The Big Short Movie
I recently viewed the movie, "The Big Short." It's the true (but of course with Hollywood embellishment) story about the financial crisis in 2008. It's the fascinating story of how a small Hedge Fund Manager, Mark Baum, predicted the impending housing/financial crisis due to insanely relaxed mortgage loan criteria (e.g., if you could breathe and just sign your name, you got a loan!).
Subprime loans were packaged into financial instruments that were fraudulently sold as rock-solid AAA rated investments to unsuspecting institutional investors around the world. It's a revealing movie about the inner workings of the greedy Wall Street investment banking community doing unethical and unlawful business with their blinders on to make billions. I encourage you to see "The Big Short."
This intriguing story of Mark Baum reinforced my contrarian position of being a "Big Long" in a small-cap Chinese company. I am bucking the current overwhelming consensus to avoid small Chinese company stocks like the plague. What appears so obvious to me as another investment opportunity of a lifetime (with even higher payoff potential than my previous experiences in Apple (NASDAQ:AAPL) and Tesla (NASDAQ:TSLA)) is to others stupidly throwing my money away.
This article describes my recent successful investment history and the rationale leading to my contrarian investment position in a small Chinese EV (Electric Vehicle) manufacturing company, Kandi Technologies (NASDAQ:KNDI), based in Jinhua, China. Kandi produces inexpensive moderate speed/range pore mini-EVs, primarily suitable in urban areas, through a Joint Venture (JV) with the largest automobile producer in China, Geely Automobile Holdings Ltd. (Hong Kong Stock Exchange: 175).
My Investment History
I bought my first Apple stock at $6 for my grandchildren's college trust funds way before its 7:1 split, or the equivalent of <$1. Apple was going broke, but I believed in Steve Jobs and loved his products. My belief was vindicated, when Jobs brought Apple back to life and eventually turned it into the most successful high technology company ever.
I had an Apple "Lisa" computer in the early 1980s, so my love affair with Apple products goes back over 30 years. I kept investing more in Apple as the stock price steadily increased, way before it was a cult stock, until I was virtually 100% invested in Apple. I rode out the 2008 recession, hanging onto the stock and then riding it back up.
In 2012, I learned about Tesla Motors and Elon Musk. I visited the newly opened Tesla retail store in the Fashion Island Newport Beach, CA shopping center. They had a prototype Tesla Model S EV (electric vehicle) with ill-fitting body panels. What really interested me was that it was pure electric, unlike hybrid EVs which used an ICE (internal combustion engine) to extend range. I immediately fell in love with the car, its design, and overall concept.
My Tesla P85+ Model S Pure EV
I researched Elon Musk and really bought into his forward thinking visions and perseverance at Tesla and SpaceX. I felt that Apple was starting to peek, so I was looking for someplace else to invest. Also, I really wanted to own a Tesla Model S EV, and felt that I could probably buy one in a year (which happened to be the waiting period at that time) with the proceeds of a $30,000 investment. I first bought Tesla at $39 a share. However, Tesla fell back to about $30 and I got cold feet and I sold at a 25% loss. Then the stock gradually started to increase and I bought back in at $40. A year later, I was almost fully invested when the short squeeze occurred. Tesla more than doubled to over $100 in a day, and within a year climbed to $290. So, I know the spectacular effect that a short squeeze can have. I purchased a new fully-loaded Tesla Model S P85+, the most fantastic car I have ever owned.
With this investment background, let's go onto my Kandi investment discussion.
My Kandi Investment
In 2014, I learned of Kandi Technologies. A video produced by Aaron Rockett on YouTube really peaked my interest, Aaron Rockett Kandi Video.
Kandi MPT CarShare Tower
Starting at $4, I gradually bought into Kandi as I learned more about the severe Chinese pollution crisis and the Chinese Government commitment and huge incentives to promote the transition from ICE (internal combustion engine) vehicles to EVs, both pure EVs and plug-in Hybrid EVs, and disincentives to buy and own ICE vehicles. It all made so much sense to me, but as I later determined, not to the investment community.
