Author's note: I had planned this article to be released on Monday before Kandi Technologies (KNDI) surprised us with its announcement; the prices have changed some, but the message is still the same.
Disclaimer: While I did visit the company in Jinhua last November, I have had no discussions with any member of management in over six months. The information and comments express here are mine alone with no non-public contribution from anyone associated with the company. Sources are exclusively from public sources both in the US and on China websites.
It has been a while since I last wrote about the NASDAQ listed, Jinhua, China based Kandi Technologies (KNDI). A lot has happened since my last article - all good for the company, and some bad for the stock. In fact, there is so much new information that I have elected to publish this article in two parts. Part 1 primarily addresses what has been going on with the stock, with Part 2 covering the fundamental advances coming in a day or two.
On March 2, I published an article titled “Revisiting Kandi: Why I Remain Confident in This Stock”, which was the eighth in a series of articles I have written on KNDI since September 2010. At the time of my first article, the stock was trading in the low $3 area on average daily volume of under 50,000 shares. Commensurate with the first article, the stock “woke up” and began a tear over the following three months, hitting a high of $7.20 in November. Average daily volume jumped tenfold to just below 500,000 in the ensuing four months. While I suppose that my articles introducing the company to Wall Street could be given some credit for the “awakening”, the company certainly did its part late in the year by delivering fundamental advances on just about all I had speculated in my early articles.
With the current stock price around $2.00 and average daily volume back to the 60,000 share level, both the company and I have, needless to say, had to endure some pretty harsh comments by ignorant shareholders. I use the word “ignorant” as it is truly meant to be - that is, “uninformed”. I make no apology for either the company or myself in my writings on KNDI; in fact, quite the contrary. As a long term investor, I could not be more proud as to the subsequent performance of the company and the fact that I was the first to uncover this sweet “flower of the Orient”. I have been an investor and supporter of KNDI since the first day it traded, four years ago. And based on the company performance, particularly in achieving its rapid dominant position as an electric vehicle innovator in just the past 18 months, I fully expect to proudly be here when the stock price is ten times the current price over the balance of this decade.
In this writing, I don’t intend to rehash what I have written prior; only to address the unusual trading activity in Part 1 and impressive subsequent events since my March 2 article in Part 2. For those new to KNDI who are curious about the genesis of my continuing enthusiasm (or insanity), I strongly suggest you read my past writings, which I have linked to above; then compare my prognostications to subsequent company announcements. By doing this, you will quickly note that all of the reasons the stock rightfully launched to highs at last year's end have not only been confirmed, but new even more exciting events have been recently added.
Why the Stock Has Been “Tourched”
Well, unless you are related to one of Geico’s recent ad stars - a caveman, or living under a rock - I don’t have to say much more than; KNDI is a China Reverse Takeover (RTO) and it has had a significant reported short position against it. Am I happy that KNDI was an RTO? You bet I am. Just like the early shareholders of Warren Buffett’s Berkshire Hathaway (BRK.B) today are glad it was an RTO, but maybe for a different reason. Had KNDI not done the RTO, it is extremely unlikely that this always profitable China company would have ever found its way to trading in the US.
Contrary to recent popular opinion, not all Chinese companies came to the US to rip off Western investors. In KNDI’s case, the reason was much more a strategic move by its capitalistic CEO. In less than five years prior to its 2007 RTO, this Jinhua based company had already grown from inception to China’s largest exporter to the US of Go-Carts (15% share) along with a stable of other “toys for big boys” such as ATVs, UTVs, Dune Buggies etc. All growth from inception was financed by its Chairman/CEO and sole (sole then, controlling now) shareholder, Xiaoming Hu (who even today, in spite of the company's strong financial position, still personally guarantees most of its bank debt in order to get a lower interest rate). Not until 2010 did the company finally tap the US equity market with two small institutional placements totaling $26.6 million. The reason Mr. Hu elected to have its stock trading in the US rather then Asian markets, which the company easily qualified for at the time of the RTO, was simply to enhance its ability to sell its wares in its dominant US market. Hardly a dealer from that day forward has missed the opportunity to prominently mention for credibility (see here - “Manufacturer: Kandi Technologies, A US NASDAQ Listed Company").
