Ceres Power Holdings (LON:CWR) has announced a very meaningful strategic partnership with and equity investment from Weichai Power. Zeus Capital said that Weichai is listed in both Hong Kong and Shenzen, employs 74k people, and is currently valued at c. $10bn. The agreement includes £40m of equity investment for a 20% equity holding payable in two stages; £17m today at a price of 15.08p and £23.2m later in 2018 at a price of 16.46p, premiums of 18% and 29% to last night’s close respectively. In addition, the agreement provides the potential for significant revenue through engineering services and technology transfer, license and royalty payments, initially in the Chinese electric bus market. Forecasts remain prudently unchanged at this juncture, ahead of the second equity tranche. However, we believe this provides strong commercial validation for Ceres’ SOFC technology, particularly in the automotive sector, and we see scope for material catalysts over the medium term.
Sixth JDA with a major automotive player – Weichai is a leading automotive and equipment manufacturing company producing 600k engines, 830k transmissions, 150k heavy trucks and 200k fork lift trucks in 2017. In the first instance, the strategic partnership with Ceres will develop and launch a SOFC fuel cell range extender for the rapidly growing Chinese electric bus market. Putting the initial commercial opportunity in perspective, Weichai currently produces 30k buses for the domestic market a year.
Material benefits to Ceres – The gross equity investment of c. £40.0m provides growth capital to scale up Ceres’ operations in the UK, as it prepares for full commercialisation of its 5kW stack, and removes any funding concerns. The agreement provides access to the Chinese fuel cell market through a credible local operator. The market is the largest and fastest growing globally with government policy to reduce CO2 emissions supported by subsidies. Chinese production will yield economies of scale increasing Ceres’ SteelCell® competitive advantage. The relationship will build in stages with the initial phase of technology transfer for development of FC engines for electric buses moving into further trials post which the JV will be created. The sales model is based on a license and royalty fees and longer-term share in profits of a JV.
Commercial developments enhance the equity story – Ceres management has done a good job meeting, and with this latest announcement surpassing, the commercial milestones it set out three years ago. Despite the positive developments it remains difficult to ascribe a potential value to each of the JDA partners. However, the depth of the agreement with Weichai allows for a more tangible approach to the potential value ascribed to the agreement. On conservative market share, price and royalty assumptions we ascribe a PV of c.£60m to the tie up with Weichai.