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For the last couple of years, various writers, including myself, have published several articles pointing towards Jinhua-China based, Nasdaq-listed Kandi Technologies (KNDI) as the leader of pure EV passenger cars in China. Those of us who have published these comments have given numerous links to translated articles in the China media which closely tie KNDI to PRC owned State Grid as evidence. State Grid is China and the World's largest electric utility who services over a billion residents. Even Kandi itself has mentioned this close relationship in several press releases and SEC filings. However, as exceptional it is to have a small company as Kandi to have such a tight relationship with a utility company more than three times larger than all the Electric Utilities in the US combined, the "Holy Grail" shareholders have been waiting for was the endorsement for Kandi's unique business model from a "top level" direct Executive level Government entity.

This goal was reached on Sept. 25 though a "Policy Paper" (Policy) published by PRC's highly influential State Council Development Research Center Enterprise Institute on "China's electric car business model innovation…". The Policy, translated using Google Translator, is linked and titled: "The electric car business model innovation to explore and policies should be taken to Publish"

As most Government documents are, it is a long read, but it totally blows away anyone's concern that Kandi might not be considered #1 by the people who matter in EVs in China. For really one of the first times, the highest level of the PRC not only mentions Kandi (translated as Condi) and its business model, but clearly infers favor to it's model for installation in all of China. So much in fact that as you can see in the "Policy", they coined the name for this Quick Battery Exchange/Leasing Model and call it "Hangzhou Condi lease and for power mode".

The Policy itself is some 22 pages when copied and pasted in a doc file, so I am just going to extract and paste some highlights here in italics along with a page or so of the opening. (Remember, this is Google translated so please don't blame me for misspelling or grammar in the sidebar quotes)

The Opening:

The State Council Development Research Center Enterprise Institute has released "China's electric car business model innovation, exploration, and the policy should be taken "(hereinafter referred to as the" Policy "), on issues such as the significance of China's electric car business model, example and obstacles analysis and policy recommendations.

The Summary:

Electric vehicles as a new energy transport, is China's strategic emerging industries, support of a series of national policy in recent years, China's research and development and production of electric vehicles made a lot of progress, but fully mature technology a certain distance. In the case of current battery technology is not yet a major technological breakthrough, explore business model innovation, and the commercialization of electric vehicles, large-scale development is important.

In the electric car business model innovation and choice, in three different ways. First, based on the operating mode of the vehicle (such as a different run time, travel route, busy and idle time distribution), business model options; business model (such as the power grid companies, battery companies, car companies, etc.) based on different leader choose ; The third is based on regional characteristics (such as the business model of the large and medium-sized cities , small towns, rural areas, etc.) choice.

Currently the country has explored several major electric car business model. That car electrical separation, financial leasing, real-time monitoring "characteristic mode of Putian, this mode is mainly used in the field of electric buses; fixed car route for the government official car, a large group of employees, relative to a single use, and. charging relatively fixed location segments target Hefei directed buying patterns;- for-electric mode for urban residents in Hangzhou lease.

As touched on in the above paragraph, there are three models (modes) referred too more specifically further in the Policy. They are:

1. Hangzhou Condi lease and for power mode

2. Shenzhen Putian finance leases mode

3. Hefei Jianghuai directional buying patterns

To be clear, as you will see, the second two are "models" in contrast not in preference.

The Hangzhou Condi lease for power mode

Let me first clarify that China has two "modes" or models. The "Plug-in" mode which is self-explanatory; like the Tesla (TSLA), Nissan Leaf (OTCPK:NSANY) Chevy Volt (GM) etc., and the "for power" mode. The For Power mode refers to EV's with the capability of a Quick Battery Exchange feature. In China "for power" includes two Kandi models, their KD5011 lithium battery powered and their KD5010 lead acid powered cars each with external "side slide" exchange feature. Additionally, major gas powered (ICE) auto makers, Zoyte and FAW Haima, have been operating a combined total of around 200 ICE to EV modified SUV's as Hangzhou taxi's that have an antiquated manual QBEX capability by locating the battery under the rear seat and accessed through the rear hatch. I am explaining this now as throughout the Policy you will see numerous references to "for power". You now know that the Kandi model uses "for power". But in addition, the specific "Hangzhou Condi lease for power mode" model referred to in the Policy, also includes the battery lease mode as Kandi has recently announced is underway in Hangzhou for both its 20,000 EV long term leasing program, and its 100,000 EV "CityCar" short term rental program with automated self-serve parking garage.

