Ballard Power Is A Sell On Growing Headwinds (NASDAQ:BLDP)

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Ballard (NASDAQ:BLDP) is down by 53% since my last bullish article. My thesis at that time was that Ballard's bet on China being a hotbed for hydrogen energy growth will result in a boost in Ballard's revenues in 2021. My thesis was partially correct. China is still a hotbed for the hydrogen economy, but, Ballard may not be able to establish a foothold in the hydrogen supply chain there.

China announced the Beijing-Tianjin-Hebei region (Beijing-led) as the first demonstration cluster for their new hydrogen project. The project's aim is to develop the complete hydrogen supply chain in the region and play out ten scenarios designed to exhibit global influence using hydrogen energy. Unfortunately, the Ballard-Weichai JV (located in Shandong province) is not located in this region, which is essential to become part of the project. However, the demonstration regions aren't the only places where the hydrogen market is booming. There have been activities in other parts of China as well such as

These are real-world business in the hydrogen fuel cell industry in China and unfortunately, Ballard is not seeing any part of this pie. In fact, as per their last report, around $20.4 million of revenue for Ballard Power is unrecognized because that inventory still lies unsold in the JV warehouses. Overall, the hydrogen fuel cell market has not been slow in 2021, as evidenced by the activities listed above. It is just that BLDP did not have any part in it.

Amongst other regions, Japan is investing big on hydrogen energy to rid itself of its dependence on imported energy. Ballard dissolved its joint venture with Ebara in Japan in 2009 and today, Ballard has no presence in the Japanese hydrogen economy. India also announced a hydrogen program in 2021 aimed at producing green hydrogen. For starters, Ballard has bagged a contract to supply 15 fuel cells to TATA Motors, which will supply hydrogen fuel cell busses to IOCL, a state oil refining company, for a feasibility study. Meanwhile, Reliance, one of the largest companies in India, has announced the conversion of plant unit in their refinery to produce blue hydrogen. In the long-run, however, based on the Prime Minister Modi's initiative for self-reliance, it is more than likely that fuel cell manufacturing will be carried out by India.

This leaves Europe as the last market which can be captured by Ballard. In the past six to nine months Ballard has received a few project orders such as fuel cell for ferry in Norway by Norled A/S, additional fuel cells for Canada Pacific's Hydrogen Locomotive Program, orders to supply 31 fuel cell engines to a leading global construction, electric power & off-road equipment manufacturer and collaboration with Caterpillar (CAT) and Microsoft (MSFT) to set up a 1.5 MW backup power for datacenters. All this is excellent news because different projects test Ballard's fuel cell under different power requirement environments, which in-turn cements Ballard's fuel-cell technology's dependability. However, the bad news here is that Ballard has been receiving orders for such feasibility projects for many years now. Despite being in the fuel cell business for over 40 years, it has not developed technological leadership in any one use-case of the hydrogen fuel cells. In fact, compared to some companies supplying fuel cells in the Chinese market, Ballard's fuel cells are inferior in power density by volume (lower watt/liter) and also by weight (lower watt/kg). The current political tensions between the East and the West may restrict the Chinese manufacturers’ access to the western fuel cell markets and allow Ballard to slip in-between to feed the demand in Europe. However, in the long-run developing a core segment leadership is paramount to business success.

In conclusion, Ballard's fuel cells have shown their mettle in a variety of applications, however, they are not the leaders in any one of them. From marine applications to commuter train applications, Ballard's fuel cells have proven feasibility in the past few years. Many of these projects may become successful in the future but none has become yet. By successful, I mean, conversion from project to an NPV positive project generating repeat orders for Ballard. For example, the Siemens led Mireo Plus H prototype train in Bavaria and Baden-Württemberg will start testing from 2023 and scheduled to be operational in 2024. This particular project was announced in 2019. Similarly, the CP locomotive project was announced in Mar 2021 and Ballard is scheduled to deliver the fuel cells (14 200kW modules) in 2022. Anglo-American is targeting a roll-out in 2024. The common factor in all these projects is the process of extensive testing required by the companies before roll-out (from project initiation to delivery of fuel cell). Even after roll-out there is no guarantee that future orders will be placed to Ballard, because there is just no product differentiation. It is more of a commodity than a brand.

