Sales Growth Expected to Be Stable
The author is an analyst of NH Investment & Securities. He can be reached at dongyang.kim@nhqv.com. -- Ed.
Backed by: 1) RPS strengthening; and 2) the government’s hydrogen economy roadmap, the fuel cell market for power generation should enjoy healthy growth moving forward. Having booked: 1) fuel cell orders of W1.3tn in both 2018 and 2019; and 2) an LTSA backlog of W2tn, Doosan Fuel Cell is expected to display stable sales growth. The shares are currently trading at a 2020E P/S of 0.8x, which is undervalued versus global peers.
Fuel cell: Competitiveness boosted by oil price drop
Thanks to the strengthening of the renewable energy portfolio standard (RPS), the renewable energy market is expanding. Large-sized power producers will be required to obtain 10% of their generated power from renewables by 2023 and 28% by 2030. The domestic fuel cell market for power generation should also experience growth on the back of the government’s hydrogen-economy roadmap, which sets an annual average fuel cell installation target (for power generation purposes) of 668MW (2019~2040 total: W6.7tn).
Benefiting from government policy, the renewable energy market should continue to expand. Yet, a decline in raw material cost for traditional generation facilities (stemming from a drop in oil price) is likely to weigh on the competitiveness of renewables. That said, unlike solar and wind energy, fuel cell uses LNG as a power source. And, fuel costs make up two-thirds of total power generating cost (including depreciation and amortization of power plants+variable costs) at fuel cell plants. Assuming that the SMP, REC, and heat selling price remain stable, a 1% drop in LNG prices (which lag oil price changes by about 1~2 quarters) should boost fuel cell plant operators’ annual NP by 4.7%.
Despite likely losses in 1Q20, excessive concerns unwarranted
Doosan Fuel Cell should book 1Q20E sales of W15.0bn and an operating loss of W4.8bn. Most of the revenue is expected to be generated by long-term service agreements (LTSAs), with installation sales decreasing following a concentration of deliveries in 4Q19. We also note that quality improvement costs are anticipated to be reflected until end-1H20.
Nevertheless, such earnings volatility is due to client demand concentrating in 2Q and 4Q, and the firm should deliver annual sales of W495.0bn and OP of W24.9bn. The company is making smooth progress with its 2020 order target of 142MW (+10% y-y, 40MW in 1Q20). Moreover, its sizable (W1.9tn) order backlog for LTSAs (to be recognized as sales over the next 20 years during the operation of power plants) should contribute to reducing quarterly sales volatility.