Throughout the Paper, you will see positive comments referencing the Kandi model such as this:

From the current electric vehicle leasing model as a new type of public transport modes, more conducive to ease urban traffic congestion, The parking resources Kui favor urban environmental protection, and also more likely to take the lead in achieving large-scale industrialization.

Or This:

…Because of the use of low cost electric car leasing electric vehicles of this model than leasing a traditional car more competitiveness in the market, electric vehicle leasing model is likely to be realized the industrialization of electric vehicles is a very important way.

Or this:

…Unlike traditional automotive business model, new business models, there will may include vehicle leasing, battery replacement and other emerging elements. These elements will be electric vehicles from the point of view of the business model to help overcome the existing three problems.

And a few more:

Establish a network of electric vehicle leasing, an effective solution to the problem of the "high cost" while also effectively improve the efficiency of the social wealth. Lease the use, so consumers do not bear the high cost of purchase as well as long-term do not have a car to bring the funds "idle". As a provider of vehicle leasing, its vehicles have to use more efficient than traditional private owners to use high efficiency. A car to meet the needs of more people at different times of the car…

Whether it is a battery replacement station network or electric automobile leasing network this emerging business model will allow charging hard "problem solved". Daily travel needs of consumers, the driving range of electric vehicles use a battery shorter, but when used for power plants network only need less than 3 minutes, it can be a full battery replacement in place, to obtain a longer driving range…

With the advent of the new business model of vehicle leasing, battery replacement, three major problems facing the electric vehicle market "low performance", "high-cost" charging hard "are likely to be solved. Especially in the short term, in the case of technology cannot achieve a breakthrough to resolve the problems encountered in the development of electric vehicles, business model innovation is particularly important.

And what should be most exciting to Kandi shareholders

As an attendee at Kandi's first ever US "Shareholders Day" in Atlanta earlier this month, I can affirm that the area of development that was presented with the most enthusiasm by the KNDI CEO, Mr. Hu, was Kandi's Licensed and Patented EV Vertical (stereo) Parking Garage, CarShare (Time-Share) concept. He surprised all attendees when he confirmed that not only was the 100,000 Kandi EV program approved by the Hangzhou government, but that the start of construction of the first 200 car garage was imminent. Mr. Hu expressed strong confidence at the meeting that now that this model was approved in Hangzhou, roll out throughout all of China was likely and would lead to millions of Kandi EV sales in the future. Here is a link to a 3D animation on how the below structure operates.

From the looks of the below quote from this Paper, the top levels of the PRC Government now seem to give strong credence to his enthusiasm for Kandi's national expansion in China.

For brevity sake here, I am not going to explain this program here, but instead refer any interested reader to both mine and Todd Krajniak's last Seeking Alpha articles for an explanation of this program. But here is the Kandi program outlined in the Paper.

(click to enlarge)Operating Small Scale Model of KNDI

Hangzhou intends to implement another mode leasing model. This mode can be defined as a new type of public transport modes, rent not buy, sharing billing. The Condi Company is preparing to this model the Hangzhou scale promotion. The model used in all pure electric cars and rechargeable stereo garage, car rental stations are located at the city's airport, railway stations, commercial centers, residential areas, required the establishment of the station area, the travel mode to provide users with a rental car operators within the region. This model can solve the practical problem of restricting the promotion of electric cars , such as charging, maintenance and battery recycling. Electric vehicles by car leasing operations system implementation of the city pure electric vehicles and their energy supply centralized purchase, centralized management, centralized charging, centralized maintenance, and dispersion rented by car. Car Rental station is the basic unit of operation network, to provide users with a car rental and a variety of services, undertake vehicle charging, maintenance, battery recycling network system operation and management. User Car Rental, independent travel by car, to reach their destinations may be close to the car to another car rental stations in different places, needed also carry phone Car Rental delivery, pick-up service, convenience, economy, fast. This is both a the ordinary taxi flexible, private car by car, the fun of the freedom of movement, but also similar car rental offset intercity also the convenience of the car, it may become a high-quality, high efficiency, low energy consumption, low pollution, low-cost new modes of public transport.

