Kandi Technologies (KNDI) has cemented its credibility and offered revelations at its Atlanta Investor Analyst Meeting, showing how the company can develop electric vehicle (EV) market dominance in China.
To set the stage, the meeting had some 30 shareholders in attendance. Mr. Hu, Kandi's CEO, speaks no English, so along with him at the head table were two translators; IR representative Kewa Luo; and Jeffrey Li, one of the company's securities attorneys; along with lead attorney Tom Wardell (both lawyers from the international 600-partner law firm of McKenna Long & Aldridge).
The language barrier is important to know due to possible gains or omissions due to translation during the presentation and Q & A. However; it is also very important to understand that by not only having their two attorneys present and participating the whole time but also having the venue located at the attorneys' law office, significant credibility to the presentation was added. If any of this article's content is incongruent with the representations made by the company at the meeting, I'm sure Mr. Wardell will be quick to respond with corrective releases.
The meeting started with this power point presentation illustrating new models and overviews of their leasing and rental programs by Mr. Hu, and was followed by the extended Q&A, which offered many revelations as lead counsel allowed the session to run 2 hours over the scheduled time until all investor questions had been fully addressed to satisfaction.
Hu's #1 Anecdote
Early in the presentation, Mr. Hu told an anecdote of early discussions with government EV "higher-ups". He told them; "China has no companies building EVs". They responded, "this is not true, BYD, Chery, Zoyte etc.". He told them, "No, they are not building EVs, they are just taking ICE cars they have already built and modifying with electric motors. Because of this there is no consistency or opportunity for a standard to be set for batteries. Which also means that they have no incentive to want to address the major problems of reducing costs, or extending range, as the QBEx offers." He said, "Soon they understood, and that is why KNDI is now looked at by the government as #1 in EVs in China."
Revelations from Q&A Discussion:
There were several key themes addressed with investors, ranging from specific existing vehicle and changing station count, the term "Letter of Intent," the path to national expansion, timing of the announced programs, and differing cultural expectations, which affect communication with the financial community.
"Letters of Intent"
Recently Kandi has issued several releases outlining Letters of Intent for the Hangzhou 20,000 vehicle leasing program, the 100,000 vehicle "Time Share" rental garage program, the Shandong factory construction project, and a rather cryptic Zyote Letter of Intent, which read like the formation of a joint venture.
The term 'Letter of Intent' in the west is a very preliminary document. As explained to us, in China a 'Letter of Intent' is signed after an agreement has been reached. It is a written document spelling out what will be accomplished and how. It is not a contract, in U.S. parlance, and is not enforceable in court. It is, however, an advanced step. There may not be other formal steps involved or communicated until the accomplished fact is complete. The Letters of Intent were disclosed because they are an advanced step from which it's not uncustomary to simply proceed toward project completion.
Progress Updates on the Above 4 Letters of Intent:
The Shandong factory construction project which is tied to supportive policies for promoting a minimum 20,000 EV's per year in Shandong Province is anticipated to break ground this year and ambitiously hopes to be completed by the end of next year. As seen from this PR, this new facility should contribute 3 Billion RMB or $450 million a year to KNDI's top line once fully operational.
The Hangzhou 20,000 EV leasing program is beginning, as stated by Mr. Hu. The CALB leasing subsidiary is expected to be active on September 15, 2012. We were given an assurance by Mr. Wardell there will be a press release as the delivery of vehicles begins.
The 100,000 vehicle "time-share" rental garage project should have its first garage complete yet this year. The partnership has now found itself in talks with State Grid Corporation of China regarding the role State Grid desires to play. As explained to us, State Grid is powerful and they supply the needed electricity. In China it's not a bad thing if State Grid decides to insert itself in your venture. Here's a link to a 3D Animation showing how the Vertical Parking Garage time-share program parks the cars and charges them automatically.
The Zyote LOI was quite vague. As explained to us at the meeting, in order to qualify for all of the subsidies possible, Kandi for a fee of 300 RMB per car sold is using one of Zyote's manufacturing licenses while waiting for approval of Kandi's application for that specific manufacturing license.
The city of Hangzhou is in the lead, currently launching subsidized EV programs for individual drivers. Many other cities have made inquiries. Mr. Hu wouldn't be surprised to see other cities become eager to surpass Hangzhou. However, China is very regional. Therefore Kandi will have to develop manufacturing regionally in order to qualify for all local subsidies.
Drawing from part of the Shandong LOI questioning, Mr. Hu stated that Shandong was one of multiple opportunities presented to Kandi for expansion. Due to the competitiveness of the opportunities Shandong came in with a package of grants, subsidies and low interest loans which allowed Kandi to build without needing to seek additional financing.
This local funding package availability segues into the later discussion about the necessity of a rollout of regional manufacturing facilities if/as Kandi expands. Mr. Hu believes there will be grants and low interest loans available for subsequent construction projects making the need for additional funding unlikely.
As translated by Jeffery Li, to be considered a local manufacturer, Kandi must at least make the body and some parts within the region. They will be able to ship in major components from centralized facilities. The actual capital outlay doesn't seem as daunting as it would be if it were necessary to make all 4,000 parts in each vehicle in each province.
