In this briefing:
- This Week in Blockchain & Cryptos: Bakkt, Li Ka-Shing, & Starbucks
- Softbank: A Strong Tender Result
- Don’t Write off Further Aussie LNG Supply Growth: Positive for WPL AU; Negative for US LNG Players
- NTT (9432 JP) Remains the Broadband King in Japan, Both for Fixed Line and Mobile
- Tesla–The Struggle to Stay Afloat in 2019
1. This Week in Blockchain & Cryptos: Bakkt, Li Ka-Shing, & Starbucks
- If you are a follower of the Asian stock markets, one of the “rules of thumb” is to carefully follow the investments trails of the “superman” Li Ka-Shing, who has recently publicly declared that he supports Bakkt. On December 31st, 2018, Bakkt raised $182.5 million from high profile investors including Li Ka-Shing backed Horizon Ventures, M12 (Microsoft’s venture capital arm), Intercontinental Exchange (owner of the New York Stock Exchange), Alan Howard, and the Boston Consulting Group.
- Starbucks and Bakkt have yet to mention exactly when Starbucks will allow consumers to use Bitcoin to purchase coffee at their stores. In terms of timing, we believe that the probable time frame is likely to be sometime in 4Q 2019 to 2020 when Starbucks will start allowing their consumers to start using Bitcoin at some of their stores. This will represent a crucial positive tipping point for Bitcoin in the next two years.
- Rakuten & Bitcoin – It has been reported that Rakuten may start to allow Bitcoin as a means of payment as early as April 2019.
2. Softbank: A Strong Tender Result
Softbank Group (9984 JP) released the results of its 750mn USD tender for its Euro and USD commercial paper, which could also portend further support for the equity ahead of results next Wednesday. More details below.
3. Don’t Write off Further Aussie LNG Supply Growth: Positive for WPL AU; Negative for US LNG Players
We think the market is underestimating global LNG supply in the early to mid-2020s from current facilities: initially we look at Australia, which became the world’s largest LNG exporter on a monthly basis in November (~80mtpa or 25% of global supply). Our analysis of Australian LNG supply suggests that production in the early to mid-2020s will be much higher than market expectations of falling production, as fields move into decline. Overall we think this is negative longer-term for the LNG market as supply could supply to the upside but it is a relative positive for the Australian LNG companies.
We think production could grow to around 95mtpa by the mid-2020s due to substantial upside to the nameplate capacity on existing facilities, tie-backs and new developments keeping existing facilities full and utilizing new brownfield LNG trains. Australia’s key advantages versus LNG projects elsewhere are the low offshore upstream operating costs, cheap shipping costs to Asia, an investor friendly environment and having a huge installed base of LNG infrastructure and associated cashflows.
Relative to its size Woodside Petroleum (WPL AU) should be the biggest beneficiary and it is also positive for Inpex Corp (1605 JP) and Santos Ltd (STO AU) . It is also good news for the larger integrated players such as Chevron Corp (CVX US), Total Sa Spon Adr (TOT US) and Royal Dutch Shell (RDSA LN). We think that the US LNG players are disadvantaged relative to Australian expansions so this is relatively negative for the likes of Cheniere Energy (LNG US) and NextDecade Corp (NEXT US).
4. NTT (9432 JP) Remains the Broadband King in Japan, Both for Fixed Line and Mobile
With its nationwide fiber optic network infrastructure, NTT continues to dominate the fixed line broadband market in Japan with 68% market share. In this Insight we explore the fixed line broadband market in Japan today and how it is evolving, especially with the increasing dominance of “collaboration” offerings that bundle fiber with mobile services.
Mobile services are getting a lot of attention today, especially in the run up to 5G launches over the coming 12 months, but without fiber backhaul, 5G would be a nonstarter. In this Insight we investigate what 5G will bring and what is needed to support it as well as the telcos’ latest plans.
NTT is not just an incumbent telecom operator, it’s also a key player for future technologies and provides the physical infrastructure and architecture for many of the industries new services.With all the talk about 5G it is sometimes easy to forget that fixed line networks are still necessary. With NTT’s strong fiber-based network and its collaborations with NTT Docomo and many other partners in mobile and data, we believe NTT is well positioned to be a key and winning player in the evolving telecom and technology space.
