Kandi Technologies (KNDI) is on the precipice of fulfilling the prophecy that its founder Mr. Xiaoming Hu, set out to accomplish when he first created it. This formerly nondescript company, which solely manufactured go-karts, ATVs, and UTVs is confidently growing into an emerging "Goliath" in the pure electric vehicle (EVs) sector in China. This article reflects recent milestone updates, issues still to be resolved, and a brief discussion and analysis of its undervalued market valuation.
Recent News Couldn't Be Better
An increasing number of positive Chinese media articles have surfaced regarding Nasdaq-listed Kandi Technologies since my initial article was published here on Seeking Alpha on October 12, 2012: "What Percentage Of The 120M China EV Bike Owners Will Kandi Technologies Convert?" The reasons are many, but foremost among them is China's continued strong commitment (via aggressive PRC initiatives, local governmental subsidies and other attractive incentives ) in making the transition from Internal Combustion (ICEs) Cars to Electric Vehicles (EVs). From Kandi's perspective, it is in a unique position as the only Chinese EV automobile manufacturer capable, with full governmental support via subsides and promotion, of producing EVs at an affordable price point for China's emerging middle class. Kandi's positioning, with its proprietary disruptive technologies, is directly responsible for the recently announced Joint Venture with Geely Automotive (OTCPK:GELYF), China's largest passenger car manufacturer, as was reported in China Daily. For those of you not familiar with the name Geely, it is the company that bought Sweden's Volvo from Ford (F), and now looks to be in in the lead to buy control of failing U.S. EV maker Fisker. A more detailed analysis on this JV in a follow-up article.
Future new manufacturing facility framework deals are now in place in Shandong Province, China's 3rd most populated (92mm) and wealthiest per capita; as well as Hainan Province, China's Hawaii; and the most recent one -- the mega-agreement mentioned above with Geely Automobile Holdings Ltd. An agreement so noteworthy that Geely's stock market cap jumped the day of the announcement over 1.5 times KNDI's total market cap. Nomura Securities (ranked number 10 internationally in the investment banking community) analysts Steve Man and Joseph Wong complimented KNDI's contribution to the auto giant company by saying:
"Geely announced it has entered into an agreement to form a 50/50 joint venture with Kandi Technologies (KNDI.US, not rated), to develop and market electric vehicles (EV). We do not expect the JV will make any contributions to Geely's 2013 earnings; however, we believe this is positive for Geely in the long run.
Given the recent headlines on smog, we believe China will continue to aggressively push for the adoption of alternative vehicles, including EV, in the long term. In our opinion, Geely and other automakers must remain at the forefront in the development of EV. Since EV technology has yet to reach market wide acceptance, we believe a JV is the best strategy to minimize development costs and risks.
Kandi Technologies has embraced a concept similar to the vehicle-to grid (V2G) technology. Other than the fact that both companies are based in Hangzhou, we believe Kandi's application of V2G is a major reason for the cooperation. We believe V2G is one of the more viable concepts in the EV industry. In Kandi's case, used EV batteries are swapped with recharged batteries. Recharged, unused batteries are connected to the grid to balance loads during peak load demands."
Source: Nomura Institutional Research Note dated February 3, 2013
Setting A Course And Running With It
If the above referenced agreements, including the current contract with the City of Hangzhou, Zhejiang Province (20,000 units delivered on or before December 31,2013), are fully implemented, Kandi sales in the EV category could realistically reach $2B dollars+ (300,000 units+ @ today's pricing of $6300.00 per EV ) within 4 years (2017). And, as will be detailed in a subsequent article, there are a few more potentially lucrative revenue streams that Kandi will take advantage of on its way to insure its position as China's leading EV manufacturer, for now and into the future: The annual production capacity of 300,000 mini electric cars project has completed feasibility studies…
In a few years, I will hopefully publish a new article on SA entitled "China's Most Recent Billion Dollar Company", referencing this article as an "I told you so."
At this point in time, however, I have tempered my enthusiasm because the fruits of my title line for this article have yet to be manifested into any meaningful Kandi EV sales (estimated at 1500 units for 2012), through no fault of its own, which will be addressed later on in this article. While the future exponential growth of Kandi is in the EV sector, we should not dismiss Kandi's root sector, which continues to grow and operate profitably -- its legacy business -- recreational vehicles, including go-carts, ATVs, UTVs, Trikes, etc.
Kandi's Recent Nasdaq Performance
If investors were to peruse the historical prices of Kandi in the last four months, some may have asked the following question: "why is Kandi's price so low with all this positive news?" while exhibiting a real sense of frustration during this time period. In their opinion, rightfully so. Or, from my perspective, "is that really the right question we should be asking at this time?"
My 40 years' experience in the market has shown me that any true growth company, especially one with disruptive technologies, is going to experience choppy, sometimes underperforming, market action prior to its sustainable launch, especially if it's a company of Chinese origin. Snafus (bumps in the road) that cause delays are not unusual when ramping up for a greatly anticipated official launch date. If one is to accept this reasonable premise, the right question should be, "is Kandi's business plan moving in a logical, orderly, and positive direction at this stage of its development?" IMO, the unqualified answer is yes, despite the bureaucratic (governmental red tape re: subsidies, etc.) and partner CALB's snafus (battery manufacturer and contracted purchaser of the first 5,000 EVs needing additional time to reorganize its finances in order to purchase Kandi's EVs), which have adversely delayed what should been the blockbuster launch of the Hangzhou EV Program, which was to have commenced by the end of September 2012. So even though the delays were not caused by Kandi, its stock price has suffered nonetheless. It should be noted, however, that I am gratified to have learned that the City of Hangzhou has recently taken away CALB's exclusivity in purchasing and subsequently leasing Kand's EVs by adding 3 additional leasing companies, which will now compete for Kandi's production in Hangzhou. It is my belief that this seemingly minor adjustment to the process of launching EVs in Hangzhou exhibits a refreshing "no nonsense" approach by local government officials in not accepting lame excuses by any participant that further delay this program. In essence, saying, "If you don't produce, you will be punished and we will find alternatives."
