ANALYSIS: EHang Begins U.S. IPO Process as It Commercializes Autonomous Aerial Vehicles
EHang Holdings (EH) has filed to raise gross proceeds of $100 million from a U.S. IPO, according to an F-1/A registration statement.
The firm is developing autonomous aerial vehicle technology (drone) products and services.
EH is very early in its commercialization efforts and faces large, entrenched competitors in the nascent AAV space.
Company & Technology
Guangzhou, China-based EHang was founded in 2017 to design, develop, manufacture, sell and operate autonomous aerial vehicles (AAVs) to provide passenger transportation, logistics, smart city management and aerial media solutions.
Management is headed by founder, chief executive officer and chairman Huazhi Hu, who was previously chief technology officer at Beijing 999 Emergency Rescue Center.
EHang has developed the first passenger-grade single-seat model AAV, according to management, which the firm unveiled in 2016 and that requires minimal space for vertical take-off and landing, consequently enabling its potential for use in urban environments.
EHang has developed an autonomous traveling engine that enables AAVs to navigate intelligently themselves.
Devices are equipped with an autopilot and a flight control system, a communication system, a battery management system and a safety management system.
Investors in EHang included ZhenFund, PreAngel, OFC, Microsoft Accelerator Beijing, LeBox Capital, GP Capital, GGV Capital, and Nick Yang. (Source: Crunchbase)
The firm's marketing expenses consist of advertising and promotion expenses, payroll and related expenses for personnel in sales and marketing.
Management aims to promote EHang's products through online events as well as offline promotional and other advertising activities.
Sales and marketing expenses as a percentage of revenue have dropped significantly since 2017.
The sales & marketing efficiency rate, defined as how many dollars of additional new revenue generated by each dollar of sales & marketing spend, swung to a negative (0.5x) in the most recent six-month period.
Market & Competition
According to a 2019 market research report by Markets and Markets, the global autonomous aircraft market was valued at $3.6 billion in 2018 and is projected to reach $23.7 billion by 2030, growing at a very strong CAGR of nearly 17.1% between 2018 and 2030.
The main factors driving forecast market growth are the reduction in cost and human error due to increased autonomy, and advancements in artificial intelligence.
Major competitors that provide or are developing autonomous aircrafts include:
Airbus (EPA: AIR)
Lockheed Martin (LMT)
Northrop Grumman (NOC)
Elbit Systems (TLV: ESLT)
EH's recent financial results can be summarized as follows:
Slightly reduced topline revenue
Increasing gross profit and gross margin
Stable operating losses
Increased use of cash in operations
As of June 30, 2019, the company had $8.8 million in cash and $9.9 million in total liabilities. (Unaudited, interim)
Free cash flow during the twelve months ended June 30, 2019, was a negative ($8.3 million).
EHang has filed to raise $100 million in gross proceeds from an IPO of its ADSs representing underlying Class A shares.
Class A shareholders will be entitled to one vote per share and the company founder and CEO, who will hold all Class B shares, will be entitled to ten votes per share.
The S&P 500 Index no longer admits firms with multiple classes of stock into its index.
Per the firm's latest filing, the firm plans to use the net proceeds from the IPO as follows:
- for research and development of products, services and technologies.
- for selling and marketing, including development of sales channels globally.
- for expanding production capacity.
- for developing urban air mobility solutions, such as passenger air mobility services and urban air logistics services.
- for general corporate purposes, including supplementing its working capital and pursuing potential strategic investments and acquisitions, although it has not identified any specific investment or acquisition opportunities at this time.
Management's presentation of the company roadshow is not available.
Listed underwriters of the IPO are Morgan Stanley, Credit Suisse, Needham & Company and Tiger Brokers.
EH is seeking U.S. capital markets public investment for continued development of its aerial passenger transportation systems.
The firm's financials show some revenue, but EH is still very early in its commercialization phase.
The market opportunity is forecast to grow sharply in the years ahead but the firm will face increasing competition from deep-pocketed aerospace companies and other transportation firms who are also angling for entry into the nascent market.
Like many Chinese firms seeking to tap U.S. markets, the firm operates within a VIE structure or Variable Interest Entity. U.S. investors would only have an interest in an offshore firm with contractual rights to the firm's operational results but would not own the underlying assets.
This is a legal gray area that brings the risk of management changing the terms of the contractual agreement or the Chinese government altering the legality of such arrangements. Prospective investors in the IPO would need to factor in this important structural uncertainty.
The regulatory environments that EHang operates in are varied and changing, mostly in its favor.
Management will need to be nimble in pursuing sales in countries or regions that provide favorable regulatory policies to encourage continued testing and use cases for this nascent technology.
Additionally, EH is competing against very large and deep-pocketed firms with extensive operations, so at this point should be seen as an "underdog" in the burgeoning world of autonomous aircraft.
(The opinions expressed by contributing analysts do not reflect the position of CapitalWatch or its journalists. The analyst has no positions in any stocks mentioned, no plans to initiate any positions within the next 72 hours, and no business relationship with any company whose stock is mentioned in this article. Information provided is for educational purposes only, may be incomplete or out of date, and does not constitute financial, legal, or investment advice.)
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