What’s that old Wall Street saying. “No Good Deed Goes Unpunished”? Well, management and shareholders of US listed, China based, always profitable uncontested leader in Electric Vehicle (EV) manufacturing and “Quick Battery Exchange” (QBE) development, Kandi Technologies (NASDAQ-KNDI), knows the feeling well. As of now, five months after I published my first article on KNDI, the stock, which subsequently more than doubled on incredible volume, has now made a full round trip and is back to where it started. This in spite of significant business advances and a total absence of negative news. Even more incredulous is the 20+% drop last week at a time when oil prices surged above $100bbl, PRC raised gas prices to a record of over $4.30 a gallon, and Beijing had the following revelation:
Bloomberg News February 25, 2011 3:10 AM
Beijing's air quality early this week was worse than "hazardous," the lowest rating on an index used by the U.S. Embassy in the Chinese capital to measure conditions, and was classified as "Beyond Index."
Heavy fog and the addition of almost 900,000 automobiles to Beijing's roads last year have contributed to the deteriorating air quality…”
KNDI has now begun sales in China of its line of three PRC approved (two, full road speed and subsidies eligible) pure EV’s selling for $6-10,000 before subsidy. If there every was a positive “Perfect Storm” brewing for a Company, KNDI should be in the “eye” of it.
Five months ago as a Wall Street unknown, KNDI stock was quietly resting in the low 3s. At that time I published a multi-part article which was quickly picked up by EV Internet news services and blogs around the world introducing KNDI. As you can see from the chart below, the effect was immediate and significant to the stock price.
Let me again make my position clear as I have on past articles. Though since my first writing, I have personally visited the company and management in Jinhua China, I do not have, nor do I care to have any access to information not available to anyone who takes the time to do good due diligence. Aside from what I-- along with four other investors-- saw when we visited the Company last November, (which did not include any restricted information), what I publish is made up of public information in the form of past filings, press releases, active use of Google’s on-line translation features scouring Chinese websites, and of course my opinion.
Exceptional Company Execution
If you are new to KNDI, or need a refresher, I strongly suggest you read my past Seeking Alpha articles on KNDI which can be accessed through the links below. It now appears that my revenues and earnings prognostication for 2010 year end stated in my September article will apparently prove to be too high. This miss is primarily due to a few months delay in State Grids’s (China’s dominant electric utility and KNDI partner) completion of its Main Battery Charging Farm in Jinhua. This in turn delayed initial sales to only the last five weeks of the year. I think you will find that most other speculations I made have not only come to pass, but in many cases were far exceeded.
This chart shows a chronology of events that have taken place since my first article. I have created a corresponding letter on the chart for each published event to the headlines below. Several of the headlines are from Seeking Alpha articles I wrote giving my “take” on prior events. These articles are annotated by the (NYSEMKT:SA) after the date. Articles annotated (NYSE:AES) first appeared on AltEnergyStocks. My point in listing these events is twofold; one to show there was no negative event to cause the drop in the stock price, and two, to give the reader quick reference to advances made.
- A- Examining Kandi Technologies: A China-Based EV and Quick Change Battery Company (Part I) Sep 22, 2010 (SA,AES)
- B- Buffett’s Sweet Tooth: Should Kandi Technologies Be on His BYD Dessert Menu? Sep 28, 2010 (SA)
- C- Kandi Announces Joint Venture With Leading Domestic Battery Maker and Power Company to Create China's First Battery Rental and Replacement Company; Expects EV Sales in Jinhua Will Begin in November Oct 05, 2010
- D- Kandi Technologies: Still Charging Ahead Oct 21, 2010 (SA)
- E- Kandi Technologies Names Cathy Cao Executive VP of Finance Oct 21, 2010
- F- Kandi Technologies, Corp. Reports Third Quarter Adjusted Net Income Grew 57% and Anticipates Full Year Sales Will Reach or Exceed $40 Million Nov 15, 2010
- G- Kandi Reports First Pure Electric Vehicle Sales to Consumers in Jinhua City in Conjunction With Opening of First "Battery Charging Farm" and "Express Change" Battery Station Dec 01, 2010
- H- Kandi Technologies: An Intelligent Vehicle Electrification Plan Dec 07, 2010
- (SA, AES by John Petersen)
- I- Kandi in Talks to Expand Consumer Pure EV Sales to Neighboring Provincial Capital City of Hangzhou Dec 13, 2010
- Hangzhou Government Planning for More Than 20,000 New Energy Vehicle Sales Before the End of 2012
- J- New Kandi EV Model Approved for National Subsidy of up to RMB 60,000 per Vehicle in All EV "Pilot" Cities Throughout China Dec 17, 2010
- Kandi's Newly Approved Lithium Ion Powered KD5011 Expected in Hangzhou Market in Coming Months
- K- Kandi Technologies Announces Registered Direct Placement of Approximately $16.6 Million of Common Stock Dec 21, 2010
- L- Kandi Technologies Delivers on Promise - In Less Than a Year Dec 28, 2010 (SA)
- M- Kandi Technologies Approved for Trading on NASDAQ Global Market Jan 10, 2011
- N- Kandi EVs to Be Placed on the Italian Market Jan 27, 2011
- O- Kandi Technologies Retains Lambert, Edwards & Associates as Investor Relations Advisor Feb 14, 2011
Why Electric Vehicles must succeed
Rapidly growing China-- with its 1.3 billion population-- may rank second to the US in World Purchasing Power as seen from the table below, but the following comparison of motor vehicles per capita shows a disparity, which based on “Peak Oil” assumptions leaves little room to even noticeably “close the gap”, let alone allowing a catching up with internal combustion (ICE) vehicles. With China’s massive coal and hydro resources along with aggressive building of Nuclear Power Plants, there is no reason they must rely on ICEs.
