Tuesday, February 07, 2017

Year of the Fire Rooster for Ballard

The year of the Chinese Fire Rooster promises to be especially lucky for Ballard Power Systems (BLDP:  Nasdaq or BLDP:  TXS).  The company just announced an equipment sales agreement with one of China’s leading bus manufacturers to put Ballard fuel cell engines into electric buses.  Zhuhai Yinlong Energy Group will take delivery of ten of Ballard's proprietary FCveloCity-MD fuel cell engines yet in 2017 for installation in Yinlong buses that are destined to traverse the streets of Beijing.  Details on pricing or total contract value were not disclosed.
The order comes at a pivotal time for Ballard Systems.  The company has struggled to penetrate the China bus market  -  a lucrative hot spot driven by dense metropolitan population and the need to clean up choking air pollution.  Ballard managed to eke out $74.6 million in total sales in the twelve months ending September 2016.  Unfortunately, this limited scale is not sufficient to support Ballard’s cost and expense levels.  The net loss in the period was $22 million or $0.14 per share.  The company had to tap the bank account for $22.5 million in cash to support operations.

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Ballard has been doggedly laying the groundwork in China.  In October 2016, the company entered into a joint venture with Guangdong Nation Synergy Hydrogen Power Technology Company to set up a production operation in the City of Yunfu, Guangdong.  The company expects to produce its proprietary FCvelcoity-0SSL fuel cell stack there.  Ballard took a check for $10.9 million at the closing and expects additional cash flows near $170 million over the next five years from subsequent technology transfers and product sales.  The facility is expected to be ready in late 2017.  There is a $1.0 million investment commitment on Ballard’s part for the facility for its 10% ownership in the joint venture.  The complexities of a joint venture for production in China might well be worth the trouble.  Zhuhai Yinlong alone produces as many as 30,000 buses annually.  Excellent performance on the initial fuel cell contract should put Ballard in a good position to win more business from the bus manufacturer.
This is not the first order from Synergy.  In September 2015, Synergy had pledged to order 300 FCveloCity power modules from Ballard.  It was not until the third quarter 2016 that the units were incorporated in twelve buses manufactured by Foshan Feichi Bus.  The buses have been deployed in the City of Foshan in Guangdong Province.
The Synergy relationship is intertwined with another of Ballard’s partnerships. Earlier in 2016, the company began solidifying a relationship with Broad-Ocean, a China-based manufacturer of motors used in buses, commercial and passenger vehicles.  Based in Zhongshan, Guangdong, Broad Ocean claims production of as many as 50 million motors annually for a mix of customers around the world, including Ford, General Motors, Cummins, Caterpillar and Carrier.  One of Broad Ocean’s business units has recently expanded into fuel cell vehicles. Broad Ocean and Synergy have a cooperative agreement involving 10,000 fuel cell vehicles that will incorporate Ballard’s fuel cell technology. 
In July 2016, Broad Wind invested $28.3 million in Ballard, representing a 10% stake in the company.  The infusion of capital is vital to Ballard as it attempts to scale up production.  At the end of September 2016, Ballard had $68.1 million in cash resources.  That is a considerable cushion, but one that might be necessary given the effort required to lock in strong manufacturing relationships.
Ballard shares moved higher on the various announcements of agreements and orders.  Yet investors appear to be waiting for real financial results before according too much value to BLDP.   That leaves the stock at a compelling value for investors with the patience for relationships to build.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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