Kandi Technologies, Corp. (KNDI) recently announced that they received the first sales contract for their 20k pure EV leasing program in Hangzhou from China Aviation Lithium Battery [CALB]. The order was for 5,000 vehicles to be delivered by the end of the year. The contract is an important milestone in Kandi's transition into the auto manufacturing industry and provides the first catalysts to its unique approaches to selling Electric Vehicles [EVs] in China to promote growth.
Successful businesses typically move through a life-cycle of growth followed by a leveling out as production capacity reaches market demand. Market demand is shared by the various competitors in an industry and each businesses portion of that market demand is referred to as its market share. So as one company grows, others must decline unless the market demand can be expanded.
Let's take a look at the strategy of Market Expansion in reference to Kandi's legacy business and its new opportunities in the Electric Vehicle market. Market expansion is achieved by either growing the sales of Existing Products or growing sales with New Products. With Kandi's legacy business selling All Terrain Vehicles [ATVs] and Go-Karts, growth is mostly dependent upon using existing products by finding new customers, getting existing customers to buy more or expansion into new markets.
As the company's legacy business is somewhat mature, growth can be had but can seem slow in comparison to when the company initially began sales. For the record though, Kandi did post some impressive growth numbers for some its legacy products as reported in its 14 August 2012 2nd Qtr Q10 Release. ATV sales grew 165% and Go-Karts sales grew 49% in the first half of 2012 compared to the first half of last year. And ATV sales increased 209% in comparison to the 2nd Qtr results of the previous year.
But imagine if you could have been an investor in Kandi when they first began to sell vehicles and other products and experience the growth to its current level of sales. Kandi reported in the same 10Q mentioned above that it sold 6592 vehicle units in the 2nd quarter alone. Add in the "Auto Generator" units sold of 28,298 and you have total unit sales of 34,890 for the quarter.
As I mentioned above, growing sales through market expansion can be achieved with new products and/or services. This includes the introduction of newer improved versions of existing products, introducing products that complement existing products and the most important for Kandi at this phase in its business cycle, to introduce new offering into the product mix.
For its legacy business, Kandi has recently introduced new vehicles to its line of ATVs. The yellow MDL 400AUGS-1 and Blue MDL 700AUGS-1 are examples of new and improved versions of the existing product line. They can be viewed can on Kandi's website.
Legacy vehicle growth is impressive but the real catalyst for market expansion in the EV business which began with receiving the first significant vehicle quantity order of 5000 units for the 20k project. The order is actually 1000 vehicles more than the 4000 expected for 2012.
One of my previous articles, Kandi Technologies: It Ain't Easy Being Green, described how the Kandi 20k project functions as a lease model where patrons receive a car for their long term personal use. This project is very different from the 100,000 vehicle model which supplements the public transportation infrastructure model. But what is important is how these types of projects affect Kandi in terms of growth.
To illustrate I modified previous projections to examine Kandi's growth potential. I used the 14 Aug 2012 10k margin of 20.2% and the 29 August 2012 Form S-3 outstanding share count of 29,941,134. Q1 profit was .08 and Q2 was .03 for a total of .11 so I'll double it to arrive at legacy business profit projection of .22 cents for a 2012 legacy business total. In the press release for the sales contract, a vehicle price of approximately $6,317 was established for the vehicles. The following assumptions were also used in the model:
- 2012 - All 5000 vehicle for the 20K project are delivered and there will be no sales from the public transportation model projects.
- 2013 - The remaining 15k vehicles from the 20k project are delivered and one additional 20k project and a 100K production capacity are realized for the public transportation model. Note that the public transportation model may be dispersed across multiple project and cities.
- 2014 thru 2016 - Assumes two 20k lease projects each year and increasing the public transportation model production quantities 100k per year.
- The P/E starts at 15 for the first 2 years and trails back to 10 to account for shareholder and analyst apprehension in growth.
These estimates are actually more conservative than my previous estimate for years 1 thru 3 but increase for years 4 and 5 to support increased capacity. With these projections, the stock could be very close to exceeding $100 per share by the end of 2013.
The vehicle model used for the 20k joint is the JNJ6290EV which was noted in the press release. But as I mentioned above about market expansion, growth needs to include the introduction of newer improved versions of products.
So part of my assumptions to support growth over this five year period is the introduction of additional models Kandi revealed during their investor conference in Atlanta in September. I included the depictions of the models below in a previous article but also included them here for quick reference.
The models show innovative design and improved utility. The company has many of the ingredients for a recipe of success. But management will still have to execute. The recipe for success seems simple enough though:
- Find customers
- Receive compensation
- Ensure vehicle quality
- Deliver vehicles to meet demand
- Assess customer satisfaction
- Leverage lessons learned
- Timely resolution of problems
But there will be challenges along the way for Kandi. As the company grows to gain more market share and actually creates new markets with its innovative products and concepts, competitors will adapt.
Business is a competition in which part of the game is to change the game to exploit your competitive advantage. And for now, Kandi has just changed the game.
Disclosure: I am long KNDI.