Tesla: it's too hard to promise both grand plans and solid execution, and provide long-term support at the same time.

On April 20th, Beijing time, Tesla (TSLA.O) released their Q1 report after the US stock market closed, and once again, they have fallen short of the market expectations for their automotive business for this quarter. The key points are as follows:

1. Gross margin significantly fell: The gross margin for automotive sales (excluding regulatory credits) in Q1 has fallen to 18.3%, which is below the expectation of over 20% among sellers, showing a significant gap.

2. Sales quantity is not a problem, but the cost to achieve the target is: The sales volume reached a new historical high of 423,000 in Q1, but after a significant discount and a recent shortening of the delivery time, the implied demand may not be particularly outstanding.

3. Rapid price cuts are the root cause: The unit gross profit and gross profit margin both declined, and the key issue is that the price cuts were too rapid. In Q1, the per-unit decrease in price was close to $5,000, and the decline in raw material costs only made up for less than $1,200 of the loss due to price cuts. Meanwhile, the dilution effect of fixed costs due to decreasing sales due to the Shanghai factory being fully operational and the slow ramp-up of the battery factory has ended in the short term.

4. Strong cost control ability: Through several quarters of continuous observation, it is evident that Tesla's cost control ability is strong, and regardless of how their revenue increases, their R&D, sales, and administrative expenses have remained unchanged, which means that as long as there is gross profit, it will become operating profit.

5. Operating profit was $2.7 billion, which was significantly lower than the market's expectation of $3 billion. This problem can still be traced back to the decline in automotive gross margin caused by price cuts and the top support pillar business. Although energy storage and service businesses have performed well, their scale is too small. When the top support pillar loosens, their performance may not be very effective.

Dolphin Jun's overall view:

Dolphin Jun emphasized in the last quarter after a sufficient correction in Tesla that its long-term competitive advantage is clearly visible, and when short-term sales expectations and gross margin guidance are basically locked, we should not be overly pessimistic about Tesla. Instead, we should focus more on the certainty of its long-term story. It is not difficult for the stock price to bounce back from 100 to 200 yuan.

After considerable expectation repairs during this period, Tesla has indeed fluctuated around 200 yuan. At this point, Dolphin Jun believes that in 2023, after Tesla has no new best-selling cars to drive their investment value beyond their oversold level, when Tesla reaches over 200 yuan, their intrinsic alpha appeal seems insufficient, and it looks more like a beta change that brings stock price volatility. Due to the situation in 2023, no matter how Tesla promotes its brand or touts its grand plans, the reality is:

a) As a big-ticket item, cars suffer from the effects of high-interest rates on consumer purchase, and entering 2023, both Europe and China are in a state of subsidy decline;

b) By 2023, the pressure on new energy vehicles' production capacity and supply chain from major global car manufacturers is expected to decrease or disappear. As a result, a surge in demand and a price war are likely to be the main themes of the year;

c) Even Tesla's alleged new platform that supposedly reduces costs 50% will not launch until the second half of 2024, so the majority of its sales in 2023 are expected to come from updated versions of old cars;

d) Tesla is once again emphasizing its market strategy of winning in volume and with price, via a reevaluation of its sales targets.

Taken together, these factors suggest that Tesla is likely to adopt a strategy of lowering prices to achieve higher sales volumes throughout the year. The final results for the year could be as follows:

a) A sales volume of 1.8 million units, which would make it the second-highest-selling provider;

b) However, market fluctuations and expectations for a lower profit margin will be a major obstacle in the short term. Although FSD has the potential for long-term profit margins, it will not generate significant income in the short term. Therefore, a short-term profit margin is more likely to be subject to comparison with carbonates combined with price reductions, resulting in fluctuation of around 15% to 20%.

Even though we believe Tesla will ultimately emerge as a unique market leader once the dust settles, it is unlikely that Tesla will see much upward momentum within the price wars of the present time, where no new cars are expected.