|Ranking||Country||Approximate GDP- Purchasing Power Parity|
|1||United States of America||$13,860,000,000,000|
The tables above compare China to the U.S. in per capita motor vehicle ownership (cars, trucks, buses and freight but not 2-wheelers) as of 2008, China on top with 32.2 motor vehicles per thousand population as compared to the table on the bottom for the U.S. with 819.8. On this basis, stunningly, China stands in 2008 where the U.S. stood in 1915. Considering China’s current population exceeds the U.S. four fold, it should clearly be evident, even ignoring the rest of the rapidly growing emerging economies, that alternative energy vehicles will soon be mandatory in China, (or for that matter, every country irrespective of the price of oil).
Thankfully China understands and has made it quite clear it intends to be the world leader in vehicle electrification. A realistic situation made easier for the country since it has totalitarian control over its infrastructure for “refueling solutions”, plenty of cash for initial subsidies and an emerging middle class that can grow into EVs, rather then be coaxed away from gas powered vehicles.
U.S. Stock Trading Comparisons
As of this writing, there are really only three relatively pure EV U.S. traded stocks for U.S. investors to speculate on this rapidly emerging potential trillion dollar pure EV space. Listed on NASDAQ is Tesla Motors (NASDAQ:TSLA) and (NASDAQ:KNDI), and ZAP which trades on the OCTBB (OTCPK:ZAAP).
The table below shows a general comparison I put together of some key numbers of the three companies. TSLA’s numbers came from filings, press releases and a JP Morgan research report; ZAAP’s from recent press releases and SEC filings; and KNDI from press releases and SEC filings. Estimates for ZAAP and KNDI were derived by me based on information gleaned from press releases.
Click to enlarge
U.S. based TSLA's current market cap puts it at around 23 times JPM research 2014 estimate of $1.07 a share. Now this report was put out late last Summer, about the same time BYD (OTCPK:BYDDF) was sure it would sell at least a few thousand of its e6 EVs between China and the US by the end of 2010. As it turns out, KNDI’s sales of 20 KD5010s on the first day of sales in China surpassed the total number of BYD e6s sold through the end of October. And, though some $10,000 cheaper than TSLA’s $50,000 after tax subsidy Model S, BYD has now skipped a year and doesn’t plan on bringing the e6 to the US until 2012. Thus, bringing it more then a year behind schedule.
Let's call a spade a spade. TSLA is trading at its lofty levels for two main reasons. Its charismatic CEO, Elon Musk, knows how to spin a story and there are a whole lot of “Green” funds that were formed after President Obama took office and promised a plethora of Green companies would soon be blanketing the country. This hasn’t happened, so those Funds have to put their money somewhere. Though in an excellent space, my bet is that TSLA is going to give a big shock to a lot of wallets in the not so distant future. The fact that “money pit” TSLA has a market cap twenty times always profitable KNDI is, in my opinion, incredulous.
