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I am a licensed professional engineer specializing in control systems. I originate from near Liverpool England and now live in Maui, Hawaii - which gives me a sense of great achievement :) I am a long term investor with 30 years experience and a focus on businesses with exceptionally high growth... More
  • Kandi Simply Explained, And Its Valuation 22 comments
    Sep 2, 2014 8:48 PM | about stocks: KNDI

    2014 Q3 10Q Update....

    Kandi has been quietly progressing for several years manufacturing a variety of products, now known as its legacy business. During this time, Kandi was developing its Electric Vehicle (NYSE:EV) technology and production capability as a first mover. In about 18 months, Kandi has transformed itself into the leading Chinese EV manufacturer it was always intended to be. The new Kandi EV business model consists of 3 entities, Kandi, the Kandi JV and ZZY. These 3 entities operate under the Kandi brand and Kandi management, and their operations are often reported in the media as "Kandi." The Kandi business model was conceived by Mr Xiaoming Hu, Kandi Chairman/CEO and Kandi JV Chairman, who manages the overall operation.

    Kandi Business Model

    Kandi continues operating the more profitable components of its legacy business, continues manufacturing EV parts to supply the ever-growing needs of the Kandi JV, receives 50% of the Kandi JV profits. Kandi continues to be the brains and management behind the business model operation, hiring, innovation, R&D, government relations and individual city government negotiations.

    The Kandi JV is a 50/50 partnership with Geely, the largest auto manufacturer in China (and owner of Volvo). Both Kandi and Geely have transferred manufacturing facilities into the JV and additional manufacturing facilities are currently under construction in Hainan and Jiangsu Provinces. Kandi and Geely will both be equally responsible for the planned additional manufacturing facilities as the Kandi JV grows rapidly. Production capacity is 180,000 EVs/year with 1 shift, expanding to 380,000 EVs/year with 1 shift. Soon, due to this rapid growth, the Kandi JV entity will dwarf Kandi.

    ZZY (aka Zhejiang ZuoZhongYou Electric Vehicle Service Co.) is 19% owned by the Kandi JV and 81% owned by 2 Chinese investment funds. This gives Kandi a 9.5% interest. ZZY is the revenue engine for the business model. ZZY purchases only Kandi model EVs, from the Kandi JV. The cost of the EVs to ZZY, after applying national and local subsidies, is approaching free. Subsidies are expected to be extended through 2020. ZZY effectively pays for its EVs with government money. ZZY therefore has reduced capital costs and can offer competitive pricing. ZZY raises revenue through 3 programs:

    1. Car-Share Program (aka micro-bus) which is an extension of the public transport system, similar to existing bike-share programs. Users rent by the hour from/to multiple locations within the city and the cost is much cheaper than would be taxi. Renters can reserve and pay via Alibaba's mobile Alipay with no deposit required.
    2. Group Long Term Lease Program available for residential communities via their community organization, or business enterprises, or government entities. Leases are for 3 years.
    3. Individual Long Term Lease Program. Leases are for 1, 2 or 3 years and cost is higher than for Group Leasing.


    In the past year the China Central Government and Local Governments have declared war on the internal combustion engine (NYSE:ICE) vehicles. Government is compelled to do this due to deadly pollution levels and to protect their economy from future astronomic increases in oil imports. They are additionally developing a strong EV manufacturing base that can dominate world trade as ICE vehicles become extinct. Government has introduced many deterrents to ICE ownership and obstructions to their operation. At the same time they have introduced incentives to ownership of EVs and benefits to their operation. Inevitably, public demand is moving from ICEs to EVs.

    ZZY is established in 1 district of Hangzhou and 1 district of Shanghai, China's largest city. Each city has many districts and each district consists of many towns or sub-districts, so this is just the beginning. Agreements are being implemented in provincial capitals Nanjing, Chengdu, Wuhan and Changsha. News could break on Beijing, Zhengzhou, Changzhou, Haikou, Guangzhou, and Shenzhen. There are also many more 1st and 2nd tier cities interested or in negotiations - but government moves slowly.

    ZZY is at the beginning of an exponential growth phase and is the driving force within the business model. ZZY purchases have enabled the Kandi JV to be the top Pure EV seller in China in the first 9 months of 2014 with 7,279 units sold. Kandi is also the top Pure EV producer over the same period with 15,771 out of 32,419 EVs or 49%. Mr Hu expects production to reach 100,000 EVs/year within 1 to 2 years.

    In 2015 Kandi will release 4 new technologically advanced models, the not yet named SMA7002BEV05 (luxury sedan), the Cyclone (sedan), City Beauty (mini) and City Cowboy (mini). The new models will have breakthrough technology batteries providing increased driving range and longer battery life at half the cost. The luxury sedan will target government and enterprise fleet sales and leasing. Central and local governments are mandated to have 30% new energy vehicles by 2016 and this percentage will be increased beyond 2016.

