Has Tesla's deal with Hertz opened up a new funding source for EV makers?

The recent Hertz order of 100,000 Model 3 Tesla EV's raises an interesting question. Has Elon Musk introduced a new sales model that will allow Tesla to accelerate its EV rollout? The total value of the Hertz's order is ~US$4.5 billion, with the option of upscaling to 150,000 EV's raising Tesla's forward sales revenue to US$6.8 billion.

Holon Global Investments current EV production capacity assumptions for Tesla in 2022 and 2023 are 1.3 million and 2.2 million vehicles respectively. With orders backing up beyond 12 months for most Tesla models, forward selling Model 3's production capacity to Hertz has left little additional room to meet rising demand from individual customers new to the Tesla brand.

Our Model 3 production forecasts of 645,000 EVs in 2023 is up just 29% over 2021. With the introduction of the hugely popular Model Y taking a significant bite out of capacity. By comparison, we see Model Y production reaching 750,000 EV/yr in 2023, up from 278,000 in 2021. The introduction of new Gigafactory's in Texas and Berlin is also unlikely to fill the insatiable demand in just the US and Europe.

Securing single-customer forward sales agreements should provide Tesla with the necessary collateral to obtain bank financing to fund new Gigafactory's. Our own financial model assumes it costs US$4 billion to set up a new production site with 500,000 vehicle/yr capacity, and a further US$2 billion for each additional 500,000 vehicle/yr capacity on an existing site.

Look for similar deals to be done with the Tesla Semi over the next 12 months. Autonomous road transport is expected to lower the total cost of road freight by 60% compared with current rising freight prices. This provides a huge pricing advantage for early adopters over any lagging competitors. As the Tesla Semi moves closer to its initial production target in 2023, Tesla may look to sign substantial orders with a select group of partners, and may use this arrangement to collateralize its funding to build Gigafatory's set up for Tesla-semi production across the globe.

Will traditional automakers follow suit? The 3 largest German automakers (VW, BMW and Daimler) currently hold over US$450 billion of debt (~50% used to finance customer vehicle loans), limiting their ability to accelerate its manufacturing shift toward EVs fast enough to prevent Tesla stealing a substantial share of their valuable customers. Add in another $450 billion of net debt to cover GM, Ford and Toyota, and you begin to understand Tesla's massive advantage with US$10 billion of net cash in its Q3 2021 results.

One area we failed to consider in our recent white paper on Tesla (which can be downloaded at https://holon.investments/insights/) was the ability of traditional ICE manufacturers to use large forward EV sales contracts from corporate customers as collateral to finance new EV production facilities. If traditional automakers can secure these large forward sales orders, it may provide urgent funding that will allow them to accelerate towards 100% EV production by early 2030s at the latest.

We believe any auto maker who does not commit soon to 80% EV production (as share of total production) by 2030 will unlikely survive the next 10 years (possibly returning to a domestic car brand in their home market). Toyota looks the most vulnerable, planning just 10% full-EV production share in 2030.

While forward-sales are already used as collateral in traditional financing of automakers today, the shift towards EV introduces a significant new variable. As the all-in cost of EVs falls below that of an equivalent ICE vehicle by as early as 2023, large corporate fleets across the globe (measuring in the 10's of millions) will look to shift to EVs as the leases on their current vehicle fleet expire.

Bank lending to finance a new EV production facilities (with production forward sold for a specified period) is substantially less risky than an equivalent new ICE vehicle factory today given societies shift to EVs. This should attract more demand from bank lenders. EV sales also attract ESG credits that may also be included in structuring EV financing facilities.

For Tesla, success with the Hertz model likely means it never needs to return to financial markets to raise equity capital again. Holon believes Tesla's free cash flow could hit US$50 billion per year by as early as 2025. At that point, balance sheet strength becomes so large that debt financing is no longer required.

Holon's current DCF valuation is now over US3,400 per share. The recent run in share price by 50% has likely left many investors wondering if they have missed out. We believe the market is just waking up to the enormous lead time and manufacturing advantage Tesla has over traditional automakers, and strong gains towards our current DCF should continue over the next 12 months.