Tencent Buys 5% of Tesla

Chinese internet giant Tencent has become Tesla’s 5th largest shareholder. They took a 5% stake in Tesla through the purchase of 8.2 million shares worth $1.78 billion. This is the largest investment so far of a Chinese company in the niche of self-driving vehicles.

A Tencent spokesperson said, “Tesla is a global pioneer at the forefront of new technologies including electric vehicles, assisted driving, shared vehicles, digitising real-world information, sustainable energy generation and scalable energy storage. Tencent’s success is partly due to our record of backing entrepreneurs with capital; Elon Musk is the archetype for entrepreneurship, combining vision, ambition, and execution.”

This investment by Tencent is in line with its vision that artificial intelligence will dominate the future. Tencent has an AI lab that has more than 250 people working in it. It intends to invest more in AI research that will allow the company to make innovations in the field of social media and gaming.

Zhang Tong, director of Tencent’s AI lab, said, “Tencent used to be a product-driven company. Now we want to transform into a technology-driven company. We’ve reaped the benefits of a large population, now we need to use technology and AI.”

Joseph Fath, a fund manager at T.Rowe Price, said, “Having Tencent as a partner helps position Tesla to launch the Model 3 in China. Tencent is one of the superpowers in China along with Baidu and Alibaba, and they clearly have a lot of backing from the government.”

Musk has referred to Tencent’s CEO as an adviser and mentor.

In 2016, more than 15% of Tesla’s revenues came from China. Tesla made more than $1 billion in China last year. This signifies the potential that China will become Tesla’s largest market.

Tesla has stores in Beijing, Shanghai and Guangzhou and is expanding the places where superchargers can be available such as hotels, shopping centers and restaurants.

Brian Johnson, a Barclays auto analyst, said, “Tencent’s passive stake is not only a vote of confidence in Elon Musk and the future of EVs, but also may help in accessing the Chinese market.”

Tencent started in 1998 and is known for its messaging behemoth, WeChat. Tencent has also invested in Nio, which is an electric vehicle startup. Tencent also has investments in NextEV , Didi Chuxing, and Future Mobility.

David Chao, co-founder of venture capital firm DCM, said, “Tencent’s philosophy is to just invest in the best companies in the world. Telsa and Tencent could create WeChat fan pages and communities to boost the company’s brand in China and integrate the app into Tesla cars. There are so many connections. It makes a lot of sense.”

Tesla produces the Model S sedan and the Model X sport utility vehicle. According to JL Warren Capital, Tesla exported 1356 vehicles to China in January and February of 2017.

Tesla’s Model 3 was unveiled last year in March during a late-night party in Los Angeles. Around 373,000 Model 3 cars were pre-ordered then.

March 30, 2017

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U.S. Home Sales Surge to 10 Month High

There are signs of robust demand for the U.S. housing market. Contracts to buy of previously owned U.S. homes has jumped to a 10-month high for the month of February. This is a good signal for spring which is historically the busiest season for the real estate market.

The National Association of Realtors said that based on the Pending Home Sales Index, it had increased 5.5% to 112.3. This is the highest figure since April 2016. This reflects the minimal impact from the current landscape of higher mortgage rates and higher home prices.

Lawrence Yun, NAR chief economist, said, “Buyers came back in force last month as a modest, seasonal uptick in listings was enough to fuel an increase in contract signings throughout the country.” The stock market’s continued rise and steady hiring in most markets is spurring significant interest in buying, as well as the expectation from some households that delaying their home search may mean paying higher interest rates later this year. Last month being the warmest February in decades also played a role in kick-starting prospective buyers’ house hunt.”

The forecasted existing-homes sales this year is around 5.57 million homes. This is an increase of 2.3% from last year. Also, the forecasted national median existing-home price for 2017 is expected to increase by 4%.

In the Northeast, pending home sales increased by 3.4% while in the Midwest it increased by 11.4%. In the South, it was up by 4.3% while in the West, it increased by 3.1%.