Below is a detailed financial report:

I. Overall: Ruthless Competition

1.1 Revenue Held, but at a Cost?

In Q1 of 2023, Tesla's revenue was $23.3 billion, up 24.4% YoY, roughly in line with Bloomberg's consensus forecast of $23.4 billion.

However, upon closer inspection of the company's performance, Tesla's automobile business is facing several key challenges. Despite the company's highly valued position within the market, Q1 auto sales were abysmal. Furthermore, the company's gross profit margin has fallen below 20%, down from 18%+ YoY, resulting in further impairment of the overall profitability of the company.

Thus, the true situation behind the apparently stable revenue is as follows:

As Tesla shifts its focus from production capacity to consumer demand, it is currently unable to launch new products that could increase sales. As a result, Tesla has resorted to lowering prices on its entire range of cars, leading to stagnant sales figures, lower prices per vehicle, and overall reduced profitability. Even if ancillary businesses such as energy and services perform well, they are unlikely to compensate for the effects of the overall downturn in the automobile industry.

1.2 Sell cars first, make money second: In the first quarter of this year, the operating profit was 2.7 billion US dollars, which decreased by 26% compared to the previous year, despite the revenue increasing by 24%.

Upon closer inspection, it can be seen that when the profits of the backbone car business decline too rapidly, other small businesses such as car rental, energy storage/photovoltaics, and services cannot shake the giant tree. The key to the ups and downs between revenue and operating profit also lies in the gross profit margin of car sales (excluding regulatory points).

1.3 Lithium carbonate prices cannot keep up with the decrease in car prices, and the speed of the collapse of the gross profit margin is too fast. As the most important observation index in each quarter, the overall gross profit margin in the first quarter was only 19.3%, significantly lower than the seller's consensus expectation of about 21% in the current market.

Among them, the gross profit margin of car sales excluding regulatory points, which is the most critical, quickly fell from 23.8% to 18.3% this quarter, while most sellers expected it to remain above 20%.

Next, we will focus on the single-car economy perspective to see what has affected the gross profit margin of cars.

Two, the battle is coming: Tesla's gross profit margin is not as good as BYD?

2.1 The price butcher is coming?

a. When the supply and demand contradiction shifts from supply to demand, two key variables will change: car sales and selling profit margins, like the two ends of a seesaw, can only maintain one end, and the first quarter basically maintained the sales volume after large price cuts, but the profit per car has fallen sharply:

1. In the first quarter, the revenue from selling a single car (excluding points and leasing) was 47,000 US dollars, which dropped by nearly 5,000 US dollars compared to the previous quarter, a decrease of nearly 10%. This is also basically consistent with the average magnitude of the previous Tesla's global price reduction wave.

By combining the company's depreciation and amortization expenses to roughly estimate the per-car depreciation and variable costs, the Dolphin Jun can clealy see one such per-car economic account:

1) Cars are also deflationary goods: The price of a single car decreased by 4,900 US dollars compared to the previous quarter (note that the drag of a strong USD and offshore revenue factors still exist);

2) The absolute value of per-car amortization cost has increased instead of decreasing contrary to past trends: Combined with the company's explanation, Dolphin Jun inferred that the cost dilution effect of the Shanghai factory has ended with the no longer increasing production volume, while the newly invested 4680 battery factory is still climbing in production capacity, resulting in the absolute value of depreciation and amortization cost increasing instead of decreasing.

3) The absolute value of per-car variable cost has increased by $1,200 and decreased: When entering the first quarter, the price of lithium carbonate was still over 500,000 RMB, and at the end of the first quarter, it dropped by more than half, to only less than 250,000 RMB; the market mainly estimated the gross profit margin of cars to still be over 20% due to this factor and the subsequent price reductions and raises for some models. When the three factors were put together, the cost of a single bike was reduced by only more than 1,100 yuan, but the price reduction of the single bike was too large, resulting in a month-on-month decline of nearly 3,700 US dollars in the gross profit of the single bike, and the gross profit of the single bike directly slid to 8,600 yuan, officially falling into the era below 10,000 yuan.

