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Arthur Porcari
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Arthur Porcari is a retired former regional stock brokerage firm President with 39 years stock market experience. His finance background includes, three years a stockbroker and two an investment banker with Merrill Lynch, ten years a Regional brokerage firm President, and OTC Market Maker and... More
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  • The Collapse of the Big Name China Stocks: OMG! All China Stocks Must Be Frauds. Right? Not So Fast…

    Those who have followed my Seeking Alpha articles know that in spite of spending eight days in China last November visiting several companies, I have only written positively about one US traded China Stock; Kandi Technologies. (NASDAQ-KNDI) I liked it at higher prices, and based on recently reported events, I love it now. But that is not what this article is about. This article is about a current market sector environment and a number of stocks that I personally wouldn’t buy. Not because I have any problem with them, simply because I only take long term positions in stocks that Wall Street doesn’t know or care about, but where I have spent many hundred, if not thousands of hours doing my own due diligence. However, based on my 37 years as a market professional with more of a Psychology rather then Business educational background, I think I know a short term market disconnect when I see one and history shows it is times like this when longer term reward potential is at its highest for savvy investors.


    I am not going to waste a lot of time giving the background of how we have arrived at this point of disconnect between stock price and business performance of the vast majority of US traded China companies. The various forms of media have done a more then sufficient job of creating this environment whereby fear throws out logic. If somehow you have missed what is going on in this sector, then you shouldn’t be investing in the Market. But I will unconditionally state that not all, not even a vast preponderance of China stocks, are purposely fraud infested. However you wouldn’t know this by following the media or looking at the sector stock performance over the past few months. Credit for this phenomenon is certainly given to short sellers and “attack” blog writers who have created a “magic bullet” to create instantaneous assured profits from short selling. But don’t for a second buy into their claim that proper due diligence is the primary reason why the stock of an attack target drops like a rock within seconds of the release of their articles. I suspect the dramatic drops are more so attributable to short sellers capitalizing on Market Psychology of the old adage; “It is easier to scare an investor out of a stock then into a stock”. This point is further proven by the immediate collateral selling in other sector stocks, no matter how unrelated, in just minutes from the release of a 20 to 40 page target article.(who can read that fast?) The thought of this broad based power now being realized by even ignorant attack writers with short selling in mind should be chilling to all to say the least. Emboldened with this psychological tool, virtually all stocks, China or otherwise, could in the future be more vulnerable then ever to this brilliant form of manipulation.


    I have read and researched a number of these articles and their targets and have found several which have uncovered activities which seem to range from at least suspicious, to bizarre, to fraudulent in appearance to a western way of thinking, but to broadly blame any such activity as purposely fraudulent rather then considering the possibility that cultural or translation differences may be the cause seems “over the top”. But in all fairness to the writers; even if they did want to be equitable to the target company and perhaps present a draft of their article in advance for contributory company comments, corporate securities counsel would most likely not allow clients to respond in fear of violating SEC selective disclosure rules. So yes, congratulations to the attack writers and their short selling friends, they have found their magic bullet and regrettably for the retail investor, they have no friend in the Regulators who are supposedly empanelled to protect them.


    Now on to my main theme here


    A month or so ago, many, including myself, felt most of the Chinaphobic sector carnage was likely past. As an old Viet Nam era Marine Corp captain, to my investor friends I had likened the small cap China stock environment at that time of stagnant prices and much lower volume to that of a completion of a combat ”fire fight”. I was suggesting it was time for the bold to stick their heads out of the foxhole and go on the offensive. But even to my supposedly experienced amazement the attacks writers just boldly moved on from the small caps to the “institutional” darlings like Longtop (LFT) and Sino-Forest (OTC:SNOFF). Up until a couple of months ago Institutional investors in the big named “Chinas”, were snickering at the carnage the shorts were wrecking on the small Chinas. These confident “Funds” kept driving the big Chinas like Baidu (NASDAQ-BIDU), China Dangdang (NASDQ-DANG), (NASDAQ-YOKU), (NASDAQ-SINA), New Oriental Education (NYSE-EDU), Perfect World (NASDAQ-PWRD), Shanda Interactive (NASDAQ-SNDA), Trina Solar (NYSE-TSL), China Yuchai (NYSE-CYD) etc. to newer “highs”. But now let’s fast forward to earlier this week. The “tape” says it all...













