Hyzon Motors: Bear Raid Looks Like It Missed Its Target
Summary
- HYZN stock still is down 30% from where it traded before Blue Orca Capital released a short report last week with allegations including fake orders, fake customers, and executive resignations.
- Hyzon's response on Tuesday seems to adequately address the core concerns, yet the market seems still skeptical.
- To be sure, Hyzon stock remains a high-risk play — yet it's difficult to see what, precisely, has changed over the last six trading sessions.
- As a result, there's an intriguing case for stepping in here.
Olemedia/E+ via Getty Images
Different investors have very different opinions about "activist shorts," who release negative reports about stocks in a bid to profit from short positions. But whatever one's stance on the ethics of the trade, recent history in the electric mobility space suggests investors should at least take those reports seriously. Trading in fuel-cell trucking play Hyzon Motors (NASDAQ:HYZN) (NASDAQ:HYZNW) stock over the past six sessions suggests the market has at least learned that lesson.
Hyzon stock has fallen 30% since its close on Monday, including a 28% drop on Sep. 28 when the report from Blue Orca Capital was released. The credibility earned by activist shorts in names like Nikola (NKLA), Workhorse Group (WKHS), and Lordstown Motors (RIDE) no doubt is a factor. So likely too is the general skepticism toward "de-SPAC" mergers like Hyzon, which merged with special purpose acquisition company Decarbonization Plus Acquisition Corporation in a deal that closed in July.
As an investor who's generally pro-short (and an occasional short myself), as well as a diehard SPAC cynic, my bias would be to take Blue Orca Capital's side of the debate. But a closer look suggests that at the least it's not quite that simple. The detailed response from Hyzon on Tuesday seems to address most (though not quite all) of the issues raised by Blue Orca, yet the HYZN stock price still is 30% lower and the company's enterprise value off some 40%. HYZNW warrants have been nearly halved.
In fact, I personally picked up some of those Hyzon warrants on Tuesday, in part as a trade and in part due to an intriguing, if admittedly high-risk, bull case for the truck manufacturer. That's an investment that still may well go sideways — but for reasons that stand apart from the argument Blue Orca is making.
The Pre-Short Bull Case for Hyzon Motors Stock
Hyzon is essentially a spin-off of Horizon Fuel Cell Technologies, a company based in Singapore that has worked on fuel cell efforts for close to two decades. Hyzon aims to use Horizon fuel cells (for now; the company has plans to eventually produce its own cells) to power a lineup of commercial vehicles.
It's a strategy that often gets compared to that of Nikola — but there are important differences. Hyzon has access to its own fuel cell technology (intellectual property is shared with Horizon); Nikola does not. Nikola focuses on Class 8 trucks (colloquially known as semis); Hyzon has a broader reach.
Nikola aimed for a total cost of ownership model that included the buildout of a hydrogen fueling network (a model that has not worked out yet); Hyzon is focusing on "back to base" route operators who generally have existing fuel sources or the near-term ability to add those sources to a single depot.
More broadly, Hyzon's plans seem far more measured than those of Nikola. Hyzon is focusing mostly on markets in Asia and Europe, given the lack of infrastructure in the U.S. and the country's geographic size. It's aiming to win over public sector customers, and with private clients beginning with so-called "seed" orders to prove viability. At a "fireside chat" in June, Hyzon chief executive officer Craig Knight admitted to "execution risk" with particular challenges 24 to 30 months out as the company neared an inflection point; it's impossible to imagine Nikola founder and former CEO Trevor Milton offering any such caution in public.
To be sure, Knight is correct: there is execution risk here, and that's just the beginning. Skeptics might paraphrase de Gaulle's famous (and likely apocryphal) quote about Brazil, and argue that fuel cells are the fuel of the future and they always will be. Battery-electric models are competing in the same markets, though Hyzon has pointed out that a battery can eat up 15% to 20% of a Class 8 truck's maximum weight. FCEV rivals include Hyundai, Toyota (TM), and many others; there's no guarantee Hyzon will win in its home markets or anywhere for that matter.
This is a startup, pure and simple. Much can go wrong; some no doubt will.