Reflected in the cost ratio: the single bike price has been reduced too quickly, the dilution effect of the single bike folding has been suspended, and the spread and amortization expenses and variable cost rate of the first quarter have both increased.

Through the above analysis, it can be clearly seen that the reason for the loss of the Tesla gross profit rate is that the automobile sales have been excessively reduced, and the increase in carbonate lithium cannot make up for it. In addition, due to the Shanghai plant entering a stable production period and the new battery plant climbing uphill, the dilution effect of fixed costs was lost in the short term.

This caused Tesla's automobile sales gross profit rate to plummet by nearly 5.5 percentage points, which is a surprising drop. As a result, the gross profit rate of automobile sales in the first quarter was only slightly over 18%, whereas at the peak of Tesla's first quarter last year, the gross profit rate had almost reached 30%.

b. Tesla: Is a gross profit rate below 20% the new normal without a period of mixed warfare for new cars?

Looking at the situation in 2023, no matter how Tesla exaggerated, emphasized its sentiment and ideals, the reality is:

a. As a large consumer expenditure, high-interest environments have exerted too much drag on car consumption, and in 2023, Europe and China have both entered a state of subsidy reduction.

b. By 2023, the pressure on new energy vehicle production capacity and supply chain for major global car manufacturers has been reduced or eliminated, and the release of production capacity and the pouring of demand may lead to fierce price competition throughout the year.

c. Tesla's new platform, which claims to reduce costs by 50%, will not be launched until the second half of 2024. In 2023, it will remain in the year of the release of old car modifications.

d. Tesla has once again conveyed its market strategy of winning by scale and exchanging quantity for price through a reassessment of sales targets.

Considering all of these factors, it is likely that price reductions and sales volume will be the theme for the entire year. In the short term, looking at the second quarter, there are two important pieces of information worth observing:

a. Generally, a four-month delivery cycle is normal because it takes about a month for the car to be delivered from the factory to the store and to the consumer. For cars in stock, the waiting time for delivery of 2-3 weeks is too long. At the beginning of the first quarter, when Tesla reduced prices to release sales, the waiting time for delivery was significantly longer, especially in the United States. However, by the end of March, the waiting time for delivery in some regions and models had returned to normal.

b. Price reduction has come again: Tesla's strategy is to maintain its production capacity and sell as much as it can produce. Under this strategy, as long as the gross profit margin can withstand, the company will reduce its prices once the inventory increases. As seen in the market, once the delivery period is shortened to less than 4 weeks, a new round of price reductions may not be far away.

From April to now, it seems that the United States is likely to enter a new round of price reduction trend (note: the red font in the figure below indicates price increase, and the green font indicates price reduction).

c. The only buffer for price reductions is the drop in the price of lithium carbonate: currently, the price of lithium carbonate has dropped from over RMB 500,000/ton in the first quarter to RMB 180,000. Before the epic price increase in 2020, the stable price of lithium carbonate rarely exceeded RMB 100,000. With the current price of RMB 180,000, there is less and less room to drop by another RMB 80,000-100,000.

Based on the average lithium carbonate price of RMB 550,000 in the fourth quarter and RMB 400,000 in the first quarter, a 30% reduction in the price of lithium carbonate will result in a corresponding reduction of RMB 1,200 in Tesla's raw material costs.

If the average price of lithium carbonate in the first quarter can drop to RMB 150,000, the stack rate of 60% of lithium carbonate corresponds to a basic material cost savings of RMB 2,500 per Tesla vehicle. Therefore, Tesla's price reduction in the second quarter should be controlled at around 5% to ensure that the gross profit margin does not continue to decline. However, this is clearly not enough, as Tesla has released information to the market that the gross profit margin for car sales this year must be maintained at 20% or higher.

