Amidst a sluggish domestic market, Doosan Fuel Cell (336260) secured $744 million in American and $97 million in European contracts, raising $364 million to fund production and aiming for a turnaround to profitability by 2027.
As South Korea's fuel cell market struggles, Doosan Fuel Cell has been facing consecutive losses. However, the company has seized the opportunity to expand its overseas operations, leveraging the power shortages faced by American AI data centers. Building on its recent success in securing approximately $930 million in supply contracts across the US and Europe, the company has now raised an additional $364 million in funding. This strategic move is aimed at transforming these substantial orders into tangible production and revenue streams.
While the domestic landscape has been challenging, with high power generation costs and evolving hydrogen power procurement systems hindering new business opportunities, the American market presents a unique opportunity. The construction of AI data centers has led to delays in connecting to the power grid, creating a demand for new power generation facilities. This has opened up a window for Doosan Fuel Cell to expand its business scope beyond domestic power generation projects and into the lucrative overseas private power market.
#### Fuel Cell Demand Surges as American Data Centers Face Power Grid Bottlenecks
In September, Doosan Fuel Cell entered into two separate contracts with HyAxiom, a US subsidiary of Doosan Corporation, to supply phosphoric acid fuel cells (PAFC) worth a combined $744 million. Building on the initial contract worth $453 million on September 2, the company secured an additional $291 million on September 15.
Two-Year, $1.11 Billion Contract for Doosan Fuel Cell
The initial order, which will be delivered sequentially from the second half of this year until the first half of 2028, is valued at $1.11 billion. Additional orders will be supplied to the North American region starting in 2028, with HiExim responsible for local sales, engineering, commissioning, and long-term maintenance in the U.S.
In August, the company signed a $108.7 million contract with German firm Liberion for the supply of solid oxide fuel cell (SOFC) stacks. Total orders from the U.S. and Europe amount to $932.3 million, while the company's cumulative orders for the year, including domestic contracts, reach approximately $1.11 billion.
In the U.S., the increasing power demands of AI data centers are outpacing the construction of power plants and transmission networks. As a result, the on-site installation of power generation facilities is emerging as an alternative, as data centers often face long waits to receive sufficient power upon completion.
Doosan Fuel Cell's flagship product, the PAFC, generates electricity through the electrochemical reaction of hydrogen and oxygen. It can utilize hydrogen extracted from natural gas and can be incrementally expanded in line with power demands through modular equipment. The relatively low noise and air pollutant emissions make it an ideal power generation solution for data centers.
Fuel Cell Market Dynamics and Two-Front Expansion
The domestic fuel cell market in South Korea has undergone a significant transformation, shifting towards competitive bidding as the primary mode of operation following the introduction of the Combined Heat and Power System (CHPS) for hydrogen-based power generation. High power generation costs and policy-driven uncertainties have led to a slowdown in new orders, posing challenges for companies like Doosan Fuel Cell in their quest for performance recovery.
However, the emerging market for distributed power systems in U.S. data centers presents a promising new avenue, surpassing the limitations of domestic ventures.
A Doosan Fuel Cell spokesperson highlighted the company's recognition for product competitiveness and supply responsiveness in the U.S. market during last month's additional order announcement. They emphasized their commitment to optimizing timely deliveries and quality control.
The potential for further orders was also indicated. According to a report by Eugene Investment & Securities on the 22nd, the size of the order candidates currently under discussion with U.S. clients by HiExim is more than four times the volume of existing contracts. In the European SOFC business, multiple companies are also engaged in follow-up contract negotiations.
$400 Million Financing for Production Expansion, Double Revenue Forecast for Next Year
Doosan Fuel Cell announced on the 13th a decision to raise a total of $400 million in funding through the issuance of $300 million in perpetual convertible bonds (CB) and $100 million in perpetual bond warrants (BW).
Funding Allocation and Growth Strategies
The secured funds will be utilized for the procurement of essential equipment and materials required for fuel cell production in the United States and Europe, as well as for the expansion of PAFC production lines.
It is important to note that large-scale orders do not immediately translate into cash inflows. Fuel cell production demands significant upfront investment in raw materials and equipment procurement, hence the need for working capital alongside order volume expansion.
The company anticipates a reduction in debt-to-equity ratio burden, which stood at approximately 350% in Q2 of this year due to domestic business struggles and persistent losses.
Furthermore, the company aims to expand its production capacity. Two-Fuel Cell's PAFC annual production capacity is expected to reach approximately 350 megawatts (MW) by the end of this year, with the potential to increase to 400 MW through additional investments.
As overseas orders begin to significantly impact performance in 2027, revenue is also expected to increase substantially.
Eugene Investment & Securities estimates that Doosan Fuel Cell's consolidated revenue will increase by 99.1%, from KRW 4,841 billion this year to KRW 9,640 billion in 2027. During the same period, operating profit is expected to turn from a KRW 1022 billion deficit to a KRW 180 billion surplus, with operating profit projected to expand to KRW 599 billion in 2028.
Financial Outlook for Doosan Fuel Cell: Overcoming Short-Term Challenges
Despite a projected 56.4% year-over-year increase in revenue for the third quarter, reaching KRW 14.2 billion, Doosan Fuel Cell continues to face cost pressures, with an anticipated operating loss of KRW 1.65 billion. These losses are attributed to the ongoing replacement costs of existing fuel cell stacks and the increased fixed costs of the SOFC factory, which have impacted profitability.
Analyst Han Byeong-hwa from Eugene Investment & Securities Co. predicts that fuel cell shipments to the U.S. market will begin in the first quarter of next year, with an increase throughout the latter half of the year. Consequently, he expects a transition to quarterly operating profits from the second half of next year onwards.
Han also compares Doosan Fuel Cell favorably to Bloom Energy in the U.S. data center fuel cell market. Based on the projected 2027 revenue, Doosan Fuel Cell's price-to-sales ratio (PSR) is 2.3x, significantly lower than Bloom Energy's 6.5x.
While maintaining a 'Buy' rating, Eugene Investment & Securities has lowered its target price from KRW 80,000 to KRW 70,000, reflecting potential share dilution of approximately 14% due to funding requirements.
Two-Sun Fuel Cell's Transition: Breaking into Overseas Markets
Two-Sun Fuel Cell Co. has entered a pivotal phase, aiming to overcome the sluggish domestic power generation fuel cell market through a strategic shift towards overseas orders. With an expansion of supply to the U.S. market and increased production capacity, the company is poised to accelerate revenue growth and enhance profitability from next year onwards.
Breaking into New Markets
The company's focus on commercialization beyond its domestic borders is a key strategy. By tapping into the U.S. market, Two-Sun aims to offset any late-session selling pressure it may face in its home market. This move is expected to drive overall growth and improve yield rates, especially with the company's plans to expand its production capabilities.
Growth Expectations
From "early trade" next year, Two-Sun is anticipated to experience a surge in its top line, erasing any intraday gains made in the domestic market. This growth is attributed to the company's successful margin call liquidations and its ability to navigate through any potential commercialization challenges.
With a well-executed strategy, Two-Sun Fuel Cell is set to make significant strides in the global fuel cell market, solidifying its position and driving long-term profitability.
