Carvana, the “disruptive” used car dealer, aka the “Amazon of used cars”, has had a tumultuous 2020 and it is only May. Entering the Year of the Rat at $88.00/share, the well-baited trap of mid-March saw a 65% swoon to sub $30.00 before a miraculous resurrection to the current $98.00 print  (hundy roll intra-day 8th May 2020), now sporting a market capitalization of an eye-watering US$16bln (within 15% of ATH). Nausea inducing moves are not new for the “Glengarry Glen Ross” of the on-line car business. $CVNA IPO’d a mere 3 years ago in May 2017 at $15.00 (15mm shares, raising $225mm for early backers and still Chairman, Ernie Garcia III). Day 1, $CVNA trade went over like cotton candy at a diabetes convention, -26% to close at $11.10. Most IPO’s are “priced to perfection” to allow for a 20% bounce out of the gates, as Cloudera $CLDR did on the same day, co-incidentally at the same offering price base of $15. Cloudera may have had a heavenly “cloud” story, but the stock has swooned 44% since, and it currently trades $8.50/sh., much in contrast to the near 9 banger Carvana has delivered since that inaugural trading day in 2017.

The cloudy macroeconomic forecast need not be outlined here, COVID-19 has the USA in a near cryogenic state. Hertz may file Ch. 11 in May as 500,000 rental cars sit idle across the country. Even the daft can connect the dots with respect to the knock on effects. Used car values will fall as the ranks of the unemployed swell and many still “working for the man” do so from a distance. 30% of the gasoline usage in the US  ̶i̶s̶  used  to be attributed to commuting, for work. Things will come back gradually as shelter-in-place orders are lifted, clearly. Delinquency numbers in the auto space were not looking good in Q1 2020, before COVID-19 hit. Delinquency rates will certainly take out the previous highs of 5.27% and may well crest in the low double digits, depending on what Mnuchen and his merry men have in reserve (Cash for clunkers II, et al). Carvana does not bear the full brunt of this, they are after all in the moving business, not the storage business. Conforming loans are securitized, largely through Ally Financial (GMAC beginning with a couple of “bolt on’s”). The CRVNA ART (Auto Receivables Trust) has been used liberally, netting >$2bln in aggregate funding. A well timed follow on equity offering (13.3mm shares at $45) also raised $600 million. Survival through 2021 is not in questions, but valuation is another matter all together.

There is no “e” as in earnings with Carvana yet, this is a disruptor/unicorn after all.  Price to book is 157x. Profitability was slated for as soon as 2023, on the pre C-19 glide path.

The flashy, impressive Carvana car vending machines may not have their buttons pressed for some time. Great marketing for certain and might even make the Idiocracy II sequel for visual effect. Adam Neuman will not be picking up his Softbank financed Cerulean 2021 McLaren at a Carvana fulfillment “vending machine”. This is exclusively a “used” car business, despite the median 71 month loan term and interest rates from 13.47-13.84% for their “prime” (FICO 635, sub-prime is < 620) rated borrowing customers. Sub-prime APR, as per their latest securitization (1st in the sub-prime category) is 19.2% (should your credit card already be maxed).  There are 24 bespoke car vending machines in operation presently and their most recent regulatory filing notes new vending machines are “on hold”. The difficult to re-purpose structures are 8 stories high and can inventory 32 cars each for a paltry 768 automotive treasures ($18,400 avg. price in 2019). LTV 101.85% (assume fees blended in). $CVNA’s average customer is not the typical prime FICO score customer preferred by the money center banks. 700 FICO scores can finance a new car in the low 5% range and used in the mid 5’s for reference. An $18,500 used car financed at 100% LTV for 71 months has a monthly payment of $380 for a Carvana “prime” loan, sub-prime is $440 ….. for almost 6 years. Even with extended and enhanced unemployment benefits, there is a high probability that many car payments do not get made (more than was modeled in any event) and the now discounted car comes back for eventual resale. The arms-length owners of the Auto ABS will also be affected of course, but funding avenues will narrow for Carvana and those still open will be more expensive. Financing via the bond markets unsecured would be difficult given Carvana’s CCC rating.