Dolphin noticed that the current market expectation for Tesla's gross profit margin for the full year of 2023 is close to 22%, while in the first quarter, the overall gross profit margin was only 21% due to poor car sales gross profit margin. Considering that a new round of price reductions seems to be approaching, this gross profit margin expectation may have to be lowered.

d. Barely any increase in sales volume, significant reduction in unit price, car income is not remarkable: In the first quarter, the company achieved a total of $20 billion in car sales and regulatory credit income, an 18% increase from the same period last year, mainly because the market's sales volume expectation was slightly lower than the company's announcement.

Among them, the revenue from car rental business was US $560 million, a 16% year-on-year decline.

Regulatory credits were relatively high in the quarter, reaching $520 million, contributing 2.6% of total revenue and nearly 20% of pre-tax profit, which is the highest level in recent quarters.

2.2 Re-auditing the Car-Selling Path: Scale is the King

In the last quarter, the Dolphin has said, "At the time when the contradiction between demand and cost has reached its peak, Tesla has already presented its choice very clearly- to win through quantity, to exchange car-selling scale for car-selling gross profit rate, and to use the massive stock of cars to tell an Internet story about paying for services and monetizing traffic, creating a space for imagination to increase the gross profit rate of its car business."

However, during the interim period, there will be fluctuations in production, sales, and gross profit margin, and the implementation method will be to reduce prices without reducing production while upgrading FSD and in-car entertainment services with a gross profit margin of around 90%."

Tesla remains steadfastly committed to this strategy this quarter:

a. It continues to stress in its outlook that production capacity is still the priority, and it will sell as many cars as it produces. Its goal is to achieve an average annual compound growth rate of 50% for sales, and it still has a goal of delivering 1.8 million cars in 2023, with most market expectations currently focusing on between 1.7 and 1.8 million cars.

In fact, during the period where demand is the king, such a production-driven sales strategy basically implies that the sales target can probably be achieved. Therefore, the sales target in 2023 should not be a place where there is too much disagreement in the market. The question is, how much per-car gross profit needs to be sacrificed to achieve this goal.

b. The first-quarter sales figures are proof of the implementation of this goal. After a sharp price reduction, car sales rebounded, and the overall sales in the first quarter still set a new historical record, reaching 423,000 cars.

According to the goal of 1.8 million cars this year, the remaining three quarters will need to continue to push the limit and may even need to achieve approximately 500,000 cars altogether.

b. As one of Tesla's absolute production centers and major sales regions, the Chinese market supported 77% of global sales in the fourth quarter, once again setting a new historical record. And this is probably the peak contribution of Tesla's Chinese factory, since the Shanghai factory will not be expanding anymore, based on the plan.

After the Shanghai factory stops expanding, there may be two corresponding problems: 1) Chinese production capacity will basically reach the limit for Tesla's global deliveries, with future contributions only at around 70%; 2) The dilutive effect brought by the Shanghai factory is basically ending, and there cannot be a new factory to replicate the ultimate cost dilution effect brought by the Shanghai factory for Tesla.

Currently, China is one of the markets with the greatest competitive pressure globally, and the maintenance of market share may only be achieved through cutting prices to stimulate sales. Further sales increases may need to rely on the European and American markets, especially the US, after the new subsidies are implemented, to see whether they can provide Tesla with some space to reduce prices and boost sales.

A more decentralized delivery method and a significant increase in production have contributed to an increase in Tesla's inventory turnover days for Q1, rising from 13 days to 15 days. However, the good news is that customer deposits at the end of Q1 have begun to recover positively after a price reduction, indicating an improvement in the order backlog compared to the end of Q4.

Latest updates on Tesla:

1) Sales in Asia and supply guarantees in Shanghai? The Shanghai factory has been operating at full capacity for several months, with weekly output basically between 17,000 to 18,000 vehicles. Tesla has started to expand into Asian markets and has entered Thailand, with Shanghai supplying the demand.

