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Positive news around EHang Holdings Limited (NASDAQ:EH) has continuously emerged in the past 6 months, including its first product’s listing on Taobao, the largest e-commerce platform in China, at a price of RMB 2.4 million (around $330,000), completion of a demo passenger flight in Japan, getting the approval and support from the government in China.
The company is riding on the trend of the low-altitude transport economy. The company is set up for success because of its leading position in terms of government support and technology advancement, which gives the company at least a year of advantage compared with its peers. This will be discussed later.
Overall, the company is not only growing very fast but is also leading other competitors in the same industry in terms of research and development, as well as regulatory approval. Therefore, the company is a strong buy for me.
Commercialization hinges on regulatory approval
For the time being, the most bullish news for the company is the Production Certificate (“PC”) obtained from the Chinese government, which is the first one across all e-Vertical Take-Off and Landing (“eVTOL”) companies globally. With the PC, EH is eligible to scale up its production, which will be followed by an Operation Certificate (“OC”) that grants it the legitimacy to operate in China. This progress aligns perfectly with the development of the industry in China – according to the Aviation Bureau in China, the low-altitude economy will grow four-fold from 2023 to 2030 given higher customer awareness and demand.
Image created by author
The regulatory approval progress of EHang has always been smooth, which shows that the company is supported by government policies, giving the company an edge. In 2020, EHang submitted the application to the Aviation Bureau in China; In 2022, the company has completed all the test flights and fulfilled the compliance assessment within 10 months; In 2023, EHang got the first-ever Aircraft Certificate (“AC”) for a single flight in the world. It is an impressive achievement that the company has got all these completed within 3 years when having the government’s blessings means everything to technology companies in China.
Image created by author with data from CICC
On the other hand, EHang’s peers domestically and globally are lagging. Its Chinese counterparts like Aerofugia, Volant and Vertaxi are still in the preliminary application of AC, which is 3 steps behind EHang, and has a long way to go towards commercialization.
EHang’s leadership compared to international competitors is also prominent. Joby Aviation, Inc. (JOBY), the largest eVTOL company in the world in terms of market capitalization, had an incident during its test flight in 2022, which affected the overall timeline of its regulatory approval process. According to Joby’s CEO, the company will only be able to obtain the PC by the end of 2024 and commence commercial operation in 2025.
eVTOL is a new area of technology in which the support of the government can drive forward the industry’s growth and the company’s leadership in the country. Thus far, the Chinese authority has demonstrated a more active stance than the FAA in the US and EASA in Europe. This has given EHang the edge for at least a year.
Rights products in a right market for the right customers
When we look at the delivery numbers, EHang had a breakthrough in 2023. The delivery number in Q4 2023 is the highest in 3 years and is close to the total of the first 3 quarters in 2023. The reasons for this are that EHang obtained the certificate in Q4 (which again proved the importance of regulatory approval) as well as the customers’ interests. According to the management, the company has received several hundreds of orders. Most importantly, the order for the UAE will be delivered in Q1, which can expect another high.
Image created by author with data from Huatai Securities
In terms of product strategy, the company is expanding its use case and integrating different parts of the value chain. With eVTOL the biggest market in sightseeing and inter-city travel in China, the company is testing a new model with better control, longer range, and faster speed. This provides the company with a better strength for the market in China.
The company also tries to enhance its products by partnering with solid-state battery technology companies and other parts manufacturers. The current battery technology of electric vehicles cannot satisfy the requirements of low-altitude transport in terms of range and speed. Therefore, the company’s integration in the upstream industry and potentially setting up a manufacturing line in Guangzhou can better fit the market needs.
Expenses increasing, but with the purpose of strengthening its moat
In the company’s 2023 financial report, the company’s margin is in an enhancing trend, with the gross margin increasing from 50.8% in 2018 to 64.1% in 2023, showing the company’s efforts and impacts in terms of restructuring its business and establishing a manufacturing line. In terms of profitability, although the company is still losing more than RMB 300 million each year, I expect that the company will be able to improve in the long term with the TC obtained for a new model.
Although the company has high SG&A and R&D expenses which lead to its negative EBITDA, we are observing a plateau in terms of the expenses growth. This trend is expected to continue, and the expenses are expected to decrease gradually since the new model of EH216 and VT-30 have completed the development phase and the company can focus more on manufacturing and sales.
According to the company’s filing, the annual burn rate is at around $12-15 million, and this number is in a decreasing trend. With around $30 million of cash on hand, investors of the company can worry less about the company’s financing plan and focus on its sales and cost management.
Valuation: A leader with higher P/S valuation premium, based on increasing sales
Image created by the author with data from the company
After the approval of its aircraft, I expect the company to continue to grow strongly in terms of sales, especially when the pipeline is strong as management disclosed. Therefore, the company in the next 3 years will be able to more than double the sales given the delivery timeline, reaching $1 billion in sales in 2026.
As discussed, given the company’s leadership compared with other eVTOL companies who are enjoying an extremely high P/S ratio, the company will be able to reach around 15-20x, which is slightly higher than its current valuation. This gives the company a target price of $29.8 – 40.1.
Investment risks
- Policy risks: The industry currently is still highly driven and impacted by the policy stance of the government. In China, there might be a change in policy or a tightened stance towards this disruptive industry, which may then impact the company.
- Technology risk: As a new technology and a new use case, the company might not be able to execute its technology development plan, like Joby did in 2022, or might not be able to scale the production as priced in our forecast
- Market risk: This is not a conventional mode of transport that requires the customers’ buy-in. If the economic condition gets worse and if the customers are not willing to pay a premium for this, it will affect EHang’s business.
Conclusion
EHang is a company in a fast-growing industry and leading its competitors in terms of regulatory status and technology maturity. The company, leveraging on the manufacturing value chain in China, is poised to be able to expand its manufacturing line to scale up even faster. With the company’s better management of cash and expenses, it is a strong buy for the future 3-5 years.
