We initiate coverage on Beijing SinoHytec ("SinoHytec", or the "Company") with "Buy" investment rating and a TP of HK$48.84. As China's pioneer fuel cell system maker, SinoHytec is to benefit from the country's rapidly growing FCV market with a sustainable first-mover advantage. We forecast 2023-2025 EPS of RMB-1.064/ RMB-0.293/ RMB0.124, respectively. We derive our TP of HK$48.84 through DCF analysis, assuming a WACC of 12.0% and a perpetual growth rate of 5%. Our TP reflects 2024F PS of 4.9x, which is undemanding compared with global peers, such as Ballard Power (BLDP CN).

Where we differ/ agree: Amid intensified competition due to growing new entrants, the market is concerned about SinoHytec's ability to maintain its market share. Through examining in detail the sources of SinoHytec's first-mover advantage relating to economic, preemption, technological and behavioural factors, we argue that SinoHytec has accrued a strong and sustainable first-mover advantage in terms of cost and differentiation, and is thus likely to continue leading the market. While we agree that there is currently uncertainty in China's FCV demand due to weaker-than-expected fiscal support, we are positive on the long-term outlook, given hydrogen's indispensable role in net zero pathways, China's stated policy support and promising cost reduction trend along the FCV value chain.

Strong and sustainable first-mover advantage from sources relating to technological and behavioural factors. By pioneering into the R&D and manufacturing of fuel cell systems, SinoHytec has accrued superior technological competency, which allows it to produce more efficiently and better meet key buying criteria. Such technological competency is likely to sustain even amid a rapidly evolving market environment, as SinoHytec possesses a hard-to-replicate R&D system involving leading universities, industry players and research institutes, established largely as a result of path dependency. From a behavioural perspective, we also see a strong, sustainable differentiation advantage accrued to SinoHytec as a first-mover.

Given the sales process of fuel cell systems, we believe there is a high non-contractual switching cost to replace SinoHytec's products with later entrants'. Meanwhile, SinoHytec enjoys the first opportunity to influence customers' perceptions of the relative importance of product attributes, thereby further increasing customer loyalty even if switching is not costly.

Catalysts: Better-than-expected implementation of FCV-related industrial policies; better-than-expected improvement in receivable collections; faster-than-expected cost reduction along the FCV value chain; technological breakthroughs that enhance the performance and economy of FCVs.

Risks: Unexpected impairment in receivables or inventories; weaker-than-expected fiscal support for China's FCV industry; slower-than-expected cost reduction along the FCV value chain.