Of the listed car rental companies, Avis has proven more savvy to date, building a war chest through new 1st lien debt ($400mm 5 year, 10.5% coupon priced at $97.00). Avis is rated B+, Tesla B3/Caa1 in comp.  Hertz ($HTZ $3.00 $434mm mkt cap) has one foot in the grave and the other on a banana peel. Lenders have given Hertz 2 weeks to figure out a viable option(s). Carl Icahn is in the mix in a big way and I think a solution will be found, one that is good for Carl, if nothing else. When GM was bailed out after the GFC it was largely to salvage the 250,000 pensioners. Hertz in comparison has 38,000 employees (few defined benefit, presumably) and Carvana has 3,900 car sales concierges, as a point of reference.

I last looked at establishing a short in the used auto space in mid 2018 via $CACC (Credit Acceptance Corp) which currently sits at $314.80 with a mkt cap of $5.7bln with a 9 p/e (sub 3 price/book to boot). https://ibankcoin.com/firehorsecaper/2018/06/17/sub-prime-auto-loans-get-off-the-gas-short-via-cacc/#sthash.1Cc2E7LK.dpbs I was talked off the ledge at the time (short never established) by sage fellow Exodus members (Pelicans Room members), it should be noted.

Much of the story the Carvana “believers” lean into is the tremendous growth Carvana offers. They have doubled revenue every year for the last 6 years. Carvana is eventually hoping to sell > 2 million cars per year, heady aspirations indeed. The 2020 estimate was 255-265k prior to COVID-19, up from the 177.5k  sold in 2019. Cash flow was negative 990 million in 2019 (-280mm in 2017, the year of the IPO for reference). The other revenue drivers for Carvana, beyond 100% gross margin advances revenue are vehicle service contracts (VSC’s) and GAP (Guaranteed Asset Protection) waiver coverage (topping up insurance payout to amount owed). Management is also a questions mark for me as the Garcia clan have a checkered past (go figure, used cars to “dented” credits, Forbes Magazine seems to have the most in-depth coverage on the inter-web). Base salaries of key execs; Ernie Garcia III $885,000, Mark Jenkins, CFO $735,000, Ben Huston, COO $735,000.

Ernie Garcia II, billionaire used car salesman, on the day of his son’s $CVNA IPO in 2017. Ernie Garcia III, CEO & Co-Founder was 34 at the time of the IPO (not pictured, he was feeding).

Used cars in the USA have an aggregate valuation of $1.5 trillion with $1.3 trillion of debt against it and with the likely impairment going forward, at best, they now match at $1.3 trillion (on paper), negative after Carvana facilitation. JD Power reported wholesale auction value for the week ended April 12th at  -83% yoy.

Key competitors: #1 CarMax Inc. ($KMX), Group 1 Automotive ($GPI), Cars.com Inc. ($CARS).

Much of Carvana’s growth has been through expansion of their coverage markets;

 

Note: NOT a COVID-19 chart, Carvana corporate slide; markets/penetration.

I think the curve flattens for Carvana quicker than it does for COVID-19, and would not be surprised to see their coverage platform turtle back to Q1 2019 levels and < (i.e. sub 100 from 150). Carvana has a very high short interest and many potential shorts run for the hills when the short interest exceeds 1/3 of the float, let alone 50%. Availability of borrow and the cost of same are critical factors when juggling sticks of dynamite. This appears to be priced for near perfection in the midst of a horror film, for all facets of the automotive sector. One for the watch list in any event. Uber (pun intended) bulls think that Bezos might tuck Carvana into the fold for a run at yet another critical “artery of the American consumer”, but I think Jeff would dry heave at the valuation and deem the Carvana moat puddle-like in terms of both breadth and depth. 100 key automotive hires along with some online mojo wave-ins like www.bringatrailer.com and/or Vroom and Amazon would be off to the races in the space without a Softbank/Visionfund like check being written.

