Nyasha Rudolf Chayira Lee Kang Hui Wu Menglan EXECUTIVE SUMMARY TESLA MOTORS INTRODUCTION - Tesla Motors is an American automotive and energy storage company that was founded in 2003 by a group of engineers namely Elon Musk, Martin Eberhard ,JB Straubel Ian Wright and Marc Tapering. It designs, manufactures and sells electric cars and battery components. The headquarters of Tesla motor company is in Palo Alto, California. It has over six thousand employees, its cars are in 37 different countries and its on the NASDAQ stock exchange. BYD AUTOMOBILE COMPANY INTRODUCTION - BYD is one of the largest Chinese manufacturers of automobiles and rechargeable batteries which were founded in 1995 by Wang Chuanfu.The headquarters of BYD Company is in Shenzhen, Guangdong province. It was founded with a capital of RMB2.5million SWOT ANALYSIS OF TESLA . STRENGTHS WEAKNESSES Strong technological expertise First to develop fully a sports car Strong supplier to other manufactures Direct service to customers and online selling. Products prices are higher than its competitors A higher cost of production since economies of scale is not achieved. THREATS OPPORTUNITIES Great support from government worldwide for environmentally friendly vehicle Improvements in quality control process can reduce costs. Willingness to support others gives them the opportunity to learn more. Difficult for the company to produce, distribute and sell cars to average customers due to their business model. Price skimming has never been used in the industry. Their technology may take time to being optimal for use of masses. BYD SWOT ANALYSIS STRENGTHS Rising global oil leading to automobile more and more popular. One of the world s largest battery manufacturer Skilled workforce High growth rate WEAKNESS Customers still have no confidence about new energy vehicles More competitors in the industry E cars may take time to be popular in Chinese market OPPORTUNITIES THREATS Domestic and foreign demand is big Great support from government worldwide for environmentally friendly vehicle. Other automobile products have high prices. New energy vehicles need high safety and quality standards Rising costs of raw materials leading to price changes Increase in labor costs Made in China BYD COMPANY Ltd- INTRODUCTION BYD is one of the largest Chinese manufacturers of automobiles and rechargeable batteries which was founded in 1995 by Wang Chuanfu.Its headquarter is in Shenzhen Guangdong province.It principally operates in four business segments namely, rechargeable battery business, handset components and automobile business. The automobile products include high end, medium and low end and whole car moulds, auto parts and pure electric vehicle.BYD has a wide range of small and medium sized cars. It is operating in America, Europe, Japan, South Korea India and Taiwan.BYD Company Ltd aims to improve quality of products while keeping the price low. Positioned itself as cost leader in the battery industry. It is China s number one electric vehicle with a booming growth rate mostly due to the home market and half of its revenue is from the auto division. The potential of the company is huge if it maintains the growth rate for it has been phenomenal and most import profitable. Robust Growth BYD has developed from 20 employees in 1995 to a corporation with 200,000 employees and 11 industrial parks across China by the end of 2010, including sites in Guangdong, Beijing, Shaanxi, Shanghai, and Changsha, totaling over 15,000,000 sq. m. It also has offices in the United States, Europe, Japan, South Korea, India, Taiwan, Hong Kong and other regions. Asset Market On July 31, 2002, BYD was listed on the Hong Kong Stock Exchange, setting the record of the highest issuing price among the 54 H shares. On December 20, 2007, BYD Electronic (International) Co., Ltd. (SEHK: 0285) went public on the Hong Kong Stock Exchange. On September 27, 2008, MidAmerican Energy Holdings, a unit of US billionaire investor Warren Buffett's Berkshire Hathaway Inc., took an approximately 10% stake in BYD by purchasing 225,000,000 new shares issued at HK$8.00 (US$1.03) per share - an investment of approximately HK$1.8 billion or US$230 million. This transaction will play a strategic role as BYD expands its operations in North America, Europe and around the globe. TESLA COMPANY INTRODUCTION Tesla Motors is an American automotive and energy storage company that was founded in 2003 by a group of engineers namely Elon Musk, Martin Eberhard, JB Straubel Ian Wright and Marc Tappering. It designs, manufactures and sells electric cars and battery components. The headquarters of Tesla motor company is in Palo Alto, California. It has over six thousand employees, its cars are in 37 different countries and it’s on the NASDAQ stock exchange.Tesla first granted widespread attention following their production of the Roadster the first fully electric sports car. Initial public offering as of 2010 and the shares closed