    April High










    Recent Low












    To the average investor, seeing the recent rapid breakdown in all the big names along with hearing the incessant media rants that “all China stocks are frauds”, would likely lead the unknowledgeable investor to the belief; “OMG!, the media is right, they are all frauds”. And of course this belief is just further unfairly compounding the problem in the lesser known names. But could it be true that all of these big names are really all frauds? Of course not. It is my opinion that what we are seeing at this moment is Institutional “Window Dressing” as we approach the end of the quarter. Mutual Funds in particular are concerned that with all of the mostly bogus media about China stocks in general, their investors might consider the fund manager “idiots” if shown holding any China stock in the portfolio by quarters end. So “ethnic cleansing” Wall Street style is running rampant.


    If it turns out that my above theory is true, it is likely (assuming no more specific “big name” fraud accusations appear) there could be a substantial rally in the big names after Quarters End settlement date passes. IMO, if the big names do rally, this should take the pressure off a number of the smaller names. If Wall Street’s Chinaphobia does begin to quiet down in the new quarter and common sense returns, then the inevitable realization that China is the real growth story for the balance of this decade should reappear and irrespective of what downturn may or may not lay ahead for US stocks, the real fortunes will likely be made in China stocks for a long time to come.


    This too shall pass


    As painful as this has been for traditional long term investors and honest China companies who have suffered during this unique period of time, this too shall pass. While no “market” is pure of those with fraudulent intentions, I suspect that time will tell that those China companies who survive this bloodbath and come out fundamentally unscathed, will inure significant benefits for two reasons; Firstly, they will have survived a regulatory and accounting review more intensive than any US based companies have ever had to endure and secondly, as US investors once again focus on investing in the fastest growing and largest economy in the world, there will be a much smaller arena of China stocks to chose from.


    Dart Board Portfolio-How to outperform any US Index over the next year+.


    Trying to safely choose the best stocks in the China arena may likely be a fool’s errand for the unsophisticated investor. But if you have a large enough sum with which to speculate, perhaps you should go to and print out the list of US trading China stocks. Tack the list to a wall and throw 20 darts and put 5% of your cash in each issue. Even if two or three of your choices yet fail, it is very likely that the balance will more than make up for the losses and handily outperform the S&P, Dow or any other US Index. (Perhaps some ETF consolidator might be wise to take this “tongue and cheek” solution at heart.)






    Disclosure: I am long KNDI.
    Jun 23 6:13 AM | Link | 1 Comment
  • Is China Based NASDAQ Listed Kandi Technologies (KNDI) Shares Ready To Explode?

    October 12 Update:  KNDI put out an 8K this morning showing they now own 30% interest in the recently announced Joint Venture with State Grid of China, and Tianneng Power International, Ltd., China's largest Electric Utility and Dominant battery maker respectfully. 30% is a much larger share then what I was expecting.

    What’s that you say? Over the past couple of weeks it already has? Maybe, but maybe the move has just begun. 

    As many of you know, a few weeks ago, thanks to and Seeking Alpha, I was allowed to publish a series of articles on this obscure, but potentially sleeping giant who is creating a paradigm shift in a trillion dollar space in China. Since publication, the stock has seen a move up of over 50% and average volume up six fold. Hopefully, I have made it very clear that I have to date not had, nor have I attempted or cared to gain, any access to non-public information. I wrote those articles based on my following the Company for three years, a lot of internet research of websites both in the US and China, and reading the “tea leaves”.

    This past week on Oct. 5th, the Company published one of its rare press releases. At the time of publication of that release, the majority of information within was not a surprise to me as effectively the same information was published on numerous China websites as early as Sept. 29. While the “majority” was not a surprise, there was one particular part that was not just a surprise, but potentially startling to me. Let me explain.

