Q2, our software attaches rate increase from around 20% last quarter to around 25% this quarter. And we believe the increasing software attach rate, it was mainly driven by the high utilization rates, and also the overwhelmingly positive feedback from our customers. For example, in June, our monthly — the NGP utilization rate exceeded 65%, and also the NGP managed penetration rate in June also exceeded 60%. And I’m looking forward, I think it’s starting from Q4, and we will start to recognize the revenue from the XPILOT 3.0 on our P5.
Thank you.
Bin Wang
[Indiscernible] second half. Guidance. Thank you.
Operator
And you next question comes from Nick Lai with JP Morgan. Your line is open.
Nick Lai
Hi, thanks. It’s Nick from JP Morgan. Thank you for taking my question. I have two simple questions, first is related to financial, and second is related to policy guideline. On the financial — you mentioned earlier as of June you have [Indiscernible] nearly 35 billion in cash on balance sheet, and can you remind us, what our strategy using that [Indiscernible] of cash. And you mentioned earlier that we are launching 2 [Indiscernible] new model per year from ’23 onwards, and also Brian just mentioned, we are going to launch a new production platform.
And also, sales marketing is [Indiscernible] increase in 2Q. So, effect on very strong top-line, can you help us understand how should we think about the possibility of margin in that a lot of expansion or investment going forward at both cost label and office label. That’s the first question. And the second question is on them [Indiscernible] IT announced by simply policy guidelines regarding data control, data security in [Indiscernible] business. And how should we integrate that? What does that mean to our biggest operationally and financially [Indiscernible] [Indiscernible]
Dr. Brian Gu
Thank you. This is Brian. Let me just touch your first question regarding our cash reserve and then the future use of those cash, including the Hong Kong IPO rate, our cash balance actually exceeds 14.6 billion at the moment. As we stated in our Hong Kong IPO perspective, we actually intend to use the proceeds mostly for R&D, as well as sales and marketing expansion. What I can say at this moment is that we are seeing a tremendous opportunity in China. The acceleration of the market is actually faster than what we expected in the beginning of the year.
And I think as the leading Company in this segment, we want to maintain our leadership by further invest into R&D infrastructure, self-marketing, brand-building, and other sort of related efforts. So, you can see that we will increase the investment pace of our business in all these areas. For example, in the area of R&D, we think this year we can — we will further accelerate the use of RMB funding. We expect the RMB expenses for the whole year will approach about 4 billion R&B. so that will be increased from the early in the year.
Also, in the sales and marketing, I think given that expected launching of our new models. In third, fourth quarter will be also increased the spending on market — sales and marketing infrastructure build-out, brand, as well as other areas and charge and facilities, etc. We intend to increase the delivery target for our business. So as Paul mentioned in the script earlier, in the Fourth Quarter, we aim to achieve on a monthly delivery key number of above 15,000 vehicles per month. So that’s actually is the acceleration of current pace of delivery that we’re seeing. And based on what we see today in the supply chain and the constraints, we are confident we can hit that level in the Fourth Quarter. So let me turn on to Dennis — let’s turn on to [Indiscernible] to talk about the data and then regulatory issues I mentioned.
Dennis Lu
[Indiscernible]
Interpreter
Regards to your second question — sorry. In regards to your second question, regarding data security, we are actually very, very happy to see this deregulation that coming out from the Chinese government because it’s going to be very beneficial, not just for the whole industry, but especially for Xiaopeng, because XPeng has been always very stringent on its data protection and also on its safety — safeguarding. Since our inception, we’ve been investing a lot in the R&D of the data security and also safety safeguarding.
We not only fulfill the requirements and regulation in China, but also in Europe and across the world as well. And in terms of the whole industry’s development in this regard, we believe that a lot of the OEM s and other competitors out there are focusing on building their advantage on different modules. But really, the challenge lies in the combination of different modules, and also how to coordinate different modules to make sure that the whole set of your intelligence or Driver Assistance system fulfill all of those safety requirements and data security protection requirements. The most challenging part actually comes in at the safety, safeguarding, and also the manageable modules that really requires a full SEC in-house R&D capabilities, which XPeng always possessed.
