Tesla inc.

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THIS REPORT WAS PREPARED EXCLUSIVELY FOR ACADEMIC PURPOSES BY [INSER STUDENT’S NAME], A MASTERS IN FINANCE STUDENT OF THE NOVA SCHOOL OF BUSINESS AND ECONOMICS.THE REPORT WAS SUPERVISED BY A NOVA SBE FACULTY MEMBER, ACTING IN

A MERE ACADEMIC CAPACITY, WHO REVIEWED THE VALUATION METHODOLOGY AND THE FINANCIAL MODEL.

(PLEASE REFER TO THE DISCLOSURES AND DISCLAIMERS AT END OF THE DOCUMENT)

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ANAGEMENT

 Tesla is a manufacturer of Electric Vehicles (EVs) and recently joined the Lithium-Ion batteries market and Solar PV, following the acquisition of SolarCity for $2.1bn. FY16 Revenues were $7bn and have been growing at a CAGR11-16 of 80%.  Tesla was a pioneer in the EV industry, reaching a market share of 31% in the U.S and 10% globally in 2016. Its vehicles have been stealing market share from other internal combustion engine vehicles due to their superior performance.

 The $5bn Gigafactory was inaugurated on 2016 and will guarantee Tesla enough room to scale its operations as it will provide batteries for 500 thousand vehicles annually. Other manufactures will be hindered by the market’s limitations as the battery market is not ready for the upcoming EV expansion.

 All vehicles are equipped with the most advanced autonomous driving software since late 2014, giving Tesla a sustainable competitive advantage over its peers.

 The Model 3, the company’s first mass-market vehicle will bring Tesla to a new level within auto manufacturers as it builds one of the most advanced automated manufacturing lines.

 The company has massive potential as the markets it competes in are pretty much untapped. Despite constantly reporting negative earnings, the structure to build a competitive advantage is built and will surely reap profits in the future.

Company description

Tesla Inc. is an EV manufacturer which recently joined the Solar PV market after the acquisition of SolarCity. Its biggest markets are the U.S., China and Norway. The company is traded on Nasdaq since its IPO in June 29, 2010.

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Electric Vehicles are just the start

…Tesla is aiming for more.

Recommendation: BUY

Price Target FY17: 356.5 €

Price (as of 29-May-17) 316.8 € Reuters: TSLA.OQ, Bloomberg: TSLA US EQUITY

52-week range ($) 178.2-327.7

Market Cap ($bn) 53.4

Outstanding Shares (m) 164.26

Source:

Source: Bloomberg,

(Values in € millions) 2015 2016 2017E

Revenues 4,046 7,000 10,549

EBITDA (294) 280 412

Net Profit (833) (674) (1,174)

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TESLA INC. COMPANY REPORT PAGE 2/38

Executive summary

The EV market is scheduled to increase nearly 25% every year as Government’s increase pressure and automotive manufacturers rush to establish themselves in this market. Tesla has successfully been able to scale and increasingly win market share in the automotive industry. With the investments in the Gigafactory and the Model 3 manufacturing line, it will be able to scale manufacturing at an unprecedented pace. Building on its vehicle’s performance and functionalities such as autonomous driving, Tesla could very possibly be able to establish a market leader position in the industry.

Challenges Ahead

Analysing what the challenges that Tesla and other Automotive manufacturers will face, I have concluded that Tesla has been garnishing the resources that it needs to compete face to face with companies 20x bigger. By overcoming its restricted production capacity and leveraging on its vehicle’s superior performance and disruptive functionalities, Tesla will grow alongside major transportation trends, while other manufacturers may struggle to keep up. Most manufacturers have business models that can be put to check upon the development of the two most important trends in transportation: autonomous driving and sharing-economy. Tesla, on the other hand, is scheduled to build upon these trends, with no old-school business segments to focus on but complete focus on the future.

Valuation

Through a Sum-of-The-Parts approach I have individually valued Tesla and the recently acquired SolarCity through a discounting cash flow calculation to account for the different industries’ returns demanded by investors. I have reached a Enterprise Value of $56,752mn for Tesla and $5,205mn for SolarCity. Considering Net Debt and Minority participations, I have reached a final global value of Equity of $56,442, resulting in a target price of 343.6 per share, which represents a potential upside of 13.1% over May 23rd_{, 2017 closing stock price.}

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Company overview

Tesla, Inc. is a vertically integrated clean-energy company with two distinct segments: Automotive and Energy. It was founded on 2003 and is headquartered in Palo Alto, California. Revenues have grown at a CAGR11-16 of 80%, reaching $7bn FY16 (Exhibit 1) Tesla ranks first at the top-3 US Automotive companies in terms of market capitalization, over GM and Ford, despite selling just a fraction of other manufacturer’s vehicles (Exhibit 2). Tesla’s biggest markets ranked are the U.S.A., China and Norway. Tesla operates a network of 265 stores and services centers, 848 supercharging stations with 5487 superchargers worldwide, employing 17,782 people. In late 2016 Tesla acquired SolarCity, the biggest US solar provider, for $2.1bn.

Tesla is a top player in the EV market registering a 31% market share in the US and 10% worldwide in 2016. Its biggest competitors are GM in the US, Volkswagen and BMW in Europe and BYD in China (Exhibit 3). Its differential aspects are: 1. Pioneering technology (w/ autopilot); 2. Owning its sales, distribution and charging networks; 3. Superior brand awareness derived from being first movers in the market.

Its stock trades on Nasdaq since its IPO on June 29, 2010 (with a market capitalization of $226mn). It has since outperformed both the SPX index and the NDX index with a CAGR of 42%, against 11% and 16% respectively (Exhibit 4).

History and Future Plans

Tesla made an impact when it unveiled its first vehicle, the Tesla Roadster, in 2008 and has amassed a huge following ever since by pushing for worldwide acceptance of electric vehicles (EVs) and sustainable energy. The Roadster success lied on its ability to compete with fellow sports vehicles with an Internal Combustion Engine (ICE) on performance, challenging the belief that EVs were meant to be dull and unappealing. Its range was 245 miles (394 km) on a full charge, and went from 0-60 mph in 3.7 seconds (which equals the accelerating speed of the 2016 Porsche 911 Carrera GTS1_).

The company positioned itself from the start as a high-end manufacturer and dealer. Its flagship vehicle, the Model S, arrived on 2012 and set the standard for luxury sedans. Adding to an incredible design, it packed all the features latest tech could offer. Current versions have dual motor all-wheel drive, autopilot software, free over-the-air software updates2_{and a 17-inch touchscreen that} controls every car’s functionality. It was merited with over 25 awards, including

1_{Zeroto60times (Website, 9/5/17).}

2_{Tesla updates its vehicles, adding/improving its features, with the cars never having to leave a client’s garage.}

Exhibit 1: Sales per Segment ($mn)

Source: Company data, analyst estimates.

Exhibit 2: Tesla vs GM vs Ford

Source: Bloomberg, Company data. Exhibit 3: OEMs EV market share

Source: EVvolumes data, compiled by author.

