We believe that without additional GW demand orders from Nikola (which are highly uncertain in our opinion), Nel’s expansion plans could result in significant oversupply and underutilisation. For example, we believe that the capacity for electrolyser production could exceed 4 GW as soon as 2022.

• Thyssenkrupp already has 1 GW of electrolyser capacity in cooperation with De Nora. Thyssenkrupp has recently signed a strategic cooperation agreement with Air Products, a leader in onsite hydrogen production, on large-scale electrolysis plants. Air Products will build and own the plants using Thyssenkrupp’s engineering, equipment, and technical services.
• ITM Power is expanding its Sheffield facility for capacity of up to 1 GW (opening Q4 2020).
• Plug Power is building a ‘gigafactory’ capable of producing 500 MW of electrolysers and 60,000 fuel cells per year. It expects to start production in mid-2021.
• Cummins, which acquired Hydrogenics, is building out the world’s largest PEM electrolyser in the world (20 MW) and partnering with Air Liquide. In a recent conference, the company mentioned an increasing visibility into electrolyser projects and increasing its investment in related R&D.
• The available capacity in China is unclear. However, BloombergNEF reported that China has been supplying electrolysers at prices as low as $200/kW, which is a 60-80% discount compared to Western peers. ITM Power’s CEO suggested we should be sceptical of the claim on call with us on 06 November 2020, specifying that the $200/kW figure may refer only to the stack rather than the total system, which is likely higher than $600/kW. We believe a significant player is Tianjin Mainland Hydrogen Equipment (THE), which supplies through HydrogenPro into Europe and US. There are eight other Chinese competitors.
• Siemens Energy, the recent spin-off from Siemens, plans to continue investing into its hydrogen portfolio having launched its first MW production solution in China, and will be supplying a 6 MW electrolyser system in Bavaria, Germany using its PEM modular solution available.
• Belgian John Cockerill recently formed a JV with Suzhou Jingli Hydrogen to open a 18,000 m² electrolyser production centre in China capable of producing 350 MW of electrolysers annually.

Oversupply in a capital-intensive industry would mean that Nel continues to lose money despite substantial growth in volume, as pricing would remain subdued. We would not expect pricing to improve until the market consolidates, just like in wind and solar before it.

Fuelling – Chicken and Egg Problem

Demand for stations is growing as countries are setting targets and aspirations for the number of full cell electrical vehicles (FCEVs). Nel faces tough competition here as well from both large industrials and other hydrogen hyped players. We believe there are more barriers to demand in hydrogen refuelling stations for three reasons. Firstly, the total cost of ownership of consumer FCEVs is significantly higher than battery electric and combustion engine cars. Secondly, to incentivise auto manufacturers into investing in lowering the upfront cost of FCEVs, governments need to subsidise refuelling infrastructure. However, part of the high refuelling cost ($16/kg at the nozzle in California, versus $4-7/kg where it becomes competitive with ICE vehicles) is the low utilisation of these stations and their small scale, which makes the relevant delivery infrastructure expensive. The chicken and egg problem will be difficult to solve especially with the popularity of battery electric vehicles (BEVs). The positive angle for hydrogen in transport is its potential in heavy duty vehicles (HDVs) where an electric battery would most likely be too expensive and heavy to be economical. However, the total cost of ownership (TCO) for HDVs is much more sensitive to the cost of fuel.

Competition Is There

There are several competitors in refuelling. Air Liquide (120 stations installed to date) has significant global participation due to its expertise as a leading industrial gas company. We have seen Air Liquide compete with Nel in Germany, South Korea, and California. We think Air Liquide’s manufacturing scale, its distribution network, and expertise in gas supply could help it extract more value from contracts than Nel. Nevertheless, Nel is one of the leaders with significant market share in Europe.  

There are smaller pure players such as Atawey – a small French supplier and part of the MAT consortium, is supplying 14 HRS in France, and McPhy, selected to supply five large hydrogen stations. The project is funded by Michelin as part of its investment in Hympulsion. In the US, the listed Plug Power is building 35 fuelling stations in 2020. Although Nel supplied Shell’s previously installed hydrogen refuelling stations in California, it has yet to confirm whether it will be supplying Shell’s next 51 station upgrades. Instead, Nel appears to be instead supplying a competitor, Iwatani.

