Economic Battle With China Could Expand to Drone Space

The economic battle between China and the West is picking up steam as top lawmakers in the United States introduce measures to stop the U.S. government from buying Chinese drones, which could be a boon for Western drone companies.

Earlier this month, Republic Rep. Mike Gallagher and Democratic Rep. Raja Krishnamoorthi introduced the "American Security Drone Act" in the U.S. House of Representatives, Reuters reported.

"This bill would prohibit the federal government from using American taxpayer dollars to purchase this equipment from countries like China," Gallagher said. "It is imperative that Congress pass this bipartisan bill to protect U.S. interests and our national security supply chain."

Also known as unmanned aerial vehicles (UAVs), the drone market is set to grow from US$26.2 billion in 2022 to US$38.3 billion by 2027, a compound annual growth rate (CAGR) of 7.9%, according to a report by Markets and Markets.

The U.S. Senate also separately approved an amendment by Sen. Marsha Blackburn and Democract Mark Warner that would stop the Federal Aviation Administration from operating or providing federal funds for drones from China, Russia, Iran, North Korea, Venezuela, or Cuba.

"Taxpayer dollars should never fund drones manufactured in regions that are hostile toward our nation," Blackburn said.

Congress banned the Pentagon from buying or using drones and components made in China in 2019, Reuters reported. The Commerce Department also put in place export restrictions on Chinese drone manufacturer DJI in 2020, saying the company was complicit in the oppression of China's Uyghur minority.

Over 50% of the drones sold in the U.S. are made by DJI, Reuters said.

Also known as unmanned aerial vehicles (UAVs), the drone market is set to grow from US$26.2 billion in 2022 to US$38.3 billion by 2027, a compound annual growth rate (CAGR) of 7.9%, according to a report by Markets and Markets.

"The civil and commercial application segment of the UAV industry is projected to grow significantly in the next ten years," the report said.

The Catalyst: Drones Being Used on Unprecedented Scale

It's not just the drones consumers are flying. Drones are making an impact on the world's battlefields. Hamas' attack on Israel shocked the world, with more than 1,400 people killed, but it deployed weaponized off-the-shelf drones to incapacitate some of Israel's static defenses, which cost millions.

Weaponized commercial drones available in electronics stores ("the types used by YouTube and Instagram bloggers to make reels," according to a report on New Delhi TV) have also been seeing use in the war in Ukraine.

The unmanned vehicles are being "used on a scale that has never been seen before," Stacie Pettyjohn, a senior fellow and director with the Center for New American Security, told NPR.

"The outnumbered Ukrainian forces have been using small drones fitted with improvised hand grenades and mortar rounds to drop on the armored elements of the invading Russian military," the NDTV report noted. "This tactic is said to be very effective."

The unmanned vehicles are being "used on a scale that has never been seen before," Stacie Pettyjohn, a senior fellow and director with the Center for New American Security, told NPR.

And it's not just for making war. Markets and Markets reported that the delivery subsegment of military UAVs is anticipated to grow the most during that time, as "drones are being utilized for delivery of medical aids, food supplies, and ammunition on battlefieds."

"Military drones are being sought across the globe for the direct delivery of emergency supplies to battlefields," the report said.

Red Cat Holdings Inc.

Several non-Chinese companies could be set to benefit from any laws restricting Chinese drones, including Puerto Rico-based Red Cat Holdings Inc. (RCAT:NASDAQ)

"The Air Force needs to secure its airfields and bases 24/7, and the Teal 2 offers the highest-resolution night vision in its class," Red Cat Chief Executive Officer Jeff Thompson said. 

Both orders were requested by the U.S. Air Force Security Forces for defending bases and installations. The Teal 2 drone, designed as a leading unmanned aircraft system (UAS) for night operations, has been approved through the U.S. Department of Defense and is equipped with advanced high-resolution thermal imaging. 

Red Cat has also deployed 200 high-speed drones on behalf of Ukraine and is involved in a US$90 million deal to provide drones for the U.S. Customs and Border Patrol (CBP).

"Looking forward, ThinkEquity expects Red Cat's revenue and operating income to increase," ThinkEquity analyst Ashok Kumar wrote in March. "The investment bank estimates revenue will reach US$11.9 million in FY23 and then more than triple to US$37 million in FY24."

Technical Analyst Clive Maund said the stock "continues to have the prospect of winning some very big orders for its drones."

He recommended staying long on the stock. "The company's Teal 2 drone appears to be a 'game changer,' as it has unsurpassed nighttime capabilities," he wrote.