at $23.89 after opening at $17 whereas its market capitalization was $3.198billion as 2014. It has delivered more than 70000 electric cars since 2008 and it has more than 25000 on the road. Currently it produces the model S Sedan and is taking reservations for the Model X SUV crossover.Tesla s biggest advantage over competitors is its direct sales and service model. It is a luxury automaker serving only elite customers so far it sold almost exclusively to very, very wealthy men. Tesla’s strategy of direct customer sales and owning its own stores and service centre is a significant departure from the standard dealership model in the marketplace. It is the only automaker that sells cars directly to consumers for it believes that customers hate car dealership. Tesla builds electric power train for vehicles from other automakers including the lowest priced car. It has been successful in the car industry and it says it follows a frequent if understated, rule of the road in Silicon Valley: just do one thing at a time. BYD is Chinese EV automaker established in 1995 and company limited specializes in IT, automobile and new energy. BYD is the largest supplier of rechargeable batteries in the global market. As you can guess, this kind of familiar business character about IT leads BYD to enter the EV market. My expert is predicting that BYD’s green car strategy that the wider adoption of its electric vehicles for public transportation will boost significantly STRATEGIC ANALYSIS For the strategic analysis, we conducted a SWOT analysis of both Tesla and BYD Companies to evaluate and show why these companies will be a good merger. Strategic analysis also includes the Porter diamond model which gives an analysis for industry and competitors. TESLA SWOT Analysis STRENGTHS Strong technological expertise: Tesla Company was founded by a group of engineers who therefore has the knowledge and expertise to contribute to the building of automobile taking into consideration the great need of meeting the worldwide standards. It is the global market leader in the electronic car industry and has managed to instill reliability in its customer mind. First to develop fully a sports car: The fact that it is the first company to fully develop a sports car it has made itself famous, advantage of being the first mover and has created a good image to its company Strong supplier to other manufacturers: It again creates a good picture and has positioned itself as a reliable company by being a strong supplier of other accessories. If in the market, it is the main supplier it does not compete on price even its competitors sell cheaper products and it also shows that it has high brand loyalty all these are strengths to the company. Direct service to its customer and online selling: The internet has become a very important tool in doing in business since customers can buy online and get products faster. Tesla owns its service centers and stores; it sells its products online, does not have to involve any car dealers when selling and this can signifantly reduce its distribution costs. This strategy also helps the company to have direct communication with customers which is very important in business. Weaknesses- Prices are higher than its competitors. Tesla is currently targeting upper class, rich affluent green conscientious people however its prices are higher than its competitors which may affect its sales. Customers who are price sensitive may prefer to buy less expensive products. Higher cost of production It does not produce goods in bulk hence economies of scale cannot be achieved leading to higher cost of production. Opportunities Great government support: The support from all around the world of environmentally friendly vehicle indicates a great potential of the industry s successfulness. This means that Tesla might encounter less barriers in entering many countries because it is supported worldwide. People are also now health conscious and all these are positive indicators of the industry. Willingness to support others gives them the opportunity to learn more: By merely supporting others the company gain a lot, it discovers and learns a lot taking into consideration that experience is a best teacher. Improvements on Quality control: If it improves on quality control it can cut unnecessary costs for example rate of turnover and inventory costs because the main goal of every company is to cut costs and maximize on revenue. Threats Higher cost of production: Since there is no economy of scale there is higher cost of production which means prices of products have also to be high to meet cost of production Difficult for it to sell to average customers: The business model of the company and the production costs does not allow it to sell to average customers if it has to make profits. Price Skimming: This strategy is usually appropriate in the introductory phase or if the targeted market is willing to pay a premium price .This a threat to