Tesla joins forces with Chinese battery maker CATL, and it's a 'game changer' for this analyst

By Claudia Assis

The news comes as Wall Street continues to dial down expectations for Tesla's first-quarter sales

Tesla Inc. is joining forces with Chinese EV battery maker CATL, which would be a "game changer" for the U.S.-based EV maker as it works to launch a vehicle costing about $25,000 and suffers through another volley of lowered expectations for its quarterly sales.

"The U.S. is an under-penetrated EV market in need of high quality,cheap battery tech. China is a highly penetrated EV market withan oversupply of batteries," Adam Jonas at Morgan Stanley said in a note Wednesday.

"The [U.S. Environmental Protection Agency] has ambitious EV goals but must consider national security issues. Tesla-CATL could be a game changer."

CATL (CN:300750) is also known as Contemporary Amperex Technology Co. Ltd. CATL Chairman Robin Zeng confirmed the partnership in an interview with Bloomberg in Hong Kong. The battery maker is working on faster charging batteries for Tesla (TSLA), and is also providing machinery for Tesla's factory in Nevada.

Tesla "realizes that reaching mass EV adoption in the U.S. is inextricably linked with China cooperation," Jonas said.

See also: What's behind Tesla's stock rally? A short test drive.

While a period of "horse trading and potential protectionist measures on both sides" is to be expected, ultimately "an 'on-ramp' to Chinese battery and EV partners will likely be required to drive higher U.S. EV adoption, and believe that as the US market leader, Tesla will play an important role in on-shoring aspects of Chinese BEV know-how," the analyst said.

The news about the CATL partnership comes as more analysts dialed down their expectations for Tesla's first-quarter deliveries. Tesla reports deliveries, its proxy for sales, a few days after the end of the quarter, and could report first-quarter numbers as early as Monday.

FactSet consensus calls for the delivery of 471,000 Tesla EVs, which would compare with 423,000 vehicles in the first quarter of 2023.

Don't miss: Wall Street has another grim take on Tesla

On Wednesday, Itay Michaeli at Citi lowered his delivery estimate to 429,900 vehicles, from a previous expectation of 473,300 vehicles.

The quarter's "setup looks tough on aggressive consensus estimates," which have come down in recent weeks, Michaeli said.

"Net-net, our view from a few weeks ago is unchanged-we remain neutral-rated awaiting a more convincing entry point," the analyst said, referring to Citi's hold rating on Tesla's stock. On the back of the lower sales estimates, Michaeli also cut down his price target on Tesla to $196, from $224, representing an upside of around 9% over Wednesday's prices.

Also on Monday, analysts with HSBC sounded a cautious tone on Tesla. "Our top concern remains the timing to commercialize its concepts, but slowing volume growth is a growing worry," they said.

The analyst kept their rating on the stock at the equivalent of hold, and kept their price target of $143. But they cut other estimates to"reflect deeper-than-expected price cuts and softer volumes," they said.

The HSBC analysts cut their estimates on 2024 revenue, gross profit and gross margins by about 6% to 8%.

The price cuts "might be supported by cost improvements, but we are not convinced continued devaluation is what the market wants," the analysts said.

"Teslas have the dubious honour of being the fastest-depreciating vehicles in the U.S.," with rental-car companies Sixt SE (XE:SIX2) and Hertz Global Holdings (HTZ) reducing their Tesla fleets due in part to the "uncertain" used-vehicle pricing, they said.

"We can see how cheaper works for consumables, but we are less convinced it works for consumer durables for which residuals are part of the cost equation," the HSBC analysts said.

Tesla's shares have lost 6% in the past 12 months, contrasting with gains of about 31% for the S&P 500 index SPX.

-Claudia Assis

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03-27-24 1251ET

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