Unfortunately, short traders have pounced on this small cap company and have very skillfully manipulated its PPS (price per share) to their benefit. It's generally believed that Mark Cuban, the billionaire owner of the Dallas Mavericks basketball team, is behind the Kandi "Big Short." Cuban and other shorts have capitalized on the widespread belief that many Chinese companies are fraudulent. Time and time again shorts have been proven wrong about their irresponsible and malicious claims about Kandi. There was a short-inspired SEC investigation of Kandi based on alleged irregularities in the reverse merger that listed Kandi on NASDAQ. Even after the SEC cleared Kandi of any wrongdoing in 2015, the shorts have continued to attack Kandi with baseless claims of fraud and dishonest management. To this day, they are still manipulating Kandi stock, using psychologically effective computer algorithms, and selling and buying between related accounts to drive the PPS down.
I and other steadfast Kandi longs have been on a "Kandi roller coaster" for nearly two years: PPS up to $22 and as low as $5, and the stock is currently very near the low end of this range. You can clearly see in the following graph how the shorts have manipulated the stock down in the past year and a half while simultaneously covering only a part of their short position.
Shorts Manipulating KNDI PPS
Shorts have exploited the recent extreme volatility of oil and the Shanghai stock market, and the small slowdown in the growth of the Chinese economy in very deceitful ways. Contrary to the claims of shorts, Kandi's business is substantially immune to the gyrations the Shanghai stock market because it is listed on the NASDAQ, not the Shanghai exchange. Furthermore, Kandi business is immune to International oil price movement as claimed by shorts, because oil and gasoline prices are fixed by the Chinese Government, and are now set well above recent lows. The Chinese Government simply does not want to pass on lower oil and gasoline prices to consumers because that would encourage more usage and even more pollution.
To make matters even worse, Kandi management has not been effective at promoting the company. Mr. Hu, although a very astute visionary CEO, and who owns nearly 30% of the outstanding Kandi stock, seems to believe that the value and phenomenal prospects of Kandi are obvious and should be naturally reflected in the PPS. While that is also my belief, it is obvious that the investment community remains to be convinced. Kandi has issued 32 press releases in the past 12 months, which is a lot, but a comprehensive IR and awareness strategy has been lacking. Although Kandi hired a reputable IR firm (The Piacente Group) in 2015, Kandi has made little use of their services.
Like in The Big Short movie, I and a few other Kandi steadfast longs have done our due diligence and independent research that identified an exceptional contrarian investment opportunity. In a sense, I and other Kandi investors, are the Big Longs! There is no US analyst coverage yet, and just 8% (of the float) has institutional ownership. US analyst coverage, or an increase in institutional ownership or another major positive event (such as a blowout 4Q'15 earnings report), could trigger a short squeeze, in my opinion.
Kandi Technologies Group is in a 50/50 JV (Joint Venture) with Geely Automotive Holdings Ltd, a subsidiary of Zhejiang Geely Holding Group Co., Ltd., Geely produces the Volvo-branded passenger cars and the iconic London Taxis, as well as Geely-branded ICE vehicles for the Chinese market. Geely has a $30 billion market cap, and is the leading automobile producer in China. This is one great partner for the much smaller Kandi EV company!
Kandi Technologies Group supplies high value EV parts, including battery packs and electronic controllers, to the JV, which assembles EVs under a manufacturing license granted by the Chinese Government to Geely. One of the JV factories, located in Changxing, was in fact a Kandi factory that was transferred to the JV as a part of Kandi's 50% investment. Both Kandi and Geely have a 9.5% interest in ZZY (Zhejiang ZuoZhongYou Electric Vehicle Service Co., Ltd.) which is the MPT (Micro Public Transportation) CarShare company serving the JV.