    Going back to the beginning of the year when the Company first introduced its leadership position in a Joint Venture to develop a total logical solution to rolling out Electric Vehicles in China, one of the partners they named was CNOOC, Ltd. (NYSE-CEO) a division of China National Offshore Company, China’s largest producer of oil and gas. No question, a very prestigious partner. Up until last weeks press release and the Sept 29 China articles, in the Company in its press releases, and the China websites  CNOOC had been continuously mentioned as a partner. Tuesday’s PR made no mention of CNOOC in its body text. Instead surprised by disclosing Jinhua Bada Group, an affiliate of the State Grid Corporation of China (SOCC), China's largest electric power transmission and distribution Company.  While CNOOC is a big company, it is dwarfed by PRC owned SOCC, which is the Worlds largest electric utility and 9th largest Company on the Fortune 500 Global index.

    What happened to CNOOC? I don’t know. But neither did the Company’s Investor Relations contact at least as of Friday. The Company’s IR contact has been with the Company since it began trading three years ago and while always “tight lipped”, seemed to be constantly on top of what is going on with the Company.  Even he admitted that this last minute change in partners was unexpected. Now how is this for an attention getter?

    What If KNDI’s patented “Quick Battery Change” technology becomes standardized in all China EV’s?

    It doesn’t take an investment genius to realize in the off chance this happens; it would be a “game changer” to KNDI’s stock price. (it could maybe reach a market cap 1/10 of TSLA, or 1/7 of A Better Place) Could this happen? Let’s look at the tea leaves.

    Back on July 24, an article was syndicated throughout China titled: 

    Breakthrough electric vehicle industry standard for new energy bottleneck

    The gist of the article has to do with an expected and soon to be announced standardization for batteries and battery charging.  Quotes from the article; 

    “It is understood that long-awaited "energy saving and new energy automotive industry development plan" will be submitted to the State Council in July…” (remember these are direct translations by Google from Chinese with my bold face)

     “With the electric car "escape", a complete set of charging station (piles) and other infrastructure facilities have sprung up bits and pieces appear in major electric vehicle pilot cities. According to incomplete statistics, the domestic ten urban planning, under construction and has built electric vehicle charging station (pile) of the total investment more than 3 million. But it is inconceivable that the central enterprises to the public and local governments look to the charging station (pile), so far, no national standards introduced. Not only the "external environment" so that even the production of electric vehicles because of the different camps are the two major sects of charging pattern formation. Such as FAW , SAIC, Changan automobile companies and other domestic ten jointly established in August 2009 electric vehicle industry alliance to promote plug-in electric vehicle business standards and models.  Condit (Kandi when translated) is with CNOOC, Zhejiang, China Putian, Zhejiang days Battery Co., Ltd. and other energy giants could reach an agreement, set up a "Chinese electric car industry to promote Union", trying to expand the "change battery" mode of influence…”

    What this Google Translated article appears to be try to say is that back in July, a plan was submitted to the PRC State Council who will at some time in the near future make a decision as to whether to adopt a Condit etc.  “battery change” concept nationwide in addition to the conventional FAW etc. “plug-in” concept. Obviously the Gov today believes that both are viable options since the KNDI led group is building changing stations with government money right now. IMO, what this “standardization” decision is all about is whether ALL China EV makers are to be directed to make their vehicles compatible with quick change technology.

    Now I haven’t forgotten about “A Better Place” and their JV with Chery Automotive. They too have their own “battery change” technology. BUT, herein lays another curious “tea leaf”.  Back in July, Chery put out this press release;


    Chery Auto to start selling electric car S18 in 2H

    In this article, Chery said this EV will sell for around $19,200 US and is expected to go on sale this years second half. But this last paragraph is a real “head scratcher” (and maybe a tea leaf);

    “Chery Auto will join hands with U.S. Better Place, an electric vehicle infrastructure provider, in the R&D of electric cars and charging network. The Chery switchable-battery electric car will be launched to the market in 2012.”

    IMO, it makes no sense that Chery would start selling this car now WITHOUT A Better Place’s quick change technology built in if they are confident that A Better Place’s technology will ultimately be Government approved. Even if it takes a couple of years for their changing stations to be operational. If their technology is about to happen, Who would want to spend that much money on a car that they know would be obsolete in less than two years? 