Still, the story that Hyzon is telling at least makes some sense. The company should have a "first mover advantage" in some of its markets, with first commercial deliveries due this year (a target reiterated in the Q2 earnings release in August). The company claims that Horizon's fuel cells lead the industry, based on third-party verification. It sees costs coming down sharply as production scales, as has been the case with solar and batteries. And, as noted at Hyzon's Analyst Day in April, FCEVs using "green" hydrogen (created using renewable energy) have far and away the lowest carbon intensity. In a category filled with a number of seeming pretenders, Hyzon at least looks like a contender.
Blue Orca Point #1: The "Fake-Looking Chinese Shell Entity"
Blue Orca, however, argued that Hyzon in fact is a pretender — perhaps literally. Its bearish thesis was based on six core points, worth going through in order.
The first is that Hyzon created a shell company in order to announce a big order — 100 units by the end of this year, 400 more next year — that could pump a Hyzon stock price that had fallen off the table after the merger close. The purported customer, Shanghai Hydrogen HongYun Automotive Co. Ltd., according to Chinese records was formed just three days before the order was announced.
In its response, Hyzon claimed that the company in fact was new — because it was created in response to a national pilot program for FCEVs that included Shanghai. Shanghai HongYun, according to the company, "will be able to leverage its existing relationships to enter into long-term logistics services agreements with end users" for Hyzon vehicles.
Admittedly, the response here feels a bit thin, leaving two obvious questions. The first is how Shanghai HongYun even has "existing relationships" when the firm is so new. Obviously, executives can have their own contacts, though a cross-check by Blue Orca suggests the business interests of the two Shanghai HongYun shareholders are quite small. The second is why these details weren't added to the Sep. 9 release.
Those questions certainly don't prove anything nefarious, given the way that business can be conducted in China, and particularly when the national government seems to involved in a program that is pushing broader interests. Hyzon did say the order was part of a "non-binding" memorandum of understanding, and investors at the least have three months to find out whether the 100-vehicle target for this year is met. At that point, it might be easier to provide a verdict on this point.
Blue Orca Point #2: Hiringa Is "Not Really A Customer"
Blue Orca's second point is that Hiringa, supposedly backing an order of 1,500 vehicles over the next five years, is not really a customer of Hyzon. Instead, as Blue Orca put it, it's a "channel partner" aiming to put Hyzon trucks in the hands of end users. Blue Orca interviewed a "senior Hiringa executive" who clarified the situation and said the company wouldn't take any deliveries until next year (and likely the second half of next year). That fact ostensibly puts Hyzon's 2021 guidance at risk.
On this point, the short seller seems incorrect. Knight discussed Hiringa in a late February fireside chat and repeatedly called the company a "partner," not a customer. The company's preliminary proxy statement in March cites a binding order for 20 trucks, with four trucks to be delivered in Q1 2022, with "aims to deploy up to 1,500" FCEVs by 2026. Blue Orca's claims largely line up with those facts (though commentary from Hiringa suggests the four-vehicle order may have slipped, which would not be a huge surprise).
The February press release from Hyzon about the agreement admittedly is more promotional and less clear on the partner/customer divide, but it's still exceedingly difficult to claim that Hyzon was dishonest, or (as Blue Orca does) that 2021 guidance is at risk when Hyzon said in March that the Hiringa order was a 2022 event. To investors familiar with the space and with SPACs, the messaging surrounding Hiringa appears to have been reasonably clear.
Blue Orca Point #3: "Phantom Big-Name Customers"
Blue Orca claims that Hyzon pulled big-name customers Heineken (OTCQX:HEINY), Coca-Cola (KO), and Ikea from its investor presentation between February and March:
Blue Orca presentation, September 2021
Hyzon responded that it simply "anonymized" some customers in its July presentation, and that looks like it might be correct:
highlighting by author Hyzon Motors July 2021 presentation
On the presentation front, it seems like the Blue Orca case falls a bit flat.
The firm does follow up with an interview with a former Hyzon executive, however. He claims that he and others were uncomfortable with how the company "was presenting orders to investors." Most of the orders, per the executive, were actually non-binding MOUs (memoranda of understanding), and the vehicles were essentially "hand-built." He or she compared Hyzon to Nikola.
Personally, I found that comparison interesting — and off-base. My personal sense in reading Hyzon's discussions at the time of the merger and soon after was that the company was in fact responding to the aftereffects of Nikola's, shall we say, aggressive commentary. In the February presentation, the company specifically said it had only $40 million in committed 2021 backlog; it raised that figure to $55 million at the Analyst Day in April. It's hard to see how those figures were misleading investors into believing that there were $3.3 billion in committed orders (the presentation in fact claims only ~$1B of that 2025 total was applicable to current MOUs).
