As a contributing author to SA I have written a few articles on Kandi Technologies (NASDAQ:KNDI) in the past couple of years. I wish to express my appreciation to all the Kandi investors who have remained loyal to the vision of Kandi. Yes, we have experienced a sometimes debilitating roller-coaster kind of ride for the last few years but the buddings of our positive belief, in this formerly nondescript company, are now appearing before our eyes with clarity.
Kandi passed a major milestone this past Friday, December 27th, when it closed above $10.00 for the first time in its history. This all happened notwithstanding the repeated attempts by Kandi's detractors to employ their concerted best efforts to thwart the stock's positive momentum. As I said in my last article, Kandi Technologies: As China Goes, So Goes Kandi, "So, goodbye short-sellers, negative authors and the like. Your honeymoon is about to end. May what happened to the short-sellers and naysayers of Tesla (NASDAQ:TSLA) experience a similar fate with Kandi." Could my prophecy be valid? Read on and determine for yourselves the answer.
Kandi is still a speculative company no doubt, with literally no analyst following it until recently (Goldman Sachs in an advisory for one of it's Wealth Funds), but its execution in preparation and wise business decision making (partnering with Geely on CarShare) regarding its vision, are now being affirmatively recognized by not only the American media but the investment community at large. Finally! It's tough being ignored.
FACT: Kandi's business models cannot be categorized as theoretical anymore because there are now "facts" on the ground. Yes, one can now see the beginnings of Kandi's pragmatic approach to the EV "mass market" of China without reservation.
The CarShare Program began in June of this year. As per Kandi's Annual Meeting Conference Call on December 19th, there are two completed garages in operation, 18 in various stages of construction, and hopefully, if Kandi's projections are correct, a total of 50 will be operationally open by the end of the 1st quarter 2014. Personally, I would be extremely pleased with 30 units operational but I equate Kandi's projection with the plethora of Five Year Plans which China puts out with regularity...Sorry, but a little levity is compelling after a rough ride...What's important, however, is that the garages, some are now calling them vending machines, are being built and the reported acceptance of this Program by the public has been exceeding expectations in a positive way. Think of CarShare as an enhanced version of ZipCar on steroids. FYI: All costs including power, maintenance, insurance are included in the hourly rental fee of $3.25 per hour. Note: This business model will be the exclusive province of the JV, (Kandi/Geely partnership (50/50) in Hangzhou, and is projected to be replicated by the JV throughout China in the coming years. See Aaron Rockett's excellent professional video explaining the CarShare Program which he produced based on his recent trip to Kandi's facilities a couple of months ago; The Kandi Machine - China's Sweet Pollution Solution.
Long-term Lease Program
The Long-term Lease Program (LLP) has, up to this juncture in time, been largely held under wraps (approximately 100 EVs in the test phase) by the City of Hangzhou because the infrastructure, QBEX power stations necessary for an orderly launch, have not quite caught up with the known demand for this program. There are currently approximately 9,000 applications for these long-term leases by the residents of Hangzhou. Under this program the cost to the lessee will be approximately $150.00 per month which includes all "battery swapping" privileges (explained below), maintenance and insurance fees. As an aside, I can readily understand Hangzhou's reticence in opening the "floodgates" at this time for LLP. Hangzhou is in the proverbial spotlight, re the EV roll-out in China, and doesn't want to end up with pie on their faces if the roll-out of the LLP isn't smooth and successful.
Politically, from their perspective, it could be a disaster...so they wait. The entity in control of the QBEX Power Station build-out is State Grid, China's largest utility supplying 80% of its power, which is currently building these stations. It should be noted that the construction costs are at State Grid's expense, coupled with Central Government subsidies. Kandi does not contribute financially at all. Briefly, QBEX permits Kandi EV users, to swap depleted batteries for fully charged ones in no more time than it takes a gas powered car to fill up at the gas pump. This convenience coupled with the speed factor re: the recharging process (no need to secure an electrical source which may take up to 8 hours of charging time) is what separates Kandi from all the hybrids and plug-ins available in today's marketplace; especially in urban centers where density of population and limited space is the norm (apartment dwellers). Note: This disruptive battery swapping technology, QBEX, is owned and patented by Kandi. Note: The LLP is the exclusive province of Kandi, not to be conflated with the JV partnership. Kandi will reap all sales and profits from this business model.
Almost forgotten in the recent coverage of Kandi by the American media is the extremely lucrative off-road recreational vehicle business. Kandi continues to increase sales, profits and market share in this significant sector of its business plan. While waiting for the results of the 4th quarter and year end results for 2013, March 31, 2014, I have projected that YOY this sector will have revenues of approximately 50 million dollars, 25% GP, and an increase in market share worldwide of 5%. It should be noted that Kandi's market share in go-karts is approaching 35%.