Source: Bloomberg, compiled by author. Exhibit 4: Market Performance

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PAGE 5/38 the 2013 Car of the Year award by Motor Trend. In 2014, it was awarded with the highest customer satisfaction score on Consumer Report’s history: 99/1003_{. It} was the highest selling EV of 2016 with nearly 51,000 units sold (Exhibit 5) and is registering impressive growth in sales, stealing market share from all major luxury sedans in the U.S. (Exhibit 6). Following the Model S success in its first year, the Consumer Report’s rating and Tesla’s first quarterly profit catapulted Tesla’s stock to $151 by the end of the year (270% YoY growth) despite two battery-related malfunctions in October that caused cars to catch fire (Exhibit 7). Tesla’s third model, the Model X Sports Utility Vehicle (SUV), was revealed on February 2012 but just began rolling-out to customers in September 2015. The company admitted it punched above its weight class on this project4_{as if the delay in deliveries – which were meant to start on} 2013 – was not enough proof. The Model X had so many distinct technological features it turned its production process into a nightmare, proving too harsh for such an inexperienced Auto company to manage, jeopardizing Tesla’s capacity to push it to the market. Its distinctive falcon-wing doors were the troublemakers5_{and even led to some} friction with suppliers involving lawsuits (which Tesla eventually settled on 20166_{). Since both models were produced on the same} manufacturing line, the Model X had a cannibalizing effect on the Model S, and Model S’s deliveries declined over 43% in the first two quarters that Tesla produced both models (Exhibit 8). Sales were clearly limited by manufacturing capacity, and as production stabilizes as it did in the last two quarters, we can expect both models’ sales to organically grow. The year 2016 started off rough for Tesla…after publishing total deliveries for the final quarter of 2015, Tesla stock tanked nearly 60% in just over one month and reached a two-year low. Critics doubted the company’s ability to manage product releases at a time where other OEMs (original equipment manufacturers) were unveiling competing products. Nevertheless, Tesla’s presentation of the Model 3 was a break-out success and Tesla recovered investors’ trust. Everyone was amazed by the Model 3 specs: 215 miles (345 km) range and autopilot at a $35,000 price point proved to be enough to shift the public’s – and investors – opinion to favor Tesla. This will be key for Tesla’s future. It has long been the ultimate goal of the company since 2009, to bring an EV to the masses and after the Model X misstep they need a big win on the Model 3 taking into account their massive investments to prepare for it. The company’s ambition with the Model 3 implied

3_{ConsumerReport (Website, 9/5/17)}

4_{On the recent 1Q17 Conference Call, Tesla’s CEO Elon Musk recalled the situation, mentioning that the concept of grabbing every}

piece of cool tech and putting it into a car with no thought of production was not ideal at best. 5_{According to Tesla, this was the distinctive feature which turned the production process to a puzzle.}

6_{Autonews, 2016.}

Source: EVvolumes.

Exhibit 5: 2016 Top-selling EVs

Source: Company and Carsalesbase data.

Exhibit 6: Luxury Sedan sales in the US.

Source: Bloomberg, compiled by author. Exhibit 8: Quarterly sales by model

Source: Company data. Exhibit 7: 2013 Market Performance ($)

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PAGE 6/38 the construction of a massive factory to provide batteries for it. The ‘Gigafactory’, a joint project with Panasonic, will have 5.5m sq. feet, becoming the biggest global building in terms of footprint, that expects to double the global supply of lithium-ion batteries7_{. It will be able to support the production of 500,000 vehicles} per year, with 35GWh capacity of battery storage, becoming a central piece for Tesla’s scaling plans. This will also fuel Tesla’s Energy line products: Energy storage batteries aimed for residential, commercial and utility applications. In May 2016, a death in a Tesla vehicle driving with autopilot caused a massive stir. But a later federal report absolved the vehicle of all responsibility. The summer of 2016 was marked by Tesla’s $2.1bn bid on the biggest solar services provider in the U.S., SolarCity, and the inauguration of the Gigafactory. These events had opposed reactions by the stock-market (Exhibit 9). On the one hand, buying a highly indebted solar company looked more like bail-out than a tactical move, on the other, the Gigafactory was in place, and provided the organizational structure to bundle everything up together, and since Tesla had committed to expanding to solar for a long time8_{, timing seemed appropriate. In October, depending on the} acceptance of the acquisition, Tesla unveiled solar solutions in the form of glass roof tiles. They are made of quartz, and being nearly unbreakable, Tesla provides a life-time warranty on them and assures they will be less expensive than a regular roof plus the utility bill the Tesla woof would save you.

It seems that the base is set for Tesla’s future. Steady production facilities for current models and an increasingly optimal organizational structure to prepare for the Model 3 launch. This vehicle, being the simplest they have yet designed, is expected to be a hit. Not only will its price point attract a new customer segment, but it may allow Tesla to garnish yet a new competitive advantage. The company is putting serious effort in production automation. In early 2017, it acquired Grohmann Engineering, an expert in production automation that was working for big OEMs like Daimler. Additionally, they are putting several resources into building the ‘machines that build the machines’, meaning its production line. Tesla claims that the software within these is 10x as tricky as the one in its vehicles and that the Model 3 production line will be at pair with the currently best. If Tesla does build a manufacturing line that other OEMs cannot emulate, it will pretty much destroy the only advantage they have over Tesla: 100 years of manufacturing experience. Early production of the Model 3 is expected to begin in July 2017, and the company’s target is to end the year with a production capacity of 5,000 Model 3/week9_{. However, the most likely scenario is that the}

7_{Forbes, 2016.}

8_{Tesla’s Website: 2009 blog post.} 9_{1Q17 Conference Call.}

Exhibit 9: 2016 Market Performance ($)

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PAGE 7/38 company delivers a soft launch in 2017, with fewer than 10,000 deliveries, to break ground so to say, and then in 2018 really push for “mass” deliveries. From 2018 to 2022, Tesla plans to launch 4 more vehicles: Another SUV (Model Y), a Pick-up Truck (Model U) and a Semi-Truck. They have also stated that when their autopilot reaches a capacity that regulators can no longer ignore, it will provide a car-sharing service for their customers, allowing them to profit from their vehicle when not in use, dramatically reducing their vehicles cost of ownership, and gaining ground on two of the most disruptive trends of transportation: autonomous driving and car-sharing.

To this point, the vision and reluctance the company has shown has been key to keeping investors on its corner. Only by doing so did Tesla get by after so many successful cash-burning years and capital raises (Exhibit 10). However, despite not being profitable, and I expect that to continue at least until 2019, they have been building pretty compelling arguments and resources that just may enable the company to revolutionize transportation, and investors seem to be in line with that.

Shareholder structure

Since its $6.3m investment back in 2004, current CEO Elon Musk has been the largest individual shareholder of the company with 20.48% of equity as of May, 2017. Institutional shareholders currently hold 69% of total shares and free-float stands at 95% of equity. There are 12 institutions that hold over 1% of the company’s equity, while the top-4 jointly hold over 30%: FMR LLC (13.5%), Baillie Gifford and Company (8%), T Rowe Price Group (7%) and Tencent Holdings (5%). Each of the 164,259,735 outstanding shares give one voting right to their holder. Tesla’s Board of Directors is composed by 7 members, and is often under scrutiny since 5 of the 6 members have other business/personal ties with the CEO.

