What happened?

Michael Burry, the prototype of the movie "Big short" and famous in World War I for shorting subprime loans, may be shorting Tesla, Inc..

As of the end of the first quarter, the "big short" held a total of 800100 Tesla, Inc. put options worth $534.4 million, according to form 13F submitted by Burry's Scion Asset Management on May 17.

Regulatory credits become the focus again

The "big short" shorted Tesla, Inc. 's position report, once again putting the regulatory points issue in the spotlight.

In fact, Burry once said on Twitter that Tesla, Inc. 's reliance on regulatory points to generate profits was an obstacle to the company's long-term prospects, but the tweets were later deleted.

According to Tesla, Inc. 's fourth-quarter results, the company's net profit of $270 million was mainly achieved by selling $401 million worth of regulatory points to other carmakers, compared with $518 million in sales of regulatory points reported in the first quarter of this year.

Tesla, Inc. 's operating income in the first quarter was $594 million, a record high, up from $401 million in the fourth quarter of last year, but regulatory points accounted for $518 million in sales.

This means that the income continues to be the key driving force for Tesla, Inc. 's profits, and the company will lose money simply selling cars. The first quarter of this year is not only Tesla, Inc. 's seventh consecutive quarterly profit, but also the sixth consecutive quarter without regulatory points sales can not make a profit.

For the whole of 2020, Tesla, Inc. generated nearly $1.6 billion from the sale of zero-emission credits, triple the $594 million earned in 2019. Pessimists of Tesla, Inc. believe that as more and more traditional carmakers move into electric cars, it will reduce the demand for Tesla, Inc. 's excess regulatory points, which in turn will affect its profits.

So the question is, what are regulatory points, and how do regulatory points help Tesla, Inc. make a profit?

What are regulatory credits?

In an effort to reduce carbon emissions, governments around the world have introduced incentives to encourage carmakers to develop electric or extremely low-carbon vehicles, including granting regulatory credits to carmakers that make and sell low-carbon vehicles.

At present, the emission requirements vary all over the world, some require a certain proportion of zero-emission vehicles according to the number of gasoline vehicles sold, and some require a certain proportion of zero emission points according to the emissions of sold vehicles. Penalties for substandard car companies vary, with some fining and some shutting down factories.

In the United States, for example, 13 states, including California, have rules around regulatory points that require automakers to produce a certain number of so-called zero-emission cars based on total car sales in the state.

Carmakers that produce zero-emission cars will earn a certain number of regulatory points based on factors such as the endurance of their vehicles-more regulatory points for zero-emission vehicles with longer endurance. And if car companies fail to meet regulatory goals, they can buy points from companies with excess regulatory points.

Since Tesla, Inc. only sells electric cars that belong to the zero-emission category, Tesla, Inc. always has extra regulatory points that can be sold at a 100 per cent profit margin.

Similar regulations exist not only in the United States, but also in the European Union and China. China's regulatory credit requirements for car companies have been advancing steadily since 2019. FAW-Volkswagen, Volkswagen's joint venture in China, has agreed to buy regulatory points from Tesla, Inc. to meet increasingly stringent environmental targets, Reuters reported last month. FAW-Volkswagen declined to comment on the report, but said, "the company's strategic goal is to meet compliance requirements in the Chinese market on its own, but will also buy points if necessary."

In order to encourage the consumption of new energy vehicles and support the research and development and market expansion of new energy vehicles, the European Union also began to establish a carbon tax system for the automobile industry last year. The EU requires that the average carbon dioxide emissions of new passenger vehicles in the EU should not exceed 95 grams per kilometer from 2021, and will be reduced by 15% and 37.5% respectively by 2025 and 2030.

Car companies that exceed the standard of 95 grams per kilometre may be forced to pay hefty fines, while the EU will issue "super incentives" for vehicles that emit less than 50 grams of carbon dioxide per kilometre.

Tesla, Inc. 's Supervision score "Business Classic"

Because Tesla, Inc. can earn a large number of regulatory points for free, they can basically be sold at a profit margin of 100 per cent. Supervision of points sales has become the main reason for Tesla, Inc. to make a profit in recent quarters.

Last September, Burry posted bearish comments on Twitter, posting a chart comparing Tesla, Inc. 's valuation with its competitors, showing that Tesla, Inc. 's price-to-sales ratio was 18, while the industry average was only .35.

"Global auto sales (excluding Tesla, Inc.) are $2.3 trillion, $100 billion EBIT (earnings before interest and tax), and a market capitalization of $807 billion," he said in a tweet. Tesla, Inc. has sales of $25 billion (without EBIT) and a market capitalization of $438 billion. Tesla, Inc. 's regulatory points income is a melting ice cube. "

And Burry's concerns are echoed by many in the industry. Asked about his outlook for regulating points sales in 2021, Zachary Kirkhorn, Tesla, Inc. 's chief financial officer, said on a conference call after Tesla, Inc. released his fourth-quarter results that it is difficult to predict, but in the long run, regulating points sales will not be an important part of Tesla, Inc. 's business. "We will not plan our business around this."

Take Stellantis, the world's fourth-largest car company formed by the merger of France's PSA Group and Italy's Fiat Chrysler, which bought about 2 billion euros ($2.43 billion) of EU and US green points from Tesla, Inc. between 2019 and 2021.

But Stellantis CEO said in a recent interview that the company will be able to meet its carbon emissions targets this year. This also means that it no longer needs to buy regulatory points from auto companies such as Tesla, Inc., and Tesla, Inc. 's trend of losing key customers of regulatory points will be inevitable.