Getting a headstart on hydrogen

Just as every journey begins with a single step, every transformational innovation begins with financing. A hydrogen economy, after all, will not simply appear out of thin air after more than a century’s investment in a carbon-based economy. Somebody will have to pay for the generators and infrastructure necessary to produce and deliver hydrogen to its users.

Fortunately, markets are increasingly coming around to the idea of investing in hydrogen. Graham Cooley, CEO of electrolyser manufacturer ITM Power, told Wood McKenzie’s Power & Renewables conference that capital markets are now fully aware of the investment opportunities in green hydrogen. Ben Gallagher, Wood McKenzie lead analyst, emerging technologies, says that at least US$4.5 billion ($6.1 billion) was invested in the hydrogen market in 1Q2021 with 55 projects announced after a dip in 2Q2020 and 3Q2020.

According to Bank of America (BoA), sectors seen to benefit most from hydrogen are those where decarbonisation with renewable electricity is not possible like steel, heating and transport. They see hydrogen tech and renewable utilities as promising given that renewable capacity needed for green hydrogen production could grow 10-fold by 2050. Industrial gas and chemicals are also seen to “gain share of this energy supply and self-decarbonisation” as well, though oil demand could fall 20% if road transport transitions fully to hydrogen by 2050.

For all the hype of electric vehicles, hydrogen-powered vehicles, too, look to be a promising use case for green hydrogen. China, which has the third highest number of hydrogen fuel cell vehicles globally, aims to have 1 million fuel cell vehicles on its roads by 2030. Auto giants from Daimler to Toyota are exploring the use of zero-emission hydrogen trucks even if light vehicle mobility remains the preserve of electric vehicles. Even so, the push for all-round cleaner energy could see sustainable electricity converted from hydrogen used to power electric cars.

Trains are another promising use case. Hasnip of SMBC notes that there has been interest in Europe about using hydrogen to power non-electrified routes, as well as smaller routes served by shorter diesel-electric trains. Such trains, claim hydrogen fuel cell firm Cummins Inc, have reduced noise and vibration, lower maintenance and operating expenditures and are cheaper to decarbonise than via electrification.

More broadly, rating firm Moody’s vice-president and senior analyst Ivy Poon sees utilities benefitting from rising energy demand and renewable energy expansion. Credit quality is seen to improve for Asian power companies as electricity demand rises, with carbon transition being a key focus in the Asian power sector. With governments committing to decarbonisation and renewable energy becoming more competitive, hydrogen could benefit from this move towards a green recovery.

Barriers to investment

But investing in hydrogen can be “high risk, high reward”. Monier of Lombard Odier says that investment into hydrogen technologies have proven volatile, with initially large gains last year having slipped due to cyclical stock rotation. Many firms have yet to turn a profit; partnerships with existing energy providers could prove a more sustainable business model, though this is perhaps typical of a growth sector. Nevertheless, Hasnip of SMBC has already observed a lot of joint ventures taking place to gain access to markets and technology as well as reduce financial risk.

However, Chollet of Pictet warns that many of the companies involved are very small and revenue generated, if any, too. “There is no true visibility yet when it comes to barriers to entry and competitiveness of these companies,” he says. While hydrogen could be risky for retail equity investors due to its novelty, Siddartha Shrivastava, head of energy and natural resources, Asia, SMBC, sees institutional investors requiring longterm stable returns in hydrogen focusing on the hydrogen transportation & logistics part of the value chain.

Another risk to hydrogen investing is that supply of raw materials, land and capital are struggling to keep up with the rising interest in green infrastructure. “The price of lithium has more than doubled in the past year. Copper prices are up by about 70%. Fights are breaking out over permits for new mines, wind and solar farms,” reports The Economist on June 12. More expensive factor inputs could see such infrastructure become more expensive.

Nevertheless, Hasnip sees this creating new opportunities in the mining industry. The rare earths sector is likely to benefit as miners shift away from coal due to the transition to hydrogen. Shrivastava also sees opportunity in ammonia — a product of hydrogen — since it can be directly used instead of requiring a fuel cell like hydrogen. Hydrogen is, moreover, often converted into ammonia for ease of transport.

Hydrogen projects are also vulnerable to multi-project risks, since power generation and infrastructure investment are co-dependent. Tessa Davis, partner at Morrison & Foerster, notes that coordinating investment timelines for demand and supply can be tricky.

Rachel Crouch, senior associate at Norton Rose Fulbright, sounds a word of caution: “Lenders to any part of the chain will have to ensure that all the linked elements will be developed as intended and on time to ensure debt repayment.”

It is also important to ensure a stable regulatory and political environment too. “More stable environments with long-term signals can create more predictability for businesses and more interest for them to invest,” says Bambawale of Engie. Largescale investments need a long payback and thus long-term certainty, with stable regulatory frameworks creating predictable demand growth for this emerging industry.

Buying into hydrogen

So, how can investors get exposure into the growing hydrogen economy? For one, they can buy ETFs to spread their risk across a basket of investments. London-listed L&G Hydrogen Economy UCITS ETF tracks the Solactive Hydrogen Economy Index NTR with a relatively low average P/B of 2.4. Yet despite its larger market capitalisation of US$435.9 million, it has been relatively volatile at 0.742 beta.

