- Hyzon is a recent SPAC merger of a heavy-duty fuel cell vehicle company. It smartly leverages its asset-light model to increase production fast.
- The company is reasonably valued based on its projections. This leaves plenty of upside for patient investors. It still has to prove itself on execution.
- Blue Orca Capital wrote an extensive short report about Hyzon. The short report doesn't attack Hyzon's technology.
- This idea was discussed in more depth with members of my private investing community, Green Growth Stocks. Learn More »
Hyzon (NASDAQ:HYZN) builds hydrogen-powered electric vehicles for commercial customers. It powers the vehicles with PEM fuel cell stacks that convert hydrogen into electricity. The fuel cell system has already been deployed on the road in ~500 vehicles. It works with third-party OEMs to deploy its current solutions. The company also designs its SuperH2Truck which it expects in 2025.
Hyzon was recently the target of a short report which I address in the second part of this article. The company just posted its response as well.
Chicken And Egg Problem For Hydrogen Solved
Cars, buses, and trucks fueled with hydrogen have one typical problem. There are no or very few refueling stations. This makes fuel cell vehicles impracticable and only usable in certain areas. Without more hydrogen vehicles, it remains unviable to build more refueling stations and vice versa.
Hyzon has a solution for this "chicken and egg" problem. It proposes its solutions as back to base vehicles. These are vehicles that just operate certain routes or areas. They start and end their day at the same point where a refueling center is available. It has a joint venture with Raven SR to provide the hydrogen locally at a hydrogen production hub.
By solving this problem, the company buys time to introduce its products. It can then extend its reach to freight hauling when more hydrogen becomes available. Others' expansion into hydrogen transportation could benefit the whole sector as more refueling stations become available.
Hyzon offers mostly green hydrogen but also grey hydrogen to lower the cost. It will have to switch to green only to make the zero-carbon theory true as grey hydrogen from steam methane reforming is very polluting.
Asset-Light Production Process
Hyzon leverages its knowledge smartly with others. It uses existing technologies like chassis and motors from manufacturing suppliers and adds its fuel cell technology.
Source: July Investor Presentation
This makes it easy for the company to scale up. It only has to increase its fuel cell production capacities. The company sounds confident of its ability to do so on the earnings call.
It's also convenient for customers. They can buy the models they're used to and get them electrified and powered on hydrogen.
Competitive With Diesel
This is an important factor for companies to switch to Hyzon trucks. In the end, it's economics that drives purchase decisions. Hyzon claims that the TCO (total cost of ownership) is already on par with diesel. Subsidies for hydrogen-powered vehicles make the trucks more attractive than diesel. The purchase costs are significantly higher, this is earned back by lower fueling costs and lower service and maintenance costs.
Hyzon also mentioned that the driver experience is better due to less noise and superior acceleration. The heavy trucks are safer and easier to drive.
Balance Sheet: Enough Cash
Hyzon has more than $500 million in cash on hand after the merger. It had a net loss of $9.4M in the second quarter and $13M over the first half-year. The management stated costs were significantly below the internal plan. On a cash flow level, it burned $28.5M over the first six months including the capital expenditures.
We intend to continue this tradition and we expect to reach free cash flow by 2024 without needing to sell additional equity.
Mark Gordon on the earnings call 8/11/2021
The negative cash flow will probably increase as the company further increases its output. In the business plan (look below), the company already expects a better EBITDA level in 2022. The asset-light model could lead to a fast increase in revenues.
The current market capitalization of Hyzon is $1.56B based on 246.99M shares outstanding. There is dilution possible from outstanding warrants (21.9M) and earnout shares which are awarded at $18 (9M), $20 (9M), and $35 (5.25M). This could represent about 20% dilution that isn't included in the current market cap. This dilution would only happen at higher share prices. I'm not taking the dilution into account in the following table.
These are Hyzon's projections. They look very positive. The current order flow supports these projections. The company doesn't expect a big change in gross margins so I believe these projections are achievable. I added the PS ratio. I used P/EBITDA instead of EV/EBITDA. EV takes cash or debt into account. I expect that the current cash position of Hyzon will be invested. Hyzon may take on debt as the company matures and shows positive EBITDA but it shouldn't be necessary to support the current plan.