Robert Tichio of Decarbonization Plus said in the February call that Hyzon's "progress is tangible, as the company will produce vehicles that will leave its production facilities this year," seemingly a contrast to Nikola and other EV SPACs. Again, the company talked up its plans for seed orders, which themselves highlight the tenuous nature of longer-term projections. On that same call Hyzon detailed a production strategy which includes outsourcing components from Ford (F) and others and assembling the vehicles via Berkshire Hathaway (BRK.A) (BRK.B) subsidiary Fontaine Modification; investors thus knew that the company didn't have its own dedicated production facilities yet.
Certainly, the five-year projections look outlandishly optimistic, with the company targeting more than half a billion dollars in EBITDA in 2025. But that's par for the course in SPACland, for better or for worse. (More on this later.) Some investors may not have understood the distinction between binding orders and MOUs, but personally I'd argue that in February some of those investors didn't care to, either. It didn't take that much due diligence to understand the story Hyzon was telling.
Blue Orca Point #4: Hyzon Is a Repackaged Horizon
Blue Orca's fourth claim is that Hyzon stock is overvalued because it's basically a dressed-up version of Horizon — itself a failed fuel-cell manufacturer. The company notes that the Chinese parent (Horizon is based in Singapore but its operations are in China) was only worth $190 million when it delisted from that country's over-the-counter market in March. That came after a ~75% decline in fuel cell unit sales in 2020.
Hyzon responded that the valuation claim is "irrelevant," as Horizon's shares are not publicly traded, and that Blue Orca has misunderstood the actual corporate parent of Hyzon. It also claims that Jiangsu Horizon (a subsidiary of Horizon Fuel Cell, the ultimate parent) shipped 36 megawatts of fuel cells in 2020, against more than 26 MW the year before.
Those figures don't directly contradict Blue Orca's unit numbers (400 in 2019, 100 in 2020), but they do suggest the firm is wrong. It's worth noting as well that Knight in March cited almost the exact same megawatt figures (36 vs 27).
Either Hyzon has its false story down well, or Blue Orca is erring. In that context, it does seem like Blue Orca has this wrong — and that the argument isn't necessarily material anyway. For instance, in arguing for the failed nature of the parent, the firm notes that Horizon only delivered "nearly 400" fuel cell systems in 2019 — but that's not a terrible number in a nascent industry.
The market cap argument, meanwhile, seems strange; why was Horizon worth $190 million in March when it owned two-thirds of a U.S.-listed company with a pro forma valuation near $3 billion? This, for now, seems to be a case of crossed wires.
Blue Orca Point #6: Two CTO Resignations
We'll skip point #5 momentarily. Blue Orca closed by citing a pair of resignations by chief technology officers, with Ian Thompson lasting from February to June of 2020 (per LinkedIn) and Gary Robb deciding to leave in September, some 15 months later.
But Hyzon says that Thompson was an interim CTO, owing to his role as a consultant. SEC filings show Hyzon was rather inactive at that point (the novel coronavirus pandemic no doubt played a role), which lends some credence to this case. Robb still owns "substantial holdings in Hyzon stock," according to the company (and SEC filings show both stock options and earnout shares).
Here, too, the bearish story seems simply incorrect.
The Margin Question and the Case for HYZN Stock
Overall, personally I don't see any evidence of fraud here. Hyzon's response seems firm and forthright; the Blue Orca report appears far less damning in its wake. Investors seemed to agree initially, as HYZN stock was up as much as 16% intraday after the response from Hyzon; the stock, however, closed up just 6.5%. Again, it's still off 30% from where it closed before the Blue Orca report was released.
There is an argument that Hyzon perhaps oversold itself in the path to the merger. But there's an irony to making that argument about a de-SPAC, because the simple truth is that with few exceptions, the market hasn't believed SPACs or SPAC projections — and with good reason. The EV space, for example, had multiple companies that projected they would set the all-time record for shortest time to $10 billion in revenue.
