Please refer to our disclaimer at the bottom of the report.

Blue Orca Capital published a short report on Nasdaq-listed Hyzon Motors Inc. on 28 September 2021. Having conducted our own research, we agree with its key findings. Hyzon issued a rebuttal to the report on 5 October 2021 that failed to address these issues.

This report contains new information on Hyzon. Its parent Horizon Fuel Cell Technologies Pte Ltd (“Horizon”) saw its 2019 sales surge, thanks to one customer. But this client was in financial trouble by the end of the year. This was never disclosed. Hyzon’s corporate governance puts its minority shareholders at risk. Horizon holds the largest block of Hyzon shares, and controls both management and the board of the two entities.  

Adding to these concerns is Horizon’s unenviable track record with spin-offs. The first two have not gone well. Hyzon is its third and is likely to suffer the same fate.

Hyzon boasts of its superior fuel cell technology. We believe these claims are exaggerated. Furthermore, we think customers will be reluctant to buy trucks whose warranties are covered by Hyzon, not by original equipment manufacturers (“OEMs”). 

We are short Hyzon Motors. 

Horizon’s Surge in 2019 Sales Was With a Major Client in Financial Distress

The bull case for Hyzon is largely supported by the fuel cell technology and expertise of its 63%-shareholder, Singapore-based Horizon, also Hyzon’s key source of hydrogen fuel cells under a supply agreement signed in January 2021. 

Singapore filings show the Horizon group reported $28.9m revenue in 2019 (see below), up 540% from $4.5m in 2018, which suggests Horizon is growing fast in the nascent market for hydrogen fuel cells. 

Source: Horizon Fuel Cell filings

We found that almost all Horizon’s sales come from its Chinese subsidiary Jiangsu Qingneng New Energy Technologies Co., Ltd — 江苏清能新能源技术股份有限公司 (“Qingneng”). Qingneng was listed on China’s OTC exchange — National Equities Exchange and Quotations (NEEQ) market — between June 2018 and March 2021. Qingneng’s financials show most of the 2019 spike was due to one customer, Shanghai SunLong Bus Co., Ltd (上海申龙客车有限公司), which accounted for 74% (RMB 150m) of Qingneng’s sales and 85% (RMB 56.5m) of trade receivables at the end of 2019. 

Qingneng’s disclosure of its largest customers by sales in 2019

Source: Jiangsu Qingneng 2019 financial statements

Qingneng and Horizon never disclosed that SunLong was and is still in financial distress. SunLong’s parent company Shenzhen-listed Tunghsu Optoelectronic Technology defaulted on three bonds (RMB 4.7bn or ~$666m) towards the end of 2019, despite reporting a $2.6bn cash stack at the end of September. The filings of both Qingneng and Beijing SinoHytec (北京亿华通科技股份有限公司), a much larger fuel cell peer and also a SunLong supplier, show SunLong’s struggles continued in 2020. 

Qingneng’s free cash flow plunged to negative RMB49.7m ($7m) for the 1H20 period. The drop was mainly due to sales, which fell 36% YoY to RMB 16m ($2.4m), and poor collections on its SunLong receivables. We estimate that Qingneng collected just RMB 1m of its end-2019 SunLong receivables (RMB 56.5m or $8m). 

Yet, just 5% of the SunLong receivables were recognised as bad debts at the end of June 2020. Qingneng chose to sweep this problem under the carpet. By contrast, SinoHytec recognised SunLong’s problems and impaired 28% of its SunLong receivables in the 1H20 period, up from 16% at the end of 2019.

Hyzon’s Corporate Governance Put Its Minority Shareholders at Risk 

The same Horizon that did not disclose its customer default now has extensive control of Hyzon through its 63%-shareholding. Both entities share common directors i.e., Chairman George Gu (顾志军) and CEO Craig Knight. The remaining shareholder base is fragmented with each owning less than 5%. Horizon is the only fuel cell supplier for Hyzon.

