Ballard Power Systems Inc (NASDAQ:BLDP) is making big news again. The fuel cell company signed a deal with Guangdong Nation Synergy Hydrogen Power Technology Co. Ltd. (“Synergy”) for the establishment of an FCvelocity-9SSL fuel cell stack production operation in Guangdong Province. The fuel cell stacks will be packaged into locally-assembled fuel cell engines and integrated into zero-emission buses and commercial vehicles in China. The key for Ballard and what got the stock moving was that the contract has a minimum value of $168 million over 5-years.
Considering that Ballard has just a $268 million market cap currently, this is a pretty big deal for the company. The announcement sent shares of Ballard to new 52 week highs around $2, but shares have since pulled back on profit taking and the shorts attacking the company. We believe that this is the start of a new bull run for Ballard and shares are going to consolidate before making new 52 week highs.
There are several reasons why we like this deal for Ballard. First, China is the world’s largest market for fuel cell buses and commercial vehicles. China is notorious for its pollution problems and mass transit is one of the main causes for this pollution besides manufacturing. Converting all the buses in China to fuel cell technology is a multi-billion dollar proposition, but is one which we see the country heading towards. Ballard’s focus on China is a smart move and this deal with Guangdong Nation Synergy Hydrogen Power Technology Co. Ltd. is just the start.
Second, this deal allows Ballard to localize fuel cell production in China to reduce costs, drive scale, mitigate market risk, avoid capital investment, and protect its core intellectual property. Ballard is not exposed to any compromise of its core intellectual property since Ballard will maintain production of all MEAs at its headquarters facility.
Third, the joint venture is well structured to Ballard’s benefit in our opinion. On closing of the transaction, expected in late-2016, a joint venture will be created to undertake the stack manufacturing operations and will be owned 90% by Synergy and 10% by Ballard. Ballard will contribute RMB 20 million (approximately $3.0 million) for its 10% joint venture interest, appoint one of the three joint venture board directors, have veto rights over certain key joint venture decisions, agree on the marketing strategy and will have no further obligation to provide future funding to the joint venture.
The joint venture will have an exclusive right to manufacture and sell FCvelocity-9SSL stacks in China. Exclusivity will be subject to certain performance criteria of the joint venture, including compliance with a code of ethics, compliance with Ballard’s quality policies, compliance with Ballard’s branding policies, achievement of the minimum annual “take or pay” MEA volumes, compliance with payment terms, and compliance with certain intellectual property covenants.
Fourth, Ballard retains the right to purchase fuel cell stacks and sub-components from the joint venture for sale outside China. China is just one market for fuel stacks. There are many more countries where pollution is a problem and the FCvelocity-9SSL stack is the solution.
Fifth, we really liked what Frank Ma, Chairman of Guangdong Nation Synergy Hydrogen Power Technology Co. Ltd., had to say.
“Ballard is the preeminent fuel cell brand for buses and commercial vehicles in China. This deal is transformational in terms of positioning fuel cells as a compelling solution for clean energy buses and commercial vehicles in China’s high-population cities where air quality is a top priority. By localizing stack and module production, we will drive costs down to enable sustainable market demand for fuel cell buses and commercial vehicles based on economics, zero emissions and passenger experience.”
Currently trading with a market cap of $268 million, BLDP is an exciting story among small caps. We feel this deal is the start of a new bull run in shares of BLDP. We expect Ballard to return to levels seen in 2014 when shares traded between $4 and $5. For the latest updates and analysis on BLDP, sign up for our free newsletter today!