No position at the time of writing in Carvana $CVNA. Vetting a 2% “starter” short. Target price $25.00 (-75% from spot $98.00). Having a measured downside is important with some of these high flyers, just ask anyone short $BYND, $W, $SHOP,  or $PTON this week. Option based strategies to be given prime consideration. I’ll post eventual trade entry via Twitter with an update to this blog post as well.

Trade safe. Get under the hood. Analyze, reflect, size, act, & hedge.

Follow me on twitter @firehorsecaper

Regards,

Caleb Gibbons, CFA, FRM

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Denis O’Brien, Ireland’s richest native ($4.3bln) is the 94% owner of Digicel Group. Digicel Group offers telecommunications (wireless, cable, and business services) media and entertainment services to 14 million subscribers in 32 markets, primarily in the Caribbean and Central America. Largest markets; Haiti (16% revenues), Jamaica (16%), Papua New Guinea (13%), Trinidad & Tobago (6%).

Digicel bonds have been the worst performing emerging market bonds of 2018, losing 30% of their value year-to-date.

Macroeconomic/FX Risks:

The strengthening US dollar had been a big factor and analysts expect the effect to be ongoing, lessening top line revenues by as much as $220mm and EBITDAR by approx. $100mm per annum. A full 95% of Digicel’s debt is US dollar denominated whereas 50% of revenues are either USD or from markets where the currency is pegged to the US dollar.

Bond information:

DLLTD 8.25% 9/30/2020 RegS. Issue size; $2bln. Maturity 9/30/2020 (2.05 years) sub 2 year duration. Net leverage 7.0x (up from 6.4x prior year). Recent price $69.76, current yield 11.83%, yield to maturity 39.33%. Fitch downgrade 8/24/2020 to B-, neg. outlook. It remains to be seen what the bond market reaction will be to Fitch’s downgrade of Friday past, but I suspect it will be muted. Bond CUSIP USG27631AD56.

Digicel Group Limited (DGL) debt, of which there is $3bln total outstanding is structurally subordinate to $3.7bln of debt held in 2 other Digicel entities, 2.3bln in senior unsecured Digicel Limited debt and $1.4bln in senior unsecured terms loans/revolver at DIFL (Digicel International Finance Limited).

Potential sources of refinancing:

The market is anxiously awaiting the game plan from Mr. O’Brien on the refinancing of the DLLTD 8.25%’s of 2020. The fact that the market is trading at the current level of distress (i.e. sub $70.00) may offer opportunities for restructuring Digicel. Given the large issue size of $2bln, a successful tender for the bonds at $80.00 could save Digicel $400mm. XTract Research recently released a report eluding to this possibility, but as I understand it no price indication has been proposed. One potential value catalyst noted in the XTract report (I have only seen an exerpt) is rolling in the assets of the currently unencumbered Digicel Pacific Limited entity.

-It is possible that $1.2-1.3bln of additional secured debt could be raised related Digicel entities.

-Denis O’Brien has eluded to the possibility of an equity infusion in the past. When Digicel was “rolling in clover” as they say, Mr. O’Brien took out $1.1bln in dividends from Digicel, the bulk ($950mm) in the form of a special dividend. This action (an equity infusion) would be in keeping with O’Brien’s plans to eventually IPO Digicel. Denis last attempted the IPO route in 3Q 2015, but it is doubtful he will try again before 2H2019 when leverage can be brought down to a more manageable level of 5.7x. Fitch and the other rating agencies note there is a lot to like in the competitive positioning of Digicel which operates largely in duopoly markets boasting a market share of 50% in many (not to mention 40% margins). What the rating agencies are more concerned with is the liquidity situation of the group with $158mm in cash/near cash versus an annual interest expense of $456mm, approaching 50% of EBITDA (Note: IF Digicel were a US company their interest expense would only be partially tax deductible as the 2017 Tax Cuts and Job Act caps/limits the tax deductibility of interest to 30% of EBITDA).