The JV sells pure (all battery powered) EVs to ZZY for their MPT CarShare business, and has just recently started selling EVs to dealers (including Geely car dealers throughout China) for direct sale to consumers. In addition to hourly and daily rentals, ZZY also long-term leases Kandi EVs to both individuals and groups. The ZZY MPT CarShare business uses both automated multi-level garages (called towers) and street-level lots for battery recharging and switch-out with charged batteries.
In Q2 2015, the JV commenced selling EVs direct to the public via dealerships and by Q3'15, 50% of EV sales were direct to the public. The JV has access to Geely's extensive dealership network and has recruited additional dealerships, and most recently signed an agreement with Pang Da Automobile Trade Co. Ltd., which has an extensive 1200 dealer network in 28 provinces throughout China.
Hundreds of millions of Chinese live in congested high-rise apartment zones and, for most, parking and EV charging are not available (like commonly in homes in the USA.). Eventual widespread utilization of MPT CarShare will mitigate the charging issue, greatly reduce parking space needs, will reduce the number of cars in use and ease traffic congestion. it is estimated that about half of traffic in city centers is due to drivers simply looking for parking spots, needlessly increasing traffic congestion and creating more air pollution. In sharp contrast, shared cars are productively and efficiently utilized most of the time. Once a shared car is used for a trip, it is usually quickly deployed again for another user's need, rather than being parked very long. This mitigates the need for parking places, so space needed for parking cars can't be used for really productive purposes (living and business space, parks, etc.)
CarShare 4.0 Initiative
Through the visionary efforts of Mr. Hu, Kandi has partnered with Geely, Alibaba, ZTE, Uber China, ZZY and Minsheng Bank to create the CarShare 4.0 consortium. As illustrated in this promotional video, this will integrate EV, internet, GPS, smartphone and wireless charging technologies to efficiently and rapidly route cars to directly sequential users.
MPT CarShare EVs use towers and street-level lots to transition EVs between users, e.g., a user travel somehow (walk, bus, subway, etc.) to a tower/lot to rent an EV, then after usage drives it back to either to the same place or to a different tower/lot, where the next user picks up the EV, and so on. Of course, the previous user must somehow travel back to his home or place of business. Ultimately, MPT CarShare 4.0 will evolve into a fleet of driverless, totally automated wirelessly charged EVs to dramatically increase the speed, efficiency, convenience, ease-of-use and safety of car sharing. Driverless EVs will pick a user up, drive to the user's destination, then go on to pick up the next user, and so on. I call this "direct consecutive car sharing" since it avoids the wasted time and extra travel hassle when using towers/lots. They will still be employed for battery recharging and replacement, but eventually wireless charging Will mitigate the need for towers/lots, except for overnight parking and other off-peak times.
Pending complete implementation of CarShare 4.0, ZZY is working with China Uber to provide direct sequential car sharing as soon as possible, and a pilot Kandi/China-Uber program is already underway. Kandi EVs are ideal Uber cars for young Chinese drivers as they are very inexpensive to purchase/lease and to operate. Kandi's quick battery exchange side-slide system will be used to prevent Uber EV downtime that would otherwise be needed for battery charging.
Positive Investment Fundamentals
Kandi's outstanding investment fundamentals are driven by this indisputable fact: China must solve its severe air pollution crisis, not only for the sake of its people's health, but to continue vigorous economic expansion of the country.
Severe Air Pollution in Chinese Cities
About half of Chinas's air pollution is generated by coal-powered electricity generation plants, and the remainder from ICE vehicle exhausts, so both sources of pollution must be addressed. China is building state-of-the-art nuclear reactors (some 25 are currently under construction) to replace the existing coal-powered electricity generation plant infrastructure, but this will take decades to fully implement. On the other hand, replacing ICE vehicles with EVs can be done much sooner, so the Chinese government is vigorously pushing the transition to EVs to reduce pollution as rapidly as possible. Also, eliminating harmful emissions generated by ICE vehicles located right in the midst of heavily polluted urban areas is very effective.
