Kandi Technologies: A Practical Approach To The EV Market

Aug.29.12 | About: Kandi Technologies (KNDI)

There's been much speculation about Kandi Technologies, Corp. (NASDAQ:KNDI) recently regarding the Chinese city of Hangzhou's Electric Vehicle rental and lease programs. But that speculation is slowly turning into reality for the company and recent events have the potential to dramatically increase the company's revenue and profit. The hard numbers thus far are for 20,100 units, which are broken out into 100 test vehicles for August and 20,000 production phase vehicles.

Production begins with a ramp up to 1000 vehicles per month for the remainder of 2012 for a total of 4000 vehicles, which will be dependent upon demand. The remaining 16,000 vehicles which is also dependent on demand will be delivered in 2013. Demand seems to be catching on as over 3000 applicants have signed up for the program thus far.

That adds a potential 1100 vehicles to Q3 and a potential 3000 to Q4. According to the last Form Q10 filing, Kandi sold 639 vehicles for $2,636,852 which sets the price at $4,126. With the latest Q10 profit margin of 20.2% this would produce $833 per vehicle. That's $916.3K additional profit in Q3 and $2.49M in Q4. Sales for the remaining 16,000 vehicles in 2013 would produce $19.99M in profit. With 29.84M shares outstanding, the per-share breakout is as follows:

1. Q3 - .03 cent per share

2. Q4 - .08 cent per share

3. 2013 - .67 cent per share

The trailing twelve month [TTM] Earnings per Share is .10 cents which would put 2013 Earnings per Share [EPS] at .77 cents with legacy sales included. With a conservative PE of 15, that would put the share price at $11.55. These are rough estimates and extremely conservative as they don't take into account the revenue of other endeavors.

Of course as mentioned above, these estimates are based on demand. Electric vehicles have not been a favorite among car buyers. This is because of the inconvenience of charging the vehicles which Kandi seems to have solved with its Quick Battery Exchange [QBX] technology. Batteries can be swapped out in about the same time it takes to pump a tank of gas. To make this even more acceptable, the government is offering subsidies that provide discounts to the rental fees. The rental fees also cover insurance and the cost of the battery swaps. Free battery swaps is akin to getting free gas.

Much of the information that has been in the news lately has been focused on recent events; most of it coming from China. Fortunately for Kandi there is a group of investors that embraced this company long before its most recent success and insured that the truth regarding the company rose to the top of the minutia and innuendo that has plagued Chinese stocks. A member of the group formed the KNDI - Kandi Technologies -- Private Forum. It's a private message board dedicated to researching the stock without manipulation of information.

If you are considering an investment in this company, you can be sure that the best and the brightest have done their due diligence and you now have the luck of having it literally served to you on a silver platter; okay, not literally, but damn close (sans the platter).

But even though the information provided was compelling, I wanted to take a more pragmatic approach to examining Kandi. Kandi Technologies is first and foremost a manufacturing company. As such, they must follow a Systems Development Lifecycle Model [SDLM] to support their engineering processes. The steps include Analysis, Design, Implementation, Testing and Evaluation, so to add some parity, I'll use these categories to review the company.

Analysis

Like many great inventors, Kandi identified a problem that needed to be addressed. Pollution is a very big problem for China (as well as many other nations) and the Chinese government wants to do something to fix it. While I don't have any insight into Kandi's operations, the obvious outcome of the analysis would suggest that the solution must address one of the biggest contributors to the problem which is the Internal Combustion Engine [ICE]. It must be affordable to the masses and it must be convenient to use. Kandi decided to enter the EV market. The solution is a potentially profitable venture with strong altruistic overtones.

Design

Kandi designed a series of affordable EVs and began to evolve the technology that supported their use. One of the biggest drawbacks to driving an [EV] is having to charge the battery. Kandi partnered with State Grid, one of the largest energy producers in China, to develop battery swap technology. This is one of those disruptive technologies that can have a profound change on an industry. Disruptive technologies provides for the evolution of new or existing markets.

Implementation

In proceeding with the implementation, Kandi and State Grid addressed both the internal and external requirements. Internally, they began to implement an infrastructure to support battery swapping which included automated mechanisms. The swap stations are to be placed strategically throughout the city and countryside to ensure accessibility. From an external perspective, they have largely removed the cost of the batteries from the drivers of the vehicles making them more affordable by having the batteries exist as part of the support infrastructure. They have also successfully leveraged government support in the way of subsidies for direct buyers.

Kandi has further solidified their position and favor with strategic entities such as Aviation Lithium Battery Co, Zhejiang Guoxin Vehicle Leasing Company and Zhejiang Zotye Holding Group Co.

Testing

There has been extensive testing done on the vehicles and infrastructure to ensure safety and reliability are key attributes of the vehicles' performance. Internal testing is generic and should be followed by testing in the operational environment which leads us into the evaluation.

Evaluation

This is where the 100 Vehicle Pilot Program comes in. From an engineering and manufacturing perspective, having 20,000 vehicles hit the street all at once could easily become a nightmare. It's much easier to have a 100 vehicle lot to correct problems on in the field and then if there are problems, you can modify the design for the future 20,000 vehicles before they hit the street. This test mitigates the risk of a potential vehicle retrofit or recall.

A good investment is one that has some stability (low volatility). A true investor should be thrilled that there is a 100 Vehicle Pilot Program to shake out the bugs. And yes, there will be most likely be some problems. And thanks to a prudent approach to the engineering and manufacturing processes, scale and risk will be significantly reduced.

Conclusion

As shown above, Kandi is not shooting for the quick sell. They are marching down a more prudent path to success. You can bet that other cities will be watching the Hangzhou's 100 Vehicle Pilot Program and the production ramp up. And if the pilot program is successful, these cities will be more accepting to starting their own programs that would provide an alternative to the larger car companies.

The market for Kandi vehicles is somewhat different from that of Tesla (NASDAQ:TSLA), Ford (NYSE:F), General Motors (NYSE:GM) or even BYD as they represent a higher end market. Kandi is designed to be affordable and less intrusive on the current congested infrastructure. There may even be a niche market among the younger crowd that may want to start "Tricking Out" their Kandi cars.

Kandi has begun several other efforts in preparation for sales growth expansion that could substantially erode market share of the larger high-end auto makers. Some of the more notable ventures are a 5 year vehicle rental program in cooperation with Zhejiang Guoxin Vehicle Leasing Company with a projection of 100,000 Vehicles; a collaborative agreement with Zhejiang Zotye Holding Group Co to promote [EV] use; and development of a facility able to produce parts supporting 100,000 EVs. Revenues for the facility are expected to be RMB3 billion (about $472M).

The company has recently announced an investor and analyst meeting September 5th in Atlanta. This is a great step forward in getting the company recognized. With the potential of the EV business and the continuing business of their legacy operations, Kandi is well poised to be a breakout company in 2013.

Disclosure: I am 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.