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2010 Goldman Sachs Case Competition Team 37 Presentation Jack Wei | Jinghao Yan | Arjan Puniani | Roy Liu.

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Presentation on theme: "2010 Goldman Sachs Case Competition Team 37 Presentation Jack Wei | Jinghao Yan | Arjan Puniani | Roy Liu."— Presentation transcript:

1 2010 Goldman Sachs Case Competition Team 37 Presentation Jack Wei | Jinghao Yan | Arjan Puniani | Roy Liu

2 In-house processing from start to finish DesignEngineeringManufacturingDistributionSales Integrated Automobile Firm Powertrain technology Core Competency Unlike its rivals, Tesla owns its dealerships Sales and Distribution Overview of Tesla Tesla is a vertically-integrated new-technology automobile firm

3 Political points Government Backstop Government support is mutually-beneficial Goal: re-ignite, prop up automobile industry Score political points via “green tech” and “jobs” Cheap loans are an indirect government subsidy Political suicide to let Tesla fail and default Goal: to be green leader in auto industry Government support lends credibility to Tesla Expensive investments mitigated by cheap debt Loan guarantees encourage bank lending Loan guarantees incur zero upfront cost Government Tesla Government’s interests are directly aligned with Tesla’s Auto industry Green Investments Jobs

4 Assessment of Forecast Is management’s forecast realistic? RevenueUnits Sold (Model S)EBITDA Margins (in millions)(in thousands) Weighted ARPU Model S Sales Projection 20,000 annual target beginning 2013 plausible $84,716 in 2013 $84,801 in 2014 Comparable to other premium sedans <1% of global premium sedan market Industry Average 11.4% EBITDA Margins Optimistic Management forecast puts EBITDA margins at 16.5% Median industry margins 11.4% Mass production at NUMMI Full integration may facilitate 5% additional margin

5 OpportunitiesRisks Superior Technology Industry leader in EV powertrains, car batteries Vehicle performance on par with Mercedes Upside and Downside Risks Opportunities and risks associated with valuation and IPO Public Validation Low-interest DOE loan provides financial health In-line with green jobs agenda Seasoned Management Veteran executives with rich history of innovation Experienced in partnering with industry leaders Unrivaled Brand Recognition Long waitlist for cars not available until 2012 Large down payments secure consumer loyalty Expansion Uncertainties Uncertainty in 2012 debut of Model S Design specs are still pending final review From Niche to Mass Production The Model S is expected to be high-volume Lack of Infrastructure Lack of ubiquitous charging stations inconvenient Public policy unable to match Tesla’s ambitions Unclear Future Competitive Landscape Established, well-funded rivals expected to enter Unrealistic production plan with current facilities Disruptive technologies may alter landscape

6 Assessing IPO Need An IPO is crucial to Tesla’s success Why an IPO? Why now? The IPO is necessary because even with DOE’s generous loans, Tesla still needs critical cushion and financing to successfully launch the Model S by 2012 * Detailed projections included in appendix In full compliance with DOE terms and company needs

7 IPO Timing Recent IPOs have been grossly underpriced Year-to-Date Monthly IPOs (in millions) IPO Pricing Trends BelowIn-RangeAbove Tesla is largely an American company Tesla targets the affluent… least affected DOE loan unaffected by overseas crisis S&P 500 has fallen 10% since early April IPO volume peaked in March; at year lows Increases Tesla’s cost of equity But, >40% of IPOs are under-priced IPO amounts should be significantly higher Strong IPO possible despite economic woes European Debt Crisis… Overblown Jittery Capital Markets Tremendous IPO Mis-Pricing

8 Strategic Capital Raising Tesla should plan its capital raising strategically Phase 1Phase 2Phase 3 Initial Public Offering Amount: $175m DOE Loan Draw Amount: $165m Jun-Aug, 2010 Jun, 2010 Secondary Offering Amount: $85m DOE Loan Draw Amount: $225m, $75m Jun-Aug, 2012 2011, early 2012 Secondary Offering Amount: $50m DOE Loan Pay-down ($36m), ($97m), ($121m) Jan-Mar, 2014 Dec 2012, 2013, 2014 To comply with DOE loan restrictions on liabilities/shareholder’s equity ratio starting in 2014 Secondary Offering (2014) Extra financial cushion for the Model S debut in 2012. Imminent Model S launch increases investor confidence and our valuation Secondary Offering (2012) No additional debt beyond DOE loans due to low credit rating. Pay down debt as FCF explodes to improve capital structure, minimize idle cash Debt Financing (2010-2012)

9 Discounted Cash Flow Computing the value using DCF Revenue and CFO RevenueCFO DCF We apply a dynamic R e as we believe earnings normalization and large cash flows starting in 2013 will reduce risks to slightly above industry averages (in millions) Key Assumption Growth Terminal Growth Rate5%

10 Multiples Analysis Comparables analysis EV/EBITDA Multiple Multiples Valuation * Weighted average of each company from 2010-2013 EV/Sales Multiple * Weighted average of each company from 2010-2013 (in millions)

11 15%17.50%20%22.50% 4%1251996823710 5%15091152933784 6%190513681068877 7%258516841251996 Summary Tesla should proceed with an IPO Tesla needs time-sensitive capital Expansion scheduled for 2012 IPO Need DOE loans, while hefty, are inadequate Terminal Growth Cost of equity 2015+ Sensitivity Analysis (DCF valuation in millions $) Unrivaled technology and designs Second-to-none brand recognition Tesla Deserves a Premium Huge potentials with Powertrain Raise no more than required amount Secondary offerings in 2012, 2014 Compliance with DOE terms necessary Strategic Capital Raising Model S rollout is delayed Margins fail to meet expectations No experience with mass production Potential Risks

12 Appendix

13 Key Assumptions Key assumptions and methodologies Dynamic Equity Cost of Capital (Slide 9) We believe that Tesla’s high cost of capital (25%) is only applicable until it begins generating sustainable FCFs, starting in 2013. If Tesla reaches that point, its risks are significantly reduced Therefore, Tesla’s cost of capital should only be a little above industry averages as its risk level is not necessarily higher, and it has a much more inexpensive source of debt financing than its peers. Lack of Additional Capex Investment Opportunities Tesla will have large free cash flows starting 2013 and cheap debt financing, so if a good investment opportunity arises, it is able to leverage its source of cheap debt and free cash flows to take advantage of such an opportunity. Relative Weighting of Different Competitor-groups We weighted the 2010-2012E ratios for each of our competitor groups, and weighed each of those values by 20%, 40%, 40% because we believe that is the most comparable to Tesla in terms of market and industry correlation. Computing Market Value Using Comparables We chose 2014 (the first “normal” year for Tesla) to compare, and discounted that value to the present day (May 2010). Discounting Starting Mid-Year Our DCF models assume a valuation mid-year (June) of 2010. Therefore, the discounting periods are half-year shifted, and only half of the first year’s DCF value is incorporated into the DCF value.

14 Income Statement Tesla’s Projected Income Statement

15 Statement of Cash Flow Tesla’s Projected Statement of Cash Flow

16 Balance Sheet Tesla’s Projected Balance Sheet

17 EV/EBITDA Multiples Comparables

18 Prices, Production Tesla’s Projected Units and ARPUs

19 Revenue Breakdown Detailed View of Tesla’s Revenues


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