Hello, ladies and gentlemen. Thank you for standing by for the third quarter 2020 earnings conference call for XPeng Incorporated. At this time, all participants are in a listen-only mode. After 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. Charles Zhang, Managing Director of Strategy of the company. Please go ahead, Mr. Zhang.
Thank you. Hello, everyone, and welcome to the third quarter 2020 earnings conference call of XPeng Inc. The company's financial and operating results were issued via Newswire services early today and are available online. You can also view the earnings press release by visiting the IR section of our website at ir.xpeng.com. Participants on today's call will include our Co-founder, Chairman, and CEO, Mr. Xiaopeng He; Vice Chairman and President, Dr. Brian Gu; Vice President of Finance, Mr. Dennis Lu; and myself. Management will begin with prepared remarks. The call will conclude with a Q&A session. As a reminder, this conference is being recorded. 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 under the 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 the 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 U.S. Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements except as required under the applicable law. Please also note that XPeng's earnings press release and this conference call include the discussions of unaudited GAAP financial measures as well as unaudited non-GAAP financial measures. XPeng's 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. Xiaopeng He. Please go ahead.
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Hello, everyone. Thank you for joining XPeng's inaugural earnings conference call today.
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On August 27th, 2020, XPeng successfully listed on the New York Stock Exchange, a significant milestone marking the start of our new journey as a public company. On behalf of all the employees and myself, I'd like to extend our sincere gratitude and appreciation to all of the longtime and new shareholders who have been supporting us.
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Today marks another milestone for XPeng as we reported our first quarterly results following our successful IPO. We're pleased to be speaking with you today about our strong operating and financial performance in the third quarter, in which total vehicle deliveries increased by 266% year-over-year to 8,578 units. In addition, we achieved positive gross margin of 4.6%, bolstered by significant revenue growth and mass deliveries of the P7.
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The P7 is our smart sports sedan, which is also our second in mass production level model. Deliveries of the P7 have maintained fast growth momentum since our mass delivery began in late June. During the third quarter, we delivered 6,210 P7s, of which 98% can support XPILOT 2.5 or XPILOT 3.0, our advanced autonomous driving systems. It is worth noting that on October 20th, the 10,000th P7 rolled off our production line in our own Zhaoqing facility.
We now hold the record as the fastest emerging smart EV company to surpass the 10,000 vehicle production mark. All these achievements demonstrate our ever stronger capabilities across the entire EV spectrum in research and development, manufacturing, branding, and sales and services.
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I believe XPeng is the only Chinese car making company that is developing full stack, autonomous driving software, and smart in-car operating system in house. On the second XPeng Tech Day, which was held on October 24th this year, we showcase our first of its kind all voice in-car system, which enables continuous driver vehicle dialogue interactions covering a broad range of scenarios. It is one of our key proprietary technologies developed for and applied in our second generation Xmart OS operation system.
We also showcase our autonomous driving technology capabilities bolstered by our in-house developed Navigation Guided Pilot system, also known as NGP, which enables autonomous driving on highways with features including autonomous lane changes, overtaking other vehicles, and switching ramps amongst other things. Our goal is to provide the most advanced Navigation Guided, autonomous driving system in China. We plan to make the NGP system available to our customers via OTA earlier next year.
In the first quarter of 2021, we plan to conduct an expedition for our NGP to cross over 2,000 km of highway from Guangzhou to Beijing. We believe this is just the beginning of how high level autonomous driving technology is transforming mobility in China. I firmly believe that dedication to full stack in-house R&D is the key to enhancing our product differentiation and solidifying our core competitiveness.
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In terms of production, after our own Zhaoqing plant officially started mass production of the P7 in the first half of the year. In September, our second manufacturing base broke ground in the Guangzhou Economic Development Zone with strong support from Guangzhou government. We expect this new XPeng Smart EV manufacturing base to start production by the end of 2022. Together with our Zhaoqing manufacturing base, we have set a solid foundation for XPeng's long-term growth strategy.