According to Red Cat, 37.27% of the stock is held by management and insiders. Reuters notes that CEO Thompson owns 22.13%. CEO of Fat Shark RC Vision Systems Gregory Ralph French has 8.67%. COO Allan Thomas Evans has 2.41%. Director Nicholas Liuzza has 1.76%. CFO Joseph Hernon has 0.47%, and CEO of Teal Drones George Matus has 0.58%.

Institutional investors have 9.01%. The Vanguard Group Inc. has 2.3%. Pelion Venture Partners has 1.62%. BlackRock Institutional Trust has 0.61%, and Geode Capital Management LLC has 0.49%.

The rest is in retail. 

Red Cat Holdings has a market cap of US$53.74 million, with 55.54 million shares outstanding, and trades in a 52-week range of US$1.54 and US$0.7676.

Volatus Aerospace Corp.

Upstate New York-based Volatus Aerospace Corp. (VOL:TSX; VLTTF:OTCQB) is one of North America's fastest growing drone distributors and integrators for UASs, offering enterprise sales, training, maintenance, and industry leading support services.

Volatus recently announced it had closed a CA$60 million contract to inspect the company's drones and associated infrastructure.

"In 2023, we'll inspect over 10,000 T&D structures for various utility clients," said Chief Operating Officer Rob Walker. "Starting January 2024, we will add work on the West Coast and anticipate inspecting upward of 25,000 structures in North America, more than doubling this year’s volume."

Chief Executive Officer Glen Lynch said the timetable for the contracts is notable. "Q1 is typically a seasonal quarter for Volatus due to the winter weather in Canada and Northern U.S.," he said. "These contracts are being flown in regions that will enable us to launch early in Q1 of 2024, generating material revenue during a traditionally slower time for drone services."

Rob Goff of Echelon Capital Markets rated the stock as a "Speculative Buy" for potential investors with a target price of CA$0.75 per share, representing a potential more than 300% return off its Tuesday afternoon price of CA$0.17 per share.

Goff highlighted the company’s strong financial performance, where it brought in CA$8.7 million in revenue, increased its working capital, and added a revolving line of credit of CA$2.25 million as drivers of his positive rating.

Goff has also noted that the company's new product, iRed Remote Sensing, has given it a foothold in the UK market.

Reuters has provided a breakdown of the company's ownership and share structure, where management and insiders own approximately 70.77% of the company. According to Reuters, Chairman Ian Alexander McDougall owns 31.75% of the company with 39.02 million shares, and President and CEO Glen Lynch owns 31.29% of the company with 38.46 million shares.

Institutional investors own approximately 0.49% of the company with 0.60 million shares in the form of Palos Management Inc., stated Reuters.

The rest is with retail.

Reuters reports that there are 122.91 million shares outstanding and 45.43 million free float traded shares, with a market cap of CA$19.08 million, and it trades in the 52-week period between CA$0.15 and CA$0.44.

Private Competitor Unusual Machines Inc.

Another company that could benefit is Unusual Machines Inc., a private Puerto Rico-based company focused on the drone industry.

In 2022, the company entered into a share purchase agreement with Red Cat Holdings Inc. and Red Cat CEO Jeff Thompson to acquire its consumer businesses, Fat Shark Holdings Ltd. and Rotor Riot LLC.

Fat Shark and Rotor Riot design and market consumer drones and first-person-view (FPV) goggles. Rotor Riot is also a licensed reseller of several third-party consumer drones.

Fat Shark's Dominator FPV drone goggles feature HD OLED displays, HD DVR recording, and a full-color graphic interface.

The US$20 million transaction, a combination of cash and stock, is expected to close simultaneously with a planned IPO by Unusual Machines.

"If we are successful in acquiring those entities, over the next two years, we expect that these businesses will continue to corner the FPV market while expanding into new enterprise verticals like public safety and drone delivery," Unusual Machines noted on its website.

The company plans to focus on FPV goggles, but its primary objective is to "acquire companies engaged in (the) drone industry."

"We are seeking to acquire established drone companies with high-quality technology from across the drone industry," the company said.

The company was founded in 2019 and plans to list on NYSE under the symbol "UMAC." It said it plans to acquire drone companies developing FPV products that can be used for recreation, entertainment, and competitive racing.

Important Disclosures:

1. As of the date of this article, officers and/or employees of Streetwise Reports LLC (including members of their household) own securities of Red Cat Holdings Inc. and Volatus Aerospace Corp.
2. Steve Sobek wrote this article for Streetwise Reports LLC and provides services to Streetwise Reports as an employee.
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