XPeng Inc. (XPEV) Q2 2021 Earnings Call Transcript

XPeng Inc. (XPEV -1.39%)
Q2 2021 Earnings Call
Aug 26, 2021, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Hello, ladies and gentlemen. Thank you for standing by for the second-quarter 2021 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.

Ziling Ma, director of investor relations of the company. Please go ahead, Mr. Ma.

Unknown speaker

Thank you. Hello, everyone, and welcome to XPeng's second-quarter 2021 earnings conference call. Our 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; managing director of strategy, Mr.

Charles Zhang; and myself. Management 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 under 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 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 XPeng's earnings press release and this conference call will include the disclosure of unaudited GAAP financial measures as well as unaudited non-GAAP financial measures. XPeng's earnings 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. He Xiaopeng. Please go ahead.

Xiaopeng He -- Co-Founder, Chairman, and Chief Executive Officer

[Foreign language] Hello, everyone. Thank you for joining XPeng's second-quarter 2021 earnings conference call. In the second quarter of 2021, XPeng's vehicle deliveries reached 17,398, another quarterly record high, representing a 439% increase year over year. For the six-month period ended June 30, 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 record with an all-time high order backlog. With the rapid growth in deliveries, our second quarter profitability further improved, and our gross margin reached 11.9%. Our rapid delivery growth was driven by consumers' increasing demand for Smart EVs and our leadership position in smart electric vehicle products and our fast 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 system.

With the rollout of XPILOT 3.5 earlier next year and afterwards, XPILOT 4.0, our future advanced driver-assistance system built on our next-generation hardware platform, will be able to empower a broad range of end-to-end driver driving scenarios, including those not covered by HD maps. As a result, customers' 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 model, that equip larger technology to be adopted in some of the configurations to increase redundancy of perception through hardware and sharpen its adaptabilities in handling corner cases to further safeguard driver safety. Our strategic focus on advancing fast product iteration allows us to further expand our addressable market. In the second quarter, we began sales and deliveries of lithium iron phosphate or LFP battery-powered G3s and P7s, and their deliveries comprise more than 20% of total deliveries for each model.

These new additions 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 margin response to our recently launched G3i, the new mid-cycle facelift 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. In July, we announced configuration details and the price range for our third production model, the P5, and its market 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 for advanced driver-assistance system that is capable of handling complex driving scenarios in China.

Now with P5, we are bringing to our users a driving experience that will enable them to utilize advanced driver-assistance system in urban driving scenarios with 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 system and smart cockpit technology to the broader family sedan market with an attractive pricing range from RMB 160,000 to RMB 230,000, further accelerating the EV disruption of the traditional ICE and nonintelligent automobile market. Here, I would like to share some of my predictions for the future.

First, in China, vehicles priced between RMB 150,000 and RMB 400,000 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 driving-assistance system will trigger qualitative changes in users' mobility experience. Third, as China is poised to take the lead in the development of Smart EVs around the world, 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 7, XPeng completed our dual primary IPO on the Hong Kong Stock Exchange and raised HKD 15.8 billion. 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. 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 two or three new vehicles every year, supporting XPILOT 3.0 or above. We intend to make these future new models, including hardware, software and services simultaneously available in China and in international markets. We'll also broaden our primary price range in China from between RMB 150,000 and RMB 300,000 to between RMB 150,000 to RMB 400,000, making our cutting-edge Smart EVs accessible to a broader customer base. As we accelerate our effort 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 3,000, 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 map for international markets. We estimate the total number of engineers working in our autonomous driving software, hardware and relative supporting infrastructure teams to exceed 1,500 by the end of this year.

In this June, the penetration rate of the EVs in China's market has surpassed 10% for the first time. I believe the Chinese Smart EV market is navigating through an inflection point for the next level of growth, which arrived earlier than expected. To tap into this booming opportunities, we will accelerate the construction of our infrastructure facilities, underpinning our long-term strategic road map and investments. As of the end of June, XPeng's physical sales network consisted of 200 sales stores across 72 cities in China.

Of these sales stores, 110 were directly operated by us. To keep pace with our rapid development 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. We also continue to rapidly expand our supercharging network. As of June 30, the number of XPeng-branded supercharging station grew to 231, covering 65 cities.

