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Strong Margin Growth Helps Offset FX Headwinds; HEVI Win Should Boost Sales in 2024 and Beyond

3Q23 results. The company reported revenue of $21.8 million, in line with 3Q22, due to foreign exchange headwinds. On a constant currency basis, revenue was up 5%. Continued strong margins in the transmission business drove operating income up 35% Y/Y, while other income losses pushed EPS to ($0.07) for the quarter versus $0.10 in 3Q22. Another quarter of strong gross margins with potential for further growth. Gross margins in 3Q23 were 29%, up from 22% in 3Q22, as the company’s transmission product mix evolution continues. On the call, the company noted that its new industry-leading drivetrain products are able to deliver margins of 40-45%, which we expect will boost 2024 results. Since its founding, Greenland has consistently invested in R&D and shown its ability to produce more complex and higher-value products. We see the HEVI division as the next stage of this growth. Win at Port of Baltimore, the initial service network partner, and ongoing demonstration programs position HEVI for sales traction in 2024 and beyond. The Port of Baltimore award, which will be delivered in 2024, should serve as an important reference client for others looking at the product and we expect it will lead to further port awards. HEVI has also established its first authorized service partnership that will help support units in the field and serve as a demo site in the future. HEVI has multiple demonstration programs underway, including some with national rental equipment companies, such as United Rentals, that have the potential to turn into large fleet orders. However, we note that the construction equipment market has long sales cycles, particularly with public agencies, and revenue typically can lag orders by six months or more. Recently launched HEVI Energy can help address the industry’s DC charging needs; look for updates in coming quarters. The company continues to develop its HEVI Energy division, which will offer mobile DC charging units for both EV machinery and other EV applications such as school buses and refuse trucks. We expect to hear additional updates on the new business line that we think can provide an ancillary revenue stream and help accelerate the growth of the HEVI line as the mobile chargers can reduce customers “range anxiety” and are not slowed by the long lead times of permitting and installing permanent charging infrastructure. Strong cash balance gives a platform for growth and provides potential options to enhance shareholder value. Unrestricted cash at 3Q23 was $21.5 million (~$1.50/share), up from $15.2 million at 2Q23. We see the balance sheet strength and the profitable transmission business as important attributes for GTEC as the HEVI business begins to establish itself in the US construction equipment market. Further, on the earnings call, management noted that the board of GTEC continues to explore options for what it sees as a disparity between value and the current share price. We note that earlier this year GTEC’s CEO made an open market purchase of ~$100,000 and owns approximately 3.3% of Greenland Technologies’ public float.