Ballard has two strong financial pillars that allow it to remain a going-concern. One is the huge cash-balance and the other is zero long-term debt. Irrespective of the negative cash flow business, Ballard's cash burn at the current run-rate extends a period little more than 15 years that Ballard can go for without raising finance. During this time, the challenge to Ballard is to maintain its product's technology up to date with the latest product offerings in the market and hope that the hydrogen economy moves from project study stages to application stages in the next couple of years. As explained above, currently Ballard is present in the hydrogen feasibility project sector only, which means that there is no guarantee or not even an indication that revenues changes in 2022 are permanent. If the revenues aren't going up, then probably the expenses can come down.

In the Q3 earnings presentation, Ballard CEO replied the following to a question raised by analyst Aaron MacNeil about Ballard's target of reducing expenses by 70% by 2024.

Yes. So we have internally an objective this year for a very significant increase already in 2021, we will not just beat that, but beat its significantly in 2021. So we're ahead of plan on product cost reduction for our program installment in 2021. So that boards very well in total for the 70% cost reduction for 2024.

Cost reduction has been one of the key targets for Ballard announced in their investor day on Sept 2020. However, based on the quarterly data since the announcement, the result is yet to be seen.

CoGS as % of Q3 2020 CoGS (Author)

The chart above shows the cost of products sold per dollar of revenue. In Q3 2020, Ballard costs were 81 cents for $1 revenue. In the last report, Ballard's cost of product sold was 89 cents for $1 of revenue. The announced plan was to source BOP parts from cheaper manufacturers but as you can see from the chart above, there is no progress in that front since their announcement. Today, the gross margins are not enough to meet the operating expenses even without the R&D expenditure.

The third and final metric that can result in a positive return for the Ballard shareholder is reduction in cost of capital. Right now, Ballard has no debt on its balance sheet and it has not paid any dividends or cash return on its equity. So, technically, its cost of capital is zero. In fact, a 1% share in Ballard on Dec 2016 has now been diluted down to 0.527%. Looking at it this way, the cost of capital to Ballard is negative as shareholders’ shares are being diluted to fund operations and the excessive cash is lying idle (earned 0.33% return in 2021 till Q3). I think I’ll have the support of the readers when I say that there is no chance that Ballard initiates dividends or return cash as bonus shares in 2022. Although, they have the cash and in the absence of a good project, it should be returned to their investors but, I don't think that they will.

Financially, Ballard is strong and there is no cause of concern for its continued presence.

The hydrogen ecosystem is growing in all the places where domestic energy demand is more than the domestic energy availability. It seems like it will continue to do so as till date no mishap have taken place involving hydrogen fuel cells and thus far using hydrogen for energy production using fuel cells seems safe. Unfortunately, for Ballard, its participation in these projects in the East are very limited. Europe is the only region where Ballard has had some significant projects. Almost all the projects are under trial phase. Moreover, in their 40 years of business, Ballard has not succeeded in creating a niche for themselves in the fuel cell business. Their technology is advance but is not differentiated from other manufacturers. Financially, Ballard is solid. Why they are holding on to such high cash base is a mystery though. Revenues are stagnant, cost of goods have gone up and their return on investment is nowhere. Yet, the management paints a picture of significant progress in order backlogs from Q1 to Q3 in one segment.

Taking all these points to consideration would surely result in a Sell recommendation, but their share price is so low that it cannot go further down. Their share price is just 2 times their per share book value. At this time, Ballard does not seem like an investment that will return positively in 2022.

This article was written by

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