EHang Stock: Possible Beginning Of eVTOLs In China (NASDAQ:EH)

EHang (NASDAQ:EH) is a pioneer in many ways with the company going public ahead of a number of its more high-profile competitors including Joby (JOBY), Archer (ACHR), and Vertical Aerospace (EVTL). It is also the only public eVTOL company developing an autonomous aerial vehicle system for the fledgling yet promising concept of urban air mobility. In this, transport becomes truly multimodal with the sky becoming more accessible to people and goods to get to their desired location.

The stock market was still gripped by materially bullish animal spirits when I previously covered EHang. The Guangzhou, China-based company like many other broadly pre-revenue stocks chasing fringe industries with no clear total addressable market was hitting new highs. It was clear then that this would be unsustainable and I described the valuation as being built on FOMO and hype. Its previous rapacious animal spirits have all but moderated as the company continues to develop its EHang 216 and chase certification.

Urban air mobility rightfully has its sceptics. For many bearish on the industry, it is just truly too much of a divergence from the current status quo to ever become a reality in the way that would support the stock prices of its participants. This is against widely optimistic forecasts from Joby that UAM will be a $500 billion addressable market in the United States and a global addressable market just north of $1 trillion. A trifecta of issues from population growth, inadequate public transit infrastructure, and increasing ground traffic is driving interest in the new mode of transport. Single-rotor helicopters for urban transport have existed for decades but their overall uptake has been limited due to the high cost, extreme noise pollution, and high-profile crashes including the 1977 Pan Am building helicopter accident.

eVTOLs hold the potential to be safer, cleaner, faster, and quieter to run than existing fossil fuel-based UAM solutions. Indeed, more limited moving parts due to the aircraft being electric would make maintenance easier and overall operating costs cheaper. When you include the autonomous aspect of the EHang 216, then future customers would be able to realize significantly lower running costs. This underpins the long investment in EHang. If certified, the company’s technology holds the potential to materially ramp the total addressable market being chased.

Progress On Certification With A Revenue Ramp In View

EHang last reported earnings for its fiscal 2022 second quarter which saw revenue come in at $2.2 million, a 16% increase from the year-ago quarter with gross margin coming in at 67.1% and operating losses at $11.1 million. The financials place the company in the broadly still near-zero revenue category as sales for its EHang 216 is still somewhat pending. The EHang 216 is undergoing certification in its native country with the Civil Aviation Administration of China.

The Chinese government is keen to promote home-grown technology and maintain its strong position in the broader drone industry. Shenzhen-based DJI, for example, is a leader in the consumer drone space. eVTOLs presents a large and potentially profitable export sector that EHang wants to dominate. Trial flights are already being conducted in a number of countries including Japan and Indonesia.

Whilst eventual certification would present a catalyst that could drive shares higher, there is no clear timeline as to when this will happen. Management during the second quarter earnings call stated that they continue to conduct internal tests to reflect the airworthiness standards for the demonstration of compliance. And that the CAAC and Guangdong provincial government recently launched a strategic corporation framework for civil aviation development that emphasizes the speeding up and development of the aviation manufacturing industry.

Hence, for the bulls, it seems to be a case of when and not if the company is able to gain certification. EHang ended the quarter with cash and equivalents of $36 million with management stating this retains the company on a good track to progress towards certification.

Using The Sky To Bring People Closer

Autonomous air transportation represents the beginning of a future where transportation becomes truly multimodal and provides people with a new option to go where they want. Shareholders in early 2021 perhaps got too sucked into this future and drove the company’s shares to unsustainable highs. The retracement of the commons on the back of a collapsing stock market has totally reset the previous animal spirits.

The EHang 216 should be better than traditional manned aircraft as it has been developed with a philosophy centred on full redundancy to ensure security, autonomous flights, and centralized control of the intelligent command-and-control centre. This all-electric aircraft also presents a sustainable mode of transportation in a decarbonizing world. Whilst it’s not quite clear what can be deemed a cheap valuation for EHang with no meaningful revenues to be expected before certification, the current market cap of just over $200 million is a long way away from its previous $6.8 billion peak. A buy at this point would only be for speculative investors looking to gain exposure to Chinese UAM.