-Asset sales. Digicel recently effected a sale/lease back on their cell phone towers which helps at the margin, but with net proceeds < $100mm the effect is minimal in the grand scheme of things. Beyond the 450 towers covered by the sale/leaseback details have been scant of the other $400mm O’Brien has eluded to (i.e. $500mm total asset sale program).Perhaps more important is getting capex back to 14-15% of FCF from the recent highs of 21% due to heady network investments.

-Cost cutting. No further meaningful cuts are achievable as 25% of the group work force was retrenched in 2017.

Value comps: EV/EBITDA; C&W (bought Liberty) 11.2x, Columbia (bought) 9.6x, AT&T (T) 8.5x, American Mogul (AMX) 5.3x, Telefonica (TEF) 5.4x, T-Mobile (TMUS) 6.2x, Orange (ORAN) 5.6x = avg. 7.4X.

Conclusion:

The DLLTD 8.25%’s 2020 have traded as low as $62.90 in 2018. The minimum lot size for the bond issue profiled is $200k (par value), hence if one were to buy the bond at $70.00, the initial investment would be $140,000 (plus accrued interest of almost $7k), qualifying as a substantial investment for an account sized at $5mm (i.e. 3% of invested capital). Too much single name risk for me, $100k par value is more typical. JP Morgan’s EM bond ETF, ticker EMB would offer similar exposure for individual investors with more modest account size. The ETF has $13.6bln in AUM with a dividend yield of 4.62% and a ytd -5.13% return in 2018.

Digicel (B2, neg. outlook). A total return >35% is attractive, especially when compared with the paltry 7.7% yield on longer duration single B3, neg. outlook credits like TESLA (i.e. TSLA 5.3% August 2025 bonds last traded at $87.20 to yield 7.7%) which carry much higher interest rate risk (TSLA’s 5.8 year duration versus sub 2.0 year for Digicel). Tesla’s current EBITDA is -326.2mm (analysts estimate $3.2bln in EBITDA for 2019) hence a potential double headwind of EV subsidy cessation and loss of interest deductibility. Shorting TSLA is too expensive and foolhardy, but you don’t have to own it for certain.

Follow me on twitter @firehorsecaper

Safe trading. JCG

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[Merrill Lynch: Thematic Investing – Global Future Mobility 17-Feb-2017:

Sustainable mobility: $7tn transport market facing disruption With over 1.2bn cars on the roads today, transport is a behemoth sector generating c.US$7tn in vehicle sales, supplies, and services. We believe that the sector is highly inefficient with 95% of cars parked at any one point, cars costing up to US$8.5k/year to own and operate, vehicles accounting for 1.2mn deaths p.a. and generating 23% of C02 emissions. Demographics (population to reach 9.7bn by 2050E) and urbanisation (70% living in cities by 2050E) will further strain existing infrastructure. The rising financial, social and environmental costs of transportation are unsustainable and demand a fundamental rethink of mobility. We see change catalysed by disruptive technologies and business models, rapidly evolving consumer preferences, and regulatory pressures. 4 game-changers: electric, autonomous, connected, and shared. In a world of exponential change as per Moore’s law, transport is a problem being solved at a tech pace. We believe that the convergent and mutually reinforcing trends of electrification, autonomous driving, the Internet of Cars (IoC) and the sharing economy will drive a fundamental shift from today’s car-centric travel to a platform-centric model whereby transport becomes a utility. Future Mobility – including an integrated, on demand electric fleet of autonomous taxis – can generate US$3.8tn of total positive impact in the next 10Y and lead to a “world of zeros”, including a 59% decline in vehicle demand, 87% fewer accidents, 54% fewer parking spots, and 85% lower emissions.]