Tesla since other customers might opt for cheaper products if they are price sensitive they will end up switching to other cars Technology may take time to being optimal for use of masses. New energy cars need quality standards and high safety and this means more money to maintain. Electric cars need to be charged here and which other customers might view as inconveniencing. Customer still does not have confidence in electric cars which may take time for the cars to being optimal for many customers. SWOT ANALYSIS -BYD COMPANY STRENGTHS Rising costs of oil globally；Many customers tend to be price sensitive and with the rising costs of oil globally it’s a great strength to the company Customers will always look for substitutes if they are not happy with the what is available at that particular period. All these gives BYD has high potential of being successful in the electric market. One of largest supplier: Its shows how reliable a company is and how it has positioned itself in the market, high brand loyalty. It also does not need to compete much in terms of pricing since it has already created strong customer base. Skilled workforce. Quality is very important nowadays for any business to meet worldwide standards. BYD understands that its products has to meet world standards for it to be compete and remain in the business so it has skilled workers which is a great strength. High growth Rate: BYD is growing very fast which is a positive indicator of the business. Weaknesses E cars may take time to be popular in China: There is still need for BYD to build many charging stations for the customers currently they are said to be very little although the government is willing to assist the company. Consumers still need to be confident about these electric cars since some of them are still not sure whether it’s convenient to be recharging now and then, how long do they go before they cars has to be recharged, how safe are they and the level of maintenance needed More competitors in the market. China is an emerging market and BYD does not only face domestic competitors but also from foreign companies it becomes a threat. Rising costs of oil and also as the world is becoming more environmental aware causing many cars to focus on producing electric cars to suit the current trend. The need for electric has risen for the past 5- 10years. Opportunities Government support Government planning to encourage use of alternative energy vehicles to the public, this gives BYD a safe status in the industry. European Union granted BYD approval to sell electric buses to EU nation states without obtaining permission on a nation by nation basis. This has pushed BYD to its highest trading levels. Other automobiles have high prices. BYD electric cars are relatively cheap comparing with other companies, for the customer who are prices sensitive they will go for the brand with the price that suit them which is an added advantage to BYD. Most of its cars range from $30 000 to $40 000. Threats High safety and quality standards: Electric cars are said to require high safety and high quality standards of maintenance which means more money needed so customers might try to avoid all this by not buying which becomes a threat to the company. Rising costs of raw materials: This makes it difficult for the company to put a fixed price for the products due to constant changes in the price of raw materials Increase in labor costs: China used to be one of the countries with cheap labor but recently the labor costs are said to be increasing which means is a major threat to the company. Rising prices of raw materials will increase the price of the production and consumers might shift to other brands. Country of origin: Chinese products are perceived to be of poor quality as compared to any other foreign brands. This needs to be dealt with since the car industry is all about the security of human life and if BYD is to be successful international PORTERS FIVE FORCES ANALYSIS Bargaining power of buyers low Threat of substitutes low Bargaining power of suppliers low Rivalry among existing competitors high Threat of new entrants/barriers to entry high • Tesla motors does not sell products in bulk • Do not have standards very unique in the industry • Few competitors buyer power extremely low • Few green substitutes ;hybrids, public transport, hydrogen • Tesla vehicles are differentiated when compared to other • Low power of suppliers as many suppliers produce speci • Suppliers rely on automakers • No more Big 3(Ford,GM,Chrysler) • Nissan ,GM ,Mazda producing own brands of EV • Switching cost are high • Strong brand identity SYNERGY Tesla Motors, the American start-up electric car company that had its IPO in June 2010, has been facing a lot of attention amidst the volatile oil market. The rising of all-electric vehicles has never been better because of rising oil prices, consumers’ acute awareness of violent political oppression across the oilproducing Middle