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In terms of sales and service network, as of September 30th, 2020, XPeng's physical sales and service network comprised of a total of 116 stores and 50 service centers covering 58 cities.
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Additionally, our super charging network continued to expand across the nation. As of September 30, 2020, XPeng branded super charging station has increased to 135, covering 50 cities. Furthermore, we announced an XPeng sponsored free super charging program at the Beijing Auto Show on September 26th. The program has been initiated in 24 cities and will be expanded to at least 60 cities by the end of the year. XPeng will strategically invest in the nationwide deployment of a super charging network over the next few years.
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While continuously strengthening our leadership position in China's smart EV industry, we're also strategically developing opportunities in international markets. For example, in September, we shipped the first batch of XPeng's G3s to Europe. The super long-range version of the G3 is our smart SUV model adapted for European markets with the specification. The shipment marked our first step to tapping international markets.
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In the third quarter, we successfully completed our IPO, which had a total offering size of RMB 1.7 billion. Together with the RMB 900 million raised in Series C+ financing, our fundraising totaled nearly RMB 2.6 billion in the third quarter. With the support of substantial capital reserves, we intend to increase investments in branding, sales and service network, charging network, as well as in technology advancement and model development.
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For the fourth quarter of 2020, we expect deliveries of our vehicles to be approximately 10,000 vehicles. Our ability to achieve remarkable performance is attributable not only to our strong in-house R&D capabilities, but also to our effective strategies in market positioning, product planning, manufacturing capabilities, and our operational roadmap.
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Thank you, everyone. With that, I'll now turn the call over to our VP of Finance, Mr. Dennis Lu, to discuss our financial performance for the third quarter.
Thank you, Xiaopeng, and hello, everyone. As noted, we delivered strong top-line performance in the third quarter and posted a positive gross profit for the first time in our company's history. We have reached this milestone in large part due to our successful launch and mass delivery of the P7, which also carries an increased average selling price compared with our prior model. Our August IPO and the New York Stock Exchange listing not only provided funding for our long-term sustainable growth, but also further strengthened our brand and our influence in the electric vehicle industry. Now I would like to walk you through our detailed financial results for the third quarter of 2020.
Total revenues were RMB 2 billion for the third quarter, representing an increase of 343% from RMB 450 million for the same period of 2019, and an increase of 237% from RMB 591 million for the second quarter of this year. Revenues from vehicle sales were RMB 1.9 billion for the third quarter, representing an increase of 376% from RMB 399 million for the same period of 2019, and an increase of 251% from RMB 541 million for the second quarter this year. The year-over-year and quarter-over-quarter increases were mainly due to the acceleration of deliveries of the P7 since we began its mass delivery in the late June this year. Gross margin was 4.6% for the third quarter, compared with a negative 10.1% for the same period last year, and also a negative 2.7% for the second quarter this year.
Vehicle margin was 3.2% for the third quarter, compared to negative 10.8% for the same period a year-ago, and negative 5.6% for the second quarter this year. The increase was primarily due to a better product mix, decrease in material cost, and improvement in our manufacturing efficiency. Research and development expenses were RMB 635 million for the third quarter, representing an increase of 46% from RMB 435 million for the same period in 2019, and an increase of 99% from RMB 320 million for the second quarter this year. The year-over-year and quarter-over-quarter increases were mainly due to a significant amount of share-based compensation expense recognized related to the share-based awards we granted to our employees with the performance condition of an IPO.
If we exclude this share-based compensation expense, number one, our research and development expense will be decreased year-over-year, primarily because we incurred significant amount of expense relating to the development of the P7 in the same period last year. Number two, the research and development expense will increase quarter-over-quarter due to increase of design and development expense relating to the new product, which will be launched next year. Selling general and administrative expenses were RMB 1.2 billion for the third quarter, representing an increase of 321% from RMB 286 million for the same period last year, and an increase of 152% from RMB 477 million for the second quarter of 2020. The year-over-year and the quarter-over-quarter increase were mainly due to the share-based compensation expense recognized for the reasons mentioned above.