And also, in terms of the software OTA, which also is an important matrix in regards to data protection and also safety safeguarding. we are very, very cutting edge in this development as well. For example, we are the first OEM or [Indiscernible] in the industry that actually conduct a driver proficiency test before allowing them to use our Driver Assistance system. We are also. We’re the first Company of its kind that adopted this lighter technology on top of our visual technology to make sure that we protect the driver safety as our top priority. Definitely, we see this new regulation as beneficial news for not just the whole industry, but especially for OEMs such as us, that actually possess the in-house full sec of R&D capability, thank you.
Operator
All right. Our next question comes from Ming Lee with Bank of America Securities. Your line is open.
Ming Lee
Well, thank you, Madam Ching, So I have two questions. The first question is regarding your international expansion plan. I think yesterday, we just saw a news that you also start to ship P7 to Norway. So, in the future, will you continue to adapt the wholesale business model, or you will start to open your own brand stores, and — through the retail model. Besides that, you also mentioned that starting from 2023, all of your models, will be able to using the international standard and to do shipped to worldwide.
So, you have you [Indiscernible] the most difficult and the challenges while you need to localize your component, what kind of component or software is the most difficult to localize, that’s my first question. And the second question actually, just to follow the previous — the regulation — regulation issue. So actually, I think that it’s a good thing to see a strict regulation and your regulation as you gave the guidance for all the auto Company to come priorities. However, I think in the near term, is it possible that OTA become more difficult or the Q1 use software and hardware able to provide level 4 automate functions. But the regulation probably only allows you to provide level 3 functions. In this case, how often do you see the possibility on this and narrow down [Indiscernible] advantage [Indiscernible] [Indiscernible]
Operator
And our next question comes from Edison Yu.
Dr. Brian Gu
Sorry. Let me respond to the question. So, because we were actually on mute. So, on the first question, Ming, you’re talking about the international strategy for sales marketing. Currently, we actually are aiming to try both in terms of working with distributors locally as well as opening out the right owned stores. We will actually even try a hybrid model in Europe. For example, in Norway, we are working with the leading distributor right now. But also, we have plans to open up our own stores in large cities or capital cities in the European countries that we target.
So, we’re experimenting a mixed model. Obviously, that’s something that we will need to decide what are the best model for us. But I think as currently, it’s a hybrid model. Your second question is on the OTA and also the data security. Q – Ming Lee, your second question I think this was the same question that was asked before, right? The question about the renew regulation, how they impact our ability to innovate as well stay ahead, I think as Paul mentioned in the answer earlier, it is obviously we are welcoming the regulatory framework.
And I think as the leading Company in this, we will benefit from the higher standard, higher bar for such practice. So, I think for us, we don’t see this actually will slow down our innovation, nor will they actually narrow the gap between us and the followers. We actually think the increased regulatory attention on this area were actually further strengthen the top players and create more barriers for the followers to come, so that’s our view.
Ming Lee
Got it. Thank you, Brian.
Operator
All right. And your next question comes from Edison Yu with Deutsche Bank. Your line is open.
Edison Yu
Thank you for taking our questions. As to first one, it seems you’re making a bigger push into the premium and going forward. I’m just curious if you could share how you will go about the differently than the existing model, or the more mass-market models. Will you be kind of implementing better service, or whether it be some sort of brand differentiation with this kind of premium offering. And the second question is just about the XPILOT 3.5 pricing. I think in the past, you’ve talked about as the feature set grows, the price should go up. So, wondering if you could provide any details there [Indiscernible]
Dr. Brian Gu
So, to answer your second question first is, we actually intend to have a higher pricing for XPILOT 3.5. It should be priced at a premium to the current XPILOT 3.0. And obviously, the XPILOT 3.0 will still be available to vehicles with the hardware. In the foreseeable, models we’ll actually have the current pricing maintained for the XPILOT 3.0 and slightly premium price for XPILOT 3.5 to reflect the additional features.