Recently, the first batch of 11 XPeng-branded supercharging stations has been deployed on the Shandong section of the Beijing-Shanghai Expressway and the Hunan 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 Expressway, 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. In terms of our international expansion, as of this June 30, we had explored approximately 500 G3s to Norway.

And in August, we plan to export 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 sales, delivery and customer service enhancements. Our target is to prepare ourselves for the overseas market 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. Turning to our production.

With our G3i and P5 commencing production, our Zhaoqing factory is now able to produce the G3i, P7 and P5 concurrently. And in August, we added a second production shift at the Zhaoqing factory. With the increase in 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 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. In summary, we'll continue to strive to overcome the various challenges before us stemming from chip shortage, sales structural shortage, COVID-19 resurgence in some parts of the world and production transition from G3 to G3i. 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 RMB 4.8 billion and RMB 5 billion.

I look forward to sharing with you our latest progress on technology innovations on our third XPeng technology day on October 24 this year.,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 -- Vice President of Finance

Thank you, Xiaopeng, and hello, everyone. Our outstanding performance in the second quarter continued to reflect XPeng's leadership in China's booming Smart EV industry, where we continue to introduce innovative technology, differentiated products and premium service. Fueled with 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. ow I would like to walk you through our detailed financial results for the second quarter of 2021. I will reference RMB 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 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 brand 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 RMB 141 million for the first quarter of 2021.

The year over year and quarter-over-quarter increase were mainly due to more income from service, parts and accessory sales in line with higher accumulated 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. Vehicle margin was 11% for the second quarter of 2021 compared with negative 5.6% for the same period 2020 and 10.1% for the first quarter of 2021. The improvement was primarily attributable to better product mix and material cost reduction.

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 and development staff; 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 increase 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 cost and commission for the franchised 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 -- 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 2021 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 redemption right of the preferred 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 of 2021.

Net loss attributable to ordinary shareholders of XPeng Inc. was RMB 1.2 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, the fair value change on derivative liabilities related to the redemption right of the preferred shares and accretion on the preferred shares to redemption 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 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 30, 2021, our company had cash and cash equivalents, restricted cash, short-term deposits, short-term investments and long-term deposits in total of RMB 32.9 billion, which is previously a Hong Kong IPO proceed of RMB 13 billion compared with RMB 35.3 billion for the year as of December 31, 2020.,With that, now I would like to turn back the call to Ziling Ma.

Unknown speaker

To be mindful of the line of our earnings call for our second-quarter financial result, I will 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.

Questions & Answers:

Operator

[Operator instructions] Your first question comes from Tim Hsiao with Morgan Stanley. Your line is open. 

Tim Hsiao -- Morgan Stanley -- Analyst

Thanks for taking my questions, and congratulations on a great result. 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 be concerned about similar supply shortage into next year, especially export where we need to secure the key component supply for four models in total with volume unlikely doubling. So I just wanted to know that how could shortage such challenge into next year? We had a company considering investing or forming strategic alliances with some parts makers like for the cheaper batteries, so I'm sure we can get sufficient supply. My second question is about the demand of P5 because I think Mr. He already mentioned that demand is pretty strong.

But could you share more information about the progress in collecting the orders during its presell? I understand you might not be able to share too much detail, but how should we think about that volume scale relatively to, for example, that of our inflection model P7 and with the component shortage or the volume ramp-up of P5 into fourth quarter? [Foreign language] 

Xiaopeng He -- Co-Founder, Chairman, and Chief Executive Officer

[Foreign language] Thank you. So in regards to core components and chipset shortage, I think we have to look at it from two ways. The one -- the first way is there are some expected shortage that we can deal with and prepare for. And the other kind is the unexpected ones.

Now for the expected ones, I'm mainly talking about the chipset or chip shortage. But the unexpected ones are mainly referring to pandemic resurgence. For example, lately, we saw this serious lockdown. And as it so happened that one of your Tier 1 or Tier 2 suppliers is located in one of those lockdown cities, there's nothing you could do about it, and those will be considered as unexpected elements that affect our shortage and add to our challenge.

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 with chip shortage. The second thing is we can work with some top-tier suppliers in terms of chipset production and development. We can work with them in several ways.

