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EHang's IPO Is Coming Too Soon

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About: EHang Holdings (EH)
by: Gary Templar
Gary Templar
Growth, IPOs, tech, biotech
Summary

EHang Holdings, a Chinese company aiming to develop autonomous aerial taxis, has released preliminary plans for an IPO.

EHang has only sold a few autonomous vehicles and will face intense competition in this lucrative market from larger competitors.

EHang’s revenue declined in 2019 compared to 2018, the company is unprofitable, and it only has a few clients so far.

Investors should wait for more information, but this company is likely to not be a valuable investment.

Chinese vehicle company EHang (NASDAQ:EH) has released plans for a $100 million IPO. The $100 million figure is almost certainly a placeholder figure, and Reuters reported in March that the company was then preparing to raise $400 to $500 million. Major underwriters for this IPO include Morgan Stanley and Credit Suisse.

EHang has made waves with its plans to launch the first autonomous aerial vehicles (AAVs) used as a taxi service. But while the prospect of investing in the first flying car may be tantalizing, this remains a highly immature market and EHang faces some troubling questions regarding its product and finances. These questions make me wonder whether this will ever be a valuable investment.

Are Flying Taxis the Future?

In 2019, flying taxis are no longer an absurd forex academy pipe dream. EHang has been conducting AAV demonstration flights throughout 2019, with CNBC reporting on one of these flights in April. EHang states in its SEC report that its EHang 216 has a cruising speed of 100 km/h, is designed to fly for up to 35 km with a maximum payload of 220 kg and needs about two hours to charge. The 216 is designed to carry up to two passengers.

The market opportunity for such a vehicle barely needs to be stated. EHang received approval in January from the Chinese government to launch a commercial air taxi service in its native town of Guangzhou that would help relieve traffic congestion. EHang lists logistics and smart city management solutions as other market opportunities. EHang drones can deliver packages through the air or could manage traffic and watch out for natural disasters such as forest fires. Lung Biotechnologies is a major investor in EHang, as the biotech company wants to use its drones to transport life-saving organs.

But while the market for AAV or even an unmanned drone that can transport goods would be immense, EHang has more words and promises than results. The company states that it has delivered just 38 passenger-grade AAVs, with an additional 28 unfulfilled orders.

Furthermore, such a lucrative market invites competition from much larger and more established companies. Boeing (NYSE:BA) completed a flight with an autonomous passenger air vehicle in January, and Airbus has been developing an air taxi service as well. These companies have more experience with developing aerial vehicles, and their larger size means that they are more inured against the effects of safety failure. EHang admits that a “high-profile accident” could seriously harm the reputation of AAVs even if that accident is caused by a different company.

A Major Financial Shift

In examining EHang’s finances, investors must understand that the company has undergone a radical shift in priorities over the past year. For EHang’s talk of AAVs and aerial mobility, the company only began making money through AAVs in 2019. Before then, the bulk of EHang’s revenue came from what the company calls “smart city management solutions” and “aerial media solutions.” This included using drones to make light shows over Chinese cities and developing a command and control system to help navigate traffic.

These projects, in EHang’s words, were useful in creating the infrastructure to support its AAV program. But EHang has abandoned these projects in favor of drones. Revenue from these two sectors fell from RMB35.2 million in the first half of 2018 to RMB 7.9 million in the first half of 2019. Revenue from AAV exploded during that same time period, but the fact remains that EHang’s total revenue declined from RMB38 million to RMB32.3 million ($4.7 million) over the first half of 2019.

EHang will argue that its AAV mobility revenue growth is more indicative of the company’s future, but it needs a longer history to prove this. This is especially the case since the company admits that 45% of its 2019 1H revenue came from just one customer and two customers made up 66% of its accounts receivable balance. This may improve as EHang develops its AAV program and finds more customers but is by no means certain.

Other financial indicators are problematic as well. EHang is losing money quickly, reporting a net loss of RMB37.6 million ($5.4 million) in the 2019 1H and a mostly negative cash flow history. EHang has $8.7 million cash on hand balanced against $9.8 million in total liabilities.

Final Thoughts

As EHang has not announced how much it plans to raise nor its planned valuation, we will have to wait to firmly state whether investors should be interested in this IPO or not. Any valuation will be made even more difficult by the fact that the AAV industry is new, and so there are not many companies to make a comparison with.

But if we assume that EHang is planning to raise at least $400 million, we can presume that this company will be chasing a valuation from $1 to $1.5 billion at a minimum. Such a valuation would be absurd. We have no idea how EHang will grow in the near future given its lack of AAV revenue history. The company is unprofitable and will face competition from larger more established competitors with a minimal moat. And a valuation well over $1 billion is difficult to justify for a company with just $4.7 million in revenue over the 2019 1H.

Watch and see if EHang does slash its expected valuation. But if it does not, do not be allured by the possibility of investing in the next flying taxi and avoid this company altogether.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.