Tesla Motors: One would think that Tesla could crack $300 a share on such ebullient projections (Tesla/Uber M&A perhaps). A lot of market cap has been added in a very short period of time, that is for certain. The last $100 move has been a blur with the stock up a full 24% year-to-date in 2017.  To grow in to the resultant current market cap Tesla has to be selling 1.7mm vehicles, at a profit, within 5 years (versus the 2.2mm currently produced and sold by mainline competitors such as BMW and Mercedes Benz).

As with all things “on the come”, much depends on the trajectory of China where 350,000 NEV’s (New Energy Vehicles) were delivered in 2016, 1.45% of the 24.3mm total vehicles delivered (up 15% yoy and accounting for 1 in 4 cars sold globally). EV’s account for 0.9% of sales in the USA and 1.3% in Europe in comparison. Chinese car producers accounted for 43% of global EV production (dominated by leading models from BAIC, Geely and BYD) and 46% of all plug-in sales globally. Tesla’s market share is 2% of NEVs in China (Japan is lower at est. 1.5%).  source: EV Volumes

Taking 59% of passenger vehicle demand out (ML 10yr #) should reduce emissions by at least that amount as some of the remaining internal combustion engine powered passenger vehicles are replaced with electric ones, but 85% seems like a high estimate to me. In China 31% of air pollution is attributed to vehicles, but heavy trucks as a sub category account for a full 90% of current total vehicle emissions. Despite Elon’s claims, electric transport trucks are not ready for prime time yet on the scale required to markedly change the emission numbers, the batteries required would be just too heavy (even before factoring the weight of the cargo) to stay within max payload limits (80,000 lbs.).

Estimated life to date Tesla sales in China are pegged at approx. 9,000 units (3000 were sold in 2015 versus an initial target of 10,000) and Japan at a very weak 2,000 (Japan’s EV subsidy is ¥950,000, or US$8,400), roughly equivalent to the US EV credit of US$7,500. As of mid 2016, Japan has more EV charging stations than gas stations. Tesla opened their 14th Supercharging station near Fukuoka in Kyushu earlier this month.

The fact that any credence is given to announcements like “opening” the Tesla market in India is laughable. Tata sells complete cars for less than the 55kWh battery cost projection on the new Model 3 Tesla. Ditto for Dubai on a relevance metric, Dubai will likely never hit 1mm in total car sales and 70% of current car sales are Japanese models.

I have previously written on the fact that EV subsidies are being curtailed in key global markets. The story does not end with EV subsidies either as Tesla has provided very generous residual buyback programs in key global markets like Hong Kong, which has very generous government incentives at the front end (fully detailed in the  legacy post below) putting a Tesla Model S pricing nearly on top of a gas powered Honda Civic and well below a Mercedes entry model. The 75% of purchase price buyback program after 24 months (low km) has been curtailed, but I fully expect lucky HK Tesla owners that have the “golden ticket” to exercise their put to Elon Musk. Factoring buybacks there is the potential to post net negative sales into China for Tesla in late 2017 to early 2018. Losing money on both the way out and on the way back into inventory as an exhibition (aka used) model will test the resolve of the hardiest Tesla bulls.

https://ibankcoin.com/firehorsecaper/2016/03/05/tesla-ev-subsidy-taper-tantrum-alert/

In the case of China, Federal NEV subsidies are expected to roll off by 20% in 2017 and regional subsidies by a more substantial 50-60%.

There has been a great deal of speculation about Elon Musk’s relationship with President Trump. Most recently, it seems like Elon is being relegated to dealing with VP Pense. Trump is very concerned with his image, it appears from afar, and it likely makes him uncomfortable that Tesla stock trajectory has left Elon with a paper fortune approaching treble his. Despite the fact that both Trump and Ryan have expressed a dislike for the current EV credit, Tesla stock has autonomously avoided the potholes and turned skyward like a SpaceEx rocket, seemingly never to re-enter Earth’s atmosphere. The EV credit may not be fully extinguished in the next budget, but it will likely be reduced from $7,500 which along with cheap $3/gallon gas might dissuade some of those Model 3 deposits from actually closing.

