Why Tesla's China Situation May Be More Favorable Than Previously Imagined

Tesla Inc TSLA secured permission last month to construct a wholly-owned factory in Shanghai’s free trade zone, circumventing Chinese laws requiring foreign automakers to enter joint ventures with domestic partners.

However, it was seen to remain subject to a 25-percent import tariff. Now, even that hurdle seems to be collapsing.

The Analyst

Bernstein’s Toni Sacconaghi Jr. covers technology stocks including Apple Inc. AAPL, International Business Machines Corp. IBM and Hewlett Packard Enterprise Co HPE.

The Rating

Bernstein reiterated a Market Perform rating on Tesla with a $265 price target.

The Thesis

China’s regulations for electric vehicle manufacturers may further diminish, Vice President of Investor Relations Aaron Chew told Bernstein.

“Tesla appears to believe that it may be able to produce cars in China for the country's domestic market without having to face import tariffs,” Sacconaghi wrote in a Wednesday note.

Additionally, Chew forecasted steady capital expenditure through 2018 and suggested the company could develop $100-per-kiloWatt batteries by 2019, two years ahead of competitor expectations.

Bernstein sees risk in the potential need for a 2018 capital raise and Model 3 execution.

Price Action

Tesla’s stock took a beating over the last week amid a bottom-line earnings miss, legislative proposals to eliminate the electric vehicle federal tax credit, and the firm’s mentioning in the Paradise Papers.

At time of publication, Tesla was trading at $303.27, down 9 percent week-over-week.

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