For the first time, we covered Beijing Yihuatong (“Yihuatong” or the “Company”), giving it a “buy” investment rating and a target price of HK$48.84. As a leading manufacturer of fuel cell systems in China, Yihuatong has benefited from China's rapidly growing fuel cell vehicle market with its continued first-mover advantage. We forecast that the company's earnings per share for 2023-2025 will be RMB 1.064 /RMB 0.293 /RMB 0.124, respectively.

We used the DCF valuation method to arrive at a target price of HK$48.84, assuming WACC of 12.0% and a sustainable growth rate of 5%. Our target price reflects a market-sales rate of 4.9 times in 2024, which is a low valuation compared to global peers such as Ballard Power Systems (BLDP CN).

Our views are different and different from the market: due to the increasing number of new entrants and intensifying competition, the market has doubts about Yihuatong's ability to maintain market share. Through detailed analysis of the sources of Yihuatong's first-mover advantage in terms of economy, seizing opportunities, technology, etc., we believe that Yihuatong has accumulated a strong and sustainable first-mover advantage in terms of cost and differentiation, so it is expected that it will continue to lead the market. Although we agree that the current demand for fuel cell vehicles in China is uncertain due to weaker than expected financial support, we are still optimistic about the long-term outlook given the indispensable role of hydrogen in the net-zero path, China's clear policy support, and the expected cost reduction in the fuel cell vehicle value chain.

A strong and sustainable first-mover advantage comes from technical and behavioral factors. By leading the development and manufacture of fuel cell systems, Yihuatong has accumulated excellent technical capabilities, enabling it to produce efficiently and better meet key procurement standards. This technical capability is expected to be maintained even in a rapidly evolving market environment, as Yihuatong has an R&D system that is difficult to replicate, including first-class universities, industry participants, and research institutions, which is largely built on path dependency. From a behavioral perspective, we also saw that as a pioneer, Yihuatong has strong and sustainable differentiation advantages. Considering the fuel cell system sales process, we believe that replacing Yihuatong products with latecomer products has a high non-contractual conversion cost. At the same time, Yihuatong has the first opportunity to influence customers' perception of the importance of product attributes, thus further increasing customer stickiness even when conversion costs are low.

Catalysts: Implementation of fuel cell-related industrial policies was better than expected; accounts receivable payments were better than expected; cost reduction in the fuel cell vehicle value chain was faster than expected; technological breakthroughs to improve the performance and economy of fuel cell vehicles.

Risks: Accounts receivable or inventory depreciated beyond expectations; financial support for China's fuel cell vehicle industry was weaker than expected; cost reduction in the fuel cell vehicle value chain was slower than expected.