Business Model

Tesla’s business model has plenty of distinctive features that have fuelled the hype around the company, allowing its popularity to skyrocket over the course of 9 years, since its first vehicle. Their mission was to accelerate EV adoption across the world, and the plan has been public on their website since 2008: Build a high-performance sports car, leveraging their technology iterations on electric powertrains and focusing on selling few units at a big margin. Then, use the proceeds and the experience acquired to manufacture a family vehicle, that would have a lower price and therefore be more accessible to the public, selling Exhibit 10: Tesla’s Cash sources

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PAGE 8/38 more at a lower margin. Use the money from such vehicle to build a mass-market vehicle, at a lower margin, leveraging their brand awareness and possibilities for economies of scale to take EV adoption to the next step. The company is on a near perfect track on following such plan, and has sustained its business model on 3 pillars: 1. Unlike any other OEM, Tesla does not partner with dealerships to sell their vehicles, it sells them directly to its customers. It has created a global network of stores, service centres and showrooms with Tesla personnel to advocate for their products. This achieves several things, but most importantly, it allows Tesla a much greater control over its sales process and product development, while providing their customers an incredibly superior customer experience in relations to other manufacturers through dealerships. Through this process, Tesla was the first OEM to standardize online selling, and built a cult-like fan base that is incredibly loyal. The company is able to capture this value and take hundreds of thousands of orders for customers who will only get to see what the car they will buy looks like over a year after the deposit. 2. Tesla’s service network is one of a kind. It’s called “Service Plus” and combines every step of the customer relationship with the brand on one place. It includes charging stations, repair centres and showrooms, building upon that community scope that the brand wants to provide for their customers. It also has a Mobil Repair service – Tesla Rangers – that will meet the customer to its location/home. Through Tesla’s software in each of their vehicles, they can detect when a vehicle needs a fix, and then repair it via an over-the-air software update without even needing to look at or touch the car. If there is a serious issue, they will send a Ranger to meet the customer and take care of its vehicle. 3. Supercharger Network is currently unbeatable. Tesla has the most advanced charging technology available, and offers charging speeds over 2x as fast as its competitors. Plus, it is the only OEM with its own charging network. For customers who bought their vehicle before January 2017, charging will be free for the entire life of their vehicles. All in all, Tesla realized that cool EVs were not enough to compel a big, doubtful, market. By tackling all consumer constraints surrounding EVs and fuelling an incredible community spirit, it was able to hype the EV wave and ride it while further expanding and improving its reputation.

Gigafactory

The Gigafactory 1 (Tesla has hinted it may build up to 5) is a key project for Tesla’s ambitious plans of expansion. To be able to scale production, it needs an incredible amount of battery packs for its vehicles, and since they have established a 1 millio n vehicle capacity goal for 2020, the supply gap to fill is massive. On 2015, Panasonic produced 4.5 GWh of EV batteries (the largest

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PAGE 9/38 producer by a factor of 3x)10_{which would have the capacity to feed just around} 125,000 Model 3 vehicles per year… On July 30, 2014, Panasonic and Tesla partnered to dramatically increase the world’s supply of EV batteries with an expected capacity of 35GWh. On the latest conference call the company mentioned that 35GWh would be a passing point, and they could even surpass 100GW with just the Gigafactory, assuring plenty of room for Tesla to expand. Panasonic commits to produce and supply lithium-ion battery cells and investing in all the associated machinery needed upon mutual approval, while Tesla will prepare, provide and manage the property, land and utilities, and purchase Panasonic’s cells to build its packs. The goal is to assemble all the different production lines under one roof – Panasonic and other suppliers and Tesla’s battery pack manufacturing line – which will achieve an estimated 35% cost reduction. Savings will come from optimized manufacturing processes, previously unachievable, in battery cell and pack production; optimized battery cell design for EVs (in size and function), and by eliminating packaging and transportation costs between supplier.

Automotive Industry

The global automotive industry is pretty much stagnated since 2005. Passenger cars sales have declined 10% in the U.S. from 2005 to 2016, and 3.5% in Europe. China is the biggest outlier as they have overwhelmingly multiplied its unit sales b y a factor of 5x over the period mentioned (Exhibit 11). The biggest 10 OEMs share 52.2% of the market sales volume, with the top-3 (Toyota, Volkswagen and Ford, by order) owning 44%% of it (Exhibit 12). To paint a good picture of where Tesla stands in the market, the second youngest American Automotive manufacturer is Chrysler with 92 years of existence. The industry has registered a consolidation trend, with bigger OEMs managing an increasing number of brands under their name. There have not been any major players joining the market and the overall industry has reached a plateau. Global automotive unit sales are expected to grow at a CAGR of 4% until 202011_driven by a huge contribution from China, where the market is booming, and is expected to account for 25% of global sales in 2020 and 30% on 202512_.

Electric Vehicle Industry

The Electric Vehicle Industry seemed unappealing in the early 00’s. The technology was not ready and there was not a mass market eagerly waiting for EVs that justified big R&D spending by established OEMs. Despite the

10_{Clean Technica}

11_{Statista: KPMG and LMC Automotive.} 12_{Statista: CAR Uni Duisburg-Essen} Exhibit 11: Passenger car sales per market (mn units)

Source: KPMG.

Exhibit 12: Top OEM’s market share

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PAGE 10/38 consensual truth that, sooner or later, the industry needed to abandon ICEs and pivot to electric powertrain engines, the profit motivation was still not big enough, and there were no major developments in the first few years of the 21st_century. Since 2010, the EV industry boomed from its embryonic state and accumulated over 2m sales worldwide. The American and Chinese markets assumed front-running positions from the get go and now account for over half the stock of the world’s EVs (Exhibit 13).

In late 2015, the UN held a Climate Change Conference in Paris, attended by 196 countries. Among several issues, the primary goal was to reach a consensus on lowering greenhouse gas emissions and push for a more sustainable economy. Allianz ranks road transportation as the third biggest source of greenhouse gas emissions, and this sector was subject to a lot of scrutiny during the conference. It was agreed by the intervenient countries that a goal for the global stock of EV needed to be set, with countries committing to reaching 20 million EVs by 2020 and 100 million by 2030, so it is expected that the industry will tend towards those numbers as governments push for the industry growth and new firms join in to compete in an infant market. It is more realistic to assume that we will be able to reach 75% of this quota, as such objectives tend to be exaggerated. Under such scenario, total EV sales would need to grow at a CAGR of 24% until 2030, which I reasonably assumed in my estimations.

EVs are currently segmented across three categories:

1. BEVs: Battery Electric Vehicles with battery packs that are recharged from electricity sources. Accounted for approximately 60% of the market in 201513_{, and is the most challenging segment since the vehicle relies} only on the battery for ‘power’. Major players are Tesla, Nissan, Renault, VW, BYD and GM.

2. PHEVs: Plug-In Hybrid Vehicles have both a battery pack and an ICE, being refuelled with either petrol and/or recharged from electricity sources. These are more expensive to build and achieve a poor performance comparing to BEVs. Major players are VW and GM.