East, and new developments in EV technology. By the price of Gasoline is going up, people started to find alternatives to fuel their cars, leading technology and anticipated launch of the first EV car became good solution for this taste. However, auto industry characteristics aren’t favorable to Tesla and the electric vehicle market remains untested in the United States. More importantly, Tesla’s financial risks and debt situation show a big question mark over the company’s future and we thought it’s unlikely that the company will be successful if it operates alone. Even with the inherent risks in Tesla, we also believe that its intellectual property, powerful brand image, and industry-leading products will show it a very attractive and likely acquisition for a well-established car manufacturer. This part will talk about synergies that are crated by acquisition of Tesla and BYD. When Tesla unveiled their first car, the CEO chooses to share all the core technology and patent of Tesla to the public. Many experts criticized the action of Tesla as a foolish mercy to competitor. However Tesla thought differently with other and it bump up the competitor’s interests to EV cars industry, so what are the potential synergies between BYD and Tesla if they are merged? There will be big four advantages to each side. First synergy will be Tesla and also BYD will gain friendly troops to win the battle. These days, all the automakers have been uniting themselves to one giant group to survive from the battle by making the synergies through uniting, because the situation of a car industry is very hard for company which wants to stand by themselves. There are also many advantages for uniting together than alone. For example, Volkswagen Group had united AUDI, BENTLY, LAMBORGHINI, and Porsche. As a result of uniting, Volkswagen group became the biggest automotive group in the world. Tesla also needs to find strong troops to compete with giant dinosaurs. New paradigm of car (marketing synergy) When the Tesla came out to public, the market feedback was so hot and impactive. Some people view Tesla with suspicious eyes about the performance. However, recent Tesla’s sailing is going very well. What did make Tesla so impressive and famous now? Naturally, Tesla was the first commercial vehicle that fully moved by electricity. The impact of Tesla exploded the interests of ecofriendly car of public. Despite the effort of automakers, Gasoline car has dominated market for more than 100yers and people started to want more ecofriendly and efficient car. As a result, the Tesla was come out as perfect solution for people’s satisfaction. Now the current car paradigm is on transition period of Gasoline vehicle to EV. This kind of distinguish interest was foresaw by the automakers and experts with public’s ecofriendly thought. Unlike the explosive market feedback, Tesla’s sailing is not considered as a big threat to other automakers. Current market situation of EV market is not yet settled down. Many people still believe that EV cars cannot work as normal vehicle because of technical problem. However, BYD and Tesla can break this thought of public by merging together. Firstly, they have to change the people’s thought that EV car is not enough to role play as normal vehicle. This rush from two companies seems like small, but if the Tesla’s luxury image and BYD’s realistic image is gathered together, they will be massive outcome of merge that actually change the paradigm of the car market now. Moreover, these two companies will be listed as a first EV maker’s merge in automotive history which can be shown to public as next generation’s car. From the merge, Tesla and BYD will show the world that they deserve their attention by showing innovative EV cars to market. . Strong alliance (corporate synergy) a) Steady brand image. Now, the brand image of BYD and Tesla is repetitively weak compare with the kingdom of German luxury brands. Ultimately the real competitor of Tesla will be the German luxury cars and competitor for BYD will Volkswagen or GM.. Unlike them, Tesla’s impact to market is relatively small because of the brand power. Especially, In Asian market, the brand awareness of Tesla is not as popular as in US and Europe, as well as the interest of EV. Tesla and BYD need to grab the people’s interest about EV cars in Asia to keep growing their brands. Therefore, we expected that by havi ng this merge with BYD, Tesla can easily enter to Asian market which make steadier brand image for comp etition as well the massive marketing synergies from merge. b) Market segment Our group thought that the biggest weakness of Tesla was their target market. Tesla’s target market is limited only on the luxury market until now. Tesla has been informing that they are planning to make a car for everyone, but it will take a long time to show a new model is less than 35000USD. Their target market become a reason that leads Tesla to success but also disturbing