Hyzon wasn't one of those companies, but of course the projections were (and admittedly still are) aggressive. Again, Hyzon is projecting $517 million in EBITDA in 2025 on the back of $3.3 billion in revenue. What was then DCRB stock topped out at $19.95 at the peak of the SPAC bubble in February; at that level it still traded at less than 8.5x projected 2025 EBITDA, with years of growth likely to follow in a market estimated at $200 billion. At the pre-Blue Orca close of $9.21, Hyzon still traded at 3.4x that EBITDA projection.
Those multiples alone show that some level of optimism was more than discounted. That's the nature of SPACs, even if some investors unfortunately appear to not have entirely understood that fact in 2020 and early 2021. To my jaundiced eye, Blue Orca has done nothing to show that Hyzon is an outlier in the group, let alone actively and aggressively misleading investors.
That said, it bears repeating: even if Blue Orca were 100% wrong, that doesn't mean HYZN stock goes up from here. There are real risks. There are real questions. Knight was asked in March why the company decided to build trucks and not just sell the systems. He responded that incumbent manufacturers are still focused on existing products and "don't have a sense of urgency" to switch to FCEVs. That probably is somewhat true, even with the moves by Toyota and Hyundai into fuel-cell trucks, but it doesn't mean Hyzon will be a success.
Rising natural gas prices are another concern. Hyzon (like Nikola) needs to push fuel-cell vehicles on a total cost of ownership basis. But hydrogen prices may soar if natural gas feedstock is more expensive (or unavailable); "green hydrogen" for now remains mostly unavailable. Given that Hyzon is pushing itself as a first mover, a delay could be more than just a short-term problem.
Finally, there is one key concern that Blue Orca raised and that comes up in even a cursory review of Hyzon's presentations: margins. Blue Orca cast considerable doubt on Hyzon's plan to generate gross margins above 30% — and, on its face, with good reason.
Again, most of the Hyzon vehicle will be outsourced, whether it's components, the fuel cells (initially at least), or the assembly. (Hyzon has partnered on an e-axle which it says will improve motor-to-wheel efficiency, and will develop power systems as well.) It's hard to see industry-leading gross margins with a production process that relies so heavily on third parties.
Even after the sell-off, that is a concern. Cut gross margins by 500 or 1000 basis points and 2025 EBITDA margins can fall by more than half. At that point, even assuming $3B-plus in revenue the 2025 EV/EBITDA multiple expands to the high single digits or low double digits — not quite the massive steal current projections imply.
But at this point, the bull case is more qualitative. This does seem like a company with a chance to win in an enormous market, in which case the upside is likely to be significant at 22% gross margins or 32% gross margins. There are real orders here, including an intriguing opportunity with mining companies that is starting to play out. The 30% sell-off in six sessions seems unwarranted.
All of the real risks to HYZN stock were known a week ago, and the market still priced the stock above $9. Despite Blue Orca's efforts, nothing's really changed — except that price.
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of HYZNW either through stock ownership, options, or other derivatives. 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.
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Comments (30)
Short sellers often say that the louder the company and/or CEO gets in these situations, the closer they pay attention. It's the ones threatening lawsuits or screaming about bias (Nikola being a pretty good example of the latter) that seem less credible. I thought their response was pretty measured: we have to reply and now we're moving on. So far, the market still pretty obviously disagrees.
- I would agree more on the big customers if the July presentation didn't mention them at all. Then it's, "they made up Coke and Heineken and IKEA." But the three companies are still in there.
To me, comparing logos on slides is a meaningless exercise. But maybe that's because I think looking at those logos has little value to begin with.
- here I'm going to disagree a little more strongly. It's not playing with words. The short report only calls Anderson a CTO bc it's on his freaking LinkedIn. And the fact that he resigned is not a surprise because he wasn't doing that much anyway. Hyzon was barely in business in the first half of 2020 for a number of reasons. It's not likely he was in charge of this massive R&D ramp and jumped ship after five months. It's not bearish that the guy left and they brought on a new, permanent, hire at that point, whatever Anderson's title. I see no evidence that Anderson was a material part of this business.
As far as Robb goes...why is "retired" in quotes?
- I agree the Hiringa agreement has little value, particularly at this stage. I disagree that Hyzon presented it otherwise.
- Lithium-ion or lithium-metal have very real disadvantages in the commercial end market. And it would seem unlikely (possible, but unlikely) that lithium-ion or lithium-metal will get cheaper and FCs won't. Similar trends are at play in both.