As summarized later, the Chinese Government is dramatically subsidizing and providing many other incentives to promote EVs, both pure and plug-in hybrid types. Since hybrid EVs still contribute to the pollution crisis, they are not the ultimate solution and receive lower subsidies.
Sometimes when I use the term "Kandi", it technically should be "JV", but it is practically the same thing as Mr. Xiaoming Hu, the Chairman/CEO of Kandi, is also the Chairman and former CEO of the JV.
Kandi's positive investment fundamentals, in no particular order, include:
Fundamental No. 1: Consumer cost of pure EVs is dramatically reduced by nearly 2/3 (1/3 by Central Chinese and 1/3 by local Government subsidies). Subsidies will be gradually phased out over the next several years.
Fundamental No. 2: As subsidies reduce, Kandi will start earning Carbon Credits for each EV and selling them on the carbon exchange. Conversely, ICE car manufacturers will be required to purchase carbon credits for each ICE vehicle produced. This will subsidize and reduced the consumer cost of EVs and increase the cost of ICE vehicles.
Kandi EV Production Factory, Changxing, China
Fundamental No. 3: The JV has 300,000 EV/yr production capacity in place with three factories in Rugao, Changxing and Shanghai. Under 10% of this capacity was utilized in 2015. At Kandi's current and expected exponential growth rate, these factories will be fully operational well before 2020, in my opinion.
Fundamental No. 4: In addition to subsidies and future carbon credits, many more Chinese Government incentives are already in place to promote EV utilization, including: no sales tax, free unlimited license plates (compared to $16,000 for restricted number of plates for those fortunate to win by lottery), able to drive everyday of the week during severe smog alerts (ICE cars 10 be on the road only on alternate days). Also, a minimum of 30% of all government vehicle purchases must be EVs, starting this year.
Fundamental No. 5: Kandi is directly NASDAQ listed, unlike other Chinese stock ADRs. Significantly, SEC cleared Kandi of any wrongdoing in an investigation concluded early in 2015 and one can assume that there was rigorous analytical audit of its financial statements, which inspires confidence.
Fundamental No. 6: Agreements have been signed by ZZY with major Chinese real estate developers to integrate MPT CarShare facilities into future multi-family housing developments.
Fundamental No. 7: ZZY entered into an agreement with Yangtze Alliance (Yangtze River Delta High-speed Railway Tourism Alliance) to provide MPT CarShare facilities at high use train stations in four provinces.
New Kandi K30 Luxury Sedan Pure EV
Fundamental No. 8: The new Kandi K30 luxury sedan EV will target the government and corporate markets. At least 30% of all government vehicle purchases are mandated to be EVs starting in 2016.
Fundamental No. 9: The Geely/Kandi JV will IPO in either the Shanghai or Hong Kong Stock Exchange, probably in 2016, to finance JV growth. This will also benefit Kandi shareholders, as 50% of JV IPO market cap will be reflected in Kandi's market cap.
Fundamental No. 10: Kandi EV sales have more than doubled every year since the inception of the JV, and I expect sales to increase by over 3x in 2016, from at least 25,000 in 2015 to well over 75,000.
Fundamental No. 11: A $150-$175 min Central Government subsidy payment is due soon.
Fundamental No. 12: Kandi has maintained profitability for the past six quarters, even while sustaining explosive growth and developing four totally new EV models, one released in late 2015 and three EVs to be introduced in 2016.
New K17 Cyclone Sedan Pure EV
Fundamental No. 13: The new larger K17 Cyclone Sedan EV, with a huge Tesla-like touch screen and Alibaba software, was named/voted the 2015 "EV of the Year" in China.
Fundamental No. 14: Kandi has partnered with Geely, Alibaba, ZTE, Uber China, ZZY and Minsheng Bank to create the CarShare 4.0 consortium which will ultimately have a fleet of driverless EVs to efficiently and economically provide private mobility to millions of Chinese.
New K12 City Beauty Pure Mini-EV
Fundamental No. 15: The all-new Kandi K12 Urban Beauty and K13 City Cowboy mini-EVs incorporate the latest lithium battery technology. The K12 release is imminent, and the K13 will be introduced later in 2016. These next generation models also feature Tesla-like touch screen and Alibaba software.