Tesla to be more popular in real life due to very high price. When they unveiled first model, Tesla brought a massive response from the public by connecting efficiency with luxury. Many Hollywood stars started to ride Tesla and many people interested on Tesla which is showing the standard of next generation car. However, the fact was that not everyone is affordable to ride Tesla. c) Easy to access China and US. The reason why this might be a good idea for BYD is access to superior product design capabilities, system engineering and manufacturing quality methodologies as well as access to the US market. The typical brand image of Chinese automakers in US has very negative opinion about safety, design and quality. The problem for BYD was that reputation of Chinese cars was so negative and bad so it was too difficult to compete with domestic automakers. In addition, BYD has been well grown in China with full support from the government. However, BYD had never experienced business from the outside of the world which caused some doubts of BYD’s outcome in the world battle field. However, if Tesla and BYD are merged, we expect a) The doubts of American to Chinese cars will turn to positive b) Design capabilities, engineering and manufacturing quality will improve c) BYD will be cheered up by Tesla’s support and target the middle class. Tesla is also need a strong alliance like Volkswagen which can support and give a wing to make Tesla fly and BYD is perfect company for Tesla to grow up. Tesla has made a very good outcome recently, but there is a still big obstacle that they should overcome to be a real luxury automaker which can actually threat the other luxury brands in terms of size and sales. Now, tesla is only selling about 45.000 units per year. (Submitted by Tyler Durden on 06/03/2013 www.zerohedge.com/news/2013-0603/how-many-cars-must-tesla-sell) These 45,000 units are comparatively small amount compare with other luxury brands and it is not a big threat to competitors. However, if Tesla and BYD are merged, our group expects that the sales of Tesla and BYD will increase significantly in both China and US. In addition, there will be much synergy that Tesla and BYD can benefit. Technical cooperation Volkswagen group is a very good example that generates synergies from the technical cooperatio n by having strong technical cooperation. These days, more and more automakers have gathered together to cooperate to make more efficient cars by sharing technical problems. For example, Vo lkswagen group is sharing most of technologies with Audi, Bentley, and Porsche and we expected Tesla also needs this kind of technical cooperation to develop their products. This technical coope ration is not only for advanced technology but also can reduce the cost of making EVs. The main c omponents of EV cars are battery that store the electric power and send it to engine. Tesla made a con tract with Panasonic about supplying battery toTesla so a merge between the two companies will lead to a potential technical cooperation about main part of EV which will reduce the cost of maki ng cars and also enhance the supplying chain, because BYD is a not only automakers, but also the one of global battery supplier in the world. One of reason why Tesla’s sales are not big is, becau se their price of car is comparatively expensive compare with others. Tesla’s average price is abou t 80,000USD~100.000USD which is not affordable to middle class segment. However, if Tesla can r educe the making cost by having technical cooperation with BYD, the sales of Tesla can reduce th e cost of making EV which ultimately increases the competitive advantages. Although it is hard to state exactly what the overall effect of the merge will be,we feel that at the very least that sharing ideas and strategies between the two strong automobile companies will lead to the previously mentioned benefits VALUATION ANALYSIS We valued BYD using two types of methodologies :1)the use of comparable valuations and 2) some fundamental valuations such as the discounted value of future cash flows and leverage buyout analysis(LBO) . A. Comparable valuations With valuation we are going to use multiples such as book value, market value ,P/E multiple, trading comps, transaction multiple. 