According to Mr. Hu, in a voluntary statement during the discussion, the company already has a team of employees focused on the regional rollout of manufacturing facilities. At the time, because of the tone of the conversation, I simply assumed they were analysts sketching out projections. I really wish I would have asked the follow on question of, "In what capacity are those people functioning?"
Specific Vehicle Count and Existing QBEx Station Count
When asked point blank, "How many EV cars do you currently have on the road in China?" Mr. Hu through Kewa Luo responded "Over 1,000. Over 100 of them are QBEx. Jinhua is continuing. Hangzhou is starting."
"Jinhua" is referencing Kandi's first pilot city, offering subsidized sales of Kandi's Lead Acid KD5010 EV.
How many Quick Battery Exchange Stations exist in Hangzhou right now?
Mr. Hu, "25 are operational now. This will be expanded to 125 in 1 year."
Mr. Hu's answer seems to be corroborated in this EV Days article as well. "By the end of the year, the city will also be [adding] 25 new filling station[s]."
The Licensing of QBEx to Other Manufacturers
I asked, "Will you license QBEx to other manufacturers, such as Mitsubishi, Mercedes, BYD?"
Mr. Hu looked solidly at me and said, "This will not happen in China."
Hu's Ambition Revealed
A long time shareholder in attendance reminded Mr. Hu of a question he posed two years ago at the 2010 Shareholders Annual Meeting held at that time in New York. The shareholder was at the meeting, Mr. Hu was linked telephonically. The shareholder was referencing a comment on Kandi's website at that time which stated, "…. The company has completed a feasibility study for annual production to reach 300,000 mini -EVs in 5-7 years."
The question was, "With two years behind, does Mr. Hu feel he is on track now to reach this goal in the remaining 3-5 years?" Mr. Hu through translation replied words to the effect, "You see what we have accomplished in just the past few months with the 20,000 EV program and the 100,000 program and that is in just one city." Hu added, "I feel it is likely we exceed the 300,000 EV's per year number in that time." 300,000 EVs per year would add over $2 Billion a year to revenues. And since Kandi has now vertically integrated with some recent acquisitions the capability to make "in house" well over 50% of the total cost of the cars, very high margins should be expected.
Where Kandi Has Been
A few short years ago, Kandi was a fledgling ATV and go-kart maker with ambitions of being a revolutionary EV maker, having to sign financing deals and giving up warrants before State Grid joined the Jinhua JV for the use of Kandi's QBEx patents in their battery changing stations.
Where Kandi Is Now
As seen with the Shandong factory discussion, Kandi has been offered preferential financing packages to entice its factory construction as Kandi begins to launch their government subsidized EV's - a far cry from "... and we want warrants."
What I Sense About Kandi's Path
Remember the answer given when I asked if Kandi would license QBEx to other automakers? "This will not happen in China."
If the PRC does not mandate Kandi to share Quick Battery Exchange technology, then Kandi controls who can and cannot exchange low/dead car batteries. Everyone else must plug and wait several hours, providing their extension cords don't get mischievously unplugged or stolen at public charging piles. Read that paragraph again, and let it sink in before moving to the next one.
Now, imagine how the American auto industry would be shaped if the Dodge brothers had vehicles that could refuel in minutes while GM, Ford, and everyone else had much more opulent cars which took several hours to refill, providing vandals didn't steal the hose while you were pumping?
The Bears' Arguments
The bears' core argument, as seen in commentary responding to Seeking Alpha articles written by Art Porcari, Perry Coleman and Inflection Point Investing, is the cars haven't yet been delivered, therefore the cars will never be delivered, and everything else which has occurred with the development of this company is meaningless, including Kandi's profitable legacy ATV business, which has funded the development of Kandi's EV business.
The EV Investment Choice
Kandi's only other competitor for US investor interest in a relatively pure EV stock play is Tesla Motors (TSLA). It too has had to fight off large short sellers while development was underway for its single EV offering. However, due to the high profile of the stock, the company and its CEO, Elon Musk, it has garnered a large cadre of institutional investors to buy and hold shares well in excess of shares available to short. So it has the luxury of trading at a fully diluted market cap some 25-30 times higher than KNDI, in spite of losses in each year since inception while KNDI has always been profitable.
Tesla is losing money, selling opulent cars which take several hours to charge.
Kandi is already profitable as it's beginning to sell bureaucratic EV solutions in the world's largest command economy.
My Final Thought on Kandi
Out of obligation to my investors, I went to the meeting to get a read on the people. Business model aside, it seems very hard to believe any attorney of Tom Wardell's stature would host an investor meeting and allow questioning to run unrestrained until all investors were satisfied if his client's company had anything to hide.
Disclaimer: The information recanted from the meeting has been produced from my own recollection as a participant at the meeting, along with reviewing meeting notes published by fellow attendees Frank Blatterman, Steve Miller and Art Porcari. All information received from the company was done so through the interpreting of Kewa Luo and McKenna, Long & Aldridge Attorney Jeffery Li under the supervision of lead counsel of McKenna, Long & Aldridge's Tom Wardell. This report has been created for informational purposes only. Reliance on it is at your own risk.
Disclosure: I am long KNDI.