    After seeing the recent news on KNDI’s local approval and imminent implementation of their new battery exchange technology, the unexpected rapid addition of their new world class JV partner, the lack of confidence in A Better Place’s technology by Chery, and the fact that a new Nationwide standardization plan for Battery technology will soon be released, could these “tea leaves” be foretelling a major sea change in KNDI’s fortunes?

    Disclosure: Long KNDI
    Oct 10 6:15 PM | Link | 5 Comments
  • Kandi Technologies (KNDI); What’s A Sweet Girl Got To Do To Get Some Respect?

    OK, I admit it. Since the first day she became public three years ago, I am and have been a “junkie” for this “sweet” eight year old, always profitable under-reported China doll that appears destined to be the Electric Vehicle (EV) “Volkswagen” (the people’s car) of China. Though listed on NASDAQ for three years, even the well respected China Analyst doesn’t realize KNDI is a China stock. CA Recently reported KNDI as #2 on its “Top 10 Rebounding Automotive Stocks”, ahead of such well known names as Dana, TRW and Tenneco.

    On Monday, prior to the opening, KNDI once again blew away investors expectations by posting Q2, YOY sales up 80% to $9.9 million and net income up 425% to $1.2 million ($.05/sh). Closing Friday at $3.57, some 49% below its January high and 25% below its current August high, as might be expected, the stock soared out of the chocks reaching $3.83 in the first hour of trading on well above average volume. But by day’s end, the stock ended down 9% on 347,000 shares, triple the first hour’s volume. First thought might be; bad “guidance”? Nope, no guidance. Bad Conference Call? Nope, no Conference Call.  Something bad in the 10Q? Nope, best 10Q ever. In fact, for the first time in its history, working capital finally turned positive and working inventory was at one of its highest levels ever at $9.6 million. Considering the Company has almost no Long Term Debt due to China banks aversion to making long term loans, but owns a modern manufacturing facility that encompasses some 400 acres, has over 2.5 million sq. ft. under roof, a current vehicle capacity of 100,000 vehicle annually, and has a current replacement cost of more than its $70 million current market cap, I would say the 10Q was fine. Check out this video clip.


    But for us long term groupies, the action were not that surprising. This Company has made several monumental announcements over the past year with most seeing the stock taking a thrashing on the news. One might think there was a large short in a stock which trades like this. Well, in KNDI’s case, one would be right. The recent 1.185 million shares reported short represent over 15% of the shares not held by the CEO and 6.75 days to cover on recent increasing volume.


    So what’s the big surprise? All US trading China stocks have big shorts and low pe’s, right? Mostly true. But not all China stocks are sitting in a leadership position in the hottest sector, Electric Cars (EV’s), in the hottest market in the World. KNDI, with its two recently approved low and full speed PRC and locally subsidized EV’s costing under $10,000 before subsidy and just a few thousand after, for both Consumer and Government use, is truly in a “sweet spot”. But if that isn’t enough, KNDI thanks to its “patent” ownership, in true Chinese spirit, leads a Joint Venture group made up of several multi-billion dollar China companies. This JV not only clones a concept touted world wide by pre-public Venture Capitalist darling “A Better Place”, but takes it several steps further by selling the cars without the most expensive item, the batteries, then turns around and leases the batteries to the consumer. In other words, KNDI is developing the “whole” practical solution to affordable and efficient EV use. And they are doing it in a Country who has publicly committed, both in voice and money, to be the dominant Nation in EV production and use.


    From a recent PR

    About The Alliance For Chinese Electric Vehicle Development and Commercialization ("the Alliance")

    On January 4, 2010, Kandi announced it had forged an Alliance with major Chinese energy, IT and battery companies to help launch a new electronic vehicle (EV) era in China. The new business model of the Alliance addresses key hurdles to mass commercialization of EVs by reducing EV purchase costs, eliminating battery concerns and substantially increasing driving ranges. The new model envisions expansion on a city by city basis of its new model, key elements of which include: strong government cooperation, separating the sale of electric vehicles from the sale of batteries, construction of a comprehensive network of "battery stations" within each city for repair, replacement and charging of batteries, and also, utilizing Kandi vehicles and patented and patent pending EV technology for easy removal and replacement of batteries. The core members of the Alliance are: Kandi Technologies Corp., China Potevio/CNOOC New Energy and Power Ltd. (a joint venture between China National Offshore Oil Corporation and China Potevio Co.) and Tianneng Power International, Ltd. Jinhua City, where Kandi is based, has been chosen as the first model EV city by the Alliance.