California based ZAP is probably a company that most don’t realize is now a possible “contender” in the EV space, both in the U.S. and China. But for those who do, I suspect they don’t truly realize how expensive this entry was. I can’t imagine how this stock can currently be trading with diluted market cap of $385 million. And this is significantly down from the over half billion market cap it had in early January, right after it completed and announced a multi-part macro private share placement at around $.24 a share with a lot of $.25 warrants totaling some 200 million shares. The placement was used to raise $30 million to buy 51% of a Jonway Automobile a Chinese gas powered carmaker who had supposed revenues last year of around $77 million.
As stated in its Jan. 25 PR, “With ZAP’s electric vehicle (EV) technology expertise and international experience, the combined company intends to build the necessary production platform to address the Chinese EV market,” the company plans on taking its 16 years as a “pioneer in the electric vehicle industry since 1994, engaging in the design, development, commercialization and distribution of 100% pure electric vehicles and power systems,.. (full article)” and teach this Chinese company how to convert its gas powered cars to EVs. Who knows? After generating some $4 million in revenues in 2010 and accumulating a deficit of $143 million over the years developing its“expertise”, maybe the company finally learned a secret or two to teach the Chinese about EVs.
OK, so back to KNDI.
KNDI, like all players in this new EV space doesn’t have a heavy EV track record. But it has sold close to 4,000 mini-EVs over the past couple of years. Know any other near pure play company in the space that can make such a claim? As seen by his short bio, KNDI’s CEO, while not high profile, does have an impressive EV background in China. Take this excerpt:
“From October 2003 to April 2005, Mr. Hu was the Project Manager (Chief Scientist) in WX Pure Electric Vehicle Development Important Project of Electro-vehicle in State 863 Plan.”
Incorporated in “State 863 Plan” was the genesis of China’s current push to be the world leader in EV technology. The “WX” in the above quote is Wanxiang, China’s largest diversified EV Company, the same Wanxiang that caused Ener1 (NASDAQ:HEV) stock to jump 65% on 21 million shares on Jan. 18th on an announcement of a joint venture between the two. But enough on history, let’s look to the future.
A potential major win for KNDI
For those who have not been following KNDI, but clearly evident in Company announcements going back to the January 2010, KNDI has been leading a coalition of energy giants in China for a “Quick Battery Exchange” (QBE) solution whereby the consumer pays only for the car, and effectively “rents” the expensive battery. The “rent” is effectively paid by a small surcharge each time the battery is exchanged. This model was put into limited commercial operation by KNDI through the Joint Venture with State Grid in Jinhua in late November, 2010 as an experimental alternative to just plugging the car into a charging post and waiting several hours for recharging. KNDI was at the forefront of this potential paradigm shift due to its ownership of several patents, as can be seen by this State Grid announcement on its website.
In January of this year, through subtle but telling comments by PRC owned State Grid, it now appears that QBE has been selected as a major “Standard” for re-electrification of China EVs. To date KNDI has been silent regarding this potentially monumental company event, in waiting for a more definitive announcement by the PRC. Currently it appears there are two QBE models in operation. There is of course KNDI’s “side slide” model (shown in this video clip taken with a cell phone on my trip to the Company in November). The significance to KNDI is not that the Company expects its mode of QBE to be selected exclusively; it is that the concept of QBE seems now to be a chosen “standard” ,which in turn gives KNDI’s model already in operation with State Grid a major advantage over future competitors.
With its current $100 million market cap, the stock is currently trading around replacement cost of just its land and buildings, plus $25 million working capital excess-- which should soon be apparent with the soon to be released 10k. The current market is giving no value for its always profitable and growing legacy business, let alone value for its China potential. Let’s look at that potential.
Non-China legacy business should reach $50 million in sales in 2011. That should generate non-GAAP net of $.35-.40 a fully diluted share. Each 5,000 cars sold in China should add another $.30-35 per share. Considering the cost to a consumer after subsidy will only be around $3000, this should not be an unrealistic number and could just as easily be a multiple with some government or fleet orders.
If and when the company reaches the 100,000 car per year level, which would still make it a minuscule player in a 20 million car a year market, per share earnings would be in the $8-9 a share level. Put whatever PE you want on that type of growth.
If the market has taught us anything over the last couple of years, it is that EVERY stock is a speculation, no matter how blue chip. Each investment should be looked at from a risk / reward point of view. Based on its 9 year history (3.5 trading in the U.S.) KNDI management has done an exceptional job of growing the company in spite of the stock price. The current “disconnect” between the current business and China potential has, in my opinion, created an incredible upside with negligible downside leaving me confident that KNDI will reward its shareholders with a multi-billion dollar company, irrespective of who the shareholders are when that milestone occurs.
Disclosure: Long KNDI