What The Market Is Missing About Tesla's Rebound in China Sales in May
Investors were encouraged that demand is back on track when reported May sales jumped vs disappointing April results, especially after troubling rumors about falling orders. They should look deeper.
Got To Keep The Carousel Going
The China Passenger Car Association reported that Tesla delivered 33,463 cars in China in May, including exports. This was up 29% versus April when the total dropped an alarming 27% versus March (see Tesla’s Troubles in China Are Heating Up on 5/12/21).
That’s a good headline, except it overstated demand in China where Tesla has been under increasing pressure. Also, exported cars are not delivered/sold cars. Most of the 14,174 Made In China (MIC) Model 3s exported in April went to Europe, for example, where Tesla delivered only 1,326 Model 3s.
Nevertheless, Tesla stock rebounded as investors decided May sales results seemed to debunk a recent report citing an unnamed insider who said net orders in May dropped to 9,800 versus 18,000 in April, implying that demand was crashing.
But orders are mostly forward looking, so if this story is true it’s too early to judge by May deliveries. And the May numbers are problematic enough.
Tesla’s May deliveries in China settled at 21,936, in line with market consensus and my own estimate. This was up 88% versus April and up 90% y/y, thanks to 12,728 deliveries of the new MIC Model Y Tesla started rolling out in January.
Model Y deliveries were sharply higher versus 5,407 reported in April, though that number was impaired by reported production down for 2 weeks. So I had estimated run-rate deliveries at 9,000, for comparison purposes, which still was down 10% versus March. May deliveries implied strong monthly improvement had resumed.
Not so for Model 3, which struggled even more than I expected. Model 3 deliveries rebounded to 9,208 versus the paltry 6,264 in April, but this still was down 17% even versus last year’s strained results when the industry was reeling from the then newly expanding Covid-19 pandemic.
That’s because it’s the same problem I have tracked since 2018 for Tesla with all of its models and in all of its markets: failure to sustain same-store sales (discussed again most recently in Tesla’s Troubles in China Are Heating Up on 5/12/21).
As a result, I started warning last summer (Investors Aren’t Worried, But Tesla Seems To Be, 8/17/20, and most recently Tesla: Who’s the Enemy Now? on 5/17/21) that MIC Model 3 sales would likely begin to falter in China as they approached stronger y/y comps. Right on time, we saw this in May results.
No surprise, then, that Tesla exported another 11,527 MIC Model 3s. This marks the second straight month Tesla had more excess MIC Model 3s available for export than it was able to sell locally.
Again, most of these cars went to Europe where Tesla delivered just 9,139 Model 3s in May. Add to leftovers implied in April and this indicates more than 15,000 MIC Model 3s Tesla couldn’t sell in China potentially also sitting unsold in Europe.
And don't forget CEO Elon Musk had boasted Tesla would need several plants just to meet demand in China.
This makes it harder to dismiss concerns about plunging net orders in May.
I had estimated Model 3 deliveries may be down 5-10% y/y with 5,000-10,000 more in excess Model 3s exported and parked elsewhere. Results were even weaker than I expected.
As a result, even with growing incremental sales of Model Y the results for April and May combined are tracking lower versus the last two quarters. So I’ll stick with my estimate for June deliveries in China at roughly 30,000, down 15% versus 35,478 in March. This assumes 10,000 for Model 3 (down 33% y/y) and a generous 20,000 for Model Y. If so, deliveries for the quarter are indicated at 63,700, down 8% versus the March quarter.
This indicates China will contribute roughly 34% to my estimated second quarter deliveries of 186,726, up just 1% versus March. With my yearly total adjusted for actual first quarter results, I have 2021 deliveries now near 775,500 (up 60%) but still well below Tesla guidance and market consensus.
Tesla's 5.3% senior notes due 2025 are essentially unchanged since my last report and continue to trade near the call price at 103.5 (0.25% ytw; -66 bps). This offers no credible upside, particularly given good odds that the bonds get refinanced soon and likely at an inordinately cheap, unappealing yield (see why in Tesla Goes To Record Extremes To Create Q1 "Profits” 4/28/21). There’s perhaps 5 points or more in downside risk in the old or refinanced bonds if Tesla’s operations & financial condition deteriorate as I expect. The bonds remain excessively valued versus, for example, even the BoA High Yield general index yield of 4.1% as Tesla is a weak B3/BB- issuer with “CCC” quality metrics on its underlying core profitability and leverage. Maintain "Underperform."
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