This may create the risk that Horizon gets access to the ~$500m cash pile Hyzon raised through the July 2021 SPAC merger, by charging Hyzon exorbitant prices to support its fuel cell business, to the detriment of minority shareholders. Hyzon will have to pay a subsidiary of Horizon at least $10m [Pg 7] by the end of this year to licence intellectual property. We call this ‘拆东补西’ or ‘pulling down the east wall to repair the west wall’.

As per the prospectus, the 155.6m Hyzon shares held by Horizon are subject to a six-month lock-up, meaning Horizon can sell its shares from January 2022. 

History of Disappointing Spinoffs

Horizon’s website shows Hyzon is its third spin-off. The first two have remained small without any meaningful growth, despite being around for at least 10 years. We believe the same will happen with Hyzon.

• Horizon Fuel Cell Europe s.r.o. (HFCE)

Czech Republic-based HFCE was Horizon’s first spin-off. The company was incorporated in 2011 to develop, produce, and sell hydrogen-themed science experiment kits for students. HFCE’s products are sold through its website and on Amazon. The company boasts of 50,000 customers in 150 countries, according to its website, but Czech filings show total profits from 2011-2019 were a measly CZK 11.1m ($0.5m).

• HES Energy Systems 

Horizon started HES Energy in 2009, first as a hydrogen aerial mobility lab, then a move into drone development in 2017. The company was acquired in 2015 by H3 Dynamics, another Singapore-based company, as part of an MBO led by Horizon and Hyzon’s strategic advisor Taras Wankewycz.

The Singapore-incorporated company’s total operating losses were negative SGD 2.4m ($1.8m) over the 2018-2020 period. About SGD 1.3m (~$1m) was burnt on operations (see below).

HES Energy’s 2018-2020 financials

Source: HES Energy filings

Exaggerated Technical Claims

Hyzon boasts of its technical superiority, in particular, its G3 Titan fuel cells lead the world on volumetric power density (“VPD” of 5.48-6.08) and gravimetric power density (GPD of 5.03-5.54), according to its investor presentation.

Hyzon’s comparison of its fuel cell with competitors

Source: Hyzon investor presentation

However, the G3 Titan is compared to fuel cells that are already in the market. The G3 Titan is still under development and will only be launched in 2022 [Pg 33 of July 2021 Investor Presentation]. Data assessed by third-party TUV Rheinland was from ‘short stack testing’ and merely points to the ‘…potential of using full power fuel cells up to 500hp (370kW) for heavy mobility applications…’. 

Hyzon’s existing product — the 150 kW G2 fuel cell — underperforms most peers. Its GPD of just 2.31 kW/kg is much lower than Ballard’s 140 kW FCgen – HSP  at 4.7 kW/kg.

Product brochure for G2 fuel cell

Source: Jiangsu Qingneng website

The Warranty Issue

Reliable warranties are crucial to industrial clients that intensively use their vehicles. Hyzon does not build trucks. It converts OEM’s internal combustion engine vehicles (e.g., DAF) to hydrogen-fueled trucks through its 50.5%-owned joint venture — Hyzon Motors Europe BV — with Netherlands-based Holthausen Clean Technology Investments BV. 

We were informed by a Holthausen representative that Hyzon, not the OEM, will cover the warranty. Hyzon’s clients will then have to trust that Holthausen and Hyzon are able to service the warranty. Holthausen is run by a father and son team, Carl and Max Holthausen. According to a March 2021 report by Dutch newspaper Het Financieele Dagblad, the Holthausens first experimented with hydrogen as a fuel about 10 years ago, first as a generator, followed by a boat, a remote controlled car, a drone, then finally a “Hesla”, a hydrogen-powered Tesla Model S.

We expect many industrial customers will be reluctant to buy Hyzon’s vehicles when established OEMs such as Toyota, Hino, and General Motors are lining up to launch their own hydrogen trucks. The likes of Daimler Trucks began testing its Mercedes-Benz GenH2 prototype truck in May this year while South Korea’s Hyundai plans to roll out 1,600 fuel cell trucks by 2025. 

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