Kandi Technologies (KNDI) And Its 50% JV Partner Geely Holdings Face A Conundrum With Bringing Their $3 Billion Kandi-Geely JV Public
Key questions that will be answered in this report:
What evidence is there that the Kandi Electric Vehicles Group Co., Ltd. (KNDI JV) is worth $3 billion?
The Conundrum ─Assuming there is convincing evidence to back up the claim, how can Management convince China investors, both private and public, that KNDI JV is worth $3 Billion while its US publically traded 50% partner, Kandi Technologies, is trading at less than one-tenth of that value?
Will KNDI shareholders be given a “heads-up” that such an offering is being prepared?
What indications are there that KNDI JV Management is interested in bringing the JV Public?
This report as a continuation of a KNDI report I published one week ago titled; “Kandi Technologies (KNDI) Wins Coveted China OEM EV License, Triggering 320,000 EVs Sales Agreements, $237 Million Government Credit Facility, Exec Upgrades and $14.5 Million Cash –And the stock goes down? Not for long”. To fully understand all the pertinent information leading up to the conclusion made in the headline, the prior article should be read, preferably first.
Abstract: In this report you will see a head to head comparison of the KNDI JV, which has never had an outside equity financing, matched-up with seven China EV Start-up Unicorns, including NIO, which over the past two years has raised some $11 Billion US dollars in Private Equity and has a current value cap approaching $25 Billion! As you will see in this comparison, by any normal valuation metric short of wild speculation, KNDI JV beats each in every category other than cash raised. Considering 10 yr NASDAQ listed Kandi Technologies, Inc. (KNDI) owns 50% of the KNDI JV, has three profitable independent EV related businesses and has positive shareholders’ equity of $233 million, yet trading with only a $300 million market cap. There is either a stock price disconnect of monumental proportion, or the KNDI JV must be all but worthless. The purpose behind this report is to show beyond doubt that the KNDI JV is worth a minimum of $3 Billion relative to its head to head competitors in China thereby exposing a near term five to six multiple investment opportunity in its 50% partner KNDI’s shares. Additionally, it is this writer’s belief and will show, based on a series of public disclosures, KNDI JV Management is at the cusp of monetizing the hidden JV value to dramatically accelerate its own growth. To accommodate a minimum fair KNDI JV offering price, public or private, as will be explained, KNDI shares must first at least triple from the current level. And lastly, the two important issues showing Managements desire to bring the KNDI JV public and how KNDI shareholder might recognize preparation for an offering will also be addressed in this report.
If you are reading this on Yahoo Finance, it was picked up from the original article published on Harvest Investor Portal. For some reason, when Yahoo picks up Harvest articles, it deletes all of the hyperlinks except for one at the bottom of the article which is a link back to the original publication which does have all the reference links. If you seriously want to get into this report, I suggest you now go down to the Harvest link and read it there.
Evidence that the Kandi Electric Vehicles Group Co., Ltd. (KNDI JV) should be valued at $3 billion
Let’s start with the below table comparing KNDI JV which, to date, has never raised any dilutive outside equity financing, to a sampling of seven well-known (at least in China) China EV Unicorns.. Take a few minutes to absorb this stunning table below and comparing KNDI JV to seven China EV Unicorns. Note that the “other seven” have already raised $11.6 billion in Private Equity and have a perceived value of almost $24 billion!!
Total Cash Raised from Private Equity by the Seven Unicorn EV Makers is $11.55 Billion, leaving them with a current $23.15 Billion Value Cap.
KNDI JV Total Cash Funded by $171 Million by KNDI and $197 Million by Li Shufu’s Geely Holdings. Each Partner owns 50%.
IF YOU DON’T READ ANYTHING ELSE IN THIS REPORT BUT THIS TABLE, YOU HAVE ENOUGH INFORMATION TO REALIZE HOW GROSSLY UNDERVALUED KNDI REALLY IS WITH ONLY A $300 MILLION MARKET CAP.
Seriously, as a long retired “Old School” big firm Investment Banker and Independent Regional Broker/Dealer/Investment Banker, do I believe KNDI JV is worth $3 Billion today? Probably not on a pure asset basis; but one thing for sure ─ it is worth a lot more than at least the last six on the above list. (While researching this information, my mind kept wandering back to a great recent movie, (which I strongly recommend), Crazy Rich Asians.)