Hyzon Is Ahead Of Hydrogen Competition
Hyzon didn't attract attention like Nikola (NKLA) when it came to the market. This is surprising if you look at the company's offering, which is more complete than Nikola's. It has an advantage to Nikola in my opinion. Its parent company already delivered 500 fuel cell vehicles. Hyzon will deliver 85 vehicles this year of which some are operating already.
Source: July Investor Presentation
Hyzon probably comes the closest to Nikola as all other competitors have much larger businesses than fuel cell vehicles. Nikola has a much larger cash burn and doesn't have any vehicles on the road yet. The much-hyped company is still recovering from the founder Trevor Milton's legal troubles. Nikola probably will need to raise more cash by selling additional shares. Hyzon aims to continue with the current cash position.
Other competition on fuel cells from Nikola, Hyundai (OTCPK:HYMTF, OTCPK:HYMLF), Ballard Power Systems (BLDP), PowerCell (OTCPK:PCELF), and Plug Power (PLUG) looks less threatening. Hyzon has the most power-dense fuel cells. More fuel cell vehicles also support more refueling stations which could lift the whole sector.
Management addressed supply chain issues during the latest earnings call. It has all the components for its deliveries in 2021 so it's well prepared. The scale-up of production can run into issues and go slower than expected. This would delay the business plan.
The use of grey hydrogen is a risk as well. This is up to the customer but undermines the zero-emissions selling point.
There aren't many details about the SuperH2Truck yet.
Competition for electrified trucks will increase. Tesla (TSLA) will come with its semi. This will probably have a lower cost of ownership as charging a battery is more efficient than converting electricity to hydrogen. It's thus cheaper to charge. The big advantage of fuel cells should be the refueling time which is comparable to diesel.
Part 2: Blue Orca Capital Short Report
This is an update about the short report about Hyzon Motors (HYZN) from Blue Orca Capital. I'll address their claims and believe there are inaccuracies in the short report. I'm sure they did good due diligence but focused on the possible negatives. They may be right. They disclaim they are short-sellers and position their views that way. I'm long on Hyzon so I might be biased as well. I do try to keep an open mind and would sell if I believed the company made up sales.
Before I address their claims. I want to talk about what they don't target. It's not about the viability of the technology. The fuel cells Hyzon provides work and aren't disputed by Blue Orca. Hyzon has trucks on the road and is producing more trucks as I write this. My first article goes deeper into the bull case for Hyzon.
Largest Customer Concerns
1. Hyzon's Largest Customer is a Fake-Looking Chinese Shell Entity Formed 3 Days Before Deal Announced.
It talks about one of the latest announcements of Hyzon. It's an MoU (memorandum of understanding) with Shanghai Hydrogen HongYun Automotive to order 100 vehicles in 2021 and 400 in 2022. An MoU is non-binding and can be withdrawn. It's often the first step towards a contract or order. These announcements don't carry that much value but are signs that the company makes progress. Many emerging companies announce these MoUs and make a second announcement when it turns into an actual order.
Blue Orca Capital specifically targets the Chinese company that's just been created. It could be an empty shell. This could mean two things: Hyzon purposely fabricates a large MoU or it doesn't do any due diligence on its customers. The first would be dramatic as it would mean the company commits fraud. The second would be bad as fake orders are damaging. If it's not an empty shell, then it may represent what Hyzon tells us: a possible large order from a Chinese company. It's not a certain order as it's just an MoU.
Next Largest Customer Concerns
2. Channel Checks Reveal Next Largest Customer Not Really a Customer.
Blue Orca Capital claims that Hiringa isn't a real customer. Hiringa's order is an important part of the business plan in 2021. Hyzon expects to deliver 20 out of 85 vehicles to Hiringa. This is confirmed in the latest investor presentation. Hyzon also confirmed its 2021 outlook in August in the earnings release and earnings call. This order was very specific in the press release that Hyzon and Hiringa released in February:
Hyzon Motors Inc. ("Hyzon") and New Zealand's Hiringa Energy ("Hiringa") are pleased to announce the two companies have signed a vehicle supply agreement, with Hyzon set to build and supply Hiringa with the first 20 zero emission Heavy Goods Vehicles this year.
According to Blue Orca, Hiringa only expects 4 trucks, which it will validate in 2022. Neither Hiringa nor Hyzon officially responded to this yet.
