Ballard Power: From Bad To Worse

May 05, 2021 6:43 AM ETBallard Power Systems Inc. (BLDP), BLDP:CA45 Comments

Summary

Company misses Q1 consensus expectations by a wide margin with backlog down for the fifth quarter in a row. Another equity raise increased liquidity to a whopping $1.27 billion.
Chinese market remains stalled as participants await further clarification on the new government subsidy policy framework (which is unlikely to increase near-term FCEV adoption anyway).
On the call, management warned that commercial sales for its truck, rail, and marine segments are still several years out.
Expect analysts to reduce estimates and price targets across the board as current consensus expectations require material downside revisions.
Given the very weak near- and medium-term outlook, investors should abstain from chasing the shares after Tuesday's selloff and rather wait for the Chinese overhang to lift.

Photo by audioundwerbung/iStock via Getty Images

Note: I have covered Ballard Power Systems (NASDAQ:BLDP) previously, so investors should view this as an update to my earlier articles on the company.

On Tuesday, investors started to lose patience with leading Canadian fuel cell systems developer Ballard Power Systems ("Ballard" or "Ballard Power") after the company reported another set of disappointing quarterly results with revenues well below expectations, very weak gross margins and poor order intake.

Total order backlog at the end of Q1 was $112.0 million, down 34% year-over-year with $73.1 million scheduled to be recognized over the next twelve months.

The large revenue miss was mostly due to two main factors:

A further reduction in revenues derived from its expiring engineering contract with AUDI.
No material product revenues were recognized under the supply agreement with the company's new Chinese joint venture, Weichai Ballard Hy-Energy Technologies Co. ("the Weichai JV").

As already discussed by me in March, the Chinese government's new subsidy policy framework represents a major setback for the all-important Weichai-JV as the focus has shifted from subsidizing vehicle sales to incentivizing breakthroughs in key core technologies and industrialization of basic materials to improve economics across the FCEV (fuel cell electric vehicle) entire value chain.

Source: IHS Markit

While this more holistic approach might very well benefit China's hydrogen and fuel cell industry over time, it is unlikely to have any meaningful near-term impact on domestic FCEV adoption.

Even worse, the industry is still awaiting further clarification on the new policy framework but with no less than five government agencies being involved in the city cluster selection process, I wouldn't bet on a near-term announcement.

The policy setback has actually resulted in the Weichai JV not having placed an order with Ballard Power since Q4/2019 as the joint venture is still sitting on approximately $47 million in unsold product inventory.

It is becoming increasingly likely that Ballard won't be able to ship additional MEAs (membrane electrode assemblies) to the Weichai JV this year thus resulting in virtually zero product revenue from the joint venture as compared to $23.5 million in 2020 (assuming no recognition of previously deferred revenue).

In addition, MEA supply to the company's legacy joint venture in China Guangdong Synergy Ballard Hydrogen Power Co. ("the Synergy JV") which accounted for 8.4 million of FY2020 revenues has also been impacted by the new policy framework with zero shipments in Q1.

On the conference call, management encountered some tough questions as analysts finally demanded more insights into the company's timelines for commercial sales into the promising truck and rail markets.

Unfortunately, the answers provided weren't exactly suited to instill confidence in the company's near-term business prospects as these markets remain in their very early innings and will be largely limited to pilot projects for the foreseeable future.

Not even the decade-old fuel cell bus business is getting real traction with the major European projects JIVE and JIVE 2 already being far behind schedule before COVID-19 even hit and China hindered by the above discussed policy issues.

Without product sales to the Weichai JV, the company is basically back to what it has been for most of its existence, a provider of engineering solutions and custom-made fuel cell systems for all kinds of pilot projects with no near-term prospects of achieving commercial scale.

Fortunately, management seized the opportunity provided by the recent ESG hype and raised an additional $527.3 million in a recent bought deal offering thus increasing the company's cash position to a whopping $1.27 billion at the end of Q1. At the current cash burn rate of $20-$25 million per quarter, Ballard Power still has more than a decade of runway.

Hopefully, the company won't waste its valuable liquidity on potential acquisitions but rather use its expensive stock as the main currency given still elevated industry valuations.

Bottom Line:

While management continues to tout the company's growing sales pipeline and "unprecedented customer engagement across all markets", the backlog has been down for the fifth quarter in a row now and with the further reduction in revenues derived from AUDI and ongoing policy issues in China, Ballard Power will likely miss current analyst expectations for almost 20% year-over-year growth by a mile.

In fact, I wouldn't be surprised to see revenues actually being down 20% from last year's $103.9 million number given the painfully low 12-month order backlog of just $73.1 million. On the call, management basically admitted to the issue, so expect analysts to reduce estimates and price targets across the board.

While management claimed a "step change in the last 30 days" with regards to order intake and stated its expectations for "very high levels of conversion throughout 2021 and 2022", it's difficult to envision anything else than some additional bus module orders and more pilot projects at this point. Also, keep in mind that it usually takes a couple of quarters for orders to be delivered.

With analysts currently expecting FY2022 revenues to grow by 45% to $175.3 million (or more than 100% from my FY2021 revenue estimate of $80 million), another miss appears inevitable at this point.

While Ballard Power has sufficient liquidity for the next couple of years, near- and even medium-term business prospects appear far weaker than previously anticipated by market participants.

Given these issues, investors should abstain from chasing the shares after the recent selloff and rather wait for the Chinese overhang to lift.

This article was written by

Henrik Alex

16.82K Followers

I am mostly a trader engaging in both long and short bets intraday and occasionally over the short- to medium term. My historical focus has been mostly on tech stocks but over the past couple of years I have also started broad coverage of the offshore drilling and supply industry as well as the shipping industry in general (tankers, containers, drybulk). In addition, I am having a close eye on the still nascent fuel cell industry.

I am located in Germany and have worked quite some time as an auditor for PricewaterhouseCoopers before becoming a daytrader almost 20 years ago. During this time, I managed to successfully maneuver the burst of the dotcom bubble and the aftermath of the world trade center attacks as well as the subprime crisis.

Despite not being a native speaker, I always try to deliver high quality research to followers and the entire Seeking Alpha community.

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