    Now skeptics might say; “wait a minute”, all this China EV talk right now is just that, “talk”. To an extent, that is correct. As of the end of Q2, 2010, the only reported KNDI sales made in China of EV’s have been two test lots of two different models of EV’s to two different cities, Jinhua, and Hangzhou for China Postal Service evaluation. But all that changes now that we are in the second half of the year. Here are some recently reported events over the past four months from Monday’s PR:


    • On April 13, 2010, Kandi announced that, in an effort to "jump-start" EV sales in Jinhua City, Zhejiang Province, it anticipated local government funded subsidies for up to 50% of the purchase price would be made available to the first 3,000 purchasers of Kandi's electric vehicles. It believes this reflects a strong government commitment to the success of the Alliance and the establishment of a "model EV city" in Jinhua.
    • On April 30, 2010, culminating years of effort by Kandi to develop an economical EV able to meet all government requirements, in public announcement No.98, China's Ministry of Industry and Information and Technology qualified the Kandi low speed vehicle (KD5020X) for China's energy conserving and new energy projects. The vehicle was placed on its list of vehicles in its 10th catalogue of recommended car types which meet requirements for sales to the public.
    • On June 21, 2010, the Company announced that following the milestone approval by the government of Kandi's first EV, another Kandi EV -- Model KD 5010XXYEV -- also was approved for sale in China. With its larger size and better performance, the Company believes this latest model has broad market appeal and will play a significant role in the Company's future development.
    • On July 12, 2010, Kandi announced that it expanded EV sales to Hangzhou, the capital city of Zhejiang Province, with an initial order from the Postal Service there for 60 all electric vehicles.
    • On July 16, 2010, the Company announced that construction of the first, large battery charging farm to support a planned network of battery changing stations was underway in Jinhua. The State Grid Corporation of China, China's largest electric power and transmission company, is funding the project and is responsible for construction, which is expected to be completed before the end of 2010.

    Based on an associate’s recent visit to the Company in Jinhua, a city with a population of 4.1 million, not only has the “large battery farm” mentioned in the last item above been under construction since June, but simultaneously, six battery changing stations are currently under construction as well. All paid for by the PRC government. The expected completion date of all is expected some time in October. Now knowing the Chinese penchant for “ceremony”, I can envision a large celebration, peppered with all sorts of Government dignitaries from the top of the PRC on down, along with press, and media covering this “first in the World” event. Now common sense tell me that since this is a KNDI led project which requires a car built specifically for a “quick change” battery, then KNDI better have a lot of cars sold by “opening day”, or else the party is going to flop without the star attractions. As can be seen from an above bullet point, Jinhua has already committed an initial car subsidy for 3,000 units. Now remember, KNDI will be selling these cars without its most expensive item, the battery. It is anticipated that the car will be selling for around $6,000(US) before subsidy and at a margin of 35-40%. Now it is hard for me to comprehend that in a city of 4.1 million, there won’t be one out of each 1400 people that will want to be the first to own one of these “historical” vehicles. Not surprisingly, while the Company is currently following its long penchant of “tight lips”, a source close to the Company has reported that there is already a large waiting list.

    Since the Government subsides in China go to the Manufacturer rather then the user, policy is to pay the company the subsidy within two weeks of the sale to a dealer. It is my speculation that cars will shortly begin to be sold to dealers under a “program” similar to this: Build 100 cars, sell to the dealer, present the bill to the Government, receive the subsidy check two week later. Then build 200 cars and repeat the cycle. Then 400 cars and so on. This would have all 3,000 cars ready for opening day in October. Though currently having plenty of cash and facilities available, using this cycle, the Company never has to commit more than a few hundred thousand dollars of their own cash while generating sales in excess of $15 million and substantial profit in new revenues in its last half of this year. 