The difference between China and other markets for EVs.

As you can see from the quotes below, the Policy Paper gives an excellent analogy as to why this Kandi model is so important to the PRC. One can only imagine how many of those 120 million Electric bicycle owners referenced in the Policy who have to suffer out in the elements year round would be more than excited to be able to trade up from an electric bike, to an enclosed air conditioned electric car for as little as $126 US a month as in the case of the recently announced 20,000 Hangzhou EV Program. This lease price includes unlimited battery swaps, maintenance and insurance for the KNDI lithium battery KD5011 which now is being made available in Hangzhou.

China has a multi-level market demand. From the motorcycle to the short-haul passenger cars, from common household cars to luxury cars, China's auto market is showing a multi-level market demand. This feature also exist in the electric vehicle. Therefore, when considering the electric car business model innovation, we must take into account the different levels of market demand. The total market, so even in segments for different levels of demand, will have a larger market absolute value.

Scale of many features into a small niche market. Market demand of the Chinese market has a multi-level, so many in Western countries for "niche market" only " mass product " in the Chinese market . The electric bicycle is a typical example. In Germany and other Western countries, and would very much like to be able to promote electric bike, but due to various reasons, only a small niche market-oriented electric bicycles. But is different in China - As of 2010, China's electric bicycle ownership has been as high as 120 million. This was originally in the Western countries is considered only for "niche market" products in China has become a "mass product". Equally by Europe and the United States can only be the product of a "niche market" short-distance pure electric vehicles in China will probably become mass products. Therefore, in business model innovation, exploring the development of short-distance electric car niche markets, better fund research and development of electric vehicles mainstream products in the industry value creation, nurturing.

Shenzhen Putian finance lease model

As the Policy suggests, this model is really designed for electric buses and other large commercial vehicles. The massive batteries needed in electric buses can cost as much as the bus itself. With this model, effectively the bus companies buy the buses and lease the Battery from Putian which is a Shanghai SE listed subsidiary of State Owned Enterprise (SOE) China Potevio. So as seen from the quotes below, KNDI has no competition from this model.

Putian mode is mainly used in the field of electric buses , can be summarized as "car electric separation, financial leasing, real-time monitoring…

…Therefore, the from Putian mode above characteristics, it fits in really monitoring needs and segments areas for bulk purchase, these areas of city postal vehicles, urban logistics vehicle, municipal sanitation trucks…

Hefei Jianghuai directional buying patterns model

As you can see from the below quote, this model was originated by SOE, JAC (Jianghuai) Automotive China's 9th largest ICE truck and automaker. It really is not an "innovative" model except for the fact that the JAC Auto itself is also contributing 30,000 rmb ($4,750) to both State and Local Subsidies of 55,000 rmb ( US$8,725) which brings the priced down of its single EV offering to the price of its similar ICE car.

The Policy seems to mention this not as a preferred model, but just as an example of how to get the car price down below US$10,000, a range that could attract some buying attention.

Additionally; the Policy uses this as an example of the big price difference once an ICE car is modified to EV. The J3 non-electric version only sells for 60,000 rmb (US$21,500) MSRP. But the Policy also goes on to say this is a conventional EV that requires a Plug and 6-8 hours of charge time.

The advantage of the directional buying patterns the enterprise specific consumer sales of electric vehicles. Fixed part of the consumer's car line, relative to a single purpose, if only to and from work, and the charging location is relatively fixed, easy vehicle centralized charging, charging pile set at a fixed location, able to meet consumer demand for most of the charge. This model to some extent solve the problem of the lack of performance of electric vehicles and charging difficulties.

The directional buying patterns earnings that significantly reduce consumers use cost, better economy. Future earnings that companies how to further tap the market segments to expand consumer-oriented market, and to develop more models, and improve quality. Government official car field, a large group of employees market segments are more suitable for promotion directional buying patterns.

Reading between the lines

To the novice user of "Google Translator" reading articles and papers out of China, making total sense out of the complete 22 page Policy Paper is a challenge. But having read thousands of these KNDI related media releases in the five years I have been following KNDI, I believe I have a pretty good handle on what is being said and what is meant (sometimes a big difference). Of all the media releases I have read, IMO, none have been more clear or important than this Policy Paper. I say this not just in regard to Kandi, but to the future of all EVs in China. Here is why I say this.