1) BOOK VALUE FOR THE PERIOD ENDING DEC 31,2014 (all numbers in thousands) BYD total shareholder equity (a) 28,895,000 ,000 HKD Number of shares outstanding (b) 2,275,100,000 Book value per share = a/b = 12.70 Price to book ratio :c/d (c) Share price=51.30 (d) book value=12.70 Price-to-Book ratio =4.039 We noticed BYD has a rather high market share price comparing to its book value of 12.70HKD,indicating that BYD has a large room for future growth or expansion . Also the price to book ratio is above 1.0 ,this means that BYD expects future gains because of the percei ved growth opportunities ,some competitive advantages .the P/B ratio shows us that the it is overvalued i n the Asian auto motive sector ,take for example general motors book to ratio is 1.55 ,which is lower than BYD ,so this shows us BYD is a competitive company As of Dec 2014,we found that BYD did not have any intangible assets in its financial statements, so we just assumed with the its high value of tangible assets(reflected by the high P/B ratio) it will have a high rate of growth in the future years to come. NOTE: The data we use comes from its annual report in 2014 for the sake of accuracy .Though it has released its first season report in 2015 ,the result of has not been audited Although Price to book ratio is not as useful for firms with high levels of property or fixed assets such as th e automotive market ,since fixed assets are held on the balance sheet at the original cost, if the market pr ices if this assets increase or decrease dramatically ,the book value can differ dramatically from the market value .S o hence despite the high P/B ratio, we further analyzed the company books to come to a more accurate v alue 2) MARKET VALUE Enterprise value= value of debt+ value of equity (a)Equity value = price per share* shares outstanding = 51.30* 2,275,100,000 =116,712,630,000 HKD (b)Debt value=net debt + preferred stock =65,114,000- 53,022,000 =12,092,000 Value of equity(A) +Value of debt(B) = 116,712,630,000-12,092,000 = 116,700,538,000HKD The use of market value is very useful inorder to reflect the company’s real value.In this case BYD is really impressive because out of 475 automotive manufacturing companies ,it is ranked number 29. Given the stabilizing auto sales, optimizing car models and decreasing photovoltaic burden, we believe that the Company has survived the hardest period and it is not value we concerned with .As we proposed that TELSA buys 51% shares of BYD ,and the value of 100% of BYD Shares and the amount that traders are currently willing ti trade at is 116,712,630,000 HKD. Therefore the minimum bid that could be made for BYD shares is 59,523,441,300 HKD TRADING MULTIPLE Average P/E ratio for Chinese Automotive Industry is 13.55 Earnings per share =net income/shares outstanding =0.27 Stock price= 0.27*13.55 =3.6585 Equity value = share price*shares outstanding = 3.6585*2,275,100,000 = 8,323,453,350 The equity value and the stock price here are higher than the company’s actual equity value and stock price the industry P/E ratio is higher than BYD’s P/E ratio. Here we can use this new equity to adjust for our final .So since TELSA wants to merge with BYD ,we come to the new price of 8,323,453,350. The average p/e ratio of 13.55 comes from finance.sina.com.cn and we come into this number by averaging 1 5 companies in the Chinese automotive industry. We used this industry average because the p/e ratio was computed in the same period so this reduces the rate of error in the timing problem TRANSACTION MULTIPLE Stock price: 51.30 HKD Control premium :30%- 40% Range of stock price: 66.69 HKD -71.82 HKD Based on the past deal in the automotive market a control premium is highly required in order to gain majority share of BYD .We estimated our calculation based on the Fiat and Chrysler Merger because it was similar to our proposition ,so we believe that a control premium of 30%-40% should be used .with this range of premium we are get the above stock price of 66.69 HKD -71.82 HKD per share .Because Chinese companies are rather attractive for potential investors around the world because the Chinese market is growing and has a large consumer volume. We see a promising future to acquire the 51% of BYD and our control premium is high . DISCOUNTED CASHFLOW Since BYD is a growing company with various government subsidies in different periods, the financial condition of the company is rather fluctuating. Hence, financial factors are difficult to estimate merely by studying historical data (e.g., Figure 1). To value the company more correctly and reasonably, we make use of the Wind Info software (http://www.wind.com.cn/En/Default.aspx) and CSMAR Solution (http://www.gtarsc.com/), subjectively adjusting several factors according to our understanding of the state quo. Year 2014-12-31 2013-12-31 2012-12-31 2011-12-31 2010-12-31 2009-12-31 2008-12 -31- Revenue -17,911.59 10,665.30 -30,473.20 141,035.10 276,750.00 416,852.60 99,018. 