Tesla Energy: Even though the battery storage system revenue thus far in 2017 is estimated at a trickle like $15mm, Gigafactory 1 in California has launched and Musk is already projecting heady battery cost reduction of as much as 35% to under $125/kWh. With material costs estimated at $80/kWh this cost reduction is impressive. This result could allow the promised $35,000 Model 3 to be closer to a break even proposition for Tesla Inc. As for the sale of batteries to residential, business and utilities, all indications are that the business case is plausible, if not sound, and it is not unfathomable that revenues for 2018 approach $1bln, with the heavy lifting to come from the commercial and utility customers. Tesla’s PowerPack is scaleable to 1GW and will be an economically viable means to store relatively cheap mid-day produced power to be used when peak pricing is in effect later in the day (typically 5-9pm).

SolarCity clouds the analyst’s lens as to magnitude of the negative cash flow generation, but clearly not the sign (unprofitable; check, negative cash flow; check). The now combined Tesla entity carries a substantial $6bln in debt. Tesla has a market cap of $43.9bln, now greater than Nissan and honing in on fellow American Ford. Tesla has issued secondary equity on several occasions, the last being for $1.7bln in proceeds ($1.4bln + Greenshoe exercise) at $215 in May 2016. The stock rallied over 6.5% the week following the announcement, with the proceeds earmarked for Model 3 production with deliveries by the end of 2017 and bringing forward Tesla’s 500,000 vehicle unit build plan 2 years from 2020 to 2018 (as in next year, 2018). Patient investors should ready themselves for another secondary in 2017 (more debt on the heels of the SolarCity combination is not likely in my view), as fundraising has been an annual affair since 2012 and profitability can still not be seen with a Hubble telescope. Tesla’s market cap is so enormous at this juncture $3bln + might be in order to keep the transaction costs down. Tesla has 161mm shares outstanding and a float of 129mm shares. 26.6% of the float is held short, part of the reason for the recent pin action. Elon Musk owns over 20% of Tesla stock personally (all other insiders own 1.3% in aggregate, this is the Elon Musk show, have no doubt). The largest institutional investor is FMR LLC, better known as Fidelity Investments who own 13% of Tesla’s equity.

The Gini Coefficient at Tesla is off the charts, making it ripe for the UAW to eventually turn California plants. What potential gains Tesla might realize on battery cost via a well executed Tesla Energy launch can more than be given back through higher labor cost. Starting wages are $17/hr. in the Tesla plants (Toyota Motors Manufacturing average is US$39.50) on 12 hour shifts. Elon has been quoted as saying “changing the world is not a 9-5 job”. There is a reason that North American auto jobs have migrated from Canada to non-union southern USA and on to Mexico. If Tesla wants to retain its silicon valley nucleus it will have to eventually pay left coast wages, unionized or not.

Tesla’s book value per share is $17.03, hence it is trading nearly 16X book and 5x sales. Tesla does not own much in the way of proprietary technology. The Gigafactory is plug and play Panasonic technology. Elon once characterized patents as “a lottery ticket to a lawsuit”. The Japanese, by way of contrast, own 1/3 of the world’s o/s patents and it is the Japanese firms that dominate is areas such as ADAS (Advanced Driver Assistance Programs), electrification and emission control systems. Musk arguably has a narrow moat, with venerable global competitors breathing down Tesla’s neck across the broadening business lines of Tesla Inc. Rather than focussing on the pedestrian, largely outsourced means of propulsion (i.e. the battery) shareholders may have been better served in the long run (in the short run they have done just fine!) by focussing on the semiconductors and other high end technology components that are crammed into high-end, modern, connected EV’s (5x the amount of a “low end” vehicle, contributing over a 1/3 of the vehicles all-in cost).

