Foreign automakers have long been disincentivized to sell in China, where imports see a 25-percent tax and locally produced cars must be sold through 50/50 joint ventures with domestic entities. But the Chinese government, prioritizing a shift from fossil-fuel to electric vehicles, is reportedly considering a loophole.
A recent proposal would allow nonnative brands to set up wholly owned EV segments in free-trade zones, and Tesla Inc TSLA is positioned to win big, according to Piper Jaffray.
“It seems possible that Tesla will be allowed to book 100 percent of the profit associated with locally-produced EVs, while most global competitors will probably continue booking only 50 percent (due to their entrenched JV structures),” analysts Alexander Potter and Winnie Dong wrote in a Wednesday note.
Tesla’s Play
If Tesla capitalizes on potential regulatory changes, it could see growth in China notably steeper than this year’s estimated 136-percent year-over-year delivery increase.
In fact, China could become Tesla’s biggest revenue source, according to Potter and Wong.
The company could benefit from China’s growing demand for luxury cars, standard vehicle sales that far outpace U.S. records, and non-competitive environment. China has little exposure to foreign brands, and although its firms lead global markets in EV production, with unit sales up 70 percent year over year, none pose a veritable threat to Tesla.
“We find most of China's EVs are chintzy in comparison to Tesla's products (with the exception of NIO's soon-to-be-released SUV), and realistically Tesla's most capable global peers are probably years away from releasing locally-built luxury EVs,” Potter and Wong wrote. “In the meantime, traditional (gas) luxury vehicles constitute TSLA's primary competition.”
And the government’s phasing those out.
Big Upside
Considering Tesla’s potential in the Chinese market, Piper Jaffray reiterated an Overweight rating on the stock with a $386 price target.
“There's still plenty of uncertainty, but all else equal, we think recent developments have unfolded in TSLA's favor,” the analysts wrote. “The company was wise to delay investment, but once these JV-related policy details are finalized, we expect Tesla to announce its China strategy in relatively short order.”
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