This week, large companies such as Johnson & Johnson, P&G, United Airlines, Netflix, ASML, Tesla and so on will release their earning results. I will talk about more about Tesla later of my takeaway from Tesla’s Annual Shareholders’ Meeting last week. Tesla will announce its 3Q results this Wed 20 Oct.
Upcoming financial data events: The US Beige book on the economic situation; China GDP; The US PMI data. On Friday 22 Oct, The US October Initial PMI values of Manufacturing and Service Industries will be announced. US economic growth slowed further in September after surging in the second quarter, reflecting a combination of peak demand, supply chain delays and labour shortages.
The slowdown is caused by a drop in demand for services, which has something to do with Delta variants. However, despite the greatly increased demand elasticity of manufacturers, factories are experiencing growing problems in procuring sufficient supply and labour to meet orders. Supply chain delays showed no sign of easing, and delivery times extended again in September, close to record levels. As a result, factory output growth has also weakened. In general, as demand exceeds supply, the prices of goods and services may rise sharply, and higher costs are passed on to consumers.
Market sentiment was boosted by Friday’s announcement that US retail sales rose 0.7% month-on-month in September, higher than expected -0.2% and the August data was revised up to 0.9% from 0.7%.
In late September and early October, concerns about US inflation and even “stagflation” as a result of soaring energy prices and increased supply chain congestion, which in turn led to higher inflation expectations in 10-year nominal interest rates on US Treasuries and pressure on the market. gold rose at one point. However, a number of data disclosed recently show that US growth and US stock profits are not so bad, and US inflation is not as high as feared, so market concerns about “stagflation” have cooled. US bond interest rates fell slightly, gold fell back, and the growth stocks rebounded. Therefore, investors should closely monitor the upcoming financial data points and major US earnings results to get better clarity whether recent stagflation fears are excessive.
With the cooling of the epidemic, the growth in the fourth quarter will not be very poor, or even expected to accelerate on a month-on-month basis. The third quarter coincides with the escalation of the epidemic in the United States, and although in retrospect the retail sales data from August to September are not bad, we can see from the indicators that economic activity has still been affected to some extent. The epidemic in the US has continued to cool since the beginning of September, which will help repair consumer demand, especially offline contact and travel demand, while the low base caused by the disturbance of the epidemic in the third quarter is likely to improve in the fourth quarter. U.S. announcing it was opening its land borders to fully vaccinated travellers from Mexico and Canada from 8th Nov. More than 370.2 million people crossed the Mexican and Canadian borders in 2019, according to data from the Department of Transportation.
Looking back and unravelling the performance of the S & P 500 since the third quarter of last year, we can see that profit is an absolute contribution. Fundamentals are the key to judging the medium-term trend, as long as the earnings trend is not completely reversed, we will not be completely pessimistic about the market. In terms of valuation, although the absolute level of dynamic valuation of the S & P 500 is still not low, the current valuation of US stocks is lower than a reasonable level that can be supported by the growth and liquidity environment. In addition, when earnings gradually switch to 2022, valuations will return to about 20 times, similar to levels before the outbreak at the end of 2019.
Following the stagflationary PPI print last week (+10.7% y-y), this week sees the release of China’s 3Q21 GDP (consensus 0.4% q-q, 5% y-y). China’s GDP Grows by 12.7% in H1 2021, market expect full year 2021 GDP growth could still achieve above 8%. Last year, China’s economy grew by 2.3 percent, making it one of the few major economies to register positive growth amid the pandemic. Meanwhile, High yield offshore credit spreads show no signs of stabilizing. While the onshore CNY, SHIBOR, CSI 300 and sovereign bonds seem unaffected.
China’s real estate market is valued at ~US$55trn and including construction activity, property related services accounts for ~29% of GDP. Household debt has climbed from US$2trn in 2010 to over US$10trn in 2021. Equally, the ratio of debt to disposable income has swelled to ~130% – higher than in the US. Housing accounts for 65.3% of Chinese households’ assets compared to 36% in the US. Property related loans (mortgages, loans to developers, etc.) account for ~25% of China’s banking assets.
HKEX A50 futures is the first index futures in Hong Kong to track the A-share market and the first overseas A-share derivative based on the interconnection mechanism. The launch of HKEX A50 futures provides international investors with a low-cost and convenient tool to manage the investment risk of A-shares, attracting more international investors to invest in mainland Chinese stocks. At the same time, for the Hong Kong market, the launch of the product will expand the offshore RMB capital pool and related investment products in Hong Kong, consolidating Hong Kong’s important position in the international market as a financial risk management and as a financial centre to access to the Chinese market.
The index covers 50 of the mainland A-share large-cap stocks includes 50 stocks eligible for trading on the Shanghai-Shenzhen-Hong Kong Stock Connect and is highly related to the historical performance of the main MSCI A-share index.
The top ten weights are Ningde Times Energy, Guizhou Moutai, Wuliangye, China Merchants Bank, BYD and so on. The MSCI China A50 interconnection index is more evenly distributed than SGX’s FTSE A50 index, with both healthcare and TMT sectors weighted much higher than SGX’s FTSE A50.
During Tesla’s Annual Shareholders Meeting last week, Elon Musk gave a big picture and sales forecast target to reach 20m EV cars by 2030. Tesla output will be 2m by the end of 2022, assuming 50% CARG, by 2030, it should be 50m. So 20m assumption is conservative based on that.
Assuming 20m EV car sales, average selling price of US$30,000/car, the revenue will be $600bn vs current mkt cap of $830bn ($843/share).
Assuming net profit margin 11%, its net profit will be $66bn.
If this could be truly realized, based on PEG with anticipation of 40-50% CARG, it’s mkt cap could reach to $3trn. Tesla’s mkt cap could potentially exceed Apple.
Of course, the reason why Musk gave a longer-term big picture assumption to shareholders, is to give a future vision for the capital markets to dream of. Higher the share price easier the fund raising. To achieve a 20m capacity target by 2030, they need to build 40 giga plant worldwide with each output capacity of 500k.
Is 20m car assumption realistic? To give the context of the global car sales data, that’s top No 1 & 2 car sellers combined (Toyota: 10m; Hyundai: 9.3m). It means 20m car sales assumption is to set a target of 20% global market shares by Tesla.
Musk mentioned the Shanghai giga plant took 11 months to build and took a year to ramp up to the production to maximum capacity of 500k cars. The reason it’s so efficient as Tesla treats its suppliers very well to always pay them timely. Tesla rapidly repaid all its $1.6bn debt borrowing for the Shanghai plant. It shows its cash flow is very healthy. It also makes sense on interest saving as the interest rate in China is much higher than the US and EU.
Tesla moves it’s HQ from California to Austin, Texas on tremendous tax saving. Imagine if EM sell his 2021 stock option, which worth $20bn, it’s a big tax saving decision on corporate and personal taxes. Labour is also much cheaper.
Another new business announced is Tesla insurance business will start in the US in 2022. Differences from traditional car insurance is that it depends on big data driving pattern on insurance premium.
Headwinds: the growing plan needs lots of car chips and batteries. Chips should be able to resolve the bottleneck in 2 years. Batteries is the long-term key and challenges to sustain the growth. That’s why the delay in new models launches.
Tesla is not just a hardware company but also a software company. AI, FSD and software will increase margins dramatically in the future. If values it in more towards a software company. The valuation becomes reasonable in particular the dominant leader position in the promising high growth EV sector.
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