1H22 results in line with our expectations

SinoHytec announced 1H22 results: Revenue increased 128.5% YoY to Rmb269mn, attributable net loss was Rmb60.04mn, and recurring net loss was Rmb61.75mn. In 2Q22, revenue and attributable net loss were Rmb172mn and Rmb36.56mn. Results are in line with our expectations.

Trends to watch

Accelerated roll out of incentives for city clusters boosts sales volume; market share as high as 35%. In September 2020, five government ministries released a policy to boost the healthy development of the fuel-cell vehicle industry. In August 2021, the ministries designated the Beijing-Tianjin-Hebei region, Shanghai, and Guangdong as the first group of city clusters for pilot fuel-cell vehicle projects. At end-December 2021, Henan and Hebei were designated the second city clusters in the scheme. We think the incentive policies have helped boost sales volume and order growth. In April 2022, the Beijing Municipal Bureau of Economy and Information Technology issued a document on the application for demonstration projects of fuel cell vehicles over 2021-2022. According to the document, 1,162 fuel cell vehicles were to be applied in the first year of the program (August 2021-August 2022). Data from compulsory traffic accident liability insurance shows there were 340 fuel cell vehicles with insurance in Beijing in 1H22, of which 239 (about 70%) were equipped with SinoHytec fuel cell systems. We expect the sales of fuel cell vehicles in Beijing to bolster the sales growth of SinoHytec’s fuel cell systems. Over January-July, the firm had a market share of about 35% in China, with fuel cell system installation of about 53MW.

Upgrading to large-power fuel cells. In our opinion, fuel cell systems are most suitable for medium-range and heavy commercial vehicles. These vehicles’ power requirements are generally 200kW. As a result, the industry has to upgrade to large-power fuel cells. SinoHytec has industrialized and sold 80kW and 120kW products. In December 2021, it launched 240kW fuel cell products. Moving forward, we expect the larger product to be installed for testing in cars.

Expense ratio flat YoY; GM edges downward. In 2Q22, selling, G&A, and financial expense ratios grew 1.2ppt, 1.5ppt, and 1.7ppt YoY to 12%, 25% and -2%, but R&D expense ratio fell 1.9ppt YoY to 23%. The firm made loss provisions of Rmb26.69mn for low-power systems and related materials, as technologies for fuel cell systems are upgrading rapidly.

Financials and valuation

For 2022, we forecast a net loss of Rmb42mn (previous forecast: net profit of Rmb25mn), and for 2023, we forecast a net profit of Rmb98mn (previous forecast: Rmb103mn), as prices of the firm’s fuel cell systems may continue falling as technologies upgrade. The stock is trading at 11.3x 2022e and 6.7x 2023e EV/S. We are optimistic about the long-term development of the company. We maintain OUTPERFORM and our TP of Rmb140, implying 16.2x 2022e and 9.7x 2023e EV/S with 44% upside.

Risks

Disappointing sales volume of fuel-cell vehicles and progress of hydrogen energy incentive policies.