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Source: Tesla Inc. Source: Tesla Inc.

Tesla Inc.’s manufacturing push into China, the world’s largest market for both electric vehicles and luxury cars, may boost the U.S. automaker’s profitability more than investors expect, according to Morgan Stanley.

Shareholders have yet to appreciate that lower carmaking costs in China, where Tesla is opening an auto plant, represent “a significant needle mover,” Morgan Stanley analysts including Adam Jonas wrote Wednesday in a report titled “Shanghai Giga = Porsche-Like Margins?”

Outlays on labor alone will amount to just a tenth of Tesla’s workforce spending in its home state of California, helping operations in China generate gross margins in the low- to mid-30% range, Jonas said. That compares with gross margins of 22.8% for Tesla in the third quarter and 28% for Volkswagen AG’s Porsche luxury nameplate in 2018.

“Investors may not realize how expensive it is to make cars in Silicon Valley until Tesla ramps the Shanghai Gigafactory,” Jonas said. The site could become one of the global industry’s more profitable auto plants, and a locally built Model 3 could drive earnings and cash flow enough to bring Tesla close to Morgan Stanley’s $440-a-share bull-case valuation.

Tesla this week unveiled its first vehicles built at the Shanghai plant, and a regulator Wednesday granted permission for the site to start mass production. The factory, Tesla’s first outside the U.S., is a crucial test of Chief Executive Officer Elon Musk’s bid to prove his company can sustain profitability as he bets on Chinese EV demand.

The developments come as Musk also announced Tesla will build a battery and car plant near Berlin and set up a design center in the German capital. Analysts at Oddo-BHF Group said in a report Wednesday that the move “is bound to be a major challenge for Tesla,” because labor and energy costs for carmaking in Germany are among the highest worldwide.

READ: Musk Invades Germany’s Automotive Heartland With New Factory

Jonas reiterated his hold rating and $250 price target for Tesla, noting the potential for more local competition in China in the coming years and a wide risk-reward spread for the stock.

— With assistance by Catherine Larkin