3. HEV: Hybrid Electric Vehicles are like PHEVs, but they can only be refuelled with petrol as their batteries use regenerative to recharge. An example would be Toyota’s Prius, highly popular 5 years ago but is has not reached the top-30 EVs worldwide in terms of sales as of lately.

13_EVvolumes

Exhibit 13: Top OEM’s market share

Source: OECD/IEA – Global EV Outlook2016, Analyst estimates.

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PAGE 11/38 United States

The first highway-legal commercial BEV in the market was the Tesla Roadster, launched in February 2008, selling 2,450 units until 2012. The next two players in the market arrived three years later. Nissan and GM launched the Nissan Leaf (BEV) and the Chevrolet Volt (PHEV) in 2011, selling 9,674 and 7,671 units respectively. At the time, there was just no room to grow as the support infrastructure was not there and demand did not correspond – government data accounts that there were under 5,000 fuelling stations across the country14_{, which} obviously scared away potential customers that combinedly bought just 17,731 EVs in 201115_{. In 2012, Tesla launched the Model S, and the year was defined by} a massive entering spree by other OEMs in the market. Sales reached 53,234 in 2012 and grew at a CAGR of >23% until 2016, reaching 151,827 vehicles in 201616_{(>2% of American Passenger Car market}17_{). Tesla owned 44% of the} American EV market last year, followed by GM with 18% and Ford with 16%18_. The American government’s policy has really pushed for EVs. Its most aggressive move was to concede a tax credit of $7,500 in EV purchases, which objectively reduces EVs price by the amount of the subsidy, discounting the months that separate the purchase from the ‘tax season’. In certain geographies, EVs are also circulation tax exempt which adds a few yearly savings to the mix19_. The tax credit in its entirety is limited to the first 200,000 vehicles sold by any OEM, after that, it is reduced quarterly, until reaching zero (approximately 5 quarters after the milestone20_).

China

China’s EV population has been growing at an hallucinating CAGR of 104% from 2012-16. Consequently, it topped the US as the country with the highest EV stock in the world21_{. China’s EV market is dominated by the Chinese company} BYD Auto, that registered a 29% market share in 2016 with over 100,000 vehicles sold owning the three top-selling EVs in the country. In the top-30 EV models sold, there are only two foreign brands represented: Tesla’s Model S with 2016 sales of 7,548 (2% market share) and Porsche’s Cayenne Model (PHEV) with 2,963 unit sales (<1% market share)22_{. BYD is by far the dominant player. It} has a vastly diverse portfolio of products that includes EVs, motorcycles, passenger buses, lightning and energy solutions. The company is expected to

14_{Alternative Fuels Data Centre.} 15_EVvolumes.

16_EVvolumes.

17_{Compiled with data from Passport on Passenger Car sales in US.} 18_EVobsession.

19_{OECD/IEA – Global EV Outlook, 2016.} 20_{Cleantechnica.}

21_EVvolumes. 22_EVvolumes.

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PAGE 12/38 keep its leading position in the market, as the country’s protectionist policies keep international threats away. Nonetheless, BYD has built the resources to sustainably grow in the future and is a force to be reckoned whit. It has opened factories in Europe, and its commercial electric buses have reached London, which may be a ramping launch to the rest of Europe. Historically, the Chinese government has maintained an aggressive subsidy policy to push EV adoption as being the main source for EVs in the future is a core strategy to fight pollution in China. It has excluded sales tax from EV purchases (except VAT) and commonly applies price rebates upon EVs registrations23_{. This has been expensive in the} terms of billions for the government24_{, which now is phasing out subsidies, forcing} the hand of OEM by establishing aggressive minimum EV quotas in the country (8% of sales in 2018, 10% in 2019 and 12$ in 202025_{). This would not only} balance the government’s accounts, but boost EV adoption and market penetration worldwide, as major OEMs see China as the EV ‘Mecca’, and the marketplace with the highest potential.

Norway

Europe EV sales have been growing at a CAGR of 31% since 2012 and totalled 222,000 in 2016 vehicles, with Tesla owning 7% market share. Europe is by far the most competitive EV market. The top 5 players are BMW, VW, Renault, Nissan and Mitsubishi – 16 to 10% share26_{. Norway leads by example in} transition to sustainable energy as its EV sales account for as much as 40% of 2016 new car registrations27_{. Aggressive policy by the Norwegian government} propelled EV sales to grow at a CAGR of 68% between 2012-15. The government exempted EV purchases from both sales tax and VAT, which essentially halved the total selling price28_{, being a core driver for such incredible} market penetration. Norway EV sales in 2015 were 34,343 units and Tesla registered a market share of 12%. VW leads in Norway with 37% market share and Nissan sits third with 11%.

Barriers & Growth Drivers

Even though EVs arguably offer lower running costs than regular ICE vehicles (20-25% fuel savings on a 100km trip29_{), there are currently barriers in the way of} EV mass adoption by the market that soon will be mitigated and no longer stand in its way. They can be summed up in 2 major segments: 1. Price/Performance ratio; 2. Consumer anxiety over range.

23_{OECD/IEA – Global EV Outlook, 2016.} 24_{Reuters, 2017}

25_{Electrek, 2017} 26_{EV VOLUMES CHART} 27_{The Guardian, 2017,}

28_{OECD/IEA – Global EV Outlook, 2016.} 29_{OECD/IEA – Global EV Outlook, 2016}

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PAGE 13/38 1.Price/Performance: Until this past couple of years, there was just no EV that justified its price when considering performance with the core of sales falling to the early-eco-adapters. The 2011 Nissan Leaf, for example, was priced over $31,000 and offered just 100 miles on a full charge30_{. 0-60 mph} speed acceleration would steal 10 seconds of your life, and to reach 80 mph would take you an additional 10… Of course, there was the Tesla Roadster, but it cost over 3x more than the Leaf. The point being that, there was no car that would offer you a good overall performance, at a reasonable price point compared to ICE vehicles. The main driver for the over-pricing is the lithium-ion battery cost. The estimated cost of productlithium-ion in 2012 was $633 per kWh and the battery is estimated to account for 38% of the total EV cost to produce31_{. Tesla hinted in early 2016 that its average cost per Kwh was} below $190, which already shows a 3x improvement over 4 years – and no battery had been produced at the Gigafactory at the time, so it is reasonable to expect the cost is currently significantly inferior. GM has even disclosed that LG Chem supplied them batteries priced at $145 per kWh, an incredibly low number which shows how fast the industry is adapting and evolving. Governments have been playing a key role in mitigating the price factor with aggressive subsidy policies. However, the burden will tend to shift towards manufacturers as Governments’ budgets get saturated with EV subsidies. So far, top companies seem to be ready to deliver.

