Shares of Kandi Technologies (NASDAQ:KNDI), the Chinese company that makes go-karts, electronic vehicles, ATVs, UTVs and tricycles, have been getting hammered on high volume. On Monday, the company released a decent earnings report that featured modest year-over-year revenue growth and a swing to profit, but shares have fallen by 27.4% since then, settling at $9.13 when the markets closed on Friday.
Favorable business environment
Kandi initially started with making off-road vehicles but later, with its 50% joint venture with Geely Automotive (OTCPK:GELYY), one of China's biggest automakers and the owner of Volvo (OTCPK:VOLVY), Kandi has moved into the EV space and generated a majority of its 2014 revenues and profits from EV parts and products. The two companies are producing compact electronic cars, unlike the bigger ones that are manufactured by Tesla (NASDAQ:TSLA). Moreover, unlike Tesla that sells its vehicles directly to its customers, Kandi's vehicles are mainly rented at a fixed hourly rate. The company has built automated garages in China that can store hundreds of vehicles and work like vending machines. The company intends to build hundreds of such garages throughout the country's major cities.
On top of this, Kandi will begin selling at least two EV models directly to customer this year. One of these models, the K17 which can accommodate five passengers, is for the medium-end of the market and will be launched within a couple of weeks.
For a country like China, where major urban cities are extremely crowded and vehicle ownership rates are low, Kandi's Zipcar-like business could flourish for years. With Chinese government's antipollution drive and its willingness to give subsidies to EV makers, Kandi could not have asked for a more favorable business environment.
Moreover, over the last five years, Kandi's financials have improved significantly. The company's revenues have grown from $42.8 million in 2010 to $170.2 million last year while it swung from a loss of $0.04 per share five years ago to a profit of $0.29 per share in 2014. During this period, the size of the company's cash reserves, including restricted cash, has increased from $25 million to $39.3 million. But since its focus has only recently shifted to EVs, it is still an early stage play.
In the previous quarter, Kandi's revenues climbed by 9% from last year to $43.8 million. The EV parts sales climbed 71.3% to $43 million. During the three months, shipments at the joint venture climbed by 37.4% as compared to the same quarter last year. The company swung from a net loss of $14.1 million to a profit of $6.1 million. For the full year, the joint venture is expected to achieve sales of 20,000 vehicles, which would show a significant growth from 10.935 vehicles last year.
A volatile stock
Kandi is one of those rare stocks that gets a fair share of media coverage, but is not followed by any analyst from a major investment bank. Consequently, the stock has often been at the receiving end of unwarranted speculation. The bulls have called this small-cap company which actually does not make any electric vehicle on its own the "Tesla of China" while the bears have raised concerns over the company's business model and its practices. The company also does not have major institutional ownership. Although firms like JPMorgan Chase, Goldman Sachs and Morgan Stanley have kept Kandi's shares, together, these institutions own just 7% of the company. Not surprisingly, Kandi's shares have been subject to wild swings, often without any apparent reason related to the company's performance. A formal SEC investigation into Kandi's affairs also tarnished the company's reputation.
That being said, the SEC's investigations closed earlier in February as the regulator did not find anything wrong with the company. Moreover, the problems associated with a lack of analyst coverage and institutional ownership will also likely get solved in the near future. The company has already delivered profitable growth, maintains a decent balance sheet and benefits from a favorable macro environment. On top of this, Kandi has been trying to woo U.S. investors by working on its investor relations. Less than a month ago, the company hired the New York based PR firm Piacenter Group to help Kandi in building relationship with potential investors. The company has also hired an English speaking CFO and started making quarterly conference calls, just like most of the U.S. listed companies.
Kandi Technologies has a great business and improving financials, but the biggest reasons to avoid this investment were the SEC investigations and the stock's volatility. The first issue is now history. The company is now working to improve its investor relations and corporate communications. I believe it won't be long before Kandi Technologies receives coverage from U.S. based research houses and major investment banks (some of whom already own the stock) and grows its institutional ownership. This should reduce speculation and bring the much needed stability to this stock. Therefore, I believe Kandi Technologies is heading in the right direction and the recent drop to under ~$9 per share, which translates into a trailing P/E of 31, P/B of just 2 and is close to the annual lows, is a buying opportunity.
Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in KNDI over the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.