    Improving technology raises the prospect of Kandi starting direct sales to the public which would be a second revenue generator in addition to ZZY. Geely already has nearly 1,000 sales outlets (4S stores) throughout China and nearly 200 abroad, and is the owner of Volvo which has many more sales outlets. A direct sales network is already in place.

    Valuation based on 14Q2+Q3 10Q


    Slow-growth and no-growth businesses can be evaluated based on earnings (preferably adjusted earnings) and therefore their P/E ratio can be used for valuation. Kandi has solid earnings (unlike fellow EV manufacturer Tesla) but at this stage of growth those earnings are not representative of Kandi's value.

    Start-ups and high growth businesses often have no/low earnings (due to the extra costs of growing a business) and therefore their Price/Sales (P/S) ratio is best used for valuation. Businesses in this category can support high P/S ratios, e.g. Baidu (NASDAQ:BIDU) 12, Facebook (NASDAQ:FB) 18, Google (NASDAQ:GOOG) 5, LinkedIn (NYSE:LNKD) 14, Alibaba (NYSE:BABA) 26, Tesla (NASDAQ:TSLA) 11, Kandi (NASDAQ:KNDI) 4 (was previously 6).
    Kandi's EV business is a start-up and a high growth business with a disruptive technology and can therefore support a P/S ratio greater than 6. I am tempted to use Tesla's value of 11 but to be conservative I will use a P/S ratio of 6. If P/S = 6, P = S x 6.

    Kandi's financial reporting accounts for its interest in the Kandi JV and ZZY by using the equity method and therefore does not consolidate the Kandi JV and ZZY sales revenue into its financials. However Kandi has ownership interest in the Kandi JV and ZZY and a proportion of their sales revenues are attributable to Kandi. For valuation purposes it is appropriate to include all sales revenue from the complete business that are attributable to Kandi.
    i.e. Sales = 100% Kandi Sales + 50% Kandi JV Sales + 9.5% ZZY Sales.
    Since ZZY Sales have not been disclosed, I will conservatively exclude that entity from the calculation.
    Since Kandi's business growth rate is high, I will use the last 2 quarters sales (as most relevant) and x2 to create an annualized value.


    All values taken from 2014 Q2+Q3 10Q
    Q2+Q3 Sales = (100% x $77,167,047) + 50% x ($91,983,352) = $123,158,723
    Q2+Q3 Sales Annualized = $123,158,723 x 2 = $246,317,446
    Weighted Average Diluted Number of Shares = 43,530,185
    Sales Per Share = $246,317,446 / 43,530,185 = $5.66
    Price Per Share = $5.66 x 6 = $33.96
    Share Value as of September 30 2014 = $33.96

    The above is a trailing valuation, not a forward valuation.
    Trailing valuations are based on hard facts whereas forward valuations are based on informed guesses.
    Those that study Kandi guess that the Kandi JV will sell a minimum of 15,000 EVs in 2014.
    Those that study Kandi guess that the Kandi JV will sell 60,000 to 120,000 EVs in 2015.
    There are and will be additional shares issued.
    My conservative guess is that in 2015, Sales Per Share will be at least triple to $16.98
    Forward Price Per Share = $16.98 x 6 = $101.88
    Forward Share Valuation for September 30 2015 = $101.88

    PPS Analysis

    Why is the current share price ($14.04) severely lagging the trailing and forward valuations?
    Three Reasons...

    1. Poor investor relations. Inadequate communication with no Wall Street marketing.
    2. Institutional short manipulation. Short interest currently at an all time high of 7,934,590 on 10/31. This is like a coiled spring holding the stock down. Kandi will produce a steady stream of good news as the business expands, triggering a release of the energy stored in the spring. The result will be a short squeeze or a series of mini short squeezes.
    3. It is normal for share prices to be either much lower or much higher than reasonable valuation for micro and small cap stocks. When a business is succeeding, the transition from much lower to much higher can happen rapidly.

    Disclosure: The author is long KNDI.