2.Range Anxiety: The biggest barrier for mass adoption is the consumer’s anxiety towards range. Why should one switch from an ICE vehicle, that lasts for around 400 miles (644km), to an EV that will go for around 300km while being extra-expensive and having less charging stations? As of now, there are 15,878 electric stations with 42,364 chargers across the US32_{, but on} 2011 that number was less than 10% of it (for scale, total gas stations in the US were nearly 153,000 in 201333_{). As technology keeps up to provide} longer ranges for consumers and governments and OEMs invest to provide a global supporting infrastructure, we will see increasingly fast adoption of EVs. Tesla currently has the most sophisticated network worldwide, and plans to double its superchargers and destination charging centres to 10,000 and 15,000 this year. There are independent charging networks, available to most EVs, such as ChargePoint and major OEMs are currently colluding to build a network of their own34_{so year on year we should expect massive} improvements in terms of supportive infrastructure, as well as battery density

30_{It is important to consider that this was a highly controlled and, doubtfully real-world applicable, company-led test} 31_{Source: Statista}

32_{Alternative Fuels Data Center (Website, 11/5/17)} 33_{NACS: 2015 Retail Fuels Report}

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PAGE 14/38 in electric powertrains, which will translate into a dramatic reduction in customer’s anxiety over EV ranges. Current battery recharge times and charging network already allow for long-range trips with no aggressive extra effort. Tesla’s superchargers already provide 270 km worth of range in just 30 minutes with 135 kWh capacity chargers. Last December, Elon Musk teased on twitter that the third generation of superchargers would have way over 350 kWh capacity. If it materialized, that would mean it could charge a Model 3 (which will have a 60kWh battery) in just over 10 minutes…putting it almost in parity with ICE vehicles. In addition, Battery range anxiety only works for long-distance trips, which you will averagely take 2, maybe 5 (?) times per year on average. The rest of the year you have the option to charge it at home…what ICE vehicle can claim that it fills its deposit every night? The point being: an average citizen drives 47 km a day35_and realistically, averaging 10 long trips per year per citizen is surely an overestimation. As recharge rates will tend to improve, batteries will have increased ranges and charging networks become more widespread, there will no longer be much difference between EVs and ICE vehicles in this aspect.

Key Players & Performance

Find below a brief comparison between the key players in the industry and their main financials compared to that of Tesla:

After a quick analysis of the table above, we can immediately infer that Tesla’s business model undermines its profitability. To be able to support its global expansion and to be able to provide unique technology, Tesla must incur in significantly higher relative operational and R&D costs in comparison with other

35_{United States Department of Transportation (website)}

Exhibit 14: Competitive Benchmark of Automotive Manufacturers

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PAGE 15/38 established OEMs. As a result, Tesla just reached a positive EBITDA first on 2013 (Exhibit 15), as the production for the Model S matured and allowed the company some breathing room – and high margin sales obviously. Furthermore, in terms of volume, despite growing at a CAGR of 30% over the last three years, Tesla’s revenue is a mere 3% relative to the biggest player VW. However, it is also evident that Tesla is currently the only OEM to fully specialize on BEV manufacturing, allowing it to conquer significant market shares across geographies and become a top global player. Tesla is currently known for being a cash-consuming company, and FCF has been constantly negative since its 2011 IPO. However, as Tesla grows and it’s need for further expansion decreases, two things will happen: 1. Capital Expenditures and Operational Expenses will go down relatively to other OEMs, dramatically increasing its profitability; 2. The benefit of owning sales, distribution and charging networks will no longer be offset by the higher costs imposed by its expansion. Consequently, Tesla will be able to extract more value from the selling process, like auto dealers or gas stations do with other OEMs, further increasing its profitability. On the other hand, as their competition dwells into an unfamiliar market, it will need carry an inversed path relative to Tesla, as higher relative OPEX and CAPEX weight on its margins.

Peer Analysis

Ford: Ford has announced plans to invest $4.5b in EV solutions by 2020, and launch 13 new EVs by that time36_{. Former CEO Mark Fields retired on May 26}th_, 2017, and the new appointed CEO was the former head of autonomous driving at Ford, which will certainly bring new focus on emerging opportunities in EVs and autonomous driving. To this day, the company does not provide any EV that can compete with the frontrunner’s vehicles. Its only BEV is the Ford Focus Electric, that merely sold 901 units through 2016 in the US.

VW Group (VW, Audi and Porsche): After the VW diesel scandal, the company had to pivot if it wanted to turn things around. The group took advantage of the situation and now plans to completely shift its strategy around EVs, which they plan will account for 25% of the group’s sales by 2025. Under its ‘Strategy 2025’ program, they plan to launch 30 new EV models with highly automated functions coming in on 2021. The group launched a new venture, MOIA, which intends to provide private and shared mobility services in the future and has invested $300 million in ride-hailing app Gett. VW is also in talks with Chinese brand JAC to create a joint venture around EVs. A similar factory to the Gigafactory is also planned for execution in the future. VW chief executive stated that in the next five

36_{Company Website}

Exhibit 15: Tesla’s EBITDA evolution

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PAGE 16/38 years, the group will triple its investment in “alternative drive technologies” by to €9bn, reflecting their enormous commitment. The 2017 e-Golf was a major step for VW and we may expect further developments as they enhance their MEB platform (electric powertrain technology) and launch the upcoming Volkswagen ID vehicles until 2020 (BEV with some autonomous features). As of January 2017, VW’s battery supplier is Samsung, replacing Sanyo37_{. Its batteries have} increased density and are a better solution than the ones by Sanyo (still inferior to Tesla/Panasonic). However, its current production capacity sits at under 50,000 batteries per year, not providing much room for VW EV sales to grow. GM: GM entered the market in 2011 with the PHEV Chevrolet (Chevy) Volt. Since then, its main strategic move came in 2016 where they beat Tesla to the punch in delivering the first mass-market BEV. The (Chevy) Bolt rolled out in late 2016, limited to certain geographies – California and Oregon – and recently was expanded to another 3 states. In the first quarter of 2017 it sold just over 3,000 units, which is quite a surprise considering the fact they must want to leverage on the head start they have against Tesla. The two reasons possible are not very good for GM: either demand is not there; or they are having issues with their production capacity, countering the argument that big established OEMs have against Tesla of experienced in mass manufacturing. Nonetheless, the focus and strategy are there, and GM intends have its say in the EV market. GM supplies its batteries from LG Chem, and as announced that the batteries in the Bolt cost $145 per kWh, an unprecedented low cost on lithium-ion batteries for EVs. GM is also partnering up with ride-hailing app Lyft, to analyse potential of joint projects. BMW: BMW has been focusing on developing PHEVs and are the main Tesla competitors in the luxury segment with the i8. On 2013, the company launched the i3 (BEV) to grab lower-income segments of the market. It had some success in Europe and is one of the top models with over 25,000 sales worldwide in 2016. The OEM foresees it will spend over $5bn on R&D in 2017, focusing on reducing CO2 emissions, electrifying engines and autonomous driving38_{. It expects that} EVs account for 15-25% of unit sales in 2025 which the company defend will involve a total electrification of the BMW group. Like VW, it will supply its batteries from Samsung, and therefore will have the same limiting capacity as they do.

