Coronavirus Epidemic Can Foil Tesla’s China Expansion

Tesla’s expansion into China could face harsh resistance as coronavirus spreads throughout the region. | Image: REUTERS / Yilel Sun

Tesla recently opened its Shanghai factory to start production in China but the coronavirus outbreak can hamper its plans.
Tesla could face difficulty fulfilling its obligations to Chinese government and banks.
The spread of coronavirus in China has major implications for Tesla.

Tesla’s (NASDAQ:TSLA) stock has been on a parabolic rise, appreciating close to 200% from its 52-week low.

Despite no significant fundamental developments, the rally saw Tesla’s market cap cross the $100 billion mark – a milestone that can yield CEO Elon Musk a billion-dollar pay package. With all eyes on Tesla’s upcoming earnings call, another development should be on investors’ radar. That’s the rapid outbreak of coronavirus in China.

Coronavirus Is Spreading Fast in China

The only thing more parabolic that Tesla’s stock is the rising coronavirus cases in China. As I opined in one of my previous articles, there’s a good chance the Chinese government is understating the severity of the coronavirus outbreak.

The rise in coronavirus cases has been parabolic in China. | Source: Johns Hopkins CSSE

The growing number of infections and deaths along with the desperate measures taken to curb the epidemic suggests that the Chinese government was indeed understating the impact. Now they are forced to accept that the situation is getting worse.

Chinese health official acknowledges the seriousness of coronavirus. | Source: Twitter

Tesla Stands to Lose from Coronavirus Outbreak

Markets tend to underperform in the weeks following an epidemic. As evident from the charts below, stocks underperformed following the SARS outbreak.

The SARS outbreak led to a temporary underperformance in stocks. | Source: Twitter

The coronavirus outbreak is much bigger than SARS. According to the World Health Organization (WHO), the SARS outbreak of 2003 infected 8,098 people worldwide. By comparison, coronavirus has already infected close to 5,000 people in China alone. What’s worse, estimates suggest that the actual number of cases around the world could be closer to 100,000.

Markets are likely to underperform in the near future because of the outbreak. In such a situation, some traders prefer shorting individual stocks that have a lot of room to fall.

Tesla fits the bill perfectly. Not only is Tesla’s valuation overstretched due to the recent rally, but the company has also been making big moves in China that can backfire due to coronavirus.

Tesla secured $521 million in loans from Chinese banks in 2019 for the construction of the Shanghai Gigafactory. The loan is due to be repaid in March 2020. Tesla also secured another $1.4 billion loan from Chinese banks last month and will use a part of it to roll over the debt due in March.

Although Tesla has managed to kick the can further down the road, it will have to pay off the loans eventually. Moreover, Tesla has also promised the Chinese government $320 million per year in taxes.

Tesla can’t afford to short-change the local Chinese banks or the government. The Communist Party of China won’t be happy if Tesla fails to deliver on its promises.

A worsening coronavirus outbreak could have a negative impact on the Chinese economy and make it difficult for Tesla to meet its lofty targets. The disease has already led to the death of a person in Shanghai, and extreme measures are being taken to prevent it from spreading further. Automakers are already evacuating workers from Shanghai and are they expect production delays as well.

The outbreak couldn’t have come at a worse time for Tesla as EV sales are in free fall in China. In an attempt to curb the falling sales, the the Chinese government even was forced to extend EV subsidies.

Although Tesla’s sales grew in the region, which isn’t surprising since the company still only has a small presence in China, the overall declining trend is bad news.

Tesla is overvalued by every conventional metric and is priced for perfection. Coronavirus could prove costly for the electric vehicle maker at a time when China expansion is high on the agenda.