Maintain BUY. Xpeng’s 1Q25 earnings beat on GPM and government subsidies. We further raise our FY25E sales volume and GPM forecasts given the current sales momentum and more new model rollouts in 2H25. We are of the view that Xpeng may achieve a breakeven at the net level in 3Q25. Such profit growth path has helped Xpeng enter a virtuous circle with more R&D investments and even higher profits, in our view.
　　1Q25 earnings beat on GPM and government subsidies. Xpeng’s 1Q25 revenue beat our prior forecast by 1.7%, mainly due to higher-than- expected average selling price (ASP). Vehicle GPM of 10.5% in 1Q25 was in line with our forecast, while GPM for services and others was about 10ppts higher than our projection. SG&A and R&D expenses combined were about RMB180mn higher than expected, which was offset by higher government subsidies. Net loss of RMB664mn was about RMB260mn narrower than our forecast. Both operating loss and net loss excluding extraordinary items were largely in line with our prior forecasts.
　　Improving profitability could support more new models and AI investments. We raise our FY25E sales volume forecast by 20,000 units to 460,000 units amid strong sales in the first four months of 2025 and more new model rollouts in 2H25. We revise up FY25E vehicle GPM from 11.3% to 12.0%, as new models with higher GPMs are to contribute more sales. We are of the view that it is possible for Xpeng to achieve a breakeven at the net level in 3Q25. A guidance of 32% YoY increase in R&D expenses in FY25E means a good number of new models could be unveiled in FY26E. Xpeng’s proprietary AI chip plans to be equipped from 3Q25 means another big step forward in autonomous driving progress.
　　Earnings/Valuation. We revise our FY25E net loss from RMB1.7bn to RMB0.9bn after raising sales volume and GPM forecasts. We also revise up FY26E GPM by 1.2ppts to 16.8%. We raise our FY26E net profit from RMB1.2bn to RMB3.7bn, by taking a possible tax credit into consideration. We maintain our BUY rating and ADR/H-share target price of US$28.00/ HK$110, still based on 1.8x our FY26E P/S (unchanged). We think a valuation that is slightly higher than peers is justified given its leading AI capabilities and clearer profit growth path. Key risks to our rating and target price include lower sales volume and/or GPM than we expect, slower monetization timeline for robots and a sector de-rating.