It also mentions the possibility of 1500 FCEV trucks from Hyzon on the road in New Zealand by 2026. As I read the release, these trucks aren't all going to be purchased by Hiringa. Hiringa wants to build the infrastructure for these trucks. These are projections and should be treated as such.
Fake Big-Name Customers
3. Phantom Big-Name Customers Suggest Overstated Orders and Financial Projections
Hyzon included well-known companies as potential customers in its initial slide decks and removed them later on. Coca-Cola (KO), Heineken (OTCQX:HEINY, OTCQX:HINKF), and Ikea were in initial presentations. It now discloses potential contracts more obscure with just a description of the business. This could mean some of these customers are still in the running for contracts. These are probably MoUs just like with Shanghai Hydrogen HongYun Automotive, which aren't valuable to announce yet.
SoCalGas is also one of the companies that disappeared from its investor presentations. Hyzon could announce a small order from SoCalGas on September, 1. So I believe the disappearance of big-name customers doesn't mean much.
Source: Hyzon Investor Presentation
Repackaging Of Horizon
4. Hyzon is Just a Repackaging of Its Chinese Parent Company, a 17-year-old Business Recently Valued as a Microcap.
This is a very confusing claim to me. Horizon is based in Singapore and still exists. Hyzon has to pay to use the IP of Horizon. It's in the latest quarterly sec filing. I noticed earlier that Horizon is the parent company of Hyzon. It references it as the parent already sold fuel cell vehicles. It doesn't reference the Chinese listing.
I don't see Hyzon as a repackaging. It's formed in 2020 as a subsidiary of Horizon to commercialize fuel cell-powered vehicles. It formed a joint-venture with Holthausen Clean Energy later that year to commercialize these vehicles in Europe. It makes sense that Horizon did this in a new company as it would need additional capital from external investors. Afterward, the deal with the SPAC came.
Margin Projections Are A Fantasy
5. Hyzon's Projections are Fantasy: Parent's Financials and Former Executives Suggest Hyzon May Earn 5-10% Gross Margins, at Best.
Blue Orca claims the projected ~32% gross margin is impossible. It makes the comparison to automotive peers, with Tesla (TSLA) as a best-in-class example. It uses Tesla's gross margin as a company and not just the automotive business. This is a big difference as Tesla has a gross margin of ~26% on just the automotive business. The other departments of Tesla reduce the overall gross margin to ~22%.
I also looked at Ballard Power Systems' (BLDP) gross margin. It achieved about ~20% recently but had around 30% gross margin in 2017 and 2018. Ballard is also purely a fuel cell provider. Hyzon might get better margins as it brands the trucks as its own despite using OEM chassis and components. Hyzon also has a best-in-class fuel cell that generates high power on a relatively small scale.
Will Hyzon achieve a 32% gross margin right away? We'll know this very soon after a couple of quarters. Hyzon did hint on the earnings call that demand is good and that they can get better prices than expected. Will it still achieve this in a couple of years? It's possible.
6. Two CTO Resignations in 15 Months.
In its short existence, Hyzon already had three CTO's. Hyzon's first CTO, Ian Thompson, left five months after the company was founded. The circumstances are unclear as Hyzon wasn't public and didn't communicate about it. Gary Robb, the co-founder, stepped in for 15 months until September. Shinichi Hirano replaced him as the CTO. Mr. Hirano brings a lot of experience as he was the fuel cell expert at Ford (F). It seems he was specifically attracted to this job earlier as he joined Hyzon in May 2021 as Hyzon's chief engineer.
Gary Robb officially retired but still runs a consulting service according to his LinkedIn page. It's mentioned that he will continue to do consulting for Hyzon for 24 months.
I don't think this completely refutes the short report but it gives context and shows how Blue Orca presents a worst-case scenario. It takes the MoUs out of context. These aren't definitive orders. The same happens with the big-name customers. Hyzon removed the names from the presentations but is still in talks with them as shown by the SoCalGas order. Margin projections are tough to predict. Hyzon sounds very confident on the latest earnings call about its margins.
Hyzon comes from a SPAC which always brings increased volatility and uncertainty. It hasn't generated any revenues yet which leaves a lot open for speculation. These kinds of growth stocks in an early phase come with high risk. I see significant upside if Hyzon achieves its targets.
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