Seeking Alpha
Growth at reasonable price, research analyst, newsletter provider, long/short equity
Profile| Send Message| ()  

Tesla (TSLA) continues to be relentless in fueling (ahem, charging) its formidable momentum. The recent $200 share price is another milestone that many, including us, have deemed unlikely in the past. In our recent article, we noted that we were initially too bearish on the stock and have updated our best case scenario model with a $195 price target for the next 12 months. Among the "ifs" in our model was the international success of Tesla models outside the United States, a significant factor in our price target. We would like to see how our best international scenario is holding up so far.

China

This is the market with the largest growth potential. The CEO believes Tesla can see demand from China equaling that of the US by 2015, which translates into a 25K-30K unit volume. The Model S price for the Chinese market was set at $121,280, a 50% increase from the $81,000 price tag in the United States. At such a hefty price tag, can Tesla be competitive with other car makers?

The answer is yes. While the price tag may seem outrageous, it is actually as low as Tesla can go. Fact is, much of the price difference is due to additional costs of exporting the vehicle. Here is the breakdown of additional costs associated with exporting to China:

- $3,600 shipping costs

- $19,000 customs and taxes

- $17,700 value added tax

It may be hard to explain to a Chinese customer that he is actually paying the same amount as US buyers, but one does not have to. Truth is, compared to other competitors in the luxury segment of China, the Model S is priced cheaper.

Model

Lexus

LS

Mercedes S Class

Porsche Panamera

BMW 7 Series

Hyundai Equus

Audi

A7

Tesla Model S

Starting Price (RMB)

1,490,000

1,248,000

1,138,000

933,500

738,000

698,000

734,4000

Data taken from main websites of automobile makers. Prices as of February 11th, 2014.

Suddenly, Tesla looks like a steal compared to other luxury brands. The main reason for the price difference is that car makers need to pay fees that increase with the size of the engine. Luxury models usually carry 8 cylinder and above engines due to size and performance. As an electric vehicle, Tesla is spared these additional taxes, which enables it to offer Model S at such a great value.

If Tesla can take advantage of China's electric vehicle tax incentives, then we could see prices fall even lower. At this moment, incentives are limited to domestic EV producers. However, China plans on having 5 million hybrid and EV vehicles on the road by 2020. There were only 14K EV units sold in China for 2013. It would be in China's best interest to offer incentives to EV producers in order to curb the increasing pollution issue in major cities.

Besides price, how fast the infrastructure will develop is another factor that will affect demand. As of last month, there was only one service station and one showroom in Beijing, with another to follow in Shanghai. An added benefit is that Tesla does not have traditional dealerships that require extensive square footage. In contrast, some showrooms in the US are as big as an average clothing retail store, enough to fit one or two Model S cars. This means less capital required for expansion.

Europe

In terms of pricing, the European market is not as much tilted in favor of Tesla as the Chinese one. The price for the Model S 85kWh starts at $85,200 in the European market. A BMW 5 Series, for instance, starts around $55,000 and an Audi A7 starts at $69,000. A Mercedes S-Class is still more expensive, priced over $100,000.

On top of that, most European countries have some type of electric vehicle incentive. In Germany, for instance, ev's do not have to pay an annual circulation tax for 10 years. In the Netherlands, there are several tax incentives for both individuals and institutions. Individuals do not have to pay vehicle taxes until 2015 and can import an EV into the country without paying the required taxes. Institutions that invest in EV automobiles can deduct up to 36% of the value.

As far as infrastructure, Tesla is underway with its initial plan to cover Germany by the end of this year. So far this year, there were 4 additional charging stations opened in Germany in key areas around the famous German highway. There are another dozen or so nations targeted to take full advantage of the range of Tesla charging stations by the end of this year.

Based on the demand expectations of the CEO, we could see 20K-25K units coming from Europe and an additional 25K-30K from China. This means Tesla would have between 45K-55K units sold internationally per year. This takes into account the Model S alone. If we factor in the upcoming Model X and the rumored Model E, the number of units can double or more in an ideal scenario.

As far as our model goes, we forecasted international volume for the year 2018 to be between 25K to 75K units. One thing is clear, that the worst case scenario is unlikely based on recent developments. As for the best case scenario, we will have a better picture of true demand in the next few months. Once the Model S will officially launch in China, we will get a better feel of overall demand.

Conclusion

Tesla will have its earnings report in a few days. So far, the company has raised its unit expectation for the fourth quarter by 20%. Domestic success is implied at this point. We look forward to the call to see if we have to adjust our valuation model as far as international growth goes. At this point, we are sticking to our 75K units potential for the year 2018.

Source: Tesla: Turning To China And Europe For Growth

Additional disclosure: Business relationship disclosure: I have no business relationship with any company whose stock is mentioned in this article. The Oxen Group is a team of analysts. This article was written by Adrian Moraru, one of our writers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.