He Xiaopeng
[Indiscernible] [Indiscernible]
Interpreter
Now, in response to your first question, I think P7 has already proven to our capability of entering the premium markets, especially the one price at about 300,000 RMB at he’d last month our delivery of P7 actually surpass that of all the A4. So that’s a lot about our capability of entering the premium market and the future. We target the even higher price range at about 400,000 to 500,000 even. So that’s — by entering those premium markets we plan to actually offer standardized, data-driven, and technology – driven differentiation that set us apart from our competitors, not by offering other kinds of service. In the long run, we expect to see actually a new development coming out from our R&D that actually allow us to really be different from other market offering by 2023 to 2025.
And by that time, you will actually see what I’m talking about, and by that time you will actually see that we will have something that actually showcased our core R&D capabilities, and actually allow us to build an even stronger competitive edge or competitive mode against other competitors in the market. And because this actually involve some confidential information about our key product development logic in behind, allow me to keep it confidential at the moment. And when the time allows time committing, I will give you and share with you more information in this regard. Thank you.
He Xiaopeng
[Indiscernible]
Interpreter
And I can actually give you one example as some of the flying cars that we are developing in pipeline that we are R&Ding at the moment we plan to actually target an even more premium market price at about half a million to 1 million RMB. And so that would be actually one of our Flagship products by that time, as we enter the premium markets.
Edison Yu
Thank you.
Operator
And your next question comes from Paul Gong with UBS. Your line is open.
Paul Gong
Yeah, hi. Thanks for taking my question. My first question is regarding your distribution network, I think you mentioned you are going to expand your number of stores from 200 to 350 by end of this year. My double-check this number and also, when you are expanding are you mainly opening your own direct operating stores, or are you going to deeper which we see our third-party distributors or the dealers? And also related question on this is, in terms of challenge, do you think there is currently more limitation from the coverage of the — our network or the efficiency of the network.
Where do you foresee the further improvement? My second question is regarding the number of models. It seems that how you are going to accelerate the natural fund new models from 2023, but I think there is [Indiscernible] many of the similarities with Tesla, but Tesla has right now only four model’s despites of [Indiscernible] record and much higher volume. So, when you’re planning this number of models, what is your main considerations to stop some new models, and towards this gives more challenges to your distribution network, given many of the stores, we do not necessarily to have that many of the positions, to have several cars, which [Indiscernible] [Indiscernible]
He Xiaopeng
[Indiscernible]
Interpreter
In response to your first question, definitely by the end of the year, we plan to open 350 distributor stores, and we will have both directly operate us — self-operated, and also partnership stores. And the ratio of our directly run stores will increase
He Xiaopeng
[Indiscernible]
Interpreter
Cut towards which also seems several months ago, we already saw a great improvement on the single store’s profitability. Actually, since last. Here, we already saw that happening across different models that we actually launched and sell. And so across-the-board, we see a lot of our stores making profits. And so that is why when we look at the deployment of our new stores, we will look at, first of all, the infrastructure of that particular city, meaning that do we — whether on that, we have the supercharging The port in that particular city.
And also, how developed that sales network is that supports that particular city. And so actually, we’re [Indiscernible] two core components of infrastructure in all [Indiscernible] network, we see great improvement in their sales performance in a few months’ time and so that is what we’re going to actually heavily invest in for the second half of the year, to actually further expand our distribution network.
He Xiaopeng
[Indiscernible]
Interpreter
In response to your second question, I would like to talk about two things. The first thing is, XPeng will still continue to focus on high-quality product, which means that all of the models that we are in, we expect them to achieve the number 1 or number 2 of its market share, of its kind. For example, P7 has already achieved number two in terms of sales in Class C sedan, and P3 is ranked number 1 or number 2 in the market of this time. In the future, going forward, when we have more models on our pipeline and when we launch more models, we began — we are going to adopt a different store distribution, or showcase strategy.
So, we are going to actually look at the local market and local cities and analyze the market demand in selecting which models to showcase in the showroom, and in the stores. And in some of our flagship stores where we have more space, we will actually be able to showcase the whole selection of our models. Thank you.
Ziling Ma
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.
Dr. Brian Gu
Thank you, everyone.
Dennis Lu
Thank you.
He Xiaopeng
Thank you all. Bye.
Operator
This concludes our conference call; you may now disconnect your lines. Thank you.
Source: XPeng