For some three years now, China has been trying to launch a sustainable EV program by encouraging Provinces and major cities by offering billions of dollars of sales subsidies direct to consumers. Commensurately, the PRC has funded billions of dollars into State Grid and South China Grid for early infrastructure build out. The Grids, which are owned by the PRC, have been doing their job. However, the Cities, other than Hangzhou, have fallen flat leaving tens of thousands of new EV charging points throughout China sitting idle. Where it not for Kandi with its executive headquarters located in Hangzhou and its brilliant and connected CEO taking a leadership position, it is likely Hangzhou would have also floundered with little progress. Seeing what Kandi has developed with its very easily scalable complete EV solution, is there any wonder why Kandi and its model has been selected in the new Policy as favored?

From the report:

Which factors in the business environment will have a decisive impact on the choice of the business model? Most decisive role is the leader of the business model…

What I read in this Policy, is a major "sea change" for the future of EVs in China. On reading this closely; several nuances of frustration by the PRC come through, but with these nuances, the Policy seems to be insinuating that the PRC is now going to become much more proactive in the launch of EVs in China. Just the fact that they have finally "drilled down" to a specific favored EV model in this report should be a major "eye opener" to all Cities, Provinces and Automakers.

Final Paragraph of the Policy Statement

The final paragraph really sums up the direction the PRC is now ready to go. They intend to expand the "Leasing Model" and provide whatever cash incentives necessary, not just subsides, to achieve their expansion goal. As might be expected, though not again specifically mentioning it by name, Kandi has the only model which provides for both lease and rental. So the inference for KNDI should be clear. With this closing statement, Kandi's continuing position as China EV Golden Child, could not look more secure.

From the current electric vehicle leasing model as a new type of public transport modes, more conducive to ease urban traffic congestion, parking lack of resources, favor urban environmental protection, and also more likely to take the lead in achieving large-scale industrialization. Government through financial subsidies, tax breaks and other preferential policies to encourage and support the electric car rental companies to expand their business, and actively nurture and develop the electric car rental market. Tourist cities and other local cities according to the actual situation of the region, to further increase the support of the electric car rental companies, such as environmental subsidies, free supply of land, dedicated parking, local support policies.

What's with the KNDI stock?

If one were to believe just 1/10 of what this Policy infers; to say there is a "disconnect" between the current stock price and Kandi's lead position in this potential trillion dollar industry, is beyond imagination.

While now somewhat retired to just handling my own investments, I have considered myself a market pro since first joining Merrill Lynch, 39 years ago. I have watched the Dow go from a low of 556 in 1974 to its present level, I was around and cognizant of Microsoft (MSFT), Apple (AAPL) and other disruptive technologies in their infancy. I was personally the first Investment Banker who brought a fledgling Norman, OK based garbage company with two garbage trucks and a dump public, USA Waste Services, public; which is today the World's largest public company in its industry, Waste Management Inc. (WM) on the NYSE. But I have never seen a consistently profitable microcap priced company who has been so obviously preordained by any country's government, let alone one the size of China, to greatness, be so disrespected by the Market. (Though I must admit, it did take USA Waste Services which came public at $1.50 a share with less than 3 million outstanding to finally break $2)

(click to enlarge)

The Arguments for the stock price Disconnect:

1. It's a China based company that doesn't put out much in press releases and outside media publicity is almost non-existent.

R. Yes, it is a China company and be glad. If it were not, I would not be recommending its investment or any EV stock at this time. In the past, I might have agreed the PRs were lacking, but this past problem has improved considerably this year. However, IMO, most importantly, there has been a treasure trove of thousands of articles in the China media about KNDI for any intelligent investors journalists or analyst to find while doing Due Diligence. Question back; When considering an investment in a rapidly developing Company doing business in a foreign land, would you rather see the home media heap public praises, or a lot of Company generated Press Releases?

Another important point to consider. In just three short years, KNDI came from out of "nowhere" in the China auto sector. This could have only happened thanks to its CEO, Mr. Hu knowing how to humbly respect the upper levels of the China Government. You make no friends by publicly putting your own self interests ahead of these politicians.