As you might guess from looking at the table above, the driving force behind this report is Private Equity Investment. In most cases, at least initially, it is the talented founders that the Private Equity players were funding. While I didn’t include the Unicorn Founders by name in the table, I have in the individual “snippets” section below. Not so surprising, two of the seven Founders above, had KNDI JV partner, Li Shufu as a mentor. Since this report is about the KNDI JV, let’s introduce its two stellar Founders first. Li Shufu, who is truly world renown; and Hu Xiaoming, who is also KNDI Founder/Chairman and largest holder.
Li Shufu, Geely Holdings
The above graphic displays a chronology and investment level of some Divisions of Li Shufu’s (China’s 9th wealthiest) 100% owned private empire called Geely Holdings Group ─ not to be confused with the public company Geely Auto Group, which as you can see is 44% owned by Geely Holdings Group (Li is Chairman of Geely Auto Group). I think it is worth pointing out that Geely Auto ranked #1 in passenger car sales in China in 2018, up 18% in China’s first overall down ICE auto sales year with 2,293,750 units sold which is up almost a triple from the 778,896 sold in 2016!
And also more heavily discussed in the last article, Li Shufu certainly has the “Star Power” to attract PE cash as witnessed by his 2017 Start-Up Cao Cao. Cao Cao is an EV only, “white-glove” high-end chauffer type ride-hailing company similar to an upscale UBER. Up until a recent PR by KNDI JV signing a three-year agreement to sell 20,000 KNDI JV cars to Cao Cao, it had only hi-end Geely and Volvo EVs in its current 27,000 EV fleet. Though less than two years old, Cao Cao has already raised $170 million in “A” round private equity early last year which capped it at $1.5B and is about to do a B round for another $426 million which would likely cap it around a $3+Billion value. Here are some interesting points to ponder about this recently announced JV deal. Li Shufu must think very highly of the two new KNDI JV high-end EVs, the Global Hawk EX3 and K23, to include these “incestuous” EV’s in Cao Cao right in the middle of an outside financing round.
Of particular point to note re. KNDI JV on the above table. Aside from Li’s speculative $9 Billion dollar investment in Daimler, the $196 million cash he has put into the Kandi JV is by far his second largest check written next to the $1.5 Billion for Volvo in 2010.
I have more about Li in the first article if you need more info about him. Now let’s take a quick look at KNDI’s Founder/Chairman/CEO Hu Xiaoming, who is the Co-Founder, and Chairman of the KNDI JV. From his short bio:
Hu Xiaoming was appointed as Kandi Technologies Group, Inc. Chief Executive Officer, President and Chairman of the Board in June 2007. Prior to joining the Company, from October 2003 to April 2005, Mr. Hu served as the Project Manager (Chief Scientist) in the WX Pure Electric Vehicle Development Important Project of Electro-vehicle in the State 863 Plan. From October 1984 to March 2003, Mr. Hu served as: (i) Factory Director of the Yongkang Instrument Factory, (ii) Factory Director of the Yongkang Mini Car Factory, (iii) Chairman and General Manager of the Yongkang Vehicle Company, (iv) General Manager of the Wan Xiang Electric Vehicle Developing Center and (v) the General Manager of the Wan Xiang Battery Company. Mr. Hu personally owned 4 invention patents and 7 utility model patents, which he transferred to the Company in the fiscal year 2012. In 2013, Mr. Hu Co-Founded and is currently Chairman of a 50-50 Joint Venture with Geely Auto Chairman, Li Shufu, and his wholly owned Geely Holdings Group, to manufacture small to medium size Electric Vehicles for the vast China Middle Class. Mr. Hu’s experience as our Chief Executive Officer and President, as well as Chairman of the Board, and extensive scientific and operational knowledge and expertise qualifies him to serve as Chairman of the Board and led the Board to conclude that he should be nominated to serve another term as a director.
OK, suffice it to say, KNDI JV Founders together likely has more “Street Creds” in the China EV markets than probably any of the Founders of the six Unicorns mentioned above. Now Let’s take a short look at the KNDI JV.
While mostly covered more in depth in the last report, before I move on to the seven Unicorns, I want to address a few important stand-out highlights on the main target of this report; the KNDI JV.