Fundamental No. 16: ZZY is working with China-Uber, and a pilot Uber operation is already underway. Uber drivers provide sequential car sharing without waiting for full implementation CarShare 4.0.
Fundamental No. 17: Kandi was the No. 1 pure EV producer in China in 2014 and 2015, and Mr. Hu has stated "We are very confident in maintaining our leadership position in 2016.
Fundamental No. 18: Kandi is expecting a Chinese Government EV manufacturing license in 2016 (part of the reason for the JV was to use the Geely automobile production license).
Fundamental No. 19: The Kandi MPT CarShare program expanded to 17 locations in multi-million population urban areas in 2015. In addition to MPT CarShare, the JV is now selling EVs directly to consumers. Hundreds of Geely car dealers will facilitate direct sales of Kandi EVs throughout China.
Haikou Factory Groundbreaking Ceremony
Fundamental No. 20: In addition to the three existing factories, the Haikou city government is providing $300 million to build a 100,000 EV/yr capacity, 2.16 million ft.², factory in the Haikou high tech low carbon manufacturing zone on Hainan Island. A groundbreaking ceremony with government and company officials was recently held.
1956 Isetta ICE Micro-Car (left), 2016 Microlino (right)
Fundamental No. 21: Micro Mobility Systems AG, Switzerland, is developing a modern EV version, called Microlino, of the BMW Isetta micro-car (161,000 produced for Europe in the 1950s). Initial Microlino production will be for the Chinese market and later for sales throughout Europe. Kandi has already manufactured a prototype, which will be shown at the Geneva International Motor Show in March 2016. Significantly, the prototype carries the Kandi badge.
Fundamental No. 22: ZZY has just been awarded the 2014-2015 "Corporate Integrity Award" for China MPT program operations.
Clearly there is a huge disconnect between the current PPS and the valuation of Kandi in my view and in that of other Kandi longs. For an excellent valuation assessment of Kandi, I urge you to read Bill Watts comprehensive Seeking Alpha article "Kandi: Accelerating Sales And Hidden Value" that sets the conservative valuation at $58 PPS, nearly an order of magnitude above the present market PPS.
Tesla needs a Chinese JV partner to avoid tariffs, duties and taxes, receive Government subsidies and to earn future ZEV carbon credits. The Tesla partner must be able to economically mass produce Tesla USA-designed EVs for the Chinese market, much like Apple has Foxcom mass produce Apple-designed products. Kandi is a logical potential partner, with its expanding EV factory production capacity and its focus on pure EVs without distraction of ICE cars or hybrids. If this should occur, the new Haikou factory might build Tesla Model 3s. This is pure speculation on my part, but very exciting to ponder, as this would be a high profile event that could initiate a short squeeze.
Although not yet announced, the Kandi 4Q'15 earnings report is anticipated about March 14, 2016. I expect that the PPS will run-up in the next few weeks in anticipation of a very bullish report. Kandi already announced that it easily surpassed the companies 2015 sales target.
Approximately 5.5 million Kandi shares are shorted, e.g., 5.5 million shares are borrowed by short traders with the hope that the PPS will drop so that the borrowed shares can be repaid with lower cost shares, with the short pocketing in the difference, less interest and trading expense. The total number of outstanding shares is 38.9 million. Mr. Hu, other insiders, and steadfast longs own about half of this, so the float available for shorts to cover is about 20 million shares. The average daily trading volume for the past 30 days has been only 470K shares, but it is thought about half of this is due to shorts trading between related accounts as they desperately try to drive the PPS down. With these estimates, more than 20 days would be needed to cover all shorted shares.
Because of the strong possibility of a positive event triggering a short squeeze in the near term, and the rapidity that it could occur, I am fully invested and holding long rather than trying to time a buying opportunity.
Disclosure: I am/we are long KNDI.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.