Brief China: Tesla – Shanghai Surprise and more

In this briefing:

1. Tesla – Shanghai Surprise
2. Uncertain Global Economic Outlook Produces Corporate Profit Expectations of Varying Credibility
3. Baidu (BIDU): The Change Amounts to Business Suicide, Disappointing Existing Users and Clients

1. Tesla – Shanghai Surprise

Tesla Motors (TSLA US) stock is in a tailspin, again. Closing at $297 today, the stock is down 11% ytd, well off its high last August at $379 and trailing even 2018’s comparatively tepid average of $316. Tesla bondholders have remained wary, with the benchmark 5.3% senior notes still hovering near 86 where they’ve traded since last September after plunging more than 10 points versus the beginning of 2018.

Investors are spooked as more Wall Street analysts have slashed their formerly ambitious estimates for Tesla’s fourth-quarter and 2019 revenue, profit, and cash flow primarily due to what they now identify as lower than expected demand and profitability for Model 3. The thing is, Tesla has been signaling escalating troubles for months as I have warned in “Great Magic Trick Tesla; Now Do It Again” which digested Tesla’s “miracle” third quarter and “Tesla: Down to the Wire” which reviewed the frantic close of the fourth quarter). 

So while it’s interesting that market estimates are collapsing toward my previously below-consensus estimates–and even I lowered my already cautious 2019 numbers–I’m concerned about other potentially quake-worthy news affecting performance for 2019 and beyond which we are not getting from Tesla.

With little more notice than a tweet,CEO Elon Musk popped into Shanghai, China, in early January for a showy groundbreaking ceremony to launch Tesla’s new multi-billion dollar Gigafactory 3 which reportedly will be capable of doubling Tesla’s current production capacity. Even more surprising, Musk projected Model 3 production will begin there before the end of this year–less than eleven months from now.

Yet three weeks later we still have no idea how much this mega-plant will cost, or whether Tesla has “funding secured” to pay for it–and these may not even be most troubling facts investors don’t have.

Whatare Musk, and Tesla, and Tesla’s banks, and Musk’s China-based financiers not telling us about Shanghai Giga 3? I suspect the answers may come with potentially nasty surprises.

Read more for Bond Angle analysis.

2. Uncertain Global Economic Outlook Produces Corporate Profit Expectations of Varying Credibility

Despite elevated uncertainty and lowered growth expectations for 2019, the International Monetary Fund (IMF) still expects continued global economic expansion, thereby potentially placing it at variance with the expectations embedded in financial markets.

The remaining efficacy of monetary policy in the Eurozone is being undermined by the conspicuous absence of an interest rate buffer that could ultimately be detrimental to any future attempts to support aggregate demand.

Meanwhile, the Bank of Japan will continue its ultra-accommodative policy stance due to downside risks to medium and long-term inflationary expectations, but low corporate profits growth expectations limit downside equity market risks.

Current expectations for corporate profits growth in the Eurozone and China require downgrading due to their respective economic outlooks, implying downward pressure on equity prices.

Crucially, US corporate profit expectations have been scaled back to match revenue expansion, thereby indicating that analysts have finally embraced a more realistic approach towards the future path of operating margins.

3. Baidu (BIDU): The Change Amounts to Business Suicide, Disappointing Existing Users and Clients

• Baidu’s new methodology directs the large majority of search results to its in-house functions, especially to its blog function BJH (百家号).
• Baidu began to hide websites of search results after the change above was widely criticized. However, as a result, users can hardly find authoritative websites.
• Because of these changes, it is hard for users to find useful content.
• We believe Baidu is giving up its existing advantages for users and clients.
• We also believe that users will choose to leave if the platform tries to choose content for them. If users leave Baidu, advertisers will follow them.