In late 2009, prior to the company even suggesting development of a China EV or its now China lauded, patented “express change” battery technology, the stock made an impressive rapid move up to the $6 level from a sub $1 price earlier that year during the world economic crash. This started the makings of what would soon be a very significant short interest in the stock. On January 4, 2010, the company put out a blockbuster PR announcing a joint venture with two of China’s billion dollar energy giants that drove the stock to the mid-$7’s on very heavy volume. All this well before the recent bout of China-phobia causing all Chinese stocks to be shorted. By mid 2010, reported short interest had grown to over 1.1 million shares, or some 20 plus “days to cover”, and the stock was back to the low $3 level. (Curiously, almost half of the 1.1 million short was created between $2.90 and $3.5).
In October of 2010, the company put out a monumental announcement that would change the face of KNDI forever:
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
JINHUA, CHINA--(Marketwire - October 5, 2010) - Kandi Technologies, Corp. (NASDAQ: KNDI), a leading Chinese exporter of recreational vehicles, developer of the "COCO" all electric LSV, and a leader in Electric Vehicle (EV) development in China, today announced it has formalized a three partner joint venture with China's leading battery maker, Tianneng Power International, Ltd., and Jinhua Bada Group, a subsidiary of State Grid Power Corporation, China's largest power company, to create China's first Electric Vehicle (EV) battery replacement services company…
For those who don’t know, State Grid is wholly owned by the PRC and is China’s largest electric utility, covering over one billion people and 90% of China.
The striking of this JV, to quote John Petersen, a top Seeking Alpha author and international expert on vehicle electrification regarding KNDI’s announcement;
In the final analysis, it's a lot like the business dynamic that might have developed if Henry Ford had partnered with John D. Rockefeller or one of the other oil barons in the early 1900s.”=
Could one imagine what would happen to Tesla’s (NASDAQ: TSLA) stock, even from its current lofty $3+ billion market cap, if it struck a similar venture with State Grid? From the recent stock price of KNDI, one might surmise that this deal either “fell through” or was put on some back burner. Such a supposition could not be further from the truth, as can again be seen by Monday’s PR. (Much more will be addressed as to the major significance of this PR in Part 2.)
In early May, along with all the rest of the China RTOs, KNDI stock was suffering but maintaining around the $3 level. But the volume was seriously drying up while the reported short interest was reaching its highest levels ever at over 1.2 million shares. The drying up of volume created a serious predicament for a short seller. Enter “Stage Left”, attack blogger Sharesleuth.com with a tome titled: "Kandi Technologies Corp.: Where are the Cocos?"
Now, in normal times, “who cares”? Anyone who had a clue about KNDI, wouldn’t waste the time to even look at this bizarre blog since it didn’t even attempt to address happenings in China. But in the trading environment at the time, along with an initial “nudging” from the shorts which began a few days before the blog was released, the stock was down to below $2 on heavy volume within minutes of the release of the blog. I say “who cares”, because the “Coco” referred to in the blog is effectively an obsolete first generation low speed electric vehicle that KNDI had been selling in China to distributors for export to the US. These LSEVs, approaching 4,000 sold, along with a couple of hundred thousand other vehicles also sold in the US over the years, left KNDI with no need to know, or even care, who the ultimate dealers and purchasers were once sold to the distributors in China. KNDI responsibility, as in the case of 95% of all China product exporters, pretty much ends once the vehicles are delivered at the ports of debarkation.
