Investors Bullish On China's Hydrogen Sector; This SPAC IPO Likely To Benefit

The company reported its revenue fell by 28% last year, led by a nearly 50% drop for its core hydrogen fuel cells

Key Takeaways:

• Shanghai Refire's revenue fell last year, reflecting volatile conditions as China's hydrogen energy sector remains in its early stages of development
• The hydrogen fuel cell maker's stock has risen nearly 30% since its IPO and now trades at a high valuation multiple, mostly fueled by strong government support

When it comes to new energy, there's something about being in China that seems to charge up a company's stock price. Hydrogen fuel cell maker Shanghai Refire Group Ltd. (2570.HK) nicely illustrates this principle, with a stock that trades at a lofty price-to-sales (P/S) multiple of 19 despite reporting slumping revenue in its latest financial report released last Friday.

It's no secret that China provides huge state support to new energy companies, aiming to take the global lead in sectors like solar and wind energy, new energy vehicles and battery technology that are likely to soon replace traditional gas-powered vehicles and coal-fired power. Hydrogen falls into that category, as it can be used to power vehicles and is also showing some potential for electricity generation.

But the power source has traveled a bumpy road in the West, largely because the type of hydrogen required to power such systems is far more expensive than the costs associated with more traditional power sources. Despite those challenges, China has determined the technology is worth pursuing and is throwing its support behind it, both in the form of government incentives and also support from major state-owned enterprises (SOEs).

In a major development on that front, Refire said that last November hydrogen was officially recognized as an energy source under the Energy Law of the People's Republic of China, giving it equal status alongside such traditional giants as oil, coal, natural gas and nuclear. "This decision clarified hydrogen's strategic role within the national energy system and its importance for green development," it said.

While such a development bodes well for the future, it doesn't really guarantee that hydrogen will ever become commercially viable. But that hasn't deterred China, which still pursues some experimental technologies largely abandoned by the West as dead-ends. At the same time, Refire acknowledges that China's strong state support won't last forever, and partly blames its slumping revenue on "a significant transition from being policy-driven to market-driven growth" for the sector in 2024.

The net result of all those factors is that investors are still quite bullish on China's hydrogen sector, even as it still quite clearly requires major government support. Refire's shares dipped 3% in early Monday trade after it announced its latest results but are still up about 25% from their IPO price last December.

Hydrogen transport and refueling equipment maker Guofu (2582.HK) is up by an even larger 68% since its Hong Kong trading debut last November, and trades at a similar P/S ratio of 20. By comparison, Canadian hydrogen cell stalwart Ballard Power (BLDP.US) trades at a far lower P/S of 4.9, and Canadian peer Westport Fuel Systems (WPRT.TO) trades at just 0.21.

All of this bring us back to our original thesis, which is that being in China is definitely a major booster for the stock of any company from the hydrogen power sector. That should bode well for hydrogen truck maker Scage (SCAG.US), whose stalled U.S. listing using a special purpose acquisition company (SPAC) appears to finally be nearing the finish line after many delays.

Growing pains

While policy support is nice, it's even nicer to have a fast-growing business – something Refire currently lacks. That said, there are still some encouraging signs in the company's latest report, most notably a diversification in its business both in terms of its customer base and also its domestic versus international sales.

We find it slightly amusing that Refire says in the report that "Throughout 2024, we achieved steady growth," since evidence of such growth is scant. The company's revenue fell 28% during the year to 649 million yuan ($89 million) from 895 million yuan in 2023. Refire blamed the decline on the fact that the industry is still in its early stages, and also on fluctuations in demand from some of its customers.

Most worrisome, sales of the company's core hydrogen fuel cells dropped by nearly half, generating 331 million yuan, or about half of all revenue, from 637 million yuan in 2023, when they made up 71% of the total. That kind of decline for your core product never looks too encouraging, and appears mostly related to a big drop in orders from one of Refire's largest customers.

On the more encouraging side, the company's revenue from hydrogen cell components rose 7% year-on-year to 236 million yuan in 2024, growing to 36% of revenue from just 7% a year earlier. The company's other major segment, fuel cell engineering and technical services, also more than doubled year-on-year to 63 million yuan, making up 10% of revenue, versus 2.6% a year earlier.

That kind of revenue diversification looks positive overall, even if it comes at the expense of the big drop for the company's core product. In a similar diversification, Refire reported that its top three customers supplied about half of its revenue last year, each providing more than 10% of the total. While such customer concentration is normally not great, in this case it looks like an improvement from 2023 when just one of those three customers provided more than 10% of the total. And that customer provided 30% of total revenue that year, though it significantly slashed its buying last year and provided just 17%.

Refire is also becoming geographically more diverse, though its revenue remains overwhelmingly from China. The company derived 9% of its revenue from overseas last year, up from just 3% in 2023.

Refire's gross margin deteriorated somewhat last year, dropping to 17.2% from 20.1% in 2023. But such fluctuations are quite common in this kind of developing industry, especially when your revenue declines. On its bottom line, the company's net loss widened to 737 million yuan from 529 million yuan a year earlier, though the adjusted figure improved after excluding costs related to share-based compensation and listing expenses.

Despite such a mixed report, investors are still quite fired up about Refire and its other hydrogen-related Chinese peers. But such enthusiasm is almost completely fueled by government support, and the shares could quickly run out of juice if the company doesn't find a way to return to revenue growth and show a path to eventual profitability.