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Comments (22)
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  • rlbrunson8
    , contributor
    Comments (8) | Send Message
    Thank you for your breakout of KNDI pps going forward based on P/S. As a control engineer for Boeing I appreciate the linear process and your thinking in providing a respectable prediction for pps. Clear numbers with source included. Thank You...
    2 Sep, 09:32 PM Reply Like
  • Marc Chang
    , contributor
    Comments (135) | Send Message
    CSIHawaii, thanks for this great overview!
    I don't have great expectations for a squeeze though, the interests of the shorts seem to be a bit intertwined with those of the main actors here. But considering the recent EV related news out of China I am convinced KNDI is in the right spot to be one of the main beneficiaries.
    2 Sep, 09:54 PM Reply Like
  • frellgem
    , contributor
    Comments (182) | Send Message
    A well-engineered article (pun intended)! Now this stock needs to go where the numbers are inevitably taking it. Amazing what a well-engineered short position can do in the meantime. Thanks for showing us what might have been - and what is coming eventually.
    2 Sep, 10:18 PM Reply Like
  • dom007
    , contributor
    Comments (6) | Send Message
    Outstanding breakdown...simply stated and simply understood. Much appreciated!
    2 Sep, 10:52 PM Reply Like
  • User 12969801
    , contributor
    Comments (3) | Send Message
    This is a wonderful, short and to the point description of the company and it's possibilities. The author has taken away all the details and given us just "meat" of the company/valuation.


    Good job and thank you!
    2 Sep, 11:13 PM Reply Like
  • bjavier11
    , contributor
    Comments (28) | Send Message
    Thanks for a well written dissertation of kndi. In your view, how would the recent 71m, at 17.2 ps, plus the 30m option before Nov 17 affect the pps going forward. Thanks again.
    2 Sep, 11:29 PM Reply Like
  • CSIHawaii
    , contributor
    Comments (67) | Send Message
    Author’s reply » The emotional reaction to new stock issues is usually bad. That is because the emotional horizon is about 1 week out. Taking medicine may be unpleasant but long after the taste is forgotten the benefits remain. In this case the medicine is growth hormone. When the cash received is put to use we will feel the benefit and have a positive emotional reaction. Bottom line: it contributes to volatility but is a long term net benefit for the PPS.


    The great news that the central government is to pump $16 billion into building EV charging infrastructure should be outweighing the new stock issue.
    3 Sep, 01:01 AM Reply Like
  • User 343201
    , contributor
    Comments (18) | Send Message
    Thank you for a healthy dose of realism here.
    Plain, simple and true.


    As for the recent financing there is one aspect frequently overlooked which is that even so short term the PPS may go down by instinct driven selling, the book value goes up by the same amount of capital raised y this financing!
    While it is true that new shares will decrease the amount of profit attributed to each single share it is also true that at the same time the capital raised wisely invested will increase earnings and in such manner ultimately will provide for higher profits per share!
    In the case of KANDI the sale of new shares has always boosted the sales per share to a degree that exceeded the previous earningslevel by far and thus making the dilution profitable for existing shareholders!


    Book value changes are "caused by comprehensive earnings/losses as they will increase/decrease book value and book/sh. Comprehensive earnings, in this case, includes net income from the Income Statement, foreign exchange translation changes to Balance Sheet items, accounting changes applied retroactively, and the opportunity cost of options exercised."


    So if a mature company in a saturated market is issuing new shares to distribute as management-bonus or to pay out as dividends as profit growth is lagging this dilution will cause serious pain to investors but if a high growth technology company is raising capital by issuing new shares to finance expansion and higher turnover it immediately creates higher book value.
    In the case of KNDI we have seen the money raised put to such good use that e.g. a newly acquired subsidiary was already contributing profits to the balance sheet in the same quarter of the secondary offering!


    This is not just "spinning the news" but well supported economical 101.
    You might want to check for references like these here:


    "Dilution also generally occurs every time a company issues shares. When your company issues new shares your earnings might be diluted but your book value will actually often be increased (anti-diluted). If a company with a high price earnings ratio issues shares that will usually increase the book value per share. For high tech companies with high share prices, it is a very smart move for the company to issue shares. This may dilute your earnings (or losses) but usually substantially increases your book value per share. This moves puts cash in the bank and can put a floor under the stock price since the shares will not usually decline below their cash value per share. "



    "New share issues and dilution[edit]


    The issue of more shares does not necessarily decrease the value of the current owner. While it is correct that when the number of shares is doubled the EPS will be cut in half, it is too simple to be the full story. It all depends on how much was paid for the new shares and what return the new capital earns once invested. See the discussion at stock dilution."

    3 Sep, 05:00 AM Reply Like
  • MICP1345
    , contributor
    Comments (66) | Send Message
    Very well written. Concise and to the point. Even I can understand it!
    24 Nov, 08:34 AM Reply Like
  • bullmarket2222
    , contributor
    Comments (31) | Send Message
    It's clean, it's simply explained, it's fair, and probably the most accurate valuation around....


    My thoughts are the P/S should fall in between the 6-14 depending on the Q to Q and Y over Y growth numbers....


    Good Job....