Renault-Nissan: The alliance’s cumulative EV sales reached 420,000 units in 2016, driven by the hits Nissan Leaf and Renault Zoe that sold over 71,000 units in 2016. Both manufacturers soon realized that EVs where a viable way to earn ZEV credits (tradeable permissions to manufacture more polluting vehicles) but

37_{PushEVs (website)} 38_{BMW blog.}

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PAGE 17/38 also concluded that EVs were where the future lies, and plan to continually invest in the segment. On 2017, there will be a new Renault Zoe and on 2018 a new Nissan Leaf. The alliance’s CEO has confirmed their commitment on the beginning of the year, telling Automotive News that they will keep investing in new cars, better batteries, better performance and lower prices. Nissan currently builds their own battery cells in the UK, but the manufacturer is considering focusing just on the battery pack assembly in the future and adopting the more common strategy as other OEMs to buy instead of building.

BYD is the outlier in the competitor list, as it is even more diversified than Tesla (around energy solutions). They offer solar and storage solutions, EV vehicles and electric buses, and even lighting solutions. Among Tesla, they are the best equipped to deal with the challenges ahead as they have the capacity to scale up. Currently they are the second largest producer of EV batteries, behind Panasonic which is an incredible advantage. In addition, they are making money, which Tesla is still not doing. However, the market in China is unique and BYD is achieving difficulties conquering foreign market share. Despite having several electric bus projects worldwide – London included – its passenger vehicles have not been making such a fuzz and they have yet to reach significant sales outside China.

Find below a comparison between Tesla’s vehicles and the main players/future releases in the EV market:

The reason why so many renewable energy start-ups failed in the past decade is the fact they did not realize that in order to thrive, it was not enough to offer new technology at a reasonable price, but far superior technology, that translates in far superior performance, at a reasonable price. This is exactly why Tesla is thriving and even stealing market share outside the EVs market. The table above includes the more relevant EVs in terms of sales volume and performance, and the more relevant upcoming models. If we analyse the data while scrutinizing the Exhibit 16: Top EV vehicles in terms of sales and Future releases comparison

Source: Companies' data, except 0-60mph by zeroto60times, based on the best versions of each vehicle; 1. Before tax credits; 2. Electric range; 3. US and Europe only; 4. Estimates; 5. December only

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PAGE 18/38 two biggest consumers’ “turn-offs” in regard to EVs, we can infer Tesla’s leading position in the industry:

1.Price/Performance: Looking at performance first, there is currently no match for Tesla’s vehicles. Tesla’s Model S is the fastest acceleration production-car worldwide39_{, and every other Tesla vehicle carries the most advanced autopilot} features available in the market today40_{. All vehicles are equipped with autopilot} hardware since October 2014, and, until the end of 2016, Tesla had collected data on 1.3 billion miles driven by its vehicles – Tesla records 5 million miles a day (where Google, their closest competitor on autonomous driving, racked on just 2 million accumulated miles41_{). This is of major importance as it puts Tesla in} an amazing position to capitalize on machine learning to revolutionize transportation. Tesla vehicles use a powerful on-board computer which relies on 8 cameras to see 360º around the car (with a maximum reach of 250m), allowing the car to learn and improve driving behaviours as it is used. NVIDIA, the provider for the ‘super computer’, describes it as “the world’s first AI supercomputer for autonomous driving” and says its computing power is comparable to the one of 150 MacBook Pros. A better autopilot functionality translates to increased driving security, a major factor that weighs in on consumer’s purchase decision and eventually may give Tesla a sustainable competitive advantage. There have already been cases where Tesla vehicles have predicted crashes before they happened42_{. Although there was a case} where a passenger died following a crash with Tesla’s autopilot functionalities on, a federal investigation determined the driver was negligent, and that the vehicle warned it to take charge of the vehicle a full 7 seconds prior to the accident. The investigation report also states that since autopilot was effectively on Tesla’s vehicles, crash rates have fallen 40%43_{. If Tesla keeps on displaying such results,} and we can only expect they will improve, it will just keep on gaining leverage over other OEMs, increasingly gaining market share over them.

2.Range anxiety: Tesla has been outperforming other OEMs in this department by a factor of almost 2x and is expected to keep improving with continuous investments in its Energy segment. The Gigafactory and Panasonic will keep providing Tesla with ever cheaper and more efficient batteries for its vehicles, so supply will most likely never run short. This will not only result in higher battery density (more power for the same size) as well as increased range and reduced costs, contributing to mitigate factor number 1 as well. Other OEMs have recently

39_{Money.CNN, 2017}

40_{Current autopilot features: adapt velocity to traffic, navigate in lane and change lanes when necessary without driver input, get on/off}

highways, park and be summoned from parking spot to where the driver is.

41_Bloomberg

42_{Business Insider, 2016} 43_{The Verge, 2017}

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PAGE 19/38 caught up in battery range. Particularly GM with its 2017 Chevy Bolt. However, despite LG unveiling expansion plans this year, it expects to achieve a production capacity of 100,000 EV batteries per year on 2017/201844_{, sitting behind Tesla} and Panasonic, the current biggest battery producer, that expect to achieve at least 500,000 batteries per year by 2020. Overall, OEMs will increase their capacities and improve battery efficiencies, and is not unreasonable to expect standard EVs available to the mass market to achieve ranges of over 400 km in one or two years at the rate the technology is improving. Once again, Tesla stands in the forefront to get there first and seems it has chosen the perfect partner to do so. In addition, when comparing Tesla vehicles and the Chevy Bolt, the sole contender for the Model 3 supremacy (Renault’s Zoe sits comfortably at third), it is evident the defaults in the Bolt’s charging infrastructure (that the Zoe also shares). GM does not have its own network, and relies on general operators like ChargePoint. Currently, there are 35,090 charging spots for Chevy Bolt drivers, and a mere 519 of them support fast charging. On the other hand, Tesla owns its own charging network with all outlets being superchargers, and as of now there are 5,487superchargers, over 10x as much in comparison to the ChargePoint network. Tesla’s superchargers also carry the highest charging capacity vs ChargePoint’s: 135 kWh vs 50 kWh45_{. As if that was not enough,} most public outlets also work on Tesla vehicles… All in all, not only Tesla vehicles charge nearly 2x as fast as the Bolt, but they also have over 10x as much charging outlets to do so. Consequently, no OEM can mitigate customer range anxiety as Tesla is.

To sum up, in terms of performance and EV penetration barrier mitigations, Tesla and GM stand in the forefront, with Renault’s Zoe grasping to keep up, isolated from other OEMs. However, Tesla’s autopilot, charging network, battery supplies, even the vehicles appealing design and its ability to improve continuously and indefinitely with over-the-air software updates make this an uneven playing field. Tesla’s offering is simply miles ahead of competition (literally).

Another undeniably critical factor to consider is the overwhelming demand Tesla products have. On the first week after the Model 3 Unveil, it amassed a colossal 325.000 reservations46_{with people queuing up outside Tesla’s stores to provide} their $1.000 deposit (reality check: to date it has sold a little over 200.000 vehicles). What is holding Tesla back are its production capabilities. They simply cannot keep up with demand, but they will obviously improve with time: weekly production rates have increased every quarter, reaching close to 2.000

44_{CleanTechnica}

45_{Tesla and ChargePoint (biggest widespread charging network) data} 46_{Independent, 2016.}

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PAGE 20/38 vehicles/week in 1Q17. Since the Model 3 packs less features and was designed specifically for easy manufacturing47_{, we expect massive improvements over the} next few quarters as know-how from the Grohmann Engineering acquisition bears fruit. With Tesla being the sole OEM to guarantee battery supply for scale and more than one years’ worth of demand, if they capture the manufacturing advantage they expect to capture with the design and automation of their manufacturing line (more complex than the software that allows a vehicle to drive safer than a human, using sensors, cameras and a supercomputer apparently), their organizational structure and competencies will be increasingly hard to emulate. As Tesla ships out the Model 3, its margins are expected to suffer, so no near-term profitability in sight. However, it is arguable that Tesla is putting itself in a position that will reap benefits in the future: 1. Build trust; 2. Obtain competencies; 3. Reach scale; 4. Reap profits.

