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Technology Stocks : Hydrogenics (HYGS): Fuel Cells -- Ignore unavailable to you. Want to Upgrade?

To: Secret_Agent_Man who wrote (1)	10/29/2000 5:33:27 PM
From: HiSpeed	Read Replies (2) \| Respond to of 18

HYGS is on my watch list...another recent alt ene ipo, HPOW stayed flat, and even broke the ipo price for a while, then came roaring back when the alt ene plays got hot. ' world of finance ipo center' did a nice job in their overview of this co; here's their review: PEM fuel cell test equipment This is another in the recent series of alternative energy IPOs. The current enthusiasm for these deals is being driven by increased concerns about energy process and reliability. Enthusiasm for fuel cells is also being driven by plans to severely tighten vehicle emission standards in CA, NY, MA, and ME by ’03. Hydrogenics is a Canadian firm that presents some unusual issues to prospective investors. The firm’s core financial statements are prepared using Canadian GAAP accounting standards. These standards are different from US GAAP. Core statements are also reported in CN$ not US$, unless explicitly adjusted. US laws may also not apply for securities and commercial actions. These differences may cause some confusion and misinterpretations by casual US investors. The firm currently produces equipment used to test and analyze the performance of PEM technology fuel cells. The equipment simulates, monitors, and controls such key performance parameters as power load, temperature, pressure, humidification, and contamination. It is used by firm’s currently developing PEM fuel cells. The firm’s strategy is to use its test equipment business to support its own fuel cell development research. It is currently developing fuel cells designed for very low temperature (-40 degrees Celsius) and for military operations. A regenerative fuel cell, which both stores and creates energy, is also under development. Reception has been encouraging for the firm’s test equipment. Demand took off in 2H’99 and the firm produced 47 units in 6m’00. However, customers are highly concentrated and are dominated by General Motors, Johnson Matthey, 3M, and Gore & Associates. The firm’s PEM fuel cell line is still in development stages. Prototypes are expected in 2H’00 but there was a recent setback when one of two units failed during an Antarctica field test. The outlook for the firm is mixed. The current test equipment line is encouraging and positions the firm as a “nuts & bolts” infrastructure supplier for this still developing industry. This reduces the business risk, since the test equipment must be purchased regardless of R&D outcomes. We are more skeptical about the near term prospects of the fuel cell business as a whole. Fuel cells are generally more expensive and more dangerous than other competing technologies. Consequently, manufacturing efficiency is crucial to cost control. There are also concerns about the technology. Considerable R&D efforts have been invested in this technology for several years by several large firms without breakthrough results. However, this firm is really still in development stages with limited manufacturing and marketing experience. Performance is being driven by the recent surge in test equipment. While still a small business it is hovering around breakeven. However, performance may be distorted by CN and US GAAP differences and the 2H’99 growth surge makes some prior period growth comparisons misleading. The following performance comparisons follow US GAAP. · In ’99 revenues reached $2.7 million, with a 21.3% gross margin and a 6.2% net earnings loss (-$165,000). · In 6m’00 revenues increased to $4.5 million, with a 34.5% gross margin and a 38.5% net earnings loss (-$1.7 million). During this period net earnings losses were driven by options related equity charges. Without them the firm hovered near breakeven. Notably, in 6m’00 the firm produced 47 units up from 4 units in 6m’99. And between 1Q-2Q’00, revenues increased by 70%, suggesting accelerating demand. Valuations in this sector have been mixed but generally favorable. Competitors Ballard Power and Fuel Cell Energy both recently traded in the upper half of their 52-week ranges. Some recent IPOs may add further perspective. · Plug Power was a $90 million deal offered on 10/29/99. Offered at $15, it closed at $16 for a 6.7% first day. It recently traded at $28, adding 75% in the aftermarket but in the lower half of its trading range. · Millennium Cell was a $30 million deal offered on 8/9/00. Offered at $10, it closed at $10 for a flat first day. It recently traded at $15.38, adding 53.8% in tha aftermarket and near the midpoint of its range. · H-Power was a $112 million deal offered on 8/9/00. Offered at $16, it closed at $18 for a 12.5% first day. It recently traded at $20, adding 11.1% in the aftermarket but in the lower half of its range. · Proton Energy was a $119 million deal offered on 9/29/00. Offered at $17, it closed at $28.63 for a 68.4% first day. It recently traded at $23.63, off 17.5% in the aftermarket. Reflecting the general enthusiasm for this sector, pre-offering demand has been reported to be strong (Street Scoop: 3 stars). Conclusion: This is a promising but a small and unproven firm which is riding the current alternative energy enthusiasm. Its strategy to underwrite R&D by commercializing its testing equipment is apparently successful. Adjusted for equity charges, the firm is near breakeven. However, the full extent of the product line is uncertain. The narrow customer base suggests a positive but limited market. On the other hand, the outlook for fuel cell development activities remains highly speculative. It is still in the development R&D stages. And the absence of progress by other competitors suggests there is a long way to go. Undoubtedly this offering is going to be driven by the then current level of enthusiasm for alternative energy. Under the most recent market conditions, that enthusiasm is expected to be strong. Consequently, for similar firms in this position we would anticipate a moderately positive initial reception (e.g., 20%-40%) followed by volatility.