Aug. SolarCity - the Best Idea to Invest the Future of Solar Power. Black Puma Research

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1 Aug 17 SolarCity - the Best Idea to Invest the Future of Solar Power Black Puma Research BLACKPUMAFUND@GMAIL.COM

2 Investment Summary Solar City is a pure player in roof-top solar market. The company sells renewable energy to customers at prices below utility rates (~$0.15KWh vs. ~$0.22KWh). Long-term solar lease and power purchase agreements create high-quality recurring customer payments and position SCTY to provide the growing base of customers with energy-related products and services. We believe Solar City is well positioned in the roof-top business with ~30% market share in the US (exceeded the next 9 competitors combined in 2013). We like the company and view the stock as undervalued based on DCF method. Discussion One Million Customer Target by Mid-2018 Implied 70% CAGR: We believe distribute solar is still very early-stage growth opportunity with 0.2% market penetration of SCTY s 15 markets today. In 2013, 12% of new U.S. generation capacity was distributed Solar (See Exhibit 1 for details). According to SEIA, U.S. PV Installations are expected to increase to 11GW in 2016 from 6.6GW in 2014 (Exhibit 2). With ~200,000 new single-family homes built per year on average in the 15 markets over the last five years outpacing annual new solar installations, market penetration is poised to remain low at 2.5%. In addition, Chairman Elon Musk viewed that the company will be installing tens of gigawatts of capacity annually in the future, compared with SCTY s guidance for ~525MWs of installations in FY2014, and vs. ~guidance of 6GWs in 2018, which provide huge upside opportunity for SCTY(See Exhibit 3 for details). We believe Mr. Musk s vision will provide a significant boost to the valuation of the stock and we like SCTY under his leadership. Exhibit 1: % of New U.S. Generating Capacity

3 Exhibit 2: U.S. PV Installation Forecast Source: GTM Research, SEIA Exhibit 3: Potential Cumulative Residential MW Deployed

4 SCTY to Acquire Silevo Enables the Company to Become an Integrated Name with Better Margins: SCTY announced on June 17 th that the company will acquire Silevo (the deal is expected to close by the end of August), a PV module maker for $200M (up to $350M) as a move to use their own panels for rooftop. We believe this push will help SCTY to become an integrated name with better margins, which is a great long-term set up for the stock. Manufacturing capacity is 32MWs right now but the company plans to build a 1GW plant in NY State near team, which is expected to fulfill SCTY s need by the end of 2016 (1GW of capacity). We do not expect the deal to impact SCTY near team since manufacturing capacity won t be complete until 2016, but longer-term costs will decline. With the Blended Impact of Silevo, SCTY s goal is to cut installation cost/w to $1.90/W by (Please see Exhibit 4 for detail). Sielvo s current cell efficiency is 21% (Target of 24%) compared with the average of the industry at 18% (Please see Exhibit 5 for details). Exhibit 4: Installation Cost/Watt Exhibit 5: Cell Efficiency When Compared to Equivalent Cost Structures

5 Long-term Contract already exceeding $3.3B: As of the end of Q2 2014, Estimated Nominal Contracted Payments remained at $3.3B as cumulative Energy Contracts booked rose to 128,933 at the end of Q2 from 100,609 at the end of Q1, which means by the end of 2018, the value of longterm contract will exceed $13B given 1M cumulative customers (Exhibit 6). For example, the nominal contracted payments for a 20-year lease with monthly payments of $200 and an upfront payment of $5,000 is $53,000. For a power purchase agreement, they multiply the contract price per kwh by the estimated annual energy output of the associated solar energy system to determine the nominal contracted payments. The upfront cash flow could be packaged and sold to third-party asset-backed investors, which means that asset-backed finance could lower cost of capital to less than 4% (Please see Exhibit 7 for details). Exhibit 6: Estimated Nominal Contracted Payments Exhibit 7: Securitization Sets New Low for Cost of Capital at 4.03%

