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Aerospace engineer who is seeking to learn as much about investing as possible in hopes of one day managing more than just my own money.
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  • Kandi: If You Must Invest, Use Some Common Sense

    I am writing this article as an Instablog post so I'm not accused of trying to bring down Kandi Technologies (NASDAQ:KNDI) through a "short and distort" scheme. While I've never been short, I've long been skeptical of the "Tesla of China" story since it seems to have miraculously transformed itself from a small manufacturer of go-carts and ATVs into an impressive lineup of electric vehicles and the recently anointed title of "undisputed #1 pure electric car manufacturer in China" on almost no R&D spending.

    Perhaps it's really possible to do this in China, whether through a combination of low labor costs or from free patents from their genius Chairman Hu. However, the Kandi corporate structure is becoming so convoluted I can't imagine why any American investor would even consider investing in it, no matter how revolutionary their products and business model are.

    While Kandi's corporate structure was already the typical Byzantine web of subsidiaries shared by many Chinese companies (legitimate ones as well as frauds), the creation of a 50% owned joint venture with Geely Auto (OTCPK:GELYF) last year further obfuscated things, especially since this JV sells exclusively to another entity (ZuoZhongYou, ZZY, or the CarShare Program) that is minority owned (9.5%) by Kandi.

    Since they are basically selling to themselves, or at least a related party, there has to be the temptation to inflate revenues every step of the way, with the company itself supposedly selling value added EV components to the JV, where they are assembled and then sold at a further markup to the CarShare Program.

    This structure is ostensibly a way for Kandi to fund this innovative CarShare Program, which includes a number of smart garages and battery exchange technology that was developed, prototyped, and demonstrated by the company somewhere along the way with their nominal R&D budget. It just seems strange that a company that has come up with what they consider to be a revolutionary business model would willingly give most of it away to anonymous investors to focus on becoming a reseller of commoditized EV components, including batteries.

    According to a recent interview with the CEO, Kandi does not want to raise their stake in the CarShare company since it is "operating at a loss" and "experimental". Yet in the same breath he goes on to say he expects the ZZY company to be listed on a Chinese Stock Exchange, presumably at a higher valuation or it would be difficult to understand how they raised money from outside investors in the first place.

    So why exactly wouldn't they want to put additional money into this revolutionary company that will continue to become more valuable? Well, apparently the $71 million they just raised from unsuspecting US investors would be better "utilized by the JV for operations and R&D rather than the purchase of ZZY." Okay, so all the capital just raised will go into the black hole of the JV and shareholders are okay with this?

    Bear in mind that this $71 million is 8 times more than the cumulative total Kandi has spent in R&D in the past three years since entering the electric vehicle market. But even though Geely is supposedly bringing some of their R&D expertise to the table, they have to spend more to come up with new and exciting models?

    I thought the whole point of their business model was to develop low cost EVs that could be rented out cheaply? Yet the latest press release from Kandi says the JV recently sold 1000 cars to the CarShare for $21.5 million. Do the math: this is $21,500 per car, which seems pretty steep for a low performance car in China. Since it's unclear whether ZZY is eligible for a government subsidy since they're not actually reselling the cars, this seems like a terrible deal for the CarShare program.

    It would take them forever to recoup these up-front costs, so they must be counting on a long service life for these assets, yet this would mean less opportunity for Kandi (or technically the JV) to upgrade their fleet as often and sell more cars. No wonder they keep announcing they're going to expand into additional cities, since they need to tap into an expanding pool of buyers.

    This might seem paradoxical because ZZY is currently their only customer, but I assume they'll be able to raise additional money if it looks like they're able to successfully expand geographically. Yes, China is big and supposedly offers unlimited opportunity, but that's still no reason to operate a Ponzi-like business model like this that relies on additional investors to cover up the bad economics of the initial investment.

    Furthermore, the company has given up half its share of the value added assembly of the electric vehicles to the JV, in exchange for a supposedly equal capital infusion from Geely, even though it was never disclosed exactly what that was and there is scant mention of it in any Geely press releases or records of it in any of Geely's financial statements. So far, the JV doesn't seem to have contributed anything meaningful except inflated revenue, which seems to have been achieved lately with wildly increasing average selling prices of cars to the suckers partners at ZZY.