First of all, we can find collaboration deals. Also, we can invest in some of those core suppliers. And also we can work with local governments in terms of bulk purchasing or preordering of the chipsets or chips that we need. Basically, chip shortage is a big challenge faced by the whole industry.

But as a company, a very -- company equipped with leading technology of its kind, XPeng actually has a very, very favorable position to play in this value chain because a lot of the chip suppliers consider us as their VIP, 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 delivery backlog yet. So that allow us to be really flexible in selecting different suppliers in order to fulfill our chip demand. We also can look to the overseas market for more chip supply.

So in regards to your second question, which is about the market demand of P5, if you ask me to compare it with P7, I would say that actually we see even stronger demand compared to P7 of the same developmental stage. And also, we are able to actually better plan ahead for the preordering of P5. And right now, the preorder has started since 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. So in order to fulfill the core components of 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 faced a smaller challenge compared to the fulfillment of the orders for P7 and G3. Thank you.

Tim Hsiao -- Morgan Stanley -- Analyst

Thanks. 

Operator

And your next question comes from Bin Wang with Credit Suisse. Your line is open. 

Bin Wang -- Credit Suisse -- Analyst

[Foreign language] OK. Actually, I got three questions. Number one is about new products. And actually, I wouldn't know the No.

5, No. 6 products given your competitors such as has been announced, pretty aggressive new product plan, for example, on largely offer three products per year and one actually more than 10 products in next few years. So basically, details about the No. 5, No.

6 products. And second question is about the margin because it's just that if you -- excluding the subtle increase income in 2020, actually, the Q-on-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 second half this year about the gross margin trend? And last question is about -- second question about the software attach rate, expanded attach rate, take rate in the first quarter, second quarter and the second half guidance. Thank you. 

Brian Gu -- Vice Chairman and President

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 fifth and sixth product.

That platform we aim to be probably the largest in terms of the quantity and addressable market. So it will be a platform that is targeted in the mid- to high end, which -- that we're starting 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 RMB 400,000 or even above. So that's another product that we aim to launch in the 2023 time frame.

So you can see that in addition to the G3, the P7 and P5, we will have a new platform that will have both the right-hand and left-hand driving capability target at both domestic and international markets will be a very large volume driver. At the same time, we'll be launching a product that will be especially higher than our current high end, RMB 400,000 and above. So let me turn to Dennis to talk about the margins.

Dennis Lu -- Vice President of Finance

Yes. Bin, you're right, if we take out the software margin impact, actually we had about 2.3 percentage point margin improvement quarter over quarter. Among that, around 1.1 to 1.2 was driven by our 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 part is the material cost reduction.

As we mentioned in the previous earnings call, we have reached the battery cost negotiations starting from the first quarter. But in the first quarter, we also have some inventory which we purchased in quarter 4 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 lower battery cost.

So that accounted for about 1.1 to 1.2 percentage points in terms of margin contribution as well. So this is a big part of the margin improvement by the possible factors.

Charles Zhang -- Managing Director of Strategy

Yes. Bin, Charles here. To address your third question regarding the software attach rate. In Q2, our software attach rate increased from around 20% last quarter to around 25% this quarter.

And we believe the increase in software attach rate was mainly driven by the high utilization rate and also the overwhelmingly positive feedback from our customers. For example, in June, our monthly NGP utilization rate exceeded 65%, and also the NGP managed penetration rate in June also exceeded 60%. And looking forward, I think it's starting from Q4, and we will start to recognize the revenue from the XPILOT 3.0 from the -- on our P5.

Bin Wang -- Credit Suisse -- Analyst

About guidance, second half guidance. Thank you. 

Operator

And your next question comes from Nick Lai with J.P. Morgan. Your line is open. 

Nick Lai -- J.P. Morgan -- Analyst

Yes. It's Nick from JP Morgan. Thank you for taking my question. Two simple questions.

First is related to financial and second is related to policy guideline. On the financial, yes, you mentioned earlier, as of June, we have been roughly nearly RMB 33 billion cash on balance sheet. And can you kind of remind us what our strategy is in that level of cash? And you mentioned earlier, that we're launching two, three new model per year from '23 onward. And also, Brian just mentioned, we are going to launch a new production platform and also sales and marketing increased in 2Q.

