Is A Factory Part Of Tesla's (TSLA) Expansion Plan In China?

Rumors of Tesla, Inc. (NASDAQ:TSLA) building a factory in China have surfaced once again. Southern Metropolis Daily, a local Guangdong province newspaper, has claimed (citing sources) that the company plans to independently fund and construct a factory in the region.

Per the report, Tesla has already approved a site for the facility and is awaiting the green signal from the local government. The report also speculated that the project will be announced within a year if the plan proceeds smoothly.

However, the electric vehicle producer has denied the report, as told to CNBC. Tesla reiterated its commitment to the Chinese market, the second largest auto market globally, but stated that the plans outlined per the report are untrue.

Tesla in China

As the report noted, a manufacturing unit in China would help Tesla reduce its border tax. Recently, Chinese tech giant Tencent Holdings Ltd. (OTC:TCEHY) purchased a 5% stake or 8.17 million shares in the company for $1.8 billion, making it the fifth largest shareholder and paving a way for Tesla’s further expansion in China. Tencent, also based in Guangdong, stated that the companies currently do not have any cooperative plans but may work together in the future.

Tesla’s market in China is significantly growing. The company saw its annual revenues from the country increase more than three times to over $1.06 billion in 2016, making it second only to revenues from the U.S. China imported 11,839 Tesla vehicles in 2016, five times more than the previous year. It has 24 stores and 348 regular charging stations in the country.

Regulatory Requirements

While rumors of Tesla building a factory in China appear repeatedly, a number of problems may also hinder the company in making this a reality. China has a policy requiring foreign auto manufacturers to set up joint ventures with local companies to produce vehicles. Moreover, the foreign manufacturers cannot own more than 50% in the venture. Therefore, it isn’t clear whether the government would approve a plant owned independently by a foreign automaker.

Rumors of a factory being set up by Tesla in partnership with other local companies have surfaced in the past. All of them have been subsequently denied by Tesla.

Performance

Tesla outperformed the Zacks categorized Auto Manufacturers-Domestic industry over the last three months. During the period, Tesla gained 31.6% while the industry witnessed a 0.6% rise. The outperformance has been supported by expansion plans and higher deliveries in first-quarter 2017.

Zacks Rank & Key Picks

Tesla currently carries a Zacks Rank #3 (Hold).

Better-ranked companies in the auto space include American Axle & Manufacturing Holdings, Inc. (NYSE:AXL) and Allison Transmission Holdings, Inc. (NYSE:ALSN) . Both companies sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

American Axle has an expected long-term growth rate of around 8.1%.

Allison Transmission’s expected long-term growth rate stands at 11%.

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