2023-03-30 23:23:35 ET
Summary
- Progress towards certification appears to be in the final stages but the exact timeline is vague.
- Despite the exciting prospects for this stock, caution is recommended due to the importance of type certification.
- Otherwise, EHang remains a leader in the AAV space with competition that is generally lagging.
EHang ( EH ) is at the forefront of a nascent UAM market which could revolutionise urban travel but remains essentially a binary bet on the outcome of Chinese Aviation Administration of China (CAAC) certification for investors. Management estimated in the Q3 earnings call that 216 type certification might come “around January”. January has come and gone, meanwhile no certification has materialised. Of course, this is not new territory for EHang, with CAAC certification always supposedly just around the corner. While the prospect of certification bodes well for the stock, it is balanced by the current cash runway and risks plaguing Chinese stocks at the moment, making my overall view neutral.
This being the final stage of certification involving “Demonstration and Verification of Compliance” has seemingly reignited confidence in the stock since December with the stock rising significantly since then. The UAM market is likely to grow significantly, by one estimate it is predicted to grow to over $28.3 billion by 2030 , providing around a 34.3% CAGR if accurate, while Morgan Stanley projects a $1 trillion TAM by 2040 .
CAAC Certification
CAAC certification has been repeatedly pushed back all the way back from 2021 to now. The over 100 pre-orders from within China are conditional on type certification, and of course there will likely be an influx of even more orders that will only happen post certification.
However, as of the Q4 2022 earnings call, there is no clear date for Type Certification, with management instead reverting to comparisons with other eVTOL companies who are years away from certification. This seems like a bad sign in my view, as for some reason management seems wary of giving a more specific target, leaving room for a prolonged wait. The following contains management’s most detailed estimate of progress:
Huazhi Hu
At present, over 70% of compliance tests has been either completed or to be signed soon. It means we have substantially completed over 90% of the entire type certification process.
How exactly the ‘90%’ figure is calculated is unclear, and it seems possible to me this is essentially a restatement of how far along progress already was on type certification given in the last earnings call management was projecting it would finally be reached in January.
EHang does have an impressive track record that supports certification eventually however. The EHang 216 has completed 34,000 flights in total with 8,200 of those trial flights taking place in China at 18 different test locations. Management cited the large increase in COVID infections in Q4 as one reason certification was delayed.
Huazhi Hu:
In the fourth quarter of last year, the EHang 216-S type certification successfully entered the final phase of the demonstration and implication of the companies. However, due to the massive infections after China lifted COVID control policies, until this year's Chinese Dragon holiday, a relevant TC project was delayed to a certain extent.
This explanation seems plausible and depending on how much of the delay this explains, this seems good for prospects going forward as it is a one-time setback.
China Risk
The China risk around EH stock is somewhat murky. There is an argument that there is not as much defence relevance with UAM compared to something like semiconductors, where controlling the production is critical to remaining at the cutting edge of technology like AI with direct military applications. On the other hand, last year Chinese drone maker DJI Technology was placed on a DoD blacklist for US investment amid concerns around the ties between the company and the Chinese military industrial complex. In this context, it is easy to imagine EHang being judged as a national security concern given the vehicles are unmanned, depending on other variables including the nature of the relationship between the company and the Chinese government. In that sense the company’s relationship with the government is somewhat of a double-edged sword, a close one is beneficial for certification, but a very close one could be damaging for accessing the American market in future.
Cash reserves of $36.1 million vs $8.9 million operating loss for the latest quarter leaves something to be desired in terms of a cash runway, but it has improved over Q3 figures. With certification seemingly in the later stages nearing approval, the company will likely be able to find financing but of course stock dilution is always possibly a concern.
Competition
The UAM market is a novel one, so as such there isn’t immediate, direct competition in the traditional sense, with EHang undoubtedly being number one in the Chinese market and arguably the closest to achieving certification in a significant market. Joby(NYSE: JOBY ), an American eVTOL company, completed the second stage of five required by the FAA just last month, but currently projects certification occurring in 2025. Vertical Aerospace (NYSE: EVTL ) projects regulatory approval in 2025, but currently has no production aircraft built. EHang compares favourably by some metrics to the competition with a large volume of test flights and significant progress towards certification by comparison, as well as the autonomous nature of the vehicles which is uncommon amongst eVTOL companies.
A significant advantage EHang will likely have is first mover advantage, at least in the Chinese and to a lesser extent Asian markets. The same CAAC certification that has acted as somewhat of a stumbling block thus far could transform into a protective hurdle if the company is finally granted certification themselves. This also gives them time to build up their brand reputation which will be an important factor as not just an eVTOL manufacturer but UAM operator. Once CAAC is achieved, it may also give them a head start on other Asian markets. Although local type certification will likely be required in most other Asian countries, as stated in the Q4 earnings call management expects this to be a “simplified process”.
Other Risks
One part of the possible demand for UAM is based on the travel of high-net-worth individuals, while another large part is tourism. Both could be heavily impacted by a recession, as they are obviously non-essential expenses and on top of that there would be implications for funding. This is obviously troubling given recent bank failures and other warning signs.
A further risk would be any accidents, which would likely tank confidence in the company, exacerbated further by the autonomous nature of the vehicles. One survey revealed that 38% of Americans would never feel comfortable flying in an Autonomous Aerial Vehicle (AAV), which dropped to 24% across all nationalities surveyed. Fortunately for EHang Chinese participants were more positive towards AAVs, with 86% being open to the prospect. High profile accidents could easily worsen these figures, even if overall the mode of transport is relatively safe. In this sense, t he innovative nature of AAVs itself can be a risk due to public perception, as trust in new modes of transport can be unsteady.
Conclusion
EHang is still leading other eVTOL companies in the race towards certification but with each delay loses more advantage. Type certification remains the aim of the game but is continually pushed back with no concrete dates or timeframes to speak of. It is worth noting though that the UAM market is a burgeoning one and to a degree setbacks should be expected. Aside from certification concerns, the company is still a compelling speculative bet as one of the only AAV companies with such a track record of test flights and progress towards commercialisation. Despite this, until there is more clarity on certification my view is neutral.
For further details see:
EHang: Vague Certification Outlook Is Cause For Caution