<News Alert> Volkswagen taking a leap of faith with share subscription and technical collaboration
- Volkswagen proposed 5% stake and strategic technical collaboration with XPeng implies the endorsement of the latter’s capability in smart-connected EV development
- Both parties will jointly develop BEV models for sale in the Chinese market under the Volkswagen brand. The products are expected to be ready by 2026. Future collaboration includes new EV platform and software technologies
- Volkswagen is also working with SAIC (600104) for its premium brand Audi on future EV development
- This deal reiterates our view that Chinese OEMs’ strength in the smart EV development will pivot China to lead in the global smart EV development
A wake-up call on foreign OEMs. The latest deal by Volkswagen (VW), one of the largest auto OEMs globally, to invest in a Chinese pure EV startup reiterate our view that it is a wake-up call for foreign automakers to adopt an offensive EV strategy. Currently, VW has its own EV platform – MEB, but the pace of development is still quite slow. The deal will propel VW to launch battery EV at a faster pace. For a start, 2 BEV models will be developed for the Chinese market under the VW brand, leveraging on the core competence of XPeng’s G9 platform, connectivity and ADAS software. The BEV models will be ready in the market by 2026. In the longer-term, both parties will explore areas in future EV platforms and software technologies developments. In 2022, VW’s EV penetration in China NEV market was less than 3%. VW will subscribe to about 94.7m Class A ordinary shares (or about 4.99% of enlarged share cap) of XPeng, at a subscription price of US$15 per ADS (or HK$HK$58.6 per Class A ordinary share). VW is utilising US$700m to “acquire” 2 BEV models for the Chinese market, which is quite reasonable compared to developing the models from scratch. VW’s stake and collaboration deal shows the company is taking a leap of faith in XPeng’s strength.
Implications on Xpeng. Apart from the cash injection (US$700m) to strengthen the capital base, we believe the longer-term impact is more meaningful to XPeng. From 2026 onwards, the 2 BEV models could potentially generate licensing income to XPeng as they are branded under VW brand for the Chinese market. But going forward, any new EV platforms could be under a joint venture arrangement, which might help XPeng on its overseas foray if the new EV models are for both the Chinese and overseas market. XPeng has been in the forefront of ADAS development, and it means a bigger application of its software in future EV models not only for its own brands but also future EV models with VW. Many auto OEMs are moving towards licensing arrangement on software subscription, which might create bigger values for shareholders compared to pure hardware sales. The latest transaction will endorse XPeng’s software capability especially when autonomous driving is gaining momentum especially in China. We anticipate XPeng share price to take a breather after the 32% spike this morning, as the earnings impact is limited in the near-term. We are reviewing our TP of US$13/HK$52.