A common viewpoint is that established manufacturers can come late and leverage years of production experience to take charge in the EV race. However, since the market and technologies are so different from the century old ICE paradigm, that does not compose of an advantage whatsoever. Stefan Bratzel, director of the Germany-based Centre of Automotive Management, states that Tesla’s plan of scaling up manufacturing from 76,000 vehicles per year to 1 million is actually an easier venture than the one German automakers face. Not only do other OEMs need to pivot their strategies towards EV but they also cannot disregard their money-making segments. They still compete among each other in the ICE vehicles segment, and therefore need to further invest and push for cleaner and more efficient ICEs. This is too heavy of a weight, and distraction, to carry if one plans to stay in the forefront of a new industry.

DISRUPTIVE TRENDS

The two most important trends in the Transportation sector, that have the most probability of disrupting it, are 1. Shared Economy; 2. Autonomous Driving. From what I see, we will face 4 possible scenarios in the future. If we take two axis, the X being autonomous driving acceptance and penetration, minimum to the left and maximum to the right, and shared-economy penetration in transportation industry on the Y axis, minimum down and maximum up, we end up with 4 possible quadrants. In the 4 quadrants, we face 4 possible outcomes. On quadrant 3, we have basically the present (or past: the industry has not changed much since Henry Ford…): High value in personal ownership of vehicles, OEMs profiting highly from growing sales; owning a vehicle is still a goal and a milestone in

47_{In the most recent conference call with investors, Tesla’s CEO Elon Musk has stated that the Model 3 production line} will be 4x more automated than the Model S and Model X and comparable with the best high-volume production line globally.

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PAGE 21/38 someone’s life. On quadrant 2 we also do not see much acceptance of autonomous driving, and vehicle ownership is relinquished over shared transportation. Detroit manufacturers will begin to struggle as shared economy lowers sales and threatens their business model. Quadrant 4 still highly values vehicle ownership, but we have also embraced technology and rely on it. Safety is increased, so humans let go of the wheel and let “Jesus” take over. Quadrant 1 is the most exciting: In this scenario, we see traditional OEMs’ business models obliterated as vehicle sales keep decreasing and new, previously ignored, companies keep braking the industry’s rules of the game. Disruptive business models will take charge and we shall see a surge of technological companies with bank accounts as deep as the ocean floor willing to lead the herd in transportation.

Consider the 4 scenarios, and the signals the world is giving on which path we are currently walking on. Intangible companies like Uber and Lyft are among the most valuable private companies worldwide. Apple, Uber, Tesla and Google are legally testing autonomous driving software. Billions of miles worth of data have been recorded and the number grows every second. Algorithms are now driving vehicles safer than is humanely possible using sensors, cameras and computers. Most millennials do not value as much owning a vehicle, and consider it a wasteful investment, hence the success of ride-hailing and ride-sharing apps. We are embracing a shared economy, and it reflects on every aspect of the economy. As I see it, we will be venturing towards somewhere in the upper right half of the graph. Nonetheless, as far as the autonomous driving goes, there is a quite powerful resistance. Huge lobbies from insurance companies and big OEMs are terrified, and they will do everything in their power to avoid change. However, the technology is improving at a faster pace than ever, and governments are giving some experimenting room for firms with innovative ideas. When we look at what companies will rule on the first quadrant, the most probable outcome (as far as observable symptoms go) is that we will see few traditional OEMs. We think of Google…Apple…Uber…the pioneers in the trends described. Uber sits clearly in the forefront for the ride-sharing aspect of the future, but for autonomous driving, there is no near comparison for Tesla. It racks the most massive pile of information and accumulated experience. Such head-start might just create a big enough of a moat not to allow any other firm to break in. Google has also been experimenting for a while on autonomous, but not being a car manufacturer they lack opportunities of real world testing and have just 2mn accumulated miles of data vs Tesla’s 1.3bn. In respects to car-sharing, OEMs are partnering with ride-hailing apps like VW and Gett or GM and Lyft. But in under a scope of technologically challenges, ride-hailing/sharing stands miles away from

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PAGE 22/38 autonomous, and Tesla stands to lead in that field. Elon Musk has stated that by the end of 2017, one will travel from LA to NY with no need for driver input when driving a Tesla, bold claim that it proves to be correct, will be another signal to what future we are converging to.

Energy Industry

Global energy consumption is expected to increase by more than a third until 2040, driven by developing countries48_{. However, pressure from governments} and consumers has been stacking to push firms to alleviate the economy of fossil fuel dependence, which accounted for 75% of the G20 electricity output in 201649_{, and investment needs to be made to provide alternatives. The 2015 Paris} agreement signals for a long-term phase out of fossil fuels, and the policies agreed are legally-binding for the 141 ratifying countries. The American president has withdrawn from the Paris Agreement, and the US are expected play a less active role in the future. However, countries around the world reinforced their position on Global Warming, and China is expected to assume a leadership role in this movement50_{. Global investment on Renewable Energy amounted to over} $250bn in 2015, and is forecasted to increase in the future51_{. China alone} expects to invest $360bn in renewables from 2016-2052_{. Solar and Wind are} growing to become the main sources for renewable energy worldwide with a combined 660 GW capacity installed on 201553_.

Solar Photovoltaic (PV)

Global Solar PV installed capacity has been steadily growing since 2000, peaking on 2015 with 229.3 GW. By the end of 2015, China held the largest share of the market with 18.9%. Germany, Japan and the US followed with 17.3%, 15% and 11.3% respectively54_{. The global market is expected to grow steeply as China,} the US and India are expected to install an additional 267GW of capacity by 202155_{. The American market’s installed capacity grew 14.8GW on 2016, 97%} more than in 2015, reaching an accumulated capacity of 42 GW, driven by falling costs – cost per watt reached $1.6 in 2016. Annual installed capacity is expected to grow slowly and reach 18.000 GW installed on 2022. The growth in the American market is being fuelled by the utility sector, accounting for over 70% of

48_{Euromonitor: Global Energy Transformation: A New Energy Context for Business (2017)} 49_{Euromonitor; International Environment Agency (2015)}

50_{Euromonitor: Global Energy Transformation: A New Energy Context for Business (2017)} 51_{Bloomberg New Energy Finance: Global Trends in New Energy Investment (2016)} 52_{Euromonitor: Global Energy Transformation: A New Energy Context for Business (2017)} 53_{Renewable Energy Policy Network}

