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Tesla Gets Clearance to Begin Production in China Gigafactory

Zacks Equity Research

Tesla, Inc. TSLA receives approval from China’s Ministry of Industry and Information Technology to start production at its $2-billion Gigafactory in Shanghai.

The factory would build affordable versions of Tesla Model 3 and its proposed model Y for Greater China. The company intends to produce at least 1000 Model 3 units per week in the factory as it attempts to strengthen sales in China. However, Tesla is not sure when it will be able to meet the production target for the year because of uncertainties related to orders, workers and suppliers.

The factory will be the company’s first full-scale production plant outside the United States although it has a factory in Tilburg, Netherlands, which carries out the final assembly of modules.

The recent approval can be seen as Beijing’s willingness to open up its car market. Moreover, Authorities in Shanghai have offered help to speed up construction of Tesla’s factory.

China is significant for the company’s global strategy as the government in China has set ambitious targets for electric vehicle (EV) sales.

Notably, Tesla will be the first fully foreign-owned manufacturing facility in the world’s largest auto market.

Currently, Tesla’s vehicle models imported from the United States are subject to tariffs in China. However, the introduction of the factory will help the company to avoid higher import tariffs. Moreover, China recently exempted Tesla units from a 10% vehicle purchase tax.

Rising Model 3 delivery, which forms major part of the automaker’s overall deliveries, is aiding top-line growth. Strong performance and impressive design of the company’s products are ramping up sales volumes.

Tesla is making efforts to increase vehicle deliveries. Higher volume should enable the company to achieve cost and production efficiencies. Moreover, its focus on expanding the product portfolio, introducing car-sharing services and developing self-driving capability is commendable.

Zacks Rank & Other Stocks to Consider

Tesla currently carries a Zacks Rank #2 (Buy).

A few other top-ranked stocks in the Auto-Tires-Trucks sector are BRP Inc DOOO, Sonic Automotive, Inc SAH, and  Lithia Motors, Inc LAD, currently sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

BRP has an expected earnings growth rate of 18.4% for 2019. The company’s shares have gained 64.1% year to date.

Sonic Automotive has an estimated earnings growth rate of 32.7% for 2019. Its shares have gained 112.1% year to date.

Lithia Motors has an estimated earnings growth rate of 13.2% for 2019. Its shares have gained 67.9% year to date.

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