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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
  • Kandi Technologies (KNDI); What’s A Sweet Girl Got To Do To Get Some Respect? 1 comment
    Aug 17, 2010 9:46 AM | about stocks: KNDI, TSLA, PII, F

    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 (NYSE: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 (NYSE: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
    Stocks: KNDI, TSLA, PII, F
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