CITIC Securities believes that Tesla's price cut to below 300,000 yuan will open a whole new market, corresponding to a market capacity expected to double.

They believe that the China-made Model 3 is still on track for a 25% gross profit.

Here is the full text of their recently released report:

"300,000 yuan" or more models are dominated by luxury brands, accounting for only about 10% of China's passenger car market share, the price dip will open up new space.

In the world of traditional fuel vehicles, models priced above 300,000 yuan are dominated by luxury brands, with the share of sales increasing from 6.0% in 2014 to 9.4% in 2018.

According to the National Information Center, the share of sales of models in the 20-300,000 yuan price range in China in 2018 was 13.6%, while the share of sales of models priced at 30-40 million yuan and above was only 5.1%/4.3%.

Tesla's selling price is below 300,000 yuan, which will further open up a wide space for "electrification" and "intelligent" penetration.

The Model 3 is no longer limited to luxury brands such as BBA (Mercedes-Benz, BMW, Audi), but will also be a potential market for joint venture brands such as Volkswagen, Toyota and Honda.

It turns out that Tesla's products are priced more against luxury brands such as BBA, which accounts for about 15 percent of the passenger car market.

And after the price entered within 300,000 yuan, Volkswagen, Toyota, Honda and other joint-venture brands of the mid- to high-end model users also become potential target user groups, this part of the brand accounted for about 30% of the market share of passenger cars, space further opened up.

Tesla's China-made Model 3 price has dropped to within 300,000 yuan, but we expect China-made Model 3's subsequent profitability to be even better than that of the U.S. by comparing production costs in China and the U.S.

According to the Tesla China official website, starting May 1, the base price of the China-made Model 3 standard range upgrade will be adjusted to 291,800 yuan, based on this base price calculation, the subsidized price is 271,500 yuan.

And in the U.S., excluding federal and local tax credit benefits, the Model 3 has a minimum price of $39,900 in the U.S., which is about RMB 280,000.

Our assumptions for Tesla's China-made Model 3 cost and earnings measurement are as follows.

(1) Price: only for standard range upgrades and without Autopilot as an option

(2) U.S.-China-made Model 3 gross margin: due to Tesla's 2019 earnings report gross margin of 21.2%, we expect the Model S/X gross margin to be higher than the Model 3, and we expect higher sales margins for models with the Autopilot option.

So assume an 18% gross margin on the standard range Model 3 without the optional Autopilot.

(3) Battery cost: assuming Panasonic's U.S. factory cylindrical cell price of 100$/kWh, assuming LG Chemical Nanjing factory cylindrical cell price of 95$/kWh, assuming the subsequent Contemporary Amperex Technology (CATL), China's largest automotive lithium-ion battery maker supporting Tesla LFP CTP (expected) price of 0.60 yuan/Wh.

Cylindrical batteries cost more than square CTP batteries in the module and pack segments.

(4) Cost of electric motor-controlled gearbox: Since Tesla's Shanghai plant has not yet achieved localized production of Phase I, the current cost assumption remains unchanged after China-made.

(5) Other component costs: assuming Tesla achieves 80% of China-made parts, the price reduction will be about 15%.

(6) Labor: assuming an average of 10,000 workers at the Fremont plant in 2019, with a combined per capita compensation of 30,000 yuan/month for all categories; assuming a per capita compensation of 0.6 million yuan/month at the Shanghai plant in China.

(7) DEPRECIATION: Tesla reported $1.37 billion in depreciation expense for 2019 combined, which should be apportioned to the 365,000 electric vehicles produced at U.S. plants in 2019 combined. The Chinese plant is "65% less expensive to build per unit of capacity at Tesla's Shanghai plant than in the US," according to Elon Musk on October 25, 2019.

(8) Other Manufacturing Costs: Assumes maintenance of the 20,000 yuan/vehicle calculation, assuming the Chinese plant is consistent with the US plant.

Comparing Tesla's cost difference in China and the US, it is mainly depreciation of fixed assets (this piece is down 60% according to the cost of construction), parts cost (parts China-made price reduction, estimated -15%).

With that in mind, we expect the production cost of the Model 3's standard range-extended version to drop 19% to 188,000 yuan from 231,000 yuan in the US.

Assuming further use of CATL's LFP CTP cells, the cost is expected to drop by another 8,000 yuan to180,000 yuan.

In addition, we expect the standard range Model 3 to have a chance to achieve a gross margin of more than 20% without the option of Autopilot after the U.S. plant is full and stable, mainly due to the decline in fixed costs such as depreciation, labor, etc. shared by the single car.

A Tesla under 300,000 that will bring a significant spending upgrade

In the U.S. market, for example, Tesla has brought significant spending expansion for luxury brands.

In the U.S. market, for example, total BBA quarterly sales remained relatively stable in 2017, averaging 49,000 units per quarter; in 2018-2019, total BBA quarterly sales fell to 40,000 units, hit by the Tesla Model 3 launch.

But what Tesla actually brought was an expansion of luxury brands that drove a significant consumer upgrade.

Take "BBAT" (Mercedes-Benz, BMW, Audi, Tesla) for example, the combined quarterly average sales for 2018-2019 reached 86,000 units, a 75% expansion of the combined sales in this price range before the Model 3 was launched.

With Tesla entering within 300,000 yuan, the Chinese market is also expected to bring significant expansion in luxury brand spending. Currently, the China-made Basic Model 3 is priced down to 291,800 yuan (excluding subsidies), and the price (after subsidies) is 271,500 yuan.

With the Model 3China-made version's price dropping, the competitive advantage over the BBA's main competitor model is even more pronounced and could even lead to an upgrade for consumers of joint-brand brands like the Volkswagen Passat and Toyota Camry.

Tesla under 300,000, will put higher demands on supply chain

A drop in Tesla's selling price to within 300,000 yuan will place higher demands on the supply chain, while also creating more room for growth.

In 2019, China's new energy vehicle sales were differentiated according to price, with the proportion of under 100,000 yuan, 100-200,000 yuan, 20-25,000 yuan, 25-300,000 yuan, and over 300,000 yuan being 33.1%, 47.0%, 7.7%, 5.8%, and 6.4%, respectively, corresponding to the electric vehicle penetration rate of 6.6%, 4.5%, 4.4%, 5.3%, and 3.3% in each price range.

We believe that with the launch of Tesla China-made in 2020, especially with the price dropping to 300,000 yuan, it will lead to a rapid increase in the penetration rate of electric vehicles of 250,000-300,000 yuan and above 300,000 yuan, which on the one hand proposes a higher price/performance ratio and rapid response capability for the supply chain, but also brings more incremental space.

The maturation of the supply chain that accompanies Tesla's release will also help other EV brands' selling prices to fall, jointly driving the rapid growth of the industry.

The Tesla Model 3 is priced at RMB 271,550 and the Xpeng P7 is priced at RMB 229,900-349,900, with the rear-drive, ultra-long-range version with a range of more than 700 kilometers at only RMB 254,900, followed by new models such as the BYD "Han".

The increase in quality supply is accompanied by the need for quality supply chains, which also bring greater volumes to the supply chain, which is expected to form a positive cycle.