    Now your next question should be; “is this 3,000 car subsidy a one time deal?” Those who may know are not telling right now, but according to a past article in the Jinhua Daily News, (this linked article is translated by Google from Chinese. KNDI is referred to as Condi in translation) Jinhua alone will be building an additional 14 sub-battery farms and 19 additional battery changing stations by 2012. That is a lot of stations just to service 3,000 cars. So IMO, it is a reasonable speculation that a lot more cars will be sold, and many under subsidy. Then of course there is Hangzhou and the rest of China and its 390 million and growing urbanites.

    Below I will make a forecast for the balance of the year, but before I do, let me clarify what I meant by “tight lipped” in regards to the Company. There are several parameters that come into play with this comment. The Chairman and CEO, Mr. Hu, personally owns in excess of 12 million of the 21 million shares outstanding. Between personally meeting him and speaking to others who either work with, or for the Company, as a leader he is definitely cut from the same “whole cloth” as the Founder of Volkswagen, Ferdinand Porsche, Enzo Ferrari and Henry Ford.  He is totally politically connected, and totally rules his Company. If there is one main deficiency in KNDI as a US trading public company, it is that Mr. Hu doesn’t speak English. And though I have been recently told a search is underway for an English speaking top Executive, to date there is none. For that reason the Company doesn’t do Conference Calls and doesn’t do Investor Road Shows. I have no question that with an Elon Musk of Tesla fame, or a Shai Agassi of “A Better Place”, running always profitable KNDI, there wouldn’t be a 20-30 to 1 valuation difference with both these earnings-less billion dollar valued companies.


    Historical Business

    I have talked a lot about the “sizzle” for the near future and beyond, now let me spend a minute on the “steak” which effective makes KNDI at its current price an undervalued, non-expiring option for a potential World Series grand slam future.


    Since its founding in 2002, KNDI has been known primarily as a developer and manufacturer of Off-Road recreational vehicles and recently three wheeled motorcycles. In effective the same “space” as Polaris Industries (PII). Until very recently, 98% of its business was for pure export to the US. It has been profitable in each year since inception.  While suffering a dramatic decrease in revenues after the world wide economic downturn in late 2008 and early 2009, it still managed to maintain profitability in each quarter but one. A gargantuan task as noted in its Q2 2009 numbers which saw a decline in sales of over 65% yet still made a profit. (show me a US Manufacturer with this flexibility)


    During the Energy spike in 2008 and an impending economic downturn, Mr. Hu decided to re-structure the Company in two very fortunate ways. One, start building Low Speed Electric Vehicles for export to the US, and two enter the home China market. Little is it known, but in 2009, KNDI was one of China’s largest exporters of Electric Cars to the US. Sales totaled over 2,000 units. This year to date, KNDI has already exported over 1,300 Electric Cars to the US, with 1,000 in the recently reported quarter alone. As of the first quarter of this year, KNDI has just begun exporting its US products to Europe with sales totaling $250,000. Sales to Europe should ramp up considerably in this year’s second half.  



    Based on my assumption of the second paragraph above, China consumer sales revenues for the second half should be at least $15 million with $2.5 million net profit. Other China Government sales should reach $6 million with $1.3 million net profit. Historical, conventional export sales, should reach $25 million for an additional $3.1 million net profit. Conservatively total is $46 million in sales and $6.9 net profit or approximately $.30 a share.


    When one looks at the Company’s prior record year, 2008, on $40.05 million in sales they delivered $4.92 million net on much less profitable export sales requiring trans-pacific shipping cost to the US and a distributor of Off-Road recreational vehicles. Considering this the above numbers seem conservative in that KNDI in China sells directly to the Government, and self distributes to dealers.


    For more information on the Company, I suggest you read some of my prior SA Blogs along with PR’s and SEC filings.


    Arthur Porcari


    Disclosure: Long KNDI
    Aug 17 9:46 AM | Link | 1 Comment
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