Tesla Inc. has proven to be a difficult short, even for tenacious hedge funds, let alone lowly individual investors like moi. My TSLA T-acccount is close to flat on my 3rd short attempt (short @ $260 into “revenues”) with the 1st try profitable, 2nd a loser (1/3 of 1st trade profit) and the 3rd, so far, offside. Q4 2016 numbers are out after the close this Wednesday the 22nd with analysts expecting and adjusted loss of $0.51/share which would be a marked improvement on the loss of $0.87/share booked in Q3 2016. SolarCity is enough of a wild card to lead one to suspend opinion, but it is certainly not outside of the realm of possibility that the Q3 loss is further eclipsed.

Hopefully 3rd times a charm, but I have no plans to overstay with my short position and a stop loss at $300 is in place. JCG

Follow me on Twitter @firehorsecaper

Tesla short is the fellow on the right, to be clear.

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Tesla bears, Citron being the latest, have put forward many reasons why they think $TSLA is overvalued. Because it produces spectacular electric cars with Elon Musk at the helm (in the think tank) people are getting snowed into applying a sales multiple of upward of 6X while waiting for the required earnings (GAAP earning expected by Q4 2016) to apply more traditional P/E metrics. The forward P/E multiple of Tesla is currently approximately 150x. IF Tesla sold 90k cars per years (50,580 shipped in 2015) and made $10,000 per car (loss estimate is about $4,000), the P/E would be about 30 at their current market cap of $26.33bln.

As per trusty Exodus analytics, the average car company P/E is 9x and the average consumer good company trades at 23x. TSLA is the pure electric propulsion version of RACE. Ferarri was recently spun out by Fiat Chrysler, due in part to premium valuation as a consumer product company.

The Tesla bear case hinges on the company’s cash burn rate. Other concern items include recall risk, reliability issues, and Model 3 launch timing (their 1st “non 1%” model at <$50k),which is inextricably tied to the timing of their battery giga-factory. A very important item that has received very little coverage is the fact that electric vehicle incentives are being rolled back in key global markets. The demand side of the equation is where more focus should lie.

A full 23% of Norway’s cars are now electric vehicles (EV), link to chart below. Tesla Model S is the #1 EV model in Norway. The generous Norway program, funded by their enormous Norges Bank Investment Management (NBIM) sovereign wealth fund, is to be amended, replaced by a lower cost subsidy as there are now 50,000 EV’s on Norway’s roadways (target achieved 18 months early) and 3/5 vehicles in the bus lanes are EV’s. Perhaps too much of a good thing. Electric cars carry no VAT, no purchase tax (together typically 50% of the purchase cost), pay no road tolls, no tunnel usage fees, no ferry charges, free parking, free charging and are given full access to bus lanes.

The level of Norway’s subsidy is 2nd only to Hong Kong where EVs are not currently subject to motor vehicle FRT (First Registration Tax), which equates to a US$64,400 subsidy on a Tesla 70kWh Model S. In addition to the large purchase subsidy, Telsa also offers a very generous RVG (Resale Value Guarantee) in Hong Kong where Tesla floors the residuals value at the 36 months point at 75%. Conditions apply of course, with one of the biggest being a 35,000 km mileage cap, but this is not a huge issue in HK where there are only 2,100km (1,270 miles) of roads. With a net purchase price of HKD 529,000 (US$68,000), this makes a Tesla a Toyota Prius like value choice versus cars like the Mercedes E200 which has a comparable HKD 564,000 (purchase price), and a hefty FRT (first registration tax) of HKD506,100 for a total cost of HKG1,009,500 (US$130,050). There is no RVG on the Mercedes either. About 3% of new car sales in HK are electric (USA is 0.8%). Most expect the Tesla Model S to be subject to FRT from March 2017 as it will be placed in the “luxury” category. It is possible the Tesla Model 3 could still be exempt from FRT in HK, but it is conjecture to place odds on this outcome at this juncture.