A Message For Kandi's CEO, Mr. Hu
At this juncture, I would be remiss to not also comment that the ultimate responsibility for mitigating the aforementioned, unfortunate, non-self-imposed delays still belies an ongoing problem of communication by Kandi to its shareholders and the investment community. I must confess that I cringe when the only sales information I can acquire is culled from almost unreadable Chinese media English translations. This situation has existed since Kandi became a publicly listed company in 2008 on Nasdaq. Yes, patience is indeed a virtue, but to effectively fulfill the prophecy of this emerging company, please accept the transparencies demanded by the American business culture. Talk to your shareholders and the marketplace openly, and in a timely manner. The preceding statement reflects a stark contrast in style to Tesla's (TSLA) CEO, Elon Musk. Good, bad, or indifferent, he and his spokespeople are consistently visible to both the marketplace and his shareholders. You may not like what he says or how he says it, but to his credit, he always responds. How to correct the deficiency? First, recognize that a part-time IR employee does not constitute an IR department. Then hire a full-time KNDI Executive in the U.S. whose responsibilities would include shareholder relations, coupled with his/her interacting with the media, analysts, and institutional investors. I would also suggest that a conference call platform be adopted for reporting quarterly results.
I truly believe in your vision and marvel at what you have accomplished up to this point, but to become the world-class company that appears to be taking shape, Mr. Hu, KNDI must start to act like one... Particularly now that KNDI has been launched to the top of the World EV stage, with the Geely selection of KNDI as an equal JV partner; and you being selected over all other EV manufacturers in China to give the opening keynote address at one of the top world conferences on EVs hosted in your own country last month... When, and if, the suggested course of action that I have outlined in this commentary is instituted, I am convinced that all existing and future shareholders will be rewarded more than handsomely.
Mr. Hu, as you will likely read this article, the aforementioned are your responsibilities and obligations. I would also remind you of your comment at the September 5, 2012 shareholders' luncheon in Atlanta when you said, "I understand your concerns re: communication and I will make it my utmost priority in the near future to rectify those concerns by hiring a full-time individual to do just that..." Mr. Hu, 5 months have passed and nothing has changed. It's time.
My Additional Two Cents' Worth
We, in the American business investment culture, are not very patient when it comes to just about anything that affects our portfolios, much less disappointments of promises made. And the payback for such disappointments in publicly listed stocks is usually fairly severe, at least for the short term. Specifically, relative to Kandi, I'm addressing the October 1, 2012 announcement of the initial CALB order of 5,000 EV units, part of the 20,000 unit order for the City of Hangzhou, to be delivered on or before December 31, 2012. It didn't happen. As we are all aware, any time an American company misses an announced product launch date, all hell breaks loose. Think Research In Motion (BBRY), or for maybe a more appropriate example, Netflix (NFLX), which has over the past year seen a 60% loss due to missing a target, but also gained over 100% when investor communication and results restored confidence.
When Chinese companies do the same thing, the results are of a far worse nature. Detractors (shorts) come out of the woodwork full force and cause uncertainty and fear, especially for the uninformed retail investor. This reality is exacerbated by what is a thinly traded stock with an extremely low float (16 mm). This is a short seller's dream model. Wide daily swings primarily to the downside, low volume, have occurred in Kandi for the past four months. In my opinion, what should be at least a $6.00 to $7.00 stock price right now, based on all the positive news referenced above, is still languishing at $3.98 as of today's market close (2/20/2013). Yes, Mr. Hu, you have made some major and extremely important new announcements, but you have not uttered a word publicly since October regarding the snafus/delays and or any updates as to what's on the top of the list re: stockholder concerns -- EV deliveries.
Kandi Vs. Tesla: Why The Disparity In Price?
As an aside, but still on EV topic, let's briefly take a look at Tesla Motors regarding its company and stock performance relative to Kandi's during the above referenced four-month period.
BACKGROUND: Since Tesla first launched its Roadster model in 2008, numerous production delays have plagued the company, coupled with its most recent reviews, and staggering yearly losses, which have become the rule rather than the exception. As of December 31, 2012, it has delivered less than 6,000 (estimate including 2012) EVs since 2008, with profits still being allusive. And to top that off, it is over $1,000,000,000 in debt and will need more capital shortly. Has the stock price been punished for Tesla's continuing failings? Not at all. Truth be told, Tesla hit its all-time high of $40.00 on 2/8/2013.
On the other hand, KNDI has been operationally profitable in all but one of its past 29 reported quarters -- profits generated by its legacy business. It should also be noted that its entry into the EV sector has been self-funded (no long-term debt), no government assistance, by reinvesting its profits, and a couple of institutional loans, which have been subsequently been paid off in full. At this point in Kandi's evolution, it has National PRC approval of 9 different EVs, compared to TSLA's two EVs. Still, KNDI's shares are trading just above half its 10-quarter high.
Any reasonable investor, in my opinion, would question why Tesla's stock is selling at a fully diluted market cap 50 times higher, including all options and warrants, compared to Kandi’s.
Admittedly, Tesla is an American EV company whose story has been positively presented and in front of the American public since the company's inception. Kandi is a Chinese EV company whose story hardly anyone in America is aware of. Put them side by side by the numbers and potential, however, and you decide who has the better story.
Tale Of The Tape:
KNDI Fully Diluted Market Cap = $118,000,000
TSLA Fully Diluted Market Cap = $5 Billion +
An in-depth comparison analysis will be discussed in a follow-up article.