Oh sure, the sleuthy writer found an entry error while doing a comparison of year over year voluntary tables in the 2009 and 2010 10Ks having to do with some of KNDI’s legacy products. But as can be seen from KNDI’s response in an SEC filed 8k “Letter to Shareholders”, it didn’t change the bottom line one iota. Point of note: As a “knee jerk” response to this ridiculous blog, the company did say it would be filing an amended 10K to correct the entry errors. Shortly thereafter it did, but not only for the 2010 10K, but also the 2009 along with the last two 10Qs in 2010. It filed the amendments not because it had to, since the errors did not involve anything that was required to be included in a 10K, or affected audited numbers, but because it said it would. The company’s PR response can be found at this link. The follow-up Chairman’s letter can be found here along with its PR here. The amended filings can be found here.
Let me make one point clear. I have read some 25 so-called “attack” articles on China stocks over the past few months. I have found many make bonafide cases against irregularities in the companies reported. For those I am in full support and give kudos to any writer who has taken the time to do proper due diligence before publicly attacking their targets. I don’t even have a problem that many have shorted the target stock before publication. But I do have a problem with irresponsible “guns for hire” spreading mis- and dis-information on companies solely for the purpose of accommodating short sellers. Anyone who has taken the time to read any company’s SEC filings, from Apple (AAPL) to Berkshire to Microsoft (MSFT), knows that it would be simple to cherry pick points out of their filings and put out a negative article on those selective points.
Two weeks ago I posted the below linked non-KNDI blog, which was not published, specifically addressing the “China-phobic” environment and related market disconnects created by the attack writers. Below the title line I have extracted two appropriate portions of that blog to add here.
…I am not going to waste a lot of time giving the background of how we have arrived at this point of disconnect between stock price and business performance of the vast majority of US traded China companies. The various forms of media have done a more then sufficient job of creating this environment whereby fear throws out logic. If somehow you have missed what is going on in this sector, then you shouldn’t be investing in the Market. But I will unconditionally state that not all, not even a vast preponderance of China stocks, are purposely fraud infested. However you wouldn’t know this by following the media or looking at the sector stock performance over the past few months. Credit for this phenomenon is certainly given to short sellers and “attack” blog writers who have created a “magic bullet” to create instantaneous assured profits from short selling. But don’t for a second buy into their claim that proper due diligence is the primary reason why the stock of an attack target drops like a rock within seconds of the release of their articles. I suspect the dramatic drops are more so attributable to short sellers capitalizing on Market Psychology of the old adage; “It is easier to scare an investor out of a stock then into a stock”. This point is further proven by the immediate collateral selling in other sector stocks, no matter how unrelated, in just minutes from the release of a 20 to 40 page target article.(who can read that fast?) The thought of this broad based power now being realized by even ignorant attack writers with short selling in mind should be chilling to all to say the least. Emboldened with this psychological tool, virtually all stocks, China or otherwise, could in the future be more vulnerable then ever to this brilliant form of manipulation…
… This too shall pass
As painful as this has been for traditional long term investors and honest China companies who have suffered during this unique period of time, this too shall pass. While no “market” is pure of those with fraudulent intentions, I suspect that time will tell that those China companies who survive this bloodbath and come out fundamentally unscathed, will inure significant benefits for two reasons; Firstly, they will have survived a regulatory and accounting review more intensive than any US based companies have ever had to endure and secondly, as US investors once again focus on investing in the fastest growing and largest economy in the world, there will be a much smaller arena of China stocks to chose from…
Much has been heralded by the media and attack writers that "China regulators don’t care about their companies scamming investors as long as the companies don’t try scamming the PRC government."
In KNDI’s case, everything the company is announcing and doing in China involves the PRC or local governments - whether this means paying money to KNDI for EV purchases by the China Postal Service, or subsidy payments directly to the company for consumer purchases of EVs or PRC owned State Grid attaching their name to KNDI and paying to expand KNDI’s patented QBE network. I know of no other US traded China company that is so government attached with so much to lose if ever caught doing something underhanded. This alone should give a significant amount of comfort to anyone still concerned about the legitimacy of the company.
The bottom line here is that the above events have, in my opinion, created an incredible disconnect between the company’s stock price and performance - the latter of which will be addressed in Part 2 of this article in the next day or so.
Disclosure: I am long KNDI.