90 (Figure 1, Retrieved from Wind Info) Future Cash flow (Growth rate, Future revenue, costs, EBIT, tax rate, depreciation, NWC change, Capex) To estimate the future cash flow, we firstly estimated the future revenue by estimating the future growth rate. Based on the estimation of Wind Info (Figure2), BYD will generate promising growth rate in the future because of its innovation, product expansion (electronic car) and government subsidies (eg, 2014, RMB798, 446,000). According to the Wind data, the growth rate will peak at 31.42% in 2015. We assumed that the growth rate will definitely become stable so the growth rate after 2017 is positively estimated at 23.7%. Cost of 2014 is calculated from the revenue and EBIT. Revenue Growth Rate (Figure 2, Retrieved from Wind info) Cost growth of first 3 years is determined by 9.95% based on the cost of 2013 and 2014 from the CSMAR Database and the following 7 years is estimated at 20%.In this part, we assume that when BYD achieve stable growth, the government stopped offering subsidies. Tax rate is calculated from the corporate tax of China, being 25%. The expected depreciation and Capexin year 1 is retrieved from the BYD Company Ltd 2014 Annual Report. We add a growth rate 23.7% corresponding to the revenue growth. The NWC change is considered to be consistent. Net Present Value (Free Cash flow, WACC, Terminal Growth Rate) According to the experience data, the beta is determined to be 0.76 according to the WIND. Given the information retrieved from CSMAR, WIND and the Annual Report the WACC is calculated as follows. Terminal Growth Rate is considered to be exactly estimated GDP growth of China, 7.2%. For one thing, it is assumed that the growth will be infinitely corresponding to the GDP in long term. For another, since the revenue growth is estimated positively (23.7%), the valuation could be more balanced with a modest terminal growth rate (7.2%). With a total number of shares (2,467,000,000), the price per share is valued 53.695 RMB.With an exchange rate of 1.2487 HKD/RMB, the price per share is valued as 67.04895 HKD. Sensitivity Analysis A sensitivity analysis reveals that the sum NPV is relatively more sensitive to the WACC change. It yields a range of a share price of 50.800RMB ~60.719RMB, exchanging to 63.435 HKD ~ 75.820 HKD. Deal Structure Target Equity Structure According to the BYD Company Limited 2015 First Quarterly Report, the top ten shareholders are shown i n Table 1. Shares held by HKSCC NOMINEE LIMITED are the aggregate of H shares of the Company traded on the trading platform of HKSCC NOMINEE LIMITED on its behalf held by shareholders. Mr. Wang Chuan-Fu, both Chairman and CEO, owns the largest share of the company (23.05%) while Lv Xiang-yang, Wang’s cousin, own the second largest(9.66%). Moreover, Mr. LU Xiang-yang and his spouse, Ms. Zhang Chang-Hong, are interested in the equity of Youngy Investment Holding Group Co., Ltd. as to 89.5% and 10.5% respectively. That is to say, Mr. Wang Chuan-fu is the controlling shareholder and the factor controller of the company and the cousin couple helps to consolidate the control power by owning actually 16.23% shares. In sum, Mr. Wang Chuan-fu, Mr. Lv Xiang-yang and Ms. Zhang Chang-hong are major shareholders of the company, owning collectively 39.28%. Concluded from the information above, BYD is a company with centralized ownership. The corporate orga nization is shown in Figure 1 retrieved from BYD Company Limited Annual Report 2014. Table1 retrieved from http://www.byd.cn/BYDEnglish/upload/201504/2015042801463559342041466.pdf Figure 1 Retrieved from http://www.byd.cn/BYDEnglish/upload/201504/2015042011263042555146944.pdf Deal Design Since the ownership of the target company is centralized, we propose “stock for stock” acquisition (Figure 2). Generally, large companies would be held by relatively more dispersed ownership (e.g. total shares owned by top 20 shareholders of Ford is 10%), which helps the companies to balance the relationship between power and control so as to improve corporate governance. However, in the case of BYD, highly centralized ownership might hamper management transparency and shareholders confidence. Therefore, we propose that Tesla should buy 30% shares of BYD with its own 26% shares according to our calculation. Meanwhile, Tesla sells corresponding shares without harming at least 80% of the vote to the chairman so that he can participate in the decision making process in Tesla. By this deal design, the exchange of stocks enables Tesla take considerable control of BYD, guaranteeing the supposed synergies. Additionally, the stock price of Tesla is in an upward trend recently ($255.36, +0.89%, JUN 17,2015) while the stock price of BYD is declining (￥70.9,-2.70%,JUN 17,2015). Figure 2. Tax Liabilities Exposure to Targe t’s Liabilities Need for a share holders vote Survival of the Ta rget Company Form of Paym ent Free of tax Target’s liabilities i solated from buye rs No shareholder vo tes are required assured stock Finally, considering five important factors regarding deal structure, the summary of the “stock for stock” is as above. BENEFIT We have proposed the deal structure as a stock for stock merger between BYD and the Tesla c ompany for the few reasons which have been already mentioned above. Meanwhile this kind of stock for stock will bring great benefits to both companies and the shareholders ,as we can se e the importance of it . 