For more specific allocation into hydrogen production and fuel cells, VanEck Vectors Hydrogen Economy UCITS ETF tracks the MVIS Global Hydrogen Economy Index. Despite a higher 0.55% expenses ratio, it has a lower beta of 0.604 at a 3.7 average P/B and a market cap of just US$41.7 million. For exposure to Asia, NYSE Arca-listed Direxion Hydrogen ETF offers 87% South Korea allocation with a low 0.45% expenses ratio despite a 337.5 P/B ratio and concentration risk from its 42.6% allocation to Doosan Fuel Cell Co.

L&G Hydrogen Economy ETF’s largest allocation is Plug Power Inc, a Nasdaq-listed firm that designs, develops, manufactures and commercialises fuel cell systems for electric lift trucks and material handling equipment. Having gained 666% in value from 3Q2020–4Q2020, Plug Power has significant upside potential (54.5%), counting Amazon, Walmart, Nike and Home Depot among its clients. Still, despite forming joint ventures with Renault to make hydrogen-powered vans and SK Group to expand hydrogen energy in Asia, it is not yet profitable.

Linde, the world’s largest industrial gas producer, offers a more secure route into the hydrogen theme. It has a positive 3.2% free cash flow as well as a low 26.8 net gearing on top of a 3.3 P/B ratio and 6.4% ROE. UBS is bullish on the counter, projecting it to double its sales of hydrogen by 2030 as it invests in green hydrogen. Linde has announced the construction of the “world’s largest electrolyser” in Leuna, Germany, by 2H2022 and Asia’s largest liquid hydrogen facility in Ulsan, South Korea, by 2023.

Another attractive stock is NYSE’s Bloom Energy Corp, an established fuel cell business which offers on-site power generation systems that use fuel cell technology to generate electricity. “It could be the kind of company that changes how we view energy forever,” says Motley Fool writer Travis Hoium, who believes its solid oxide fuel cell could be key to more economical green hydrogen. With its stock up 245% year to November 12, 2020, and currently having a 27% upside, the stock’s massive P/B of 717.6 highlights the stock’s overwhelming appeal.

With 8.4% net gearing and 5.8% free cash flow, Cummins Inc provides a stable balance sheet and innovation, providing the fuel cells used to power both the world’s first hydrogen-powered aircraft and passenger train. With a finger in every link in the hydrogen value chain from production to powertrains, it has nearly two decades of experience in hydrogen-based technology. Involved in both fuel cells and electrolysis, it also powers buses, trucks and boats as well as developing refuelling stations.

Hydrogen and Singapore

Singapore, with a nation-wide sustainability push, has taken several steps to have hydrogen figure as a more important element. On July 15, Second Minister for Trade and Industry Dr Tan See Leng and New Zealand’s Minister for Energy and Resources Megan Woods signed an arrangement regarding cooperation on low-carbon hydrogen.

Under the arrangement, the two countries will explore opportunities to chart standards and certifications and scale up their respective hydrogen economies, establish supply chains for low-carbon hydrogen and its derivatives, and also conduct joint research, development and deployment studies. Dr Tan calls the arrangement going towards Singapore’s bid to decarbonise its economy.

Singapore-listed firms have also begun exploring the economic potential of hydrogen technology as well. Nanofilm has announced non-binding plans for a joint venture with Temasek to invest in Sydrogen Energy. The intention is to apply Nanofilm’s advanced materials surface solutions to critical components in the fuel cell and electrolyser systems. Thus far, the main users of Nanofilm’s products and services are customers from the consumer electronics industry.

DBS Group Research’s Ling Lee Keng gives Nanofilm a $6.22 target price with 34% upside due to its proprietary vacuum-coating technology. Besides new energy sources, the firm is planning to cultivate future markets in biomedical, aerospace and Internet of Things. Despite its relatively high P/B of 6.50 and lack of dividend yield, it is a rare and lucrative growth play on the SGX.

Union Gas and Surbana Jurong are developing Singapore’s first multi-energy filling station. The plan includes exploring the feasibility of hosting alternative low carbon initiatives such as on-site production of hydrogen fuel via electrolysis and the corresponding dispensation of hydrogen fuel into hydrogen cell vehicles. The site is expected to be powered by solar and wind energy.

“We envisage that the Multi-Energy Filling Station will be a game changer not only for our group but also for the industry. It will be a blueprint for how energy stations will look in the future. Our goal is to make it scalable for easy implementation across the island and for it to also be a model that can be replicated overseas,” says Ng Yong Hwee, deputy CEO of Union Gas.

In FY2020 ended December 2020, Union Gas saw net profit surge 64.7% y-o-y to $13.86 million on the back of a 9.4% revenue growth to $86.19 million, with its liquified petroleum gas business leading the way with a 29.5% y-o-y rise in sales. It shared half of its net profit with investors in FY2020 with a total dividend of 3.03 cents, giving a 3.14% dividend yield. It has just received in-principle approval to list on the SGX Mainboard.

Keppel Offshore & Marine has also inked a collaboration agreement with risk management firm DNV to develop hydrogen value chain projects. These include safety requirements for hydrogen as an energy source, infrastructure requirements for storage and local transportation and offshore applications for hydrogen technology. UOB Kay Hian analyst Adrian Loh sees Keppel Corp earning a $435 million net profit in FY2021, allocating a $6.37 target price with 20.4% upside.