Excluding the share-based compensation expense, the increase mainly resulted from higher marketing and promotional spending to support the million vehicle sales. Loss from operations was RMB 1.2 billion for the third quarter, compared with RMB 761 million for the same period last year, and RMB 779 million for the second quarter of 2020. Excluding the share-based compensation expense, the non-GAAP adjusted loss from operation was RMB 823 million in the third quarter, compared with RMB 761 million for the same period last year, and also compared with RMB 779 million for the second quarter this year. Net loss was RMB 1.1 billion for the third quarter, compared with RMB 776 million for the same period in 2019, and RMB 146 million for the second quarter of 2020.
Excluding the share-based compensation expense and fair value change on derivative liabilities related to the redemption right of the preferred share, the non-GAAP adjusted net loss was RMB 865 million in the third quarter, compared with RMB 751 million for the same period of 2019, and also compared to RMB 717 million for the second quarter this year. Net loss attributable to ordinary shareholders of XPeng was RMB 2.0 billion for the third quarter, compared with RMB 982 million for the same period in 2019, and also compared with RMB 1.1 billion in the second quarter this year. Fair value change on derivative liabilities related to the redemption right of preferred share and accretion of preferred share to redemption value were non-cash events which will no longer recur after IPO.
Excluding the share-based compensation expense, the fair value change on derivative liabilities related to the redemption right of the preferred share, and accretion of preferred share to the redemption value, the non-GAAP adjusted net loss attributable to ordinary shareholders of XPeng Inc. was RMB 865 million for the third quarter, compared with RMB 751 million for the same period a year ago and also compared to RMB 770 million for the second quarter this year. Basic and diluted net loss per ADS were both RMB 5.07 for the third quarter of 2020. Non-GAAP basic and diluted net loss per ADS were both RMB 2.16 for the third quarter of 2020. Each ADS represents two Class A ordinary shares. Now coming to our balance sheet.
At the end of September 2020, the company had cash equivalents, restricted cash and short-term investment of RMB 20 billion, compared with RMB 2.8 billion at the end of last year. The increase was primarily due to the net proceeds we received from company initial public offering in August this year, and also the Series C+ round financing. Now for our guidance.
As Xiaopeng mentioned earlier, for the fourth quarter of 2020, we currently expect the delivery of vehicles will be approximately 10,000 units, representing an year-over-year increase of about 211%. We also expect the total revenue for the fourth quarter of 2020 will be approximately RMB 2.2 billion, representing an year-over-year increase of about 244%. The forecast reflects the company preliminary estimates of market, operating condition, and customer demand, which are all subject to change. This concludes our prepared remarks. We will now open for the call to questions. Operator, please go ahead.
Thank you. At this time if you would like to ask a question, please press star then the number one on your telephone keypad. For the benefit of all participants on today's call, if you wish to ask your question to management in Chinese, please immediately repeat your question in English. For the sake of clarity and order, please ask one question at a time. Management will respond, and then feel free to follow up with your next question. Your first question comes from the line of Bin Wang from Credit Suisse.
[Non-English content] Actually, my question is about the autonomous capability. After you launch the NGP and the memory parking in the first quarter next year, what will be the next big step in the second half of 2021 or 2022? Thank you.
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Thank you for your question. Actually, after launching NGP and the memory parking next year, we have several big moves that we're going to launch in the coming future. Those are based on XPILOT 3.0. The first thing is the memory parking within a parking lot, which means that when your car arrives at the parking lot, it will automatically take you to the available spots for parking.
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The second big launch will be for major cities, first tier cities and second tier cities, during the peak rush hours in the morning and in the evening, that is called the Autonomous Following. The autonomous driving technology will allow your car to follow closely to the vehicles before you, to make sure that you are not behind.