Looking towards the future Kandi has positioned itself, in my opinion, as the most likely to succeed in rolling-out the aforementioned EV programs. No other EV manufacturer, foreign or domestic, have CarShare or the LLP in place with QBEX. Being first does have it's advantages. Add in the 50/50 JV partnership with Geely, China's largest passenger car manufacturer, a potential powerhouse in the EV marketplace just might have been created. Key facts led me to this analysis:
- Central Government release of new subsidy policy for "pure" EV's (2013 - 2015).
- Local government aggressive marketing, promotion, and additional subsidies for EV's.
- Pollution is designated as "hazardous" in many of the major cities in China and getting worse.
- Kandi is the only EV manufacturer that possesses QBEX (quick battery exchange).
- Kandi currently has over 200,000 annual EV production capacity with more plants either currently being built, Hainan, Shandong, or being planned in Jiangsu, Shanghai and Chengdu.
- Kandi has more contractual agreements for EV production and sales with China's leading Provinces than any other domestic or foreign EV manufacturer already in place through 2017. Provinces include Zheijiang, Shandong, Hainan, Jiangsu, Shanghai, and Chengdu. Aside from Beiging, these Provinces are the most prosperous and populous in China. Btw, it is my belief that Beijing will be added to the mix this coming year.
- Strategically positioned for the emerging middle class of China who are demanding cars for their personal use. The only problem has been the affordability factor. With both Central Government approval (MIIT) and local Province/City support at this time has solved the problem.
- Kandi currently possesses more MIIT approved EV models than any other domestic/foreign EV manufacturer in China; two and four door passenger cars, light trucks, and vans.
- The recent transfer of advanced EV technology and other assets (Kandi Shanghai) from Shanghai Maple Guorun Automobile (Geely subsidiary) to the JV now provides the latest EV technologies to the JV for future development.
Other future definitive income generators, other than the ones discussed above, have not entered into the conscious mindset of interested parties, as yet, for both Kandi investors and the "green EV market" in general.
- QBEX - The "battery swapping" system owned and patented by Kandi is crucial in confronting the major psychological concerns of the public regarding adoption of the EV versus the ICE (Internal Combustion Engine) vehicle. Specifically, the fear in running out of "charge", and the time it takes in the recharging process. QBEX efficiently solves both problems as covered earlier in my article. What is not being discussed, is the future of QBEX to Kandi's bottom line as a separate entity. At some time State Grid is no longer going to be offering "free" QBEX. There will be a charge to the user for "battery exchanges." All good things come to an end at some point in time. Currently State Grid is charging every electricity customer in Hangzhou a surcharge to cover the costs for Hangzhou's EV programs. So, there is no doubt in my mind that when EV users will be charged for power, Kandi will be there to share in the profits of that electricity usage in the future because of their patents on QBEX. The income potential will be enormous when one extrapolates the number of Kandi/JV users throughout China as Kandi's footprint enlarges.
- Light Trucks and Vans - Once again Kandi is perfectly positioned to take advantage of being part the Central Government Approved EV Vehicles List. Yes, Kandi has many light trucks and vans which are approved. It would not be surprising that many of the local governments that Kandi has agreements with for CarShare and LLP will not purchase EV light trucks and or vans for their own internal purposes. It should be noted that as per the current Central Government Subsidy Policy, 30% of all new and replacement vehicles must be EV's…Think Postal Service as a beginning. I don't want to exclude any Central Government procurement either, which IMO, has great possibilities too.
- The Kandi/Geely JV - The thought of exporting Kandi vehicles worldwide through Geely's ever expanding foreign distribution network is another potentially lucrative source of income for the future.
The days when many of Kandi's detractors outwardly claimed that the company was a mirage, illegitimate, and destined for failure are now over. Based on Friday's 25% increase in stock price they may be now starting to shed big crocodile tears. Kandi and it's JV are now producing, selling, and distributing their EV's to the public in China. A significant portion of revenues and profits will be borne by the JV initially, CarShare, which will hopefully become one of the standards for recharging in China because of State Grid's de facto support (SOE - State Owned Enterprise) for QBEX. An equally or more potentially lucrative source of income moving forward will be the LLP segment which will totally be under Kandi's umbrella...Something I am very excited about.
It was my intent to have sparked some interest among the readers of this article who are being introduced to Kandi for the first time and to also increase the understanding and knowledge system of Kandi's current investors.
Disclaimer: This article in no way reflects a recommendation by the author. I would advise all to do your own DD before making any decisions regarding the consideration of Kandi becoming part of your portfolios.
Disclosure: I am long KNDI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.