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Summary

  • Kandi's short position remains near all-time high.
  • China's central government delivers first EV subsidy payments.
  • Improving company, market, and regulatory fundamentals portend sharp revenue growth.

"No matter how far you have gone on the wrong road, turn back." ─ Turkish proverb

Kandi Technologies Group, Inc. (NASDAQ:KNDI), one of the great emerging growth stock opportunities of our time, is to personal intracity transportation what Tesla Motor Company (NASDAQ:TSLA) is to the open road. And like Tesla, is led by a visionary leader pursuing an exceptional, elegant strategy that gives Kandi an edge over its competitors. Unlike Tesla, Kandi's market cap is just under $600 million, while Tesla's hovers at $28 billion, over 46 times greater than KNDI. Headquartered in Jinhua, Zhejiang Province, China, Kandi has established itself as China's leader and one of the world's largest manufacturers of pure electric vehicles (EVs).

What's the investment or trading thesis for shorting KNDI? Is this a misplaced bet, a lonely game? Or is it simply a matter of making the wrong turn and following the wrong road, unwilling to turn back?

We've all been there. It happens, and the only resolution is to turn back. But we all know it's never easy. You drive on, believing there's an easy way, a shortcut just around the bend. But inevitably the "shortest way" is to turn back ─ no matter how far you have traveled.

The Market

Think about it, China's population of approximately 1.36 billion is slightly less than the combined populations of the United States, Europe, and South America, with twenty-two Chinese cities having populations greater than 5 million. Seven have populations greater than 10 million, and three have populations greater than 20 million. The combined metro populations of Shanghai and Beijing, about 42 million, exceed the population of California.

The Peoples Republic of China ("the PRC") set an annual economic growth rate of 7% in its current five-year plan, and a key driver to China's economy is greater consumer mobility. No surprise then, China leads the world in the sales of cars.

The Problem

But smog is choking China's cities, and the internal combustion engine ("ICE") is a major contributor. Images of people wearing breathing masks during the Beijing 2008 Olympics portrayed a continuing everyday reality in China's cities. So much so that in March this year, the PRC declared a war on pollution.

Efforts in the war on pollution include controlling the proliferation of ICE cars by limiting the issuance of ICE license plates and restricting the use of ICE cars on certain days of the week. In addition, the PRC recently announced some five million aging ICE cars will be taken off the highways.

Simply put, the macro issues of smog and oil consumption deny the continuing proliferation of the ICE car in China. EVs are the best intracity solution for greater personal consumer mobility, continued economic growth, and fighting pollution. To drive the adoption of EVs, the PRC provides subsidies and other incentives for buyers of Chinese-manufactured EVs. On Monday, July 7, 2014, KNDI announced that a manufacturing subsidiary received a national subsidy of approximately $31.8 million for sales of over 3,000 EVs between June and December in 2013 and sales of over 1,000 EVs during the first quarter of 2014. Today, the subsidies cover over seventy-five percent of the cost of an EV. The PRC's stated goal remains to have five million EVs in use by 2020, despite lagging in its effort to-date.

The Solution - Kandi CarShare

A year ago this month, Kandi launched CarShare (aka "Micro Bus"), a personal, intracity, EV transportation system that provides EV rental service at a cost less than a taxi, while resolving the issues of range anxiety, ownership, insurance, battery charging, parking or garaging, and environmental disposition of batteries. CarShare provides automated EV rental at airports, train stations, hotels, business centers, selected residential areas, any place that is the focus of commuter traffic.

CarShare was launched in Hangzhou, the fourth-largest metropolitan area in China with a metro population of 20 million, and since has been launched in Shanghai. Representatives from China's new energy vehicle pilot cities visited Kandi earlier this year to learn about CarShare, and Kandi is in discussion with Beijing, Chengdu, Zhuhai, Chongqing, Suzhou, and Nantong City about initiating CarShare.

Kandi Long-Term Group Leasing

Last month, Kandi launched China's first of ten pure EV pilot communities in the Lake District of Hangzhou, where 700 residents registered for the EV long-term group leasing program. Regarding the launch, Kandi president, Hu Xiaoming, remarked:

While the JV Company is marketing the CarShare program in the center area of Hangzhou, the group leasing model is an additional initiative to promote this convenient and environmentally friendly transportation option, which is ideal to the suburban and rural residents, large government entities and corporations. With the help of Kandi's EVs, Zhuantang District has become the nation's first pure EV pilot community. This model is integral to the establishment and success of the "green transportation and intelligent city" mission and help accelerate Kandi's EV sales. Kandi will continue to dedicate itself to the mission and work to ensure that the implementation of EVs will progress efficiently to improve urban traffic and the environment.

Summary

Kandi has the capacity to produce 300,000 EVs annually, with the capability to expand to 500,000. Kandi has strategic relationships with State Grid, the largest electric utility in the world supplying electricity to over 1.2 billion Chinese citizens, a joint venture with Geely, the largest independent automobile manufacturer in China, and Wanxiang Group Corporation, the largest China-based automotive components company measured by revenues.

KNDI is just now approaching the starting line in its quest to serve the world's largest automobile market the most elegant, personal, intracity transportation system until someday, "Beam me up, Scotty."

Disclosure: The author is long KNDI. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: Short Kandi - The Wrong Road?