    2 Sep, 11:42 PM Reply Like
  • CSIHawaii
    , contributor
    Comments (67) | Send Message
    Author’s reply » I am not providing a platform for short talking points. They are not worthy of discussion and will be deleted. I have zero tolerance for innuendo, distortion and lies, or those gullible enough to unwittingly repeat such.
    3 Sep, 07:28 AM Reply Like
  • Royaltyk
    , contributor
    Comments (7) | Send Message
    excellent article, well done, thanks
    3 Sep, 07:59 AM Reply Like
  • Bill Northup
    , contributor
    Comment (1) | Send Message
    Excellent article. I think I want to buy some Kandi.
    3 Sep, 09:56 AM Reply Like
  • Stevo56
    , contributor
    Comments (49) | Send Message
    Thanks Bill, as others have said, nice summary justifying the whys of your valuation calculation, and you stuck with a fairly conservative, very obtainable, and realistic growth outlook looking at the next four quarters. Thanks
    3 Sep, 03:25 PM Reply Like
  • shoysbay
    , contributor
    Comments (3) | Send Message
    I agree that Kndi lacks institutional support which I think will make a vast difference in the price going forward. Well written article and straight to the point .
    3 Sep, 10:16 PM Reply Like
  • Ankurj
    , contributor
    Comment (1) | Send Message
    Thanks for the article, but I am a bit confused. Since Kandi sells a lot of components to the JV which go into vehicles that comprise revenues for JV - aren't you counting those revenues twice? Also P/S multiples may apply to JV revenue, but why would the go cart business have 6x P/S?
    25 Sep, 06:18 PM Reply Like
  • CSIHawaii
    , contributor
    Comments (67) | Send Message
    Author’s reply » Ankurj, your concerns are valid. Only profit is of value, not sales. However P/S ratio is a valuation method used in start-up/high growth stages of a business when profit is negative/zero/spotty. For Sales based valuation, the Sales used have to be indicative of future profit as the business matures.


    The JV will buy parts from multiple parts manufacturers including Kandi. Buying from Kandi is a legitimate "cost of sales" that does not diminish gross margin and indication of future profit.


    Parts is one of Kandi's new high growth revenue channels and it makes little difference whether it sells parts to the JV or any other EV manufacturer. Parts sales have their own independent gross margin and indication of future profit.


    On this basis both sets of sales are indicative of separate future profits and can legitimately be attributed to Kandi.


    You are correct that the legacy business is not high growth and therefore does not qualify for a P/S of 6. It could also be said that the EV business justifies a higher P/S than 6. The legacy revenue is a very small proportion of the total revenue attributable to Kandi and that proportion is diminishing rapidly - so I see no need to use a lower P/S than 6.
    26 Sep, 05:57 PM Reply Like
  • arctophylax
    , contributor
    Comment (1) | Send Message
    The modeling makes sense if you (a) believe the sales projections (which sales will be funded by the government) and (b) assume the sales will continue to grow and (c) that sales will be profitable. What happens to revenue and margins when the government decides to stop or reduce subsidies? Does the model assume this will never happen or that the car share program will become a thriving business that does not rely on government support?
    26 Sep, 12:12 AM Reply Like
  • CSIHawaii
    , contributor
    Comments (67) | Send Message
    Author’s reply » Arctophylax, the model assumes that your (a, b and c) are valid based on evidence on the ground in China. The central government has assured that subsidies will continue after 2015 with no end date given. The government has a target of 5 million pure EVs being added to the roads by 2020. This target alone will demand exceptionally high growth rates, and to-date this year Kandi has 45% of the pure EV production in China.


    The next growth indicator is that 5 million pure EVs is a drop in the bucket compared to the auto market in China which is in its infancy. Using World Bank figures for the rate of growth in past years and projecting to 2020, I calculate 88 million autos will be added to the roads. To be conservative I will halve it to 44 million. If most of those autos are ICE it will exacerbate the 2 problems that the central government is compelled to solve and likely result in the extension of subsidies beyond 2020. The 2 problems are killer environmental pollution, and damage that would result to the economy through rapidly increasing oil imports and the escalation in oil price that would result.


    When subsidies are no longer needed, Kandi's business will already be matured and many, many times greater than now. Kandi is the low cost leader focused on providing basic transportation for the masses.
    26 Sep, 06:41 PM Reply Like
  • t0nutz
    , contributor
    Comments (189) | Send Message
    good stuff csihawaii . long kndi my man!!
    27 Sep, 09:17 AM Reply Like
  • refp
    , contributor
    Comments (26) | Send Message
    Thank You CSIHawaii research on KNDI.
    27 Sep, 08:33 PM Reply Like
  • axnjaxn
    , contributor
    Comments (5) | Send Message
    Thanks for the article
    23 Nov, 08:23 PM Reply Like
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