Brief Consumer: Tesla Motors – Gaining Industrial Strength and more

In this briefing:

1. Tesla Motors – Gaining Industrial Strength
2. Tesla (TSLA): 4Q Earnings and First Impressions on the Company’s Strategy
3. Bharat Hotels Pre-IPO – Catching up with Peers
4. Teasing Updates on CaiNiao Network & Ele.me Out of Alibaba’s Q3 Results
5. Kumho Tire (073240): Tough Times Ahead Still…

1. Tesla Motors – Gaining Industrial Strength

Tesla Motors (TSLA US) continues to power ahead of the competition in electric vehicles with an 80% market share of all electric vehicles sold in the United States in 2018.  With approximately 140,000 Model 3 cars sold in the U.S., Tesla outsold every marquee sedan brand. Model 3 outsold mid-size SUVs including BMW X3, Acura MDX, Audi Qs, Lexus RX and even the Mercedes C -Class. 

2. Tesla (TSLA): 4Q Earnings and First Impressions on the Company’s Strategy

Tesla’s 4Q results came in lower than consensus expectations.  While the 4Q results did not surprise us, it came as a negative surprise to street consensus that has taken the stock down by 4.7% in after hours trading at the time of this writing.  Here are some initial impressions:

• Deepak Ahuja steps down (again) as CFO but will remain as senior advisor going forward, and Senior Finance VP Zach Kirkhorn will step up to CFO. This may actually be a positive development from the perspective of management at this time.  Ahuja has always played a critical role in pulling Tesla through one existential crisis after another based on our historical observations, and the context under which he originally retired in 2015 coincided with management believing that it was safe at that time.  With the Model 3 production normalization and the company’s subsequent restructuring initiatives, management may be feeling safer about 2019 than 2018.
• We are less concerned with why the quarterly earnings miss took place.  Gross margins for automotive sales took a dive in 4Q but in our view that resulted primarily from a significant mix shift with the Model 3 taking 70% of the delivery mix, from 67% in 3Q18.  This mix shift is likely to continue to pressure Tesla’s overall margins in 2019.  However, given Automotive gross margins came to 24.3% in 4Q we think it is relatively easy for Tesla management to guide a target 25% range especially if that target is set for 4-6 quarters from now.
• Gigafactory 3 in Shanghai is projected to be completed by the end of 2019, with short range Model 3 and the Model Y (based on the Model 3 platform with 78% shared content) beginning production at that time, financed largely with local bank debt.  Battery cell supply will initially come from Nevada, Japan and some local suppliers but modules and packs will be made in-house.  Given the logistic layout of the Gigafactory 3 and labor cost gap, we think it is plausible for management to currently project that China margins by 2020 could be roughly on par with its U.S. manufacturing operations.  It remains to be seen whether this has been thought through well but the trust factor here will have to go to Deepak Ahuja’s deep industry knowledge given his prior auto industry experience before joining Tesla.
• Tesla’s cash on hand at the end of 4Q18 stood at $3.7bn.  While some investors may remain concerned about the $920m 0.25% Convertible Prefs that are due to mature on February 27, 2019 with a conversion price of $359.87 per share, there should be sufficient liquidity on the balance sheet to cover it in our view even if share price is below that price level on maturity.

We have historically said on this forum, despite a healthy dose of skepticism on the operational aspects of the company given a highly charismatic CEO with untested automotive industry credentials, that calling Tesla’s shares is tantamount to a market call (see, e.g., Tesla: Model 3 Production Rate Reaches 5,000/Week, but Shares Fall ).  The fact that share price performance in the past few months have focused more heavily on earnings, we highly suspect that as with many NASDAQ listed stocks, market confidence with Mr. Musk’s capital raising capabilities may not be a key driver for Tesla’s valuations over the next 12 months.

Tesla (TSLA): Consensus Estimates vs. Actual

3. Bharat Hotels Pre-IPO – Catching up with Peers

Bharat Hotels (BHOT IN) plans to raise around US$150m in its Indian IPO in order to pay down debt. The company owns and operates 12 luxury hotels under “The LaLiT” brand and two mid-market hotels under “The LaLiT Traveller” brand. 

BH has been reporting a steady improvement in operations led by a pick-up in occupancy levels. This has resulted in 30% EBITDA CAGR over FY14-18. 

However, only three out of its 12 hotels seem to be performing consistently and have been increasing their contribution to EBITDA, which was at 76% by FY18. In addition, a comparison with its peer group seems to imply that the company still has some more catching up to do.

4. Teasing Updates on CaiNiao Network & Ele.me Out of Alibaba’s Q3 Results

A set of generally solid Q3FY19 earnings results from Chinese e-commerce giant Alibaba Group Holding (BABA US) also yielded some interesting insights into the company’s two main logistics-related ventures (CaiNiao Network and on-demand food delivery specialist ele.me).

Unfortunately, the information we can glean from BABA’s Q3FY19 results suggests CaiNiao and ele.me are either growing slower or generating significant losses — or both.

In our view, the main logistics takeaways from BABA’s results are:

1. Alibaba’s ‘Core Commerce’ revenues continue to grow faster than express delivery. For the seventh consecutive quarter, Alibaba’s ‘core commerce’ grew much faster than China’s parcel delivery market, outgrowing parcel volume by 8% and parcel delivery revenue by almost 18%. At the margins, China’s express delivery firms are being bypassed by new modes of fulfillment, in our view. 
2. CaiNiao Network’s 15% growth in Q3FY19 is disappointing. Revenue at Alibaba’s CaiNiao Network grew by just 15% Y/Y in the December quarter, to 4.5 bn RMB. In other words, CaiNiao grew even slower than overall Chinese express delivery revenue in the December quarter (+17% Y/Y). That’s disappointing for a company that enjoyed an equity valuation of US$20 bn when Alibaba upped its stake to 51% in late 2017.
3. The reporting segment that includes ele.me barely grew from Q2FY19 to Q3FY19. Alibaba’s ‘Local Consumer Services’ segment had revenue of 5.2 bn RMB in Q3FY19, representing Q/Q growth of just 2.7%. It’s unclear how much local services venture Koubei contributed to this, as Alibaba only began consolidating its revenues some time in December.
4. It looks like losses from CaiNiao & ele.me continued to pile up in Q3FY19. Although it’s not an ‘apples-to-apples’ comparison, EBITA losses from the group of companies that includes CaiNiao and ele.me expanded from 5.8 bn RMB in Q2FY19 to over 8.2 bn RMB in Q3FY19.  This suggests the deep losses from this group (which were equivalent to about 15% of BABA’s core ‘marketplace’ EBITA in Q2FY19) aren’t going away soon.

5. Kumho Tire (073240): Tough Times Ahead Still…

Weak car sales in China, Nissan’s removal of Carlos Ghosn, Akebono Brake Industry share price plunge – facts that make everyone cringe at the sound of it. High indebtedness, low margin and weak sales growth were the chief reasons why Akebono’s share price plunge. Kumho Tire’s high debt to equity ratio has been reduced by an equity investment from a Chinese group but will that help to turn the company around?