5. Tesla–The Struggle to Stay Afloat in 2019
Profit Warning for Q4 2018 and Q1 2019: Two Fridays ago, Elon Musk warned that Q4 profits came in lower than Q3’s, despite an 8% QoQ rise in vehicle sales during Q4. He also announced a 7% cut in Tesla’s workforce, as Tesla is now facing “a tiny profit” in Q1 that will be achieved with “great difficulty, effort and some luck”. These are extremely bearish comments from a perennial optimist like Musk. If true, however, it kills the growth story at Tesla. And with the average 15% price cut of the Model 3 in the US and 17% in China, it also shows that Tesla may have misread the demand environment for its high-priced electric sedan.
Model 3 Demand in the US has Clearly Been Exhausted: September 2018 saw peak monthly sales of 22,250 units in the US, which fell to an average monthly rate of 18,039 units in Q4. There are no more wait lists for the Model 3 at current prices: Tesla’s website says delivery can be made in under 2 weeks. In the January 18th profit warning, Musk admitted that Tesla must now sell its lowest-end version for $35,000 from May, or see production fall. At this price, Tesla’s Model 3 probably just breaks even, by our estimates.
Weak Model 3 Launch in Europe: It was hoped that the Model 3’s European launch this March would make up for waning demand in the US. But since opening up configurations for reservation holders on December 7th, Tesla only received 13,773 orders, which is a whopping 24% lower than recent monthly sales in the US. Musk was forced to open up configurations to non-reservation holders, but this led to only 2,436 extra orders over the following 2 weeks. In the US, Tesla opened up the Model 3 floodgates to non-reservation holders 12 months after launching the car. In Europe, it took less than 4 weeks.
No Hopes for Tesla in China Either in 2019: Tesla’s registrations in China for October and November 2018, combined, fell by 72% YoY and overall auto demand is weakening there. Musk proclaimed that Tesla would start production of the Model 3 in Shanghai by 2019-end. The factory site is a barren plot of land (see Figure-5). It took VW 23 months to build its latest factory in China and Toyota’s new Alabama plant will require 28 months. Why should we believe that Tesla only needs 11 months?
Watch the Competition for Tesla in 2019: Tesla will face true competition this year for its first time as 4 new European EVs hit the market. During Q4 of 2018, Jaguar’s new I-Pace outsold Tesla’s Models S and X, combined, in the Netherlands–Tesla’s number two market after the US. Audi’s e-Tron SUV–due out next month–had over 20,000 orders as of December 7th last year. Porsche’s new Taycan–a powerful rival for Tesla’s Model S–has sold out its first year of production, with most orders coming from Tesla owners. The Models S/X provided 50% of automotive gross profit in the 2H of 2018, by our estimates. A fall in volume will heavily impact profits.
Spending Will Spike in 2019 and Lead to Negative FCF: Tesla was able to squeeze out a profit during the 2H of 2018 largely because of suppressed spending on R&D and infrastructure. In order to roll out the new Shanghai plant and bring the new Model Y to market, both capex and R&D must rise significantly in 2019. Our list of “spending needs” (see Figure-1) shows that capex should nearly double to $4.5bn in 2019. Including debt obligations and payables, Tesla’s total cash needs in 2019 come to $9.3bn, which is over twice its equity. A highly dilutive public share offering appears inevitable.
Why 2019 Could Be the End of Tesla: Tesla proved in 2018 that, even with higher sales volumes and lofty pricing for the Model 3, it could only attain an estimated 2H operating margin of 1.7%, excluding environmental credits, one-offs, and stock-based compensation. 2019 will be incredibly harder as 1) Tesla faces stiff competition for the first time since its inception; 2) a lower-priced Model 3 will not generate enough profit to cover falling profitability of the Models S/X; and 3) most significantly, a steep rise in capex and R&D will lead to higher losses and negative FCF. Tesla may need a bailout by a deep-pocketed suitor this year. But this could only occur at a much lower share price.
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