Outlining Tesla’s China Risk

Tesla shares are down 27% in the last month. At the core of this decline is investors’ heightened concern about baseline demand following the fulfillment of initial pent up demand for Model 3 and the declining tax credit. More recently, since the breakdown of US-China trade talks on May 5th, the case for Tesla missing their numbers has been strengthened. Prior to May, analysts had expected Tesla to deliver less than 360k vehicles in 2019 (vs. guidance of 360–400k), but recent revisions have further reduced expectations. Our takeaways:

  • We have lowered our 2019 delivery estimates by about 10% from 340k to 310k vehicles. Guidance as of the March earnings calls for 360–400k vehicles.
  • We have lowered our China delivery estimates for the balance of 2019 from 70k to 40k vehicles. We now expect China to account for 13% of deliveries in CY19 compared to our previous estimate of about 25%. As a point of reference, China, the world’s largest EV market, accounted for 17% of revenue in Mar-19 with limited Model 3 deliveries.
  • We are lowering our numbers as a precautionary measure related to two unknowns. First, we are now factoring in that Tesla deliveries will be impacted by tariffs entering China. Ours is a minority view because most investors expect Tesla will be exempt from tariffs given the company’s investment in the Shanghai Gigafactory. Second, non-tariff factors that will impact China demand include Chinese consumers boycotting Tesla and Chinese officials adding complexity to the delivery process.
  • Despite these negative revisions, we continue to believe the company will survive to capitalize on the global EV growth curve. Our optimism about the company’s ability to weather the storm is based on Tesla’s cash position following the most recent capital raise, which now stands around $5B.
  • Our high-level math suggests the recently raised $2.7B gives a two-year cushion if deliveries come in at 300k for both 2019 and 2020. If deliveries fall below 300k in each of the next two years, the cushion will be less than 2 years.

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