For Kandi Technologies, Corp. (KNDI) the metaphor of being green carries three connotations that tell the story of this innovative manufacturer. First, the company is promoting green technologies in regards to its Electric Vehicles [EVs] to improve Chinese environmental problems. Second, the company is somewhat new (green) to the EV market with a reduced cost EV model that is focused more on functionality than looks (but this seems to be changing; more on this subject below). And third, most importantly for investors, the company is entering a new growth phase and has chosen the US securities market to monetize its success using the "Greenback".
But the company is somewhat inexperienced in navigating the precarious US stock market. Fundamentals don't always rule. With recent problems such as the Flash Crash and the debacle with Knight Capital's (KCG) trading software, the confidence of retail investors has been shaken. Now add Asian "Country Risk" to the equation and you have the makings of a very tough road ahead.
Recent advancements in Kandi's EV projects have been well publicized in recent news. Most notably are the 20,000 vehicle lease project and the 100,000 vehicle public transportation project. The 20k project is for those who want to have a car as their unshared resource in the same way as leased vehicles are used in the United States [US].
The 100k project functions more like the US rental car model except there is a "short term" component that allows it to serve the public transportation need. Vertical parking and charging garages (Garage Animation Video) are placed strategically around cities near homes and business centers. Think about where you see bus routes and taxi traffic and you most likely have a good spot for a garage. So now, in the spirit of public transportation, a consumer can pop over to a garage and grab a car and drive to their destination instead of catching a bus or hailing a taxi. Once at the destination, they can simply drop the car at the nearest garage or keep it and pay for the additional time.
Much of Kandi's growth was anticipated to come from individual sales and the leasing model. This is how the most people envision cars being used to generate revenue for a car company. But Mr. Xiaoming Hu, CEO of Kandi recently shocked some investors when he revealed at the companies first Investor/Analyst meeting in Atlanta on September 5th of this year that the primary model for growing Kandi would be the public transportation model.
This is a radical departure from the traditional car selling models of the big auto makers in their attempt to grow in China, the biggest auto market in the world. Ford Motor Co. (F) has recently announced that they are building an assembly plant estimated to cost $760 million in Hangzhou, China; the very city where Kandi's 20K and 100K projects are launching. The plant is estimated double Ford's annual production capacity in China to 1.2 million cars by 2015.
When you think about Kandi Technologies going head to head with the big dogs of the auto industry with its little EV, significant market share is hard to envision. But investor confidence has been shored up by strategic alliances and the show of support by government entities desire to reduce the dependency on the foreign oil industry and mitigation of the negative environmental impacts of gasoline engine exhaust and congestion.
But now investors have to wonder if the public transportation model is a viable strategy. Is Mr. Hu's vision to grow the company by focusing on the pay as-you-go model a practical strategy?
Traditionally, auto makers attempt to garner market share through price, looks, features and many other strategies to increase sales to individuals. Mr. Hu seems to have found a way to move significant vehicle quantities into the market by satisfying a community need rather than trying to sell to individual car buyers. Has he somehow circumvented a head-to-head battle for sales with the big automakers?
Let's take a look at some of the numbers. Art Porcari, a former financial industry professional and executive and avid Seeking Alpha author who attended the Sep 5th Investor/Analyst conference advised that Mr. Hu had confirmed that the Kandi autos will sell for much higher prices than I used in my previous article about the company (Kandi Technologies: A Practical Approach To The EV Market) of between $6,300 - $6,800 US. So I'll use the average of $6,550 for the analysis.
I'll continue to be ultra conservative and use the 14 Aug 2012 10k margin of 20.2% and the 29 August 2012 Form S-3 outstanding share count of 29,941,134 . According to Todd Krajniak, another Seeking Alpha author and Investor/Analyst meeting attendee, Mr. Hu envisions EV production exceeding 300k vehicles per year. So I'll continue with my conservative approach and start with adding 100k vehicles per year for years 1, 2 and 3 then level it out at 300K vehicles for years 3 thru 5 and stop there for this analysis. This allows for increasing production capacity without being to aggressive with the forecast. The projections are shown below (click to enlarge images):
I reduced the P/E ratio in years 3-5 to account for the reduced growth due to the artificial cap I placed on capacity, but the numbers are still striking. Year 3 represents a 2,933% increase over the Sep 17th closing share price of $4.37. If this model proves viable, Kandi could see itself grow into one of the largest automakers in the Asian market in a very short period of time. The conservative 300K capacity for Kandi represents 25% of Ford's planned 1.2M 2015 China capacity. Remember that these numbers don't include the profit from the legacy business or the 20K leasing model.
I alluded earlier to a shift from functionality to looks for the Kandi vehicles. During the Investor/Analyst meeting, the CEO introduced two new models for future production that could dramatically improve interest. The "City Beauty" and the "City Cowboy" are sure to be of interest to the younger market. More family oriented folks might find interest in the more spacious four-door "Kandi Mini" that was spotted at the China International Green Vehicle Industry Expo (Hangzhou).
I can't help but wonder if the big auto makers will take the "If you can't beat them, join them" approach to Kandi. They have the ability to provide capacity and exploit Kandi's technology patents as well as helping to accelerate mutual growth. While they can't own a Chinese company outright and Mr. Hu is the majority shareholder, they can invest.
Shares are dirt cheap at the current price and can be bought on the open market. So anyone, including the big automakers can buy in to this growth opportunity. Kandi would be a great way for the big automakers to hedge their expansion in China. Sales for the 100k public transportation project are expected to begin in the second half of September 2012.