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Coming up, we also will launch an identification feature of traffic lights within Chinese city roads, and also an upgrade version of the NGP functions that allows us to transfer from highway scenarios to city roads. Coming up, we also have more autonomous features that will allow us to be more advanced in terms of the autonomous driving technology in China.
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Your next question.
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Microphone two.
I have a question about the dealer network expansion plan. What's your number can you get in the end of this year and 2021? And what's the breakdown between the self-owned and the third party? [Non-English content]
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I'll take this question. By end of the year, we forecast that we will have 150 stores covering 72 cities.
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By end of this year, we will have 68 service centers.
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For the guidance for next year, we are still in the process of making the guidance. We'll give you updates as we have them.
Thank you.
Your next question comes from the line of Ming Lee from Bank of America. Your line is open.
[Non-English content] My question is regarding our self store expansion strategy in Guangdong province and also outside Guangdong province. Especially nowadays, your store expansion is very aggressive. And I also want to know what's your long term expectation regarding your sales breakdown between tier one cities and low tier cities. Thank you.
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Because XPeng is headquartered in Guangzhou, that's why a lot of people believe that we are mainly focused ourselves in Guangdong. However, we have recognized the situation and we are quickly expanding in other first-tier cities such as Beijing and Shanghai, also to other tier cities, second-tier and third-tier cities, and that is part of our strategic roadmap of expansion in the future. This year we are doing a lot better in terms of sales performance in other provinces outside of Guangdong.
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Our next step for us is to continue on improving and producing our product quality and through our marketing and sales, we'll be able to reach a greater extent, a higher level, higher quality of users. Outside of Guangdong, we are quickly expanding to Tier 1 cities, Tier 2 cities and Tier 3 cities through our expansion of store numbers, service centers numbers and our supercharging network. Those will remain part of our priorities in the coming quarter and next year.
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After IPO, we will be able to reorganize our company in a systematic manner and make our procedures and steps of production more efficient, and those will be reflected in our sales performance in the coming quarters.
Your next question comes from the line of Jeff Chung from Citigroup. Your line is open.
[Non-English content] I've got three questions. My first two question is the battery bottleneck issue. Do we have a battery bottleneck supply issue and how do you see this improve going forward? My second question is about the same store sales growth between the new store and the old store. Could you give us a breakdown in the third quarter on the total sales volume from new stores and the old stores before June and after June opening? Also what is that ratio into October? Thank you.
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Thank you for your question. Regarding your first question about the battery bottleneck, I think after Pandemic, the new energy vehicle industry is on the rise. In the European market, we see sales recovery in terms of the whole of European markets. Since end of last year and early this year, as a result of the Pandemic, a lot of the battery makers are doing their best to expand their capacity of production. Right now we are encountering a very temporary supply bottleneck in terms of battery supplies.
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Lately, we are indeed restricted in terms of production as a result of the battery supply bottleneck. However, in the future, with our very proactive communication with all the battery makers, and our good partnership with the battery makers, and with better planning coming forward in terms of production, I believe we can resolve this bottleneck in a very quickly manner. In the coming six months to 12 months, a lot of people have apprehensions about this battery supply and thinking that we are facing a risk of shortage in supply. However, I disagree with that. I'm actually very confident in the battery supply because a lot of the battery makers are now preparing very actively in their production capacity. I believe as a result of the fierce competition amongst these battery makers, we will be able to benefit from it in terms of supply.
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Regarding the second question about the breakdown on Q3 sales, actually, I would like to give you a little bit of context. All of the vehicles are produced after the customers sign the agreement or the sales contract. Basically all of the deliveries that you saw in Q3 are the result of the previous contract that we signed about a month or 2.5 months ago.
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From our development, actually, we observed something interesting. We used to think that it usually takes maybe six months for a new store to mature. Now we realize that it's actually much, much quicker.
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As we developed more self-owned factories of production, as we solve the battery supply problems and optimization in that area, we believe from Q4 forward, we'll be able to achieve an even higher efficiency in our product deliveries.