6 Solar City is the market leader in the roof-top solar business with ~29% share of installations, and ~128,000 customers: According to GTM Research, Solar City installed 29% of the residential solar PV capacity in the US in 1Q 14, which increased from its 27% in 2013(Please see Exhibit 8 for details). Solar City s U.S. residential solar installation share exceeded the next 9 competitors combined. Vivint came in a distant second with a 9% market share, followed by Sungevity, Verengo and Solar Universe. MW deployed was up 102% to 107MW in Q2 with 90MW deployed for residential and 17MW deployed for commercial. The company expected to deploy MW additional in 2014 and MW in (Please see Exhibit9 for details). We believe competitive advantage will allow SCTY to continue to gain market share and to access to lowest-cost finance in the future. Exhibit 8: U.S Residential Solar Installation Market Share Exhibit 9: MW Deployed

7 Retained Value per Watt Should Increase in the Future: Solar City has a transparent cost structure. The three major cost components to run the business are installation, sales, and G&A (See Exhibit 10 for details). With continued economies of scale and the acquisition of Silevo, we expect cost continue to decline (Exhibit 11). As such, we expect long-term retained value per watt to increase to above $2 from $1.72 in Q Exhibit 10: A Transparent Cost Structure Exhibit 11: Cost Reduction Continue Ahead of Plan Revenue, Contracts Outlook and Valuation

8 Right now, over 90% of SCTY s revenue is from operating lease and the rest is from Solar Energy Systems. MW deployed is expected to up ~100% Y/Y from MW in 2014 to MW in As such, the Street expects revenues to increase to $443.37M in 2015 from $254.44M in 2014(Please see Exhibit 12 for details). SCTY has two revenue segments: Operating Lease and Solar Energy Systems. Operating Lease revenue is a combination of recurring revenue from existing customers and initial revenue from new deployments, which account for more than 90% of SCTY s revenue. Long-term GMs are expected to be above 50%. The company is not expected to post positive earnings in the foreseeable future because of aggressive expansion. As such, we believe the most accurate way to value to company is to use the net present value method. SCTY currently trades at a market cap of $7.0B, which is a discount to our target value of $99 if the company remains on track to achieve its gold of 1M customers and 6GW in deployments by Our $99 Target is based on retained value of ~$13B at 2018, which discounted at the WACC of 10% (Please see Exhibit 13). Exhibit 12: SCTY s Revenue and Earnings Outlook Q1 Q2 Q3E Q4E Q1E Q2E Q3E Q4E Q1E Q2E Q3E Q4E Revenue $63.55 $61.34 $61.76 $67.64 $75.03 $ $ $ $ $ $ $ Gross Margin 23.27% 36.37% 46% 41.79% 45.60% 50.18% 49.73% 46.65% Net Income ($75.22) ($88.48) ($95.40) ($104.78) ($99.08) ($92.60) ($101.98) ($119.83) Non-GAAP EPS ($0.82) ($0.96) ($1.11) ($1.21) ($1.23) ($1.08) ($1.15) ($1.40) ($1.47) ($1.12) ($0.88) ($1.12) Source: Thomson Reuters, Black Puma Research Exhibit 13: Retained Value and Target Price FY14E FY15E FY16E FY17E FY18E Cumulative Contracts 180, , , ,000 1,100,000 Retained Value $2,050,000 $3,400,000 $5,500,000 $8,100,000 $13,000,000 Present Value of Retained Value $2,050,000 $3,090,000 $4,545,000 $6,086,000 $8,879,200 Value Per Share $23 $35 $51 $68 $99 Source: Black Puma Research Risk to Valuations 1. Changes to regulations may significantly reduce demand for solar energy systems. 2. SCTY s business currently depends on the available of rebates, tax credits and other financial incentives. The federal government currently offers a 30% investment tax credit. The credit is due to adjust to 10% in 2017.

9 3. Increases in the cost of solar panels or tariffs on imported solar panels imposed by the U.S. government may aversively impact SCTY s business. 4. A material drop in the retail price of utility-generated electricity or electricity from other sources would harm our business, financial condition and results of operations. 5. Competition could impede achievement of company targets. 6. SolarCity may need to fund their working capital and the new fab in New York State through secondary offering near term. Appendix: Technical Look of SCTY Weekly Chart