    According to the latest quarterly 10Q filing:

    "During the first nine months of 2014, 99.2% of the JV Company's revenues were derived from the sales of EV products in the PRC with a total of 7,279 units sold during such period, among which, a total of 1,950 units of EV products were sold during the three months ended September 30, 2014."

    Since the JV's net sales over these periods were approximately $127 million and $47 million, respectively, this equates to a baffling increase in ASP from $17,450 to $24,100. This is even skewed higher by the mind-boggling ASP achieved in the last three months; removing it results in an ASP of only $15,000 for the vehicles sold over the first 6 months.

    Is an over 60% increase in ASP in the last 3 months over the first 6 months really believable? What miraculous new model (all that theoretical R&D must be paying off) did they introduce in that time frame to account for this? Or more likely are they taking advantage of selling to a related party to move more inventory at higher prices?

    I'd love to hear an innocuous explanation for all of this, but there are just so many red flags at Kandi that I can't believe any US investor would risk more that a tiny speculative position in it. If you must, please use some common sense and realize that this is a highly complicated venture that relies on many unproven business relationships that may not even benefit US shareholders even if they are successful, and not some no-brainer "Tesla/Zipcar/Uber of China" opportunity that you should put all your money into.

    I may be wrong in my misgivings and miss out on this supposedly great opportunity, and if I am I will admit that I just didn't understand what seems needlessly complicated to me. However, it just doesn't pass my smell test and I reserve the right to say "I told you so" to those that ignore these warnings without being able to refute them all, so I welcome a discourse in the comments section where you can try to enlighten me.

    Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Dec 17 5:55 PM | Link | 2 Comments
  • Merger Mania!

    In honor of some of the questionable deals we've seen lately, such as Microsoft (NASDAQ:MSFT) buying Minecraft maker Mojang for $2B, to Amazon (NASDAQ:AMZN) shelling out $1B for Twitch, which allows people to watch other people play video games (seriously), I thought I'd speculate on some other illogical tie-ups that could happen as merger mania and irrationally exuberant acquisition action kicks into high gear!

    1. Clothier Chico's FAS (NYSE:CHS) buys a privately held restaurant chain to create the chic burger joint White Castle / Black Market, which satisfies the cravings of middle aged women and stoners with the munchies.

    2. Soon to go public Shake Shack buys the rotting carcass of RadioShack (NYSE:RSH) in order to further their aggressive expansion onto every street corner, strip mall, airport, and gas station. Shake Shack Shack should fetch a high valuation since it offers an exciting business model with almost no competition, other than McDonald's, Burger King, Wendy's, Whataburger, In 'n Out, Five Guys, Smashburger, etc...

    (click to enlarge)

    3. Shopping center REIT Kimco (NYSE:KIM) weds pipeline MLP Kanye Anderson (NYSE:KYN) to form Kimye, parent company of NorthWest (NYSE:NWN).

    4. Uranerz Energy (NYSEMKT:URZ) becomes an unlikely white knight to rental car company Hertz (NYSE:HTZ), which was under siege from Carl Icahn, who said "At least I got what I wanted from you shareholders and made Uranerz-Hertz in the process."

    See any other potential deals you think would be as absurd as these? Let us know in the comments section!

    Disclosure: The author is long MSFT.

    Sep 16 7:47 PM | Link | 1 Comment
  • Time To Play Benioff Buzzword Bingo!

    With salesforce.com (NYSE:CRM) about to report earnings, it's almost time to play everyone's favorite game: Benioff Buzzword Bingo!

    To play, just print out the Bingo card below and listen to the quarterly earnings call to see how many words you can match:

    (click to enlarge)

    Or make your own card and try to predict which superlatives our blustering, bombastic, big-talking baron of balderdash babbles, blabs, and blurts out! Phenomenon-GAAPreposteroustaculargemendous!

    Aug 17 9:18 PM | Link | 5 Comments
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