A hydrogen listing, and a new China toy story

“I stay away from SPACs, I don’t want to hear about them, I don’t want to buy them.”

By Doug Young & Rene Vanguestaine

Hydrogen energy is currently all the rage in China, driven by strong state support — a typical hallmark of Beijing’s push into new technologies. Last year a couple of hydrogen energy companies listed in Hong Kong, and now Scage, a relatively new maker of hydrogen-powered trucks, is seeking to enter the U.S. market through a SPAC merger.

Founded just a few years ago, Scage operates an asset-light business model by outsourcing production to C&C Truck, a joint venture between major state-owned companies Chery and CIMC. Despite having just 105 truck orders, the company is seeking a lofty valuation of between $800 million and $1 billion, translating into an astonishing price-to-sales (P/S) ratio exceeding 100. Even if Scage manages to triple its revenue in the short term, its valuation would remain about twice as high as its Hong Kong-listed counterparts.

Historically, the track record of SPACs — particularly those in the U.S. — has been lackluster, at best. Some companies have gone bankrupt, including Nikola, another hydrogen truck venture, which filed for bankruptcy in February. The inherent risks of SPACs are compounded by weaker scrutiny from the SEC compared to traditional IPOs, often leaving investors reliant on the hype generated by promoters who stand to profit significantly from the deal-making process.

Hydrogen technology, while promising, has yet to prove its scalability economically. Companies in Japan and Europe, including BMW, have experimented for years without achieving widespread adoption. Infrastructure remains a significant hurdle, particularly in the West. China may have managed to overcome similar challenges in electric vehicles, but whether the same success can be replicated with hydrogen remains uncertain. We believe investors should approach Scage — and SPACs generally — with caution.

Toying with investments

Meanwhile, another intriguing trend is emerging from China’s domestic market: the explosive popularity of collectible toys. 52Toys, a new generation Chinese toymaker targeting local consumers, has hired investment banks for a potential Hong Kong IPO. Unlike previous manufacturers focused on exports, 52Toys is tapping into the lucrative domestic collectibles craze, exemplified by Pop Mart, whose shares have soared over fivefold in just a year.

Collectible toys appeal to consumers in multiple ways. Parents in China, especially during economically uncertain periods, might indulge in toys for their children more readily due to their relatively modest cost. Beyond children, collectibles also attract speculators who view them as investments. In a market where stocks and real estate volatility have driven investors to seek alternative opportunities, toys could be uniquely attractive.

But investors should distinguish carefully between different business models. Companies like Bloks, which debuted in Hong Kong recently, rely heavily on licensing established intellectual property (IPs) like Transformers and Ultraman. This approach offers steady, albeit lower-margin, performance. On the other hand, Pop Mart’s extraordinary success stems from proprietary characters developed internally — though consistently generating new hits is challenging. Like blockbuster films or chart-topping songs, continuously producing successful proprietary IPs is an unpredictable, high-risk endeavor.

Investors face a clear choice: opt for steady performance through licensed products or gamble on proprietary innovations, hoping for explosive growth. It’s akin to choosing between buying a lottery ticket or pursuing a steady paycheck. The lottery ticket might promise incredible rewards, but the odds remain dauntingly slim. In today’s uncertain economic landscape, we suggest investors temper their enthusiasm with a healthy dose of realism.

About China Inc

China Inc by Bamboo Works discusses the latest developments on Chinese companies listed in Hong Kong and the United States to drive informed decision-making for investors and others interested in this dynamic group of companies.

Subscribe to China Inc on your favorite app:

Apple Podcasts

Spotify