54_{Solar Power Europe: Global Market Outlook for Solar Power 2016-2020 (2016)}

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PAGE 23/38 the installed capacity on 2016 (the top-3 global solar PV power plants are in the US56_{), Residential contributed approximately 17% and Commercial 13%}57_. Key Players & Performance

The acquired SolarCity is solely responsible by Tesla’s performance in the solar segment. They install and operate a network of residential and commercial solar panels across the US, and plan to manufacture their own by 2017 on Tesla’s Gigafactory 2 in NY – another partnership with Panasonic. US residential and commercial installed capacity totalled approximately 4.3 GW on 201658_and SolarCity had a 19% share of the market with over 800 MW59_{installed Here is} how SolarCity stands against its competitors:

Its revenues have been growing at a CAGR of 42% in the last three years. However, it has yet to achieve decent margins, recording an EBITDA mg of negative 81% on 2016, heavily affected by massive sales & marketing expenses. We can simply observe that the whole industry is not attractive. The top 4 companies, who share over 50% of the market, have yet to achieve a sustainable business model. Current business models for Solar providers all rely on “zero-down” solutions, with the customer avoiding an expensive upfront cost and leasing the solar panels to the providers. This implies that all players’ strategy is to spend big to earn market share, and then reap value in the long-run, but it is an expensive road to travel on as the industry’s financials show. Former major player, Sungevity, has filed for bankruptcy on March 2017, and last year at least 5 other companies suffered the same destiny60_{. Nevertheless, SolarCity is the top competitor in the residential} and commercial solar applications, and it will likely remain so in the future. Following the acquisition, the company has a more sustainable base to cope with its huge debt (Exhibit 18), and will be able to reach Tesla customers via their retailing network, with no additional costs implied. Guidance leads that management will now prioritize profitable projects over expansion opportunities, against the industry standard so far, and will reduce incentives in leasing programs like it is normalized. As a result, MW installed have decreased 40% YoY on the first quarter of 2017, but the percentage of customers who purchased

56_Statista

57_{Solar Energy Industries Association} 58_{Solar Energy Industries Association} 59_{Company Data.}

60_{GreenTechMedia}

Exhibit 17: Biggest Solar Providers Benchmark Analysis

Source: Company Data, compiled by author.

Exhibit 18: SolarCity’s Net Debt $m (left axis) and Net Debt/EBITDA ratio (right axis)

Source: Company data, compiled by author. Analyst estimates.

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PAGE 24/38 the solar panels, instead of leasing them, increased from 9% to 31%61_{. In} October 2016, Tesla has unveiled a new solar product to begin shipping in March 2017: the solar roof. With an unlimited warranty, Tesla created roof glass tiles that capture sunlight and generate power. Its cost, plus utility savings, is estimated to be less than a regular roof installation. Carrying an incredible design and aesthetic appeal, if such savings will prove to materialize, this may win Tesla some new customers and provide some new opportunities for Tesla Energy. Energy Storage

The combo between solar panels and home battery systems is praised as a game-changer and a saviour for renewables, but ultimately is a great way to people to lower their utility bills. Tesla’s global revenues from energy storage increased from $462mn in 2014 to $2.1bn in 2015. It is estimated that the market might reach $17bn in 2020 and nearly $30bn by 203062_{. The market is dominated} by sodium sulphur batteries, which account for 50% of the global storage market. However, Lithium-Ion batteries – that hold approximately 35% of the market – are expected to become the dominant technology for the future as it is denser and more cost efficient63_{. Lithium-Ion batteries are already present in many product} categories. The 2 largest categories in 2016 were consumer electronics and EVs64_{, and it is expected that EV batteries will weight 55% of the total lithium-ion} battery market by 2020.65_{. The battery costs have decreased significantly,} allowing for a greater penetration of the technology (Exhibit X) Albemarle, a major chemical company, estimates that renewables energy storage will be the highest growing category among all, with potential to grow at a CAGR of 30% until 2024, reaching over 15GWh of installed capacity, from 1.1GWh in 2015.

Energy Performance

Tesla is still a young player in the residential, commercial and utility segments for the energy storage industry. Its first product, the Powerwall, was announced on 2015 and carried a storage capacity of 7-10 kWh. On October 2016, Tesla stated it had delivered 300 MWh of Tesla batteries across 18 countries. A couple of days later, it unveiled the mentioned solar roof, and version 2.0 of the Powerpack, now with 15 kWh of capacity. Here is how the Powerwall 2.0 stands against its main competitors:

61_{1Q17 Shareholder Letter: Tesla}

62_{UK Department of Energy and Climate Change (DECC)} 63_{CRU Group}

64_{Statista, Citibank.} 65_{Statista, Goldman Sachs.} Source: Tesla.

Exhibit 19: Tesla’s concept house, with the solar roof installed

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PAGE 25/38 Under a price/performance spectrum, Tesla clearly outplays both next-best solutions currently available in the market. It charges $393 per kWh, 3x less than LG Chem’s RESU battery. And as far as capacity goes, the Powerwall 2.0 stores more than the two others combined. To provide a better picture, an average household is estimated to spend 9.3 kWh of electricity per day66_{, Tesla has an estimated cost} under 20 cents per warranted kWh67_{, meaning that if you} took solar generation costs out of the equation, you would spend on average $57 a month on electricity vs an average of $114 per month on the US68_{, a 50% saving rate at a time} where technology has still not peaked.

In the utilities segment, Tesla has completed several successful projects. The latest was a 52 MWh battery installation, powered by a 13 MW solar farm in the Kauai islands in Hawaii. This project is believed to reduce fossil fuel usage by 1.6 million gallons per year for the island69_{. Earlier in January, following a natural gas} leak in Los Angeles, SCE rushed to deploy energy storage deals to alleviate the risk of winter blackouts. In just 3 months, Tesla supplied SEC with the largest grid storage facility at the time, with capacities up to 80MWh. This project included 400 of Tesla’s Powerpack 2.0 (bundles of Powerwalls), each providing 210 kWh of capacity and represented 15% of the global installed capacity at the time70_{. Its} biggest rival in the utility segment is currently AES. The core difference with Tesla is that instead of manufacturing its own components, AES sources them from suppliers, claiming it achieves a better price with this model. AES topped Tesla in February, by installing a storage facility with capacity up to 120 MWh. They are an enormous global player, with revenues of $14bn on 2016, and its energy storage segment proves to wrestle Tesla for the top spot in this industry, with the gigantic cash cushion advantage.

After discounting SolarCity’s contribution for Tesla Energy, 2016 revenues were $97mn, a YoY increase over 500%. However, profitability stumbled from 15% gross to negative 14%. For the future, we expect this margin to improve as production ramps up in the Gigafactory and significantly reduce battery manufacturing costs by near 35%. We also expect that incoming product, the solar roof, will boost demand, allowing it to grow faster than the market. On the utility segment, Tesla will try to keep a leading position in the market, despite serious threats by massive players. Although Tesla Energy is fundamental for its

66_{OvoEnergy (website)}

67_{Providers warrant customers a certain number of kWh over a certain period. Tesla warrants 37,8000 kWh over 10 years.} 68_{Energy Information Administration}

69_{The Verge} 70_{Clean Technica}

Exhibit 20: Comparison between the top-selling storage solutions