When looking at the Unicorn table above, I believe it would go without saying, that none of the seven, heavily funded Unicorns had any EV sales revenues in their first full year of operations, let alone profitable. After all, when investors are throwing obscene amounts of cash at you, who cares about an early bottom line? But when you put a couple of brilliant businessman like KNDI JV partners Hu Xiaoming and Li Shufu working together, you just might get a different result.
2014 was the KNDI JV’s first full year of production. Let’s see how they did having only the initial KNDI JV’s initial paid-in capital of $166 million to work with.
The JV Company sold 10,935 EV products during the full year of 2014, with 3,656 EVs sold in the fourth quarter; From the KNDI YE 2014 Earnings results PR, and generated over $215 million in sales. (BTW, it was only in operation Q4 of 2013)
From Pg. F-31 of the KNDI 2014 10K
An amazing start that continued through 2015 which was an even much better year where KNDI JV ranked #1 in all PEV sales in China. However, if you read the last report, you would know the background why from all of 2016 through Q3 last year, KNDI JV was caught in a seemingly never-ending barrage of EV bureaucratic changes clearly prejudicial against small car pure EV makers. So much, that for a while, put it deep into its own “Valley of Death” and could have put it out of business, were it not for its strong management. When Q4 and YE 18 reports next month, it should be crystal clear that both KNDI and the KNDI JV not only survived but are both solidly profitable again.
Competition? Bring it on.
How is this for a “headline”: “THERE ARE CURRENTLY 487 CHINESE ELECTRIC CAR MAKERS, AND COUNTING” Before getting scared off, note that for a time in history, China had over 1,000 automakers, now at most, maybe 5% left in business. But back to the present; this article and the Wall Street Journal article that this is based on, came out in June of 2018. I would assume due to new stringent licensing rules that were initiated January 10th, the 487 number has been whittled by more than half. This new licensing topic was covered heavily in my prior article in the section about KNDI being awarded one of the last OEM licensed under the “old rules”, much less restricted than the current. But in a nutshell here is what a license gets you -- all EVs must have a license attached to it before it can be sold to the public in China. As was the case of KNDI, prior to being awarded its own license, while making its own EVs in its own facilities, it only had to “piggyback” on Geely’s license in the final step before registration. This compared to a much different current situation that NIO is using in having JAC Auto build the whole EV based on NIO’s design plans, providing the license for registration, then having NIO add its “Brand” prior to sale. In fact, other than Wiemar Auto that does have its own facility (but still must piggyback a license) the other six Unicorns have to contract with licensed automakers under the new rules for at least their first 30,000 EVs.
If a company has an OEM license like Geely or JAC has, it can be commissioned by anyone to make and/or license an EV for them as described above for historical KNDI JV and current NIO. This is similar to private labeling. As NIO clearly stated in its IPO documents, it does intend to eventually apply for its own license in the future estimated two to three years out. There is no requirement for any EV maker to ever get a license, but most, particularly those with public intentions, feel more comfortable having 100% control of its own destiny. Note in the table above, only KNDI JV as of January 8, 2019, has a coveted license.
How does an EV Maker Get a Licence?
As described in depth in the last article, now, in order to even apply for a license under the new rules, an EV maker must first make and sell at least 30,000 EVs over the trailing two calendar years under someone else’s’ license and build or buy a government-approved manufacturing facility (or facilities) with total capacity of at least 100,000 units. This is very expensive speculation for most of the 487; so now you know why I suspect half, or more, will now quickly disappear. But let me also add, because of the harshness of the new rules in getting licensed, it should be obvious that KNDI JV value has likely increased, maybe as much as a billion dollars due to both having its own license and four (three new) separate manufacturing facilities each with 100,000 capacity, where it can be contracted as the licensed OEM for start-ups. Note from the Unicorn table, at this time, in addition to KNDI JV, only Weimer Auto has a completed manufacturing facility. Since each of KNDI’s current facilities was built for future capacity expansion to as much as 300,000 units, under the new OEM rules, KNDI JV’s current overcapacity, has now turned into a significant asset.
The Seven Unicorns
Since almost all of my research in developing the above table comes from the China Media requiring a lot of research and translation, so you don’t have to take my word for it, let me provide some snippets confirming the private equity financing, inferred value, and founders; each with links that auto-translate to the various articles from which the above info is derived. Rather than spending too much time on the seven Unicorns, I decided to let the table “speak for itself”. So what I am providing now are links to China Media articles on each and a few lines extracted proving up the data that I put in the seven Unicorn table. If you want more info on each, use the link which will auto-translate the referenced article.