However, Yun said that this pending homes sales surge might not be sustainable as supply is not able to keep up with demand, particularly entry-level homes. Yun said, “The homes most buyers are in the market for are unfortunately the most difficult to find and ultimately buy. Affordability is not improving because home prices in some areas are still outpacing incomes by three times or more because of tight supply. How much new and existing inventory there is on the market this spring will determine if sales can reach their full potential and finally start reversing the nation’s low homeownership rate.”

A strong labor market is boosting demand for housing as the U.S. economy nears full employment and the labor market being able to create wage increases. However, supply constraints are pushing up home prices.

The current 30-year fixed mortgage rate is 4.23%. According to the Mortgage Bankers Association, applications for home purchase loans rose by 1.2% last week compared to the previous week.
Pending home sales last month has increased 2.6%, beating economists forecast of 2.4%.

The Atlanta Fed has a forecast of 1.0% GDP increase for the first quarter. The U.S. GDP increased by 1.9% in the final quarter of 2016.

The U.S. financial markets have not responded to this surge in pending home sales as they await further clues as to whether Fed will make more interest rate hikes for the remainder of 2017. Earlier this month, the Fed increased its benchmark overnight interest rate.

March 29, 2017

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Toshiba’s Westinghouse Files for Bankruptcy

Westinghouse Electric Co. has filed for Chapter 11 bankruptcy. This is due to cost overruns with it four nuclear reactors that are being constructed. This allows its parent company, Toshiba, to limit their financial losses.

This move will allow Westinghouse to decide whether it will continue the construction of the nuclear power projects for utility companies SCANA Corp and Southern Co.

Toshiba CEO Satoshi Tsunakawa said, “Toshiba concluded that a Chapter 11 filing was essential to rebuild Westinghouse.”

This filing for bankruptcy also ends the partnership between Westinghouse and Toshiba. In October 2006, Toshiba bought Westinghouse’s nuclear business for $5.4 billion and declared that that acquisition would lead to the dawn of a new era for nuclear energy. The backdrop then was high oil and gas prices. Also, there were movements to prevent global warming from worsening by capping carbon emissions.

However, the combination of Westinghouse and Toshiba has failed. Current Westinghouse-related liabilities has totaled to $9.8 billion as of December 2016. Toshiba has put its memory chip unit for sale to cover these losses. Toshiba is also forced to pull back from new nuclear projects that are currently being discussed in India and Britain.

This reorganization of Westinghouse will lead to complex negotiations between Toshiba, Westinghouse and the utility companies which are its main creditors. The deal will also bring into the picture the government loan guarantees by the U.S. government to help fund the nuclear reactors.

Westinghouse has already secured $800 million in financial assistance from Apollo Investment Corp for this period of reorganization.

Toshiba wants to find a buyer for Westinghouse, but there has been a scarce response to this. Two possible buyers would be Korea Electric Power Co., and Chinese nuclear construction company, KEPCO.

Jeffrey Merrifield, a former member of the Nuclear Regulatory Commission, said, “There is much value in that design going forward, and a lot of the challenges are being dealt with right now.” Merrifield said that there might be coalitions of U.S. companies that might want to purchase certain components of Westinghouse, which are the parts that design the reactor parts.

SCANA said that it is considering abandoning the project which is already a third complete.

Stan Wise, head of Georgia’s Public Service Commission said that the Southern Co’s nuclear project will likely be abandoned, which is now 36% complete.

Wise said, “There is a reason Westinghouse is exiting the process and bankrupt. Something told them the pain for them can only get worse. I hope there is a way for this process and contract to continue.”

20% of U.S. electricity is derived from nuclear energy. But it’s nuclear reactors are old with an average age of 35. Dan Aschenback, a senior vice president at Moody’s, said, “As these units get decommissioned, to stay at that percentage you need more units. But you can’t get there if you cannot construct it.”

Westinghouse said that their operations in Asia, Europe, Africa and Middle East will not be affected by this bankruptcy filing.

March 28, 2017

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