So effect on very strong top line. And can you help us understand how should we think about profitability or margin in light of a lot of expansion of investment going forward at both cost level and opex level. That's the first question. And the second question is the government [Inaudible] announced recently a policy guideline regarding data control, data security inn the tools driving business.

And how should we interpret that? And what does that mean to our business operationally and financially? [Foreign language]

Brian Gu -- Vice Chairman and President

Thank you. This is Brian. Let me just address 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 exceed RMB 4.6 billion at the moment.

As we stated in our Hong Kong IPO prospectus, 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, sales, 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 R&D funding. We expect the R&D expenses for the whole year will approach about RMB 4 billion. So that will be increased from the earlier year -- early in the year.

Also, in the sales and marketing, I think given the expected launching of our new models in third and fourth quarter, we will be also increase the spending on market -- sales and marketing infrastructure build-out, brand as well as other areas and charging facilities, etc. We intend to increase the delivery target for our business. So as Xiaopeng mentioned in the script earlier, in the fourth quarter, we aim to achieve on a monthly delivery peak number of above 15,000 vehicles per month. So that's actually the acceleration of current pace of delivery that we've seen.

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 now to Dennis. I'll turn it over to you to talk about the data and the regulatory issue that I mentioned.

Dennis Lu -- Vice President of Finance

[Foreign language] So in regards to your second question regarding data security, we are actually very, very happy to see this new regulation coming out from the Chinese government because it's going to be very, 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 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 development in this regard, we believe that a lot of the OEMs and auto 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 the safety safeguarding and also the manageable modules that really requires a full-stack in-house R&D capabilities, which XPeng always possessed. And also in terms of the software OTA, which also is an important metric in regards to your 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 EV OEM in the industry that actually conduct a driver proficiency test, but for allowing them to use our driver-assistance system.

We are also the first company of its kind that adopted this LiDAR technology on top of our visual technology to make sure that we protect the driver safety as our top priority. So 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-stack R&D capability. Thank you.

Operator

And your next question comes from Ming Lee with Bank of America Securities. Your line is open. 

Ming Lee -- Bank of America Meriill Lynch -- Analyst

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 started 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 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 ship to worldwide. So in your view, what's the most difficult challenges when you need to localize your component? And what kind of components or software is the most difficult to localize? That's my first question. And the second question, actually just following the previous regulation issues. So actually, I think it's a good thing to see a strict regulation and the new regulation actually give a guidance for all the auto company to comply this.

However, I think that in the near term, is it possible that OTA become more difficult? Or the -- for new software and hardware are able to provide Level 4 autonomous driving functions, but the regulation probably only allow you to provide Level 3 functions? In this case, how do you see the possibility on lease? And will lease narrow down XPeng's advantage. [Foreign language]

Operator

And your next question comes from Edison Yu.

Brian Gu -- Vice Chairman and President

Sorry. Let me respond to the question because we were actually on mute. So on the first question, Ming, you're talking about the international strategy for sales and marketing. Currently, we actually are aiming to try both in terms of working with distributors locally as well as opening our direct owned stores.

We were actually going to try a hybrid model in Europe. For example, in Norway, we're 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 is the best model for us. But I think it's currently, it's a hybrid model. Your second question is on the OTA and also the data security, right? So Ming, your second question, I think that's the question that was asked before, right, the question about the new regulation, how that impacts our ability to innovate as well as stay ahead. I think as Xiaopeng mentioned in the answer earlier, it is -- obviously, we're welcoming the regulatory sort of framework.

And I think as a 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 it actually narrow the gap between us and the followers. We actually think the increased regulatory attention on this area will actually further strengthen the top players and create more barriers for the followers to come. So that's our view.

Operator

And your next question comes from Edison Yu with Deutsche Bank. Your line is open. 

Edison Yu -- Deutsche Bank -- Analyst

Thank you for taking our questions. I have two. First one, it seems you're making a bigger push into the premium end going forward. I'm just curious if you could share how you will kind of go about this differently than the sort of existing models or the more mass market models.