Let me just add on this point on the battery situation. It is not a bottleneck in the way that we don't have access to the battery capacity. It is actually when you have sudden jump in demand. In the short term, you need to revise up your production, it will actually be very difficult. If given time, I think the capacity issue will be digested very quickly. I just want to give you this context. It's not like we don't have access, just like if you don't have the flexibility to really change capacity dramatically in the near term.
[Non-English content] So my question is about the software income. How is our accounting treatment on the software income into 2021? How do we transfer the pent-up revenue from the software income into 2021? If this pent-up revenue overlap with the new software revenue income in the first half next year, would that be an inflection point we see a massive increase in the revenue and net profit going forward? Thank you. [Non-English content]
Jeff, this is Dennis. Let me answer your question. Yes. Far we have received some orders. For example, the hardware vehicle has pre-installed the equipment to support the autonomous driving on the 3.0. We receive some orders, the payment of the software. That's our prepay, customer prepay money. That's not in our revenue. We need to wait until we OTA the functionality, we can book that into our revenue.
The plan is to book those into the revenue starting from next year. We actually have, for example, as of today, we have about 40% of our customer, they pick up the hardware. Among the hardware, they have about 60%-70% of customer, they buy the software. This will translate a significant amount of the software revenue starting from next year. I need to clarify, so far we have XPILOT 2.5 and 3.0. The 2.5 is free of charge. We only charge the customer with the 3.0, the autonomous driving 3.0.
Going forward, in our future forward models, we will have more modernization of the software. For example, we may upgrade to 3.5 or even 4.0, the software package. At that time, we probably will reevaluate the pricing, maybe we'll increase the software revenue. All we know, the software revenue will be a considerable portion of our overall revenue going forward.
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Thank you.
Your next question comes from the line of Paul Gong from UBS. Your line is open.
[Non-English content] My first question is regarding the gross margin. Is it right that Q3 GP margin improvement is mainly a result of the product mix, where P7 GP margin is significantly higher than Q3? Is Q3 still in negative gross margin zone in the Q3? My second question is regarding the extra pricing of XPILOT 3.0. My understanding, if I recall correctly, that is priced at RMB 30,000. How do we think about the split between the hardware cost coverage versus software revenue, and how do we foresee the hardware costs going forward? Thank you.
Okay, let me handle the margin question. Yes, we have the quarter-over-quarter margin improvement. The major contributor is from the better product mix, which means more P7 in the third quarter compared with the second quarter, only minimal volume. Then we have the reduction in material cost, including the battery and non-battery material cost reduction. We also have manufacturing efficiency improvement due to the scale, the economy of scale. We don't disclose individual vehicle line margin, but we are seeing improvement on both models. We don't disclose individual model, but overall, both models margin are improving. That's the first one. Then the second one on the autopilot. Far, we charge customer with one-off RMB 20,000 for the XPILOT 3.0.
One-off, if customer chooses to pay that in installments, they will need to pay RMB 12,000 a year for three years, then they can get the lifetime kind of service. We are seeing opportunity on the hardware because of the technology improvement and also the more volume, more scale. Both hardware and software will have the efficiency in terms of the cost, and that will further improve the margin for the software as well as the vehicle margin going forward.
Yeah, Paul, you're right. I think our hardware on the XPILOT 3.0 is more expensive than the version that has only the XPILOT 2.5. Also the price difference covers the hardware cost, as well as having some margin there as well. We expect the cost of those hardware can continue to go down as we produce more and more of these XPILOT 3.0 equipped vehicles.
Okay. Thank you.
Your next question comes from the line of Jia Lu from Bank of China. Your line is open.
[Non-English content] Good evening, management. Thanks for taking my questions. I have a question in terms of our sales distribution. Different from other two peers, we have the sales modes of self-built and dealership. How do we compare these two modes in terms of marketing efficiency and customer experience? Could you give us the breakdown of these two modes and what's our plan in future? Thanks.