Fuelling Division Makes Meaningful Investments in Customers

There are several instances of Nel funding its customers through associate or JV structures. We think Nel could be investing in these companies to support its top line growth which is crucial to investors at this stage of the company’s lifecycle. We are less concerned with the bottom-line impact since the company is deeply loss-making. 

• Uno X Hydrogen – a joint venture between Uno-X Norge AS, Praxair Norge AS, and Nel. Nel had invested NOK 20m into the JV and loaned an additional NOK 5m. Nel received purchase orders worth €4m in 2018 alone. One of the stations under this JV exploded due to an incorrectly installed plug. Nel later took ownership of the JV whilst Uno-X took ownership of the two stations (Asane and Hvam). Upon taking full ownership, Nel reversed an impairment of its loan to the JV and recognised the revenue from the contract liability on its balance sheet. It is unclear whether any liabilities remain.
• Everfuel – initially established as a Nel subsidiary, 80% of the ownership was sold to Jacob Krogsgaard, an ex-Nel employee and founder of H2 Logic, its hydrogen subsidiary. To finance his involvement, Krogsgaard sold 43m out of 70m shareholding in Nel. Nel and Everfuel signed an exclusive equipment sales and service agreement with a potential value of up €100m. We wonder how good of a deal this is for existing shareholders. Everfuel was recently listed on the Merkur market with investment from Saga Tankers, a previous shareholder in Nel. Soon after, Everfuel acquired two fuelling stations from Uno-X, which was supplied by Nel. In its 2019 annual report, Nel stated there are material transactions between itself and Everfuel Europe A/S.
• Danish Hydrogen Fuel – Nel has delivered four stations to this JV so far.
• HyNet Korea – Nel invested NOK 7.8m into a Korean joint venture between 13 industrials building hydrogen refuelling stations in South Korea. Nel has received three purchase orders from HyNet for five stations worth €10.6m (~NOK 110m).
• Nikola – Nel invested $5m of proceeds from its own capital raise into Nikola’s series C in June 2018. The relationship has been at the forefront of Nel’s filings but is yet to translate to material financial upside for Nel.

Nikola

In our opinion, the elephant in the room for Nel is likely to be Nikola, which recently faced allegations of fraud. Nikola is mentioned 12 times in Nel’s 2019 Annual Report and 59 times in its September 2020 prospectus. There is a multi-billion NOK framework contract from 2020 through 2025 where Nel could potentially deliver 1 GW of electrolysis plus fuelling equipment. Around a quarter of the Q3’20 backlog is from Nikola. If Nikola follows through with the rollout of its HRS fleet, its orders are likely to make up a significant portion of Nel’s mid-term earnings.

We do not intend to cover Nikola nor attempt to fully corroborate Hindenburg’s research. There are several facts that makes us sceptical about Nikola’s ability to execute on establishing large scale hydrogen infrastructure and bringing FCEV trucks to commercial viability.

• Chairman and founder Trevor Milton resigned 10 days after Hindenburg’s allegations were published. Milton was ‘the source of many, if not most, of the ideas and execution driving Nikola’ according to Nikola’s Q2’20 10Q.
• Several allegations were independently confirmed by reputable newspapers such as the Financial Times and Bloomberg. Nikola is under investigation by the SEC and DOJ. Nikola and Trevor Milton received grand jury subpoenas from the U.S. Attorney’s Office for the Southern District of New York on 19 September 2020 according to its Q3’20 10Q.
• Nikola’s revenue in 2020 came solely from solar panel installation services to Milton.

Nikola does have $908m of cash remaining on its balance sheet as of 30 September 2020 with a ~$100m per quarter cash burn, thus it is still wholly possible that the company executes on at least some of its ambitions. However, we believe the collapse in the share price displays waning investor confidence and the deal with General Motors, which appears critical to Nikola’s truck manufacturing plans in the US, remains unsigned.

Valuation

In the upside case, we could see a reasonable scenario where global electrolyser installations rise to 34 GW per annum by 2030. We assume Nel can capture a 30% market share, resembling a best-in-class product and pricing. We expect pricing per MW of electrolyser to fall dramatically to €0.3m/MW as we believe that is necessary for green hydrogen to become economical at that scale. Both margins and multiples can be debated but we see it as a reasonable assumption looking at other heavy capital goods companies, in particular the historical trading ranges of Vestas.