1. Tesla company won’t need to raise a huge amount of cash to pay the merge, avoiding a great cash outfl ow payment, which will reduce the stress of the company’s cash flow and maintain the company to run re gularly in the long term. 2. Shareholders of BYD company won’t lose their rights and ownership of company after merge. Their righ ts and ownership are just transferred to be Tesla company’s. The company after merge will be controlled b y both BYD and Tesla company’s shareholders. Meanwhile, the equity structure of BYD company will stay t he same. 3. Tax is free. 4. The operation of stock-for-stock is simple and costs short time. 5. The responsibility of making valuation of target company(BYD) will be taken by both of BYD company and Tesla company, which will reduce the risk of dishonest and losing money for Tesla company. 6. The stock price of BYD company will rise after merge, changing the situation of recent declining price si nce the stock price of Tesla company is rising lately.(Figure 3,Figure 4) We believe that given that Tesla’s financial situation and its strong connection with the automoti ve industry at large and that BYD has the Chinese government support. The merge will be a g ood investment for both companies and countries. Appendix 1-telsa historic data Figure 3 Retrieved from http://ir.teslamotors.com/ Figure 4 Retrieved from http://www.byd.cn/byd/tzzgx/ TSLA Earnings Date Earnings announcement* for TSLA: Jul 30, 2015 Tesla Motors, Inc. is estimated to report earnings on 07/30/2015. The upcoming earnings date is derived from an algorithm based on a company's historical reporting dates.Our vendor, Zacks Investment Research, might revise this date in the future, once the company announces the actual earnings date. According to Zacks Investment Research, based on 1 analysts' forecasts, the consensus EPS forecast for the quarter is $-1.39. The reported EPS for the same quarter last year was $-0.16. Consensus Recommendation Quarterly Earnings Surprise History Fiscal Date Quarter End Reported Earnings Consensus % Per Share EPS* Forecast Surprise Fiscal Date Quarter End Reported Earnings Consensus % Per Share EPS* Forecast Surprise Mar2015 05/06/2015 -0.7 -0.81 13.58 Dec2014 02/11/2015 -0.48 0.15 -420 Sep2014 11/05/2014 -0.29 -0.15 -93.33 Jun2014 07/31/2014 -0.16 -0.24 33.33 Appendix 2-BYD historic data Add to Portfolio Prev Close: 47.50 Open: 48.50 Bid: N/A Ask: N/A 1y Target Est: N/A Beta: N/A Next Earnings Date: N/A Day's Range: 43.30 - 48.90 52wk Range: 18.70 - 62.30 Volume: 10,238,553 Avg Vol (3m): 7,764,400 Market Cap: 109.19B P/E (ttm): 177.75 EPS (ttm): 0.25 Div & Yield: N/A (N/A) » BYD COMPANY (1211.HK) -HKSE 44.10 3.40(7.16%) 3:59AM EDT Add to Portfolio Income Statement Get Income Statement for: View: Annual Data | Quarterly Data All numbers in thousands Period Ending Dec 31, 2014 Dec 31, 2013 Dec 31, 2012 Dec 31, 2011 Total Revenue 55,366,000 49,768,000 44,381,000 46,312,000 Cost of Revenue 47,743,000 43,252,000 39,255,000 39,445,000 Gross Profit 7,623,000 6,516,000 5,126,000 6,867,000 Research Development - - - - Selling General and Administrative - - - - Non Recurring - - - - Others - - - - Operating Expenses Total Operating Expenses 54,405,000 48,558,000 43,972,000 44,745,000 961,000 1,210,000 409,000 1,568,000 Total Other Income/Expenses Net - - - - Earnings Before Interest And Taxes 961,000 1,210,000 409,000 1,568,000 Interest Expense (1,274,000) (895,000) (685,000) (513,000) Income Before Tax - - - - Income Tax Expense 134,000 56,000 78,000 132,000 Minority Interest (306,000) (223,000) (132,000) (210,000) Net Income From Continuing Ops 740,000 776,000 213,000 1,595,000 Discontinued Operations - - - - Extraordinary Items - - - - Effect Of Accounting Changes - - - - Other Items - - - - Net Income 434,000 553,000 81,000 1,385,000 Preferred Stock And Other Adjustments - - - - Net Income Applicable To Common Shares - - - - Operating Income or Loss Income from Continuing Operations Non-recurring Events Currency in HKD. Sources : www.byd.com.cn www.bydit.coom www.bydeurrope.com www.byd.autonet.com www.teslamotors.com forbes.com torquenews.com www.teslamotorsclub.com www.greencarreports.com www.tesla.edmunds.com http://finance.yahoo.com/q/is?s=1211.HK+Income+Statement&annual http://search.morningstar.com/sitesearch/search.aspx?s=o&q=BYD+AUTO&ulang=zh-CN&sort=date:D: L:d1&entqrm=0&wc=200&wc_mc=1&p=Transcript http://ir.teslamotors.com/secfiling.cfm?filingID=1193125-14-69681&CIK=1318605 http://quicktake.morningstar.com/stocknet/secdocuments.aspx?symbol=byddf http://www.statista.com/study/28003/key-figures-of-byd-auto-2014/ http://www.gurufocus.com/stock/HKSE:01211 http://www.nasdaq.com/earnings/report/tsla http://www.hybridcars.com/top-5-best-selling-electric-cars/ http://www.greencarreports.com/news/1098796_tesla-success-shows-weakness-of-ca-zero-emissionrules-company-says http://www.edmunds.com/fuel-economy/will-californias-zero-emissions-mandate-alter-the-carlandscape.html http://www.sfu.ca/~sheppard/478/syn/1141/Group_D.pdf http://www.thecasesolutions.com/tesla-motors-22872 http://www.wind.com.cn/En/Default.aspx http://www.gtarsc.com/ http://www.byd.cn/BYDEnglish/upload/2015-04/2015042011263042555146944.pdf