Will you be kind of implementing better service? Or will there be some sort of brand differentiation with this kind of premium offering? And 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. [Foreign language]

Brian Gu -- Vice Chairman and President

So to answer your second question first is we actually intend to have higher pricing for XPILOT 3.5. This should be priced at a premium to the current XPILOT 3.0. Obviously, the XPILOT 3.0 will still be available to vehicles with the hardware. So in the foreseeable sort of models, we'll actually have the current pricing maintained for the XPILOT 3.0 and slightly premium price for XPILOT 3.5 to reflect additional features.

Xiaopeng He -- Co-Founder, Chairman, and Chief Executive Officer

[Foreign language] Now in response to your first question, I think P7 has already proven our capability of entering the premium market, especially the one priced at about RMB 300,000. Actually, last month delivery of P7 actually surpassed that of Audi A4. So that says a lot about our capability of entering the premium market. In the future, we target the even higher price range, at about RMB 400,000 to RMB 500,000 even.

So that -- by entering those premium markets, we plan to actually offer standardized, data-driven and technology-driven kind of 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'll have something that actually showcase our core R&D capabilities and actually allow us to build an even stronger competitive edge or competitive moat against other competitors in the market.

And because this actually involve some confidential information about our key product development logic behind, allow me to keep it confidential at the moment. And when the time allows, time permitting, I will give you and share with you more information in this regard. Thank you. And I can actually give you one example as some of the flying cars that we are developing in pipeline that we are R&D.

At the moment, we plan to actually target an even more premium market price to add about RMB 0.5 million to RMB 1 million. And so that would be actually one of our flagship products by that time as we enter the premium market.

Operator

And your next question comes from Paul Gong with UBS. Your line is open. 

Paul Gong -- UBS -- Analyst

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 300 to 350 by end of this year.

Double check on this number. And also where are you expanding? Are you mainly opening your own direct operating stores? Or are you going to more leverage with the third-party distributors or the dealers? And also a related question on this is in terms of challenge, do you think there is currently more mutation from the coverage of the network or the efficiency of the network? Or what do you foresee the further improvement? My second question is regarding the number of models. It seems like you're going to accelerate the launch of new models from 2023. But I think there is a -- exposures more of the similarities versus Tesla.

But Tesla has right now only four models despite of number of track record and much higher volume. So are we planning this number of models? What is your main considerations to some new models? And would this give more challenges to your distribution network, given many of the stores, they do not necessarily adopt many of the positions to have several cars. [Foreign language]

Xiaopeng He -- Co-Founder, Chairman, and Chief Executive Officer

So 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 operated, self-operated and also partnership stores. And the ratio of our directly run stores will increase. And also, since several months ago, we already saw a great improvement on the single stores' profitability.

Actually, since last year, we already saw that happening across different models that we actually launch 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 we -- whether or not we have the supercharging support in that particular city and also how developed the sales network is to support that particular cities. And so actually, with those two core components of the infrastructure and all those networks, we see great improvement in their sales performance in a few months' time.

And so that is what we are going to actually heavily invest in for the half second of the year to actually further expand our distribution network. Now 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 products, which means that all of the models that we are in, we expect them to achieve the No. 1 or No.

2 of its market share of this kind. For example, P7 has already achieved No. 2 in terms of sales in Class B sedans. And G3 is ranked No.

1 or No. 2 in the market of this kind. In the future going forward, when we have more models on our pipeline -- in our pipeline and when we launch more models, we begin -- 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. 

Unknown speaker

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.

Charles Zhang -- Managing Director of Strategy

Thank you, everyone.

Brian Gu -- Vice Chairman and President

Thank you. Thank you, all. Bye.

Operator

[Operator signoff]

Duration: 75 minutes

Call participants:

Unknown speaker

Xiaopeng He -- Co-Founder, Chairman, and Chief Executive Officer

Dennis Lu -- Vice President of Finance

Tim Hsiao -- Morgan Stanley -- Analyst

Bin Wang -- Credit Suisse -- Analyst

Brian Gu -- Vice Chairman and President

Charles Zhang -- Managing Director of Strategy

Nick Lai -- J.P. Morgan -- Analyst

Ming Lee -- Bank of America Meriill Lynch -- Analyst

Edison Yu -- Deutsche Bank -- Analyst

Paul Gong -- UBS -- Analyst

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