2) Cybertruck: The Texas factory will begin production later this year, and the new price slaughter platform is still under development.

3) Berlin factory: Currently, the new factory produces 5,000 Model Y vehicles per week.

3. Energy and Services: Getting Better and Better

3.1 Energy volume: Tesla's energy storage and photovoltaic business include selling photovoltaic systems and energy storage systems to residential and small, medium, and large commercial and utility level customers. In Q1 this year, revenue reached $1.5 billion, an increase of nearly 150% YoY. However, the gross profit margin did not improve further this quarter, staying at 11%.

In terms of growth, the installation of energy storage in Q1 increased by over 360% YoY, more than doubling from the previous quarter. The supply is still unable to meet the demand, but the ramp-up performance of the Megapack energy storage battery factory in California is good, and there is still full production capacity. Also, the construction of the second 40GWh Shanghai energy storage factory will commence later this year. The performance of solar energy installation is relatively mediocre, due to climate and other factors, causing a QoQ drop.

3.2 Used car depreciation, slow but improving growth in gross profit margin: In Q1, Tesla achieved $1.8 billion in revenue from service business, a YoY increase of 44%, with the gross profit margin further improving to over 7%. The improvement in gross profit margin is mainly due to active second-hand vehicle transactions and a better gross profit margin performance.

2023 年 1 月 26 日电话会 "Tesla Minutes: "Autopilot has no rivals with a telescope, and the second Tesla may be in China.""

2022 年 10 月 20 日财报解读 "Fatal Question: How to Protect Single Car Profit When Demand Is Not Enough?"

2022 年 10 月 20 日电话会 "Minutes:" Fuel Cars Must Die, Never Reduce Production at Any Time. ""

2022 年 7 月 21 日财报解读 "What can Tesla hope for without the Shanghai factory's blood transfusion?"

2022 年 7 月 21 日电话会 "Musk: I embarrassedly raise prices again and again."

2022 年 6 月 6 日观点更新 "Did the US Stock Big Shock mistakenly kill Apple, Tesla, and Nvidia?"

2022 年 4 月 21 日""New energy roars, Tesla continues to make great strides forward""

2022 年 4 月 21 日"The new factory production capacity is climbing, and Tesla will deliver 1.5 million vehicles in 2022 (minutes)." On 28 February 2022, updated viewpoint "Loose Integrity, Safe-First Investment in Tesla;" on 27 January 2022, telephone conference "Tesla: Musk Reiterates the Importance and Potential Value of FSD (Telephone Conference Minutes);" on 27 January 2022, financial report review "Tesla, a Leader in the Field, Will Take a Mid-Point Rest?;" on 6 December 2021, updated viewpoint "Musk Selling Shares to Pay Taxes. What Lies Ahead for Tesla's Stock Price?;" on 21 October 2021, telephone conference "Tesla: Aiming for One Million Annual Sales, Musk Giving More Authority?;" on 21 October 2021, financial report review "Tesla: Female Tesla Bull Proclaims $3000 is Not the Limit;" on 27 July 2021, telephone conference "Tesla Q2 2021 Earnings Conference Call Minutes;" on 27 July 2021, financial report review "Tesla: No Limit, Always Breaking Records!;" on 27 April 2021, telephone conference "Tesla Q1 2021 Earnings Conference Call Minutes;" on 27 April 2021, financial report review "After Tesla's Non-Eventful Q1 Report, What Can We Still Expect?;" on 3 June 2021, in depth report "Tesla (Part 2): Misjudged or Overestimated, How Far has Tesla's Story Gone?;" and on 21 May 2021, in depth report "10 Year, 300 Times Return, How Much Magic is Left in the Tesla Trend?". Risk Disclosure and Statement for this Article: Dolphin Investment Research Disclaimer and General Disclosure