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Currently we have 116 sales points and self stores. Amongst them, 46 are self-owned, 70 are partners with other dealership or franchise stores. Now, in my understanding, as we begin to build a brand, it is more efficient to have your own self-owned stores so that you can educate the market and do more branding in terms of your development. As you mature, as the brands get more and more well known in the market, it is more efficient to have partnerships with other dealerships, so that you can have a high efficiency in generating sales. Right now, we believe that both of those channels are very important in contributing to our sales. In the future, we are going to set up different kinds of stores according to the location, according to the type of cities that we are in.
[Non-English content] Can I explain it by this way? In Tier 1 cities, we will have develop more in depends on our own self-built stores. In low tier city, we will use dealership. With the expansion of our brand names, and we will use more in self-built.
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As I mentioned before, we have to take into consideration many different elements. For example, the brand awareness, the acceptance level of new energy vehicles, of the market and of our customers. Right now, we don't have any preference over which kind of store that we are setting up for 1st tier cities or to 3rd tier cities. It all depends on specific situations.
[Non-English content] I have think the SG&A expenses in Q3 substantially. Could you give us some reasons about the increase in SG&A expenses and the guidance in future for SG&A? Thank you.
[Non-English content] I use English. We have the quarter-over-quarter increase in SG&A. The increase is primarily for the branding spending, the channel expansion, channel development, and also kind of advertisement to supporting vehicle sales. That is the primary higher spending on the SG&A. Going forward, as you are aware, we are still in the middle, in early phase in terms of the channel development and to build more strength in our brand to support higher volume target next year.
We foresee the marketing and sales expense will continue to maintain at this kind of level or slightly increase in the near future. At the same time, we will also to manage other, for example, for some spending, we don't need to grow with volume, we will definitely control that. For some spending that is to investment for future, we will continue to spend a little bit money on that area to support future growth.
Thank you.
Your next question comes from the line of Nick Lai from JP Morgan. Your line is open.
Yeah. Hi. [Non-English content] Okay. Let me translate my question in English. The first question is the level of backlog order, and currently we have waiting time of about four to five weeks, and what's our strategy to shorten that waiting time? The second question is really regard to the new factory in Guangzhou, and what is the capacity and the CapEx? Can you give us some guidance? Thanks.
Nick, first of all, as you probably heard during our IPO process, we don't disclose backlog information as a policy. I think in terms of the wait time, actually it depends on the specific model you are ordering. My understanding is that four weeks to six weeks are the standard sort of delivery time these days for our P7. We actually trying very hard to shorten that delivery time, because I think obviously that will improve user experience, our customer satisfaction. We actually are stepping up our production, as we speak. At the same time, we're reducing the time lag in terms of transportation and logistics as well as delivery cycle. I think, hopefully we can actually control the delivery time to shorten that within the four weeks as we can.
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Let me just add to that. Actually, for some hot models, we're going to do a really short time or a quick pre-production of those models to shorten the wait time, and also through our optimization of our delivery procedures or process, we believe in the coming quarters or two, we will be able to greatly shorten the wait time.
Yeah. Your question on Guangzhou plant. Right now, the design capacity for the second plant, we are planning to have 100K annual production. In terms of the cost of building that, we estimate this could be close to RMB 3 billion, in terms of total cost, including the equipment. Obviously, as you heard from our previous announcement, that the government-supported financing package is more than enough to cover the construction and equipment cost of that plant expansion. In terms of your question on Haima relationship, our contract manufacturing agreement with Haima will end by the end of next year. We're obviously maintaining a very frequent dialogue with Haima to how to best optimize that relationship. If there's any decision or conclusion, we'll obviously disclose to the public.
[Non-English content] Thank you very much.
Okay.
As there are no further questions now, I'd like to turn the call back over to the company for closing remarks.
Thank you once again for joining us today. If you have further questions, please feel free to contact us, XPeng Investor Relations, through the contact information provided on our website for the XPeng Investor Relations. Thank you.
This concludes today's conference call. You may now disconnect.