2. As a China based company, all I read and hear from the US media and short sellers is to "stay away from all China stocks because you can't trust any China financial filings".

R. KNDI has been public in the US for over five years. During that time it has filed more than a hundred filings with the SEC to include five registration statements. The registration statements have all been cleared by the SEC with apparently no comments published worthy of investor concern. As far as short sellers are concerned, yes, KNDI does have a sizable short of 700,000 shares as of the Sept. 24 report; though this number is down considerably from its peak of 1.2 million in mid-2011. However; one common ingredient of all successful public company "disruptors" is a continuously high short interest. It is the large short interest that keeps a high PE on these stocks.

But in Kandi's case, with the average daily volume dropping to around 80,000 shares a day, the 700,000 share current short position is likely to soon be problematical to it holder. IMO, Kandi needs to be looked at similar to a bio-tech company on the verge of a major breakthrough. As can be seen by the myriad of China articles linked in the last dozen or so articles published either on Seeking Alpha or Forbes showing how respected and government affiliated Kandi has now become, at any moment news such as this Policy Paper will inevitably be picked up by the US media. When that happens, the thin float could cause the stock to gap to such an extent that the short seller could have a serious problem.

3. If what is said here is true, KNDI will likely have to do a dilutive equity offering to keep up with its business plan.

R. Totally wrong. In spite of developing eight pure EVs from design to PRC approval over the past four years, KNDI has only taken slightly over a half million dollars in PRC grants and to date no loan guarantees. Yet it ended last quarter with its strongest balance sheet ever carrying over $40 million in cash and available credit facilities. When asked this question at the Shareholders day meeting earlier this month, the CEO was very clear in stating as the largest shareholder he has sees no need for financing that would dilute any shareholder.

4. If KNDI has such a high profile in China, whey aren't the Chinese buying the stock?

R. Good question. Mainly because they can't. Short of setting up frowned upon offshore accounts, China doesn't allow its Nationals to buy stocks unless listed on the Hong Kong or other China based exchange. If KNDI was also traded on the Hong Kong or Shanghai SE, it is likely the stock would be trading much higher. Case in point; its partner in the 20,000 EV Hangzhou lease program trades with a 48 PE on the Shanghai SE and it is just one of hundreds of battery makers with no disruptive edge. At the shareholders meeting, the CEO was asked if the Company would consider "duel" listing KNDI on the Hong Kong, now that it is so recognized in China. He answered that it was something he could now favorably consider.

5. KNDI has only around 1% Institution or Funds holdings reported and no analysts. Why?

R. Correct. And up until now, this has been a good thing. KNDI has never had an institution or analyst following; even a few years ago when China stocks were all Wall Street darlings with many having over 50% research coverage. IMO, this for several reasons. Since neither Mr. Hu or the Company's CFO speak a word of English, conference calls have been avoided. While the company has had a successful and profitable "legacy" business exporting Off Road recreational vehicles, Mr. Hu knew three years ago that the future of KNDI was going to be in EVs, so trying to give "guidance" on future sales, another requirement of analysts and funds, was a waste of time. And lastly, since the Company has never attempted to do any large US financings', no investment banking relationship, which usually bring research, has been offered. However, based on discussions in Atlanta, while no financing is in the cards, with recent English speaking Management positions added, conference calls and guidance may be added after a few more quarters.

However I look at this past lack of Wall Street following as a positive. While many current shareholders, myself included, feel the stock price vs. exceptional reward potential is absurdly low at these levels, compared to the vast majority of other China stocks, KNDI has held up well (likely the reason for the still large short position). I attribute this to its very strong base of smart retail shareholders and the Peter Lynch view that intelligent individual shareholders who are willing to put in the time and effort should always outperform "Funds". But the "word" is starting to get out on KNDI. In the past few months, In addition to several new Seeking Alpha writers, KNDI has shown been featured in a number of Forbes articles and twice in much respected EV World (once as a Feature Article). IMO, sooner than most believe, some sharp Wall Street Analyst will find the story too compelling to continue to ignore, and after the first, the "herd" will follow.

Source: PRC 'Policy Paper' Favors Kandi Technologies EV Program For All Of China