Tesla and NIO Will Benefit From China’s Carbon Credit System

Rarely can investors go wrong when they side with a Chinese stock that is enjoying favorable push from the country’s policymakers and the electric vehicle industry seems like one such bet right now.

Tesla (Nasdaq: TSLA), NIO Limited (Nasdaq: NIO) and Niu Technologies (Nasdaq: TSLA) look well placed to monetize and benefit from the push.

Last week, Beijing Environmental Exchange launched a credit system that will allow car users to collect credits for rewards. Although financial benefits for electric vehicle drivers may not be more than a few hundred dollars per year from selling emission quotas to enterprises, growing environmental awareness among consumers should also push demand for electric vehicles.

Tesla has benefited immensely from such systems in the past

Anyone who has followed Tesla over the years will attest that the company successfully built its business on the back of government subsidies and various regulatory credits, ranging from greenhouse gas, fuel economy to clean fuel credits. 

As the chart shows, almost 7% of the automotive revenue for the company came from the sale of regulatory credits, which grew 42% while total revenue from automotive sales grew just 13% during 2019.

201720182019
$360$419$594
Tesla’s revenue from auto regulatory credits ($M)

Tesla has earned handsomely from various tradable automotive regulatory credits, which the company sold to other auto companies like General Motors (NYSE: GM) and Fiat Chrysler (NYSE: FCAU) to allow them to comply with emission standards and regulatory requirements like California’s Zero Emission Vehicle Regulation.

Chinese EV players like NIO might benefit more from changing regulatory environment

This push for an environmentally friendly vehicles is nothing new. China also has other subsidies and tax breaks for new-energy vehicle purchases, including price subsidies for makers of new-energy vehicles and elimination of taxes for car buyers.

Earlier this year, The State Council, China’s cabinet, announced a two-year extension for both these schemes, i.e. subsidies for vehicle manufacturers (almost $3500 per car) and waiving of taxes for consumers (10% car purchase tax).

The new extension is skewed to favor Chinese EV manufacturers like NIO. The new reduced subsidies are now available only to cars costing less than 300,000 yuan, lower than Tesla’s China-made Model 3 that was priced around 323,800 yuan at that time.

Secondly, the government will support the sale of cars with swappable batteries, something NIO has already built the infrastructure for.

With growing trade hostilities around the world, it will be safe to assume this push to support local companies by China may stay for a while. For investors in the sector, it’s better to look at Chinese players as well, both to hedge against protectionism as well as to get pure-play exposure to one of the fastest-growing markets for electric vehicles.

My previous note on the electric vehicle industry covered some of the major Chinese players active in the industry.

After all, China has an incentive to continue supporting its electric vehicle industry

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Source: Benchmark Minerals

Lithium batteries make up almost 40% of the electric car’s value and China accounts for almost 69% of the worldwide capacity. China added 564GWh of pipeline capacity last year versus a global total of 2068.3GWh, an equivalent of producing 40 million electric vehicles by 2028.

According to Benchmark Minerals, China is now home to 88 of the 115 lithium-ion battery mega-factories in the pipeline to 2029. Finding local suppliers for raw materials will prove challenging even for the likes of Tesla that is building its battery factories.

All-in-all NIO Limited and Niu Technologies may have more going in their favor than current market expectations or the stock price is reflecting.

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