Tesla’s short-sellers seem to forget Tesla is a great China play

15 Apr, 2020 08:38
source: Singularity Financial

Singularity Financial Hong Kong April 15, 2020 – by David Lee

Jim Chanos is a stunningly smart hedge fund manager who is famous for shouting out Enron first.  On April 10, he predicted Tesla Inc. will lose money again this year and believes investors will eventually trade the stock more like a carmaker than a tech company.

The founder of hedge fund Kynikos Associates and well-known short seller said on April 2, during his CNBC interview, that he is still betting “maximum” against Tesla, even after the electric automaker’s stock fell dramatically in the past month.

Chanos has many reasons for his short thesis on Tesla, including the erratic leadership, the deteriorating business fundamentals and the continuous lack of profitability. However, his main argument is that Tesla is ultimately just a car company, and it is overvalued on every metric that applies to other businesses in the automotive industry:

“It has to lay people off like a car company, not like a Silicon Valley software company,” Chanos, the president of Kynikos Associates, said of Tesla on Bloomberg Television. “It has manufacturing plants like a car company. It’s got a lot of debt like a car company. So investors can try, can convince themselves all they want, that this is a software company or this is some leading-edge technology company. Sadly, the numbers belie that.”

Chanos has been publicly short Tesla for several years. “So far,” Chanos said, betting against Tesla “has not been the correct call, I will admit.”

Please reference the below stock chart to see how Tesla’s stock price has played out over the course when Jim Chanos started targeting the company.

– In November 2019, Chanos said, “Tesla is and remains one of our biggest and our best short positions.”

– In late 2017, Chanos predicted Tesla was “headed for a brick wall”, as Elon Musk was struggling to ramp up production of the Model 3 sedan.

– In September 2016, Chanos said the combined company would be a “walking insolvency.”  In June 2016, he warned, “be wary of companies with lots of executive turnover.”

– In Oct 2015, Chanos called out, “Tesla is an overpriced car company.”

After Tesla’s surprise profits during the third quarter of 2019, many short sellers threw in the towel. One of Brazil’s largest independent hedge-fund managers, Adam Capital, closed its Tesla short position and concluded that its short thesis no longer holds.

Another famous short-seller of Tesla’s stock, David Einhorn, also raised issues regarding Tesla’s credibility last year. In its Q3 investor letter, Einhorn mentioned that Tesla keeps on prioritizing positive public relations ahead of customers’ safety. In a tweet, he once again accused Tesla and Musk of manipulating the company’s accounts receivable number.

The truth to be told, Tesla is a great China play

Around March 18, Bloomberg did a coverage on Tesla titled “How China bent over backward to help Tesla when the coronavirus hit”.

“After the coronavirus outbreak caused a nationwide shortage of face masks in January, Chinese officials were quick to ensure that Tesla Inc. wouldn’t be left without.” the report stated.

Tesla received 10,000 masks, cases of disinfectant that require a government permit, thermometers and other materials that allowed the company to restart its factory near Shanghai the first working day after the extended Lunar New Year break, according to Chinese state-run media.

The support for Tesla — which also included providing accommodation for some employees as the outbreak snowballed — is emblematic of China’s wider embrace of Elon Musk’s car venture. The billionaire has waged a charm offensive since deciding to build his first plant outside the U.S. in China, home to the world’s biggest electric-vehicle market, and has been rewarded with the support of officials even as the trade war strained relations with the U.S.

As Beijing pushed local authorities to get the country back to work last month, officials in Lingang singled out Tesla as an example of their success in helping the area’s industry to recover. The management committee of Lingang “will make all efforts to help key companies including Tesla return to normal production,” Xu Wei, a spokesperson for the Shanghai municipal government, said at a briefing in February.

Local banks provided financing for Tesla’s China push, including a $1.6 billion injection announced at the end of last year. The acquisition of land for the plant and a slew of local permits were cleared swiftly, and the factory was hooked to the nation’s power grid quicker than the average for other firms.

Tesla also obtained an exemption from China’s 10% sales tax on cars. Typically, only electric vehicles made by Chinese companies have been exempt.

Now let us take a look at the production volume of Tesla’s Shanghai Model 3 in 2020.

The Tesla Shanghai Model 3 jumped straight to the #1 spot in China’s battery electric vehicle production charts in January, according to figures released by MIIT. The 2,625 units put the Model 3 some 12.5% ahead of any rivals. That is quite an achievement considering January was only the first month of full operation at the Shanghai Gigafactory.

Since it’s only at the start of its volume production ramp, and the Tesla Shanghai Model 3 has gone straight into the lead already, it will undoubtedly take the top spot this year. And remember that China is by far the largest EV market in the world, over twice the size of Europe and almost 3× that of the US.

With the Chinese electric vehicle (EV) market suffering from the general lock-down due to the coronavirus pandemic, sales took an expected beating, with only 15,000 passenger EVs registered in February, the worst result in over 3 years, representing a 65% drop year over year.

Still, it could have been worse, especially considering the overall Chinese market was down by 82% in February.

As a consequence of these events, the February EV share grew to 6.6%, and 5.5% just among fully electric vehicles (BEV). That pulled the 2020 share to 3.7% (2.7% BEV), a step below the 5.5% of 2019, but we hope that after all the doom and gloom, the second half of the year witnesses a return to growth in China.

One positive sign from the February numbers was the return to a BEV-friendly market, with BEVs dropping only 57% while plug-in hybrids (PHEVs) fell 81%, leading BEVs to have 84% of plug-in sales in February. That’s in line with the 86% of last December, and pulls the 2020 BEV share of the EV market to 73%. So, the “Go BEV, or Go Home” mantra is back in this market.

In March, more than 90% of automotive factories are back in production, so while that month will still see a transition to regular activities, CPCA expects a 40% drop in March in the overall market. April and May should witness a return to normalcy.

One thing is certain — this crisis will probably lead to some behavioral changes, like a possible loss of faith in public transport, which could mean a reinforcement of private vehicle ownership and/or changing buyer tastes.