The US Federal subsidy for electric cars is US$7,500 (some States kick in too, with $2,000 typical of those that do). The UK subsidy is GBP4,500 (US$6,400).

https://atlas.qz.com/charts/VyVRQEC7xhttps://atlas.qz.com/charts/VyVRQEC7x

Singapore is an interesting case. Tesla (or at least the owners/importers) have a strong case for feeling hard done by. Singapore is knicknamed the “Little Red Dot” for a reason, it is small with only 3,356km (2,000miles) of roads. One would think an ideal place for EVs where exorbitant car pricing keeps the automobile stock at approx. 1mm cars for 5.4mm inhabitants. In a case last week, a Singaporean was charged a S$15,000 (US$10,800) tax surcharge on a used Tesla Model S which was imported from HK. His all-in cost for this “previously enjoyed” Tesla Model S was just shy of US$300,000, quite a contrast to anywhere else on the globe (my 6 year old petrol fuelled Golf GTI was US$48k two year back). This is the first known case of a tail-pipe CO2 emission free vehicle being penalized in this fashion, as Singapore factors in emission at the electric power station to their carbon math. The electric energy consumption of the Tesla S when tested was 444 watt-hour/km and with a carbon allocation (grid emission factor) of 0.5g/watt-hour applied, the deemed carbon output was 222g/km of CO2 which placed the vehicle in the +S$15,000 band under the Carbon Emission-based Vehicle Scheme. Clearly, how your EV stacks up against the competition is an important metric in the purchase decision. Both the BMW i3 and the much pricier i8 qualify for a S$30,000 (US$21,600) carbon rebate, purchased new,  in Singapore. The frugal Peugeot Ion was assigned  a S$20,000 carbon rebate (US$14,400) after comparable testing to that the Tesla Model S.

Equating electric vehicle subsidies to G10 quantitative easing:

In the current environment, Tesla needs all the global QE (incentives) they can get. Norway is tapering EV credits, Hong Kong is tapering and considering a hike in early 2017, Singapore is hiking (Model S at least). A number of less critical markets continue with ZIRP, considering NIRP, but their numbers do not move the needle markedly.

The US has 6.4mm km (3.9mm miles of roads). The now aluminium bodied Ford F-150 is the best selling vehicle in the US, boasting better fuel economy than most 5 year old cars. With a range of 250 miles, under optimal conditions, Tesla is destined to be largely an urban focussed, 2nd-3rd vehicle phenomenon for the foreseeable future.

Ditto for China where charging stations are an issue. Surprisingly cost is not an issue is China with many thinking Tesla would sell more if they charged 1.5X more for them. Tesla works best in compact urban areas, but people typically do not own free standing homes in these markets. Soft infra like fibre has faced slow adoption due to cost making large scale EV parking space charging a Jetson’s like proposition.

The Nissan Leaf EV surpassed the 200,000 unit sales metric in December 2015. This is double to nearest two competitors (Chevy Volt & Toyota Prius). Elon Musk was not put on planet Earth to duel with such pedestrian people delivery vehicles. Tesla, SpaceX, Hyperloop, SolarCity, the list goes on, but we think Jack Dorsey is spread too thin. I would love to play poker with this man. JCG

Note: Awesome product execution, top shelf, and never accomplished before from a standing start. I’ll likely own a Tesla vehicle some day, but my involvement with the publicly listed TSLA stock to date has been from the short side. Currently short, and nervous. 131mm shares authorized, 101.8mm issued, 29.4mm (22.5% owned by insiders) with a comparable (slightly higher %) number of shares held short. Nitroglycerin. Adult swim. Tight stops advised.

Follow me on Twitter @firehorsecaper as my 11 year old is gaining on me.

 

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