It’s always a good idea to read over the 10-Q and 10-K SEC filings of public companies.
Occasionally, you may catch something in those filings that weren’t discussed in the quarterly earnings report, or mentioned during the conference call.
Sometimes, a little change in the language used can tip you off that the company may be concealing something. You do have to be careful, though, because little adjustments in language may simply be a choice by the company’s securities attorneys to hew closer to a certain regulatory requirement.
When it comes to a company like Tesla, however, even the slightest little change may actually mean something big. A stealth price cut, for example, may be hidden in a tax incentive ending.
Tesla is supposed to be producing its Model 3 in Shanghai in the future. In its 10-K filing, Tesla said it expected to begin production of the Model 3 by the end of the year, but also said doing so was “subject to a number of uncertainties, including regulatory approval”.
The same sentence is in its 10-Q, but with the added sentence, “…[and] receipt and maintenance of certain manufacturing licenses.”
It’s a small and subtle, but important addition, and it may or may not be Tesla-specific.
Why the equivocation? It’s the nature of doing business in China that all companies must grapple with.
The Chinese government wakes up every day and must figure out how to feed, clothe, and shelter two billion people.
If the people get angry, revolution is possible. So the government does things like crackdown on the casino whales and other wealthy people to demonstrate to the population that they are concerned about corruption and acting on it.
That’s why the Macau casinos tanked for a couple of years.
The government isn’t only focused on wealthy Chinese citizens up to no good. It also makes life difficult for US companies, because the Chinese system is utterly opaque.
Since the Chinese government is a dictatorship with total control over everything, anything can and will happen to businesses over there, either directly or by proxy.
There may or may not be a reason for what does down, and even then, the reasons provided may or may not even be the truth. Sometimes a business may not be told anything and simply shut down.
The Party hierarchy is such that, as an example, a Tennis Championship may be coming to China. Some bureaucrat somewhere, who doesn’t want to lose his nice life and privileges, knows that President Xi loves tennis, so the bureaucrat wants to be certain that tennis is all over the news and media and retail outlets.
So the bureaucrat issues an order to end all table tennis and badminton matches.
Circling back to Tesla, this environment creates significant uncertainty for any stock that has a business in China. Tesla may or may not even have regulatory approval for a Model 3 plant.
The receipt of certain manufacturing licenses may be in doubt, and without question, “maintenance” of those licenses could mean they vanish without notice.
So while it may seem shifty of Tesla to manipulate this language, and it may very well be shifty, it is most likely a function of doing business in China.
Which is to say, investors should already be wary of Tesla, and why investors keep throwing cash at Tesla remains a mystery. China, however, adds a further element of risk.