Maintain BUY. We are of the view that the GPM beat in 2Q25 largely reflected Xpeng’s superb cost reduction efforts on the facelifted models including the G6, G9 and X9, despite lower selling prices. That could indicate solid GPMs in 2H25E and FY26E, with more new/facelifted models and a better model mix.
　　We project a net profit of RMB255mn in 4Q25E and RMB4.2bn in FY26E. n 2Q25 GPM beat. Xpeng’s 2Q25 revenue was 1.8% lower than our prior forecast, while vehicle margin widened by 3.9ppts QoQ to 14.3%, or 1.9ppts higher than our projection. R&D expenses in 2Q25 were about RMB200mn higher than our forecast, leading to an in-line operating loss.
　　Net loss of RMB478mn in 2Q25 was about RMB186mn narrower than 1Q25 and RMB75mn narrower than our forecast.
　　GPM beat reflects Xpeng’s cost reduction efforts on facelifted
　　models. We are of the view that the most important reason for the QoQ lift in vehicle GPM in 2Q25 was the significant margin improvement from the facelifted G6, G9 and X9, despite price cuts for most configurations. That gives us more confidence in the margins for new models including the P7 and X9 EREV. We project vehicle GPM to rise by 0.5ppts/0.9ppts QoQ to 14.8%/15.7% in 3Q25 and 4Q25, respectively, aided by a better model mix and greater economies of scale. n Well on track to turn profitable. We revise down our FY25E sales volume forecast slightly by 10,000 units to 450,000 units to adjust for new model delivery schedules. We also revise up FY25E R&D expense forecast by RMB0.2bn to RMB8.6bn, as higher sales and margins give Xpeng more flexibility in investing in new models, robotics and AI. Therefore, we project a net loss of RMB148mn in 3Q25E and a net profit of RMB255mn in 4Q25E.
　　We still believe Xpeng could be close to a breakeven at the non-GAAP level in 3Q25E. We raise our FY26E sales volume forecast by 20,000 units to 620,000 units, mainly due to the new P7, as the company targets a top 3 best-selling BEV sedan priced RMB200,000-300,000 for the P7, following the success of the Xiaomi SU7 and Tesla Model 3. We thus raise FY26E net profit by 6% to RMB4.2bn, taking a possible tax credit into account. n Valuation/Key risks. We maintain our BUY rating and ADR/H share target price of US$28.00/HK$110.00, still based on 1.8x FY26E P/S (unchanged). 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.