“… Based on this issue price, Weilai Automobile's (Chinese name for NIO) valuation is approximately $6.4 billion…
… According to the latest prospectus, Weilai Auto has raised a maximum of US$1.518 billion, a decrease of US$282 million compared with the proposed US$1.8 billion in the previous prospectus.
According to the information, since its establishment in 2014, the profitability of Weilai Automobile has been in the foreseeable future. According to relevant statistics, up to now, Weilai Automobile has accumulated a total of about 2.4 billion US dollars (about 16.5 billion yuan), but its four-year loss has risen and then rose. In the first half of this year, Weilai Automobile's net loss was 3.33 billion yuan, plus its loss of 7.59 billion yuan in 2016 and 2017. The accumulated loss of Weilai Automobile has reached 10.92 billion yuan…”
Weimar Motors (WH Motors)
“…On March 23, a list of unicorns identified by the Ministry of Science and Technology was released. Weimar Motor ranked 18th with a valuation of US$5 billion”…
…In February 2018, Wei Hui, founder of Weimar Motors, revealed that Weimar has raised nearly 20 ($3.2 B) billion yuan in funds…
…Shen Hui- On December 1, 2009, Shen Hui officially joined Geely Group as the group's vice president . 2009 – 2014 Vice President of Zhejiang Geely Holding Group, Senior Vice President of Volvo Cars and Chairman of China, Chairman and CEO of Shanghai Geely ZhaoyuanInternational Investment Co., Ltd.
Shen Hui (Founder of Weimar) reveals: Why should I leave Volvo?
2015-01-14 09:55:20 Source: Netease Automobile Comprehensive
“In 2014, in addition to Sun Xiaodong, the senior executives who left the company from Geely also had a higher position, Shen Hui, who was the former vice president of Zhejiang Geely Holding Group, the senior vice president of Volvo Cars and the chairman of Volvo Car China. Why did Shen Hui go to Botai to build a smart car and listen to him?
Netease Auto reported on January 14 that I was at the top of my own brand, you know, Li Shufu is above…”
“…On December 13, Gu Hongdi, president of Xiaopeng Automobile, said in an interview that Xiaopeng Automobile has raised 10 billion ($1.5B) yuan. "This is the money already in place." The valuation of Xiaopeng Automobile has reached 25 billion ($3.7B) yuan…”
“…Aichi Yiwei Company. The total amount of three rounds of financing of Aichi Automobile Company has exceeded 7 billion (1.06 B) yuan and the valuation is over 10 billion (1.5B) yuan. However, this friend revealed that the money of Ai Chi billion is not enough, and may need to refinance 7-10 billion yuan!...”
“…I am wondering, the first three rounds of financing of 7 billion, the valuation of more than 10 billion
New energy vehicles, perhaps as the name of Aichi billion-dimensional CEO Gu Feng…”
“…Fu Qiang: Co-founder and President of Aichi Automobile, former president and CEO of Volvo Car China Sales Co., Ltd…”
“…The human team, the 20-month manpower expenditure without any profit is also extremely huge, and the follow-up involves the establishment of factories, molds, design platforms and team compensation, the valuation of 20 billion yuan ($3.1 B) of singularity IS6 and 7 billion yuan ($1.1B) financing It can be described as a drop in the bucket...”
“…Origin car stuff August 22 news, the new strength of the car, the Ranger car announced today to complete the B + round of 350 million US dollars financing, the round of financing by Gezhi Assets exclusive strategy shares, Gezhi assets also become Ranger The second largest shareholder of the car. At this point, Ranger has completed three rounds of round A, B, and B + rounds of financing, with accumulated financing of more than $1.25 billion and overall valuation of $3.35 billion.
CEO Qin Yifei will become the global co-chairman and co-founder of Ranger…”
Bi Fukang, Founder/CEO. In June of this year, Baiteng successfully completed a $500 million Series B round of financing, with accumulated financing of $1 billion. To ensure efficient vehicle production processes, the three production vehicles will use the same production platform to meet production and expansion needs
Important Note: The Founders of two of the above Unicorns, Weimar’s Shen Hui and Aichi, Fu Qiang who cumulatively raised an amazing $4.3 Billion in Private Equity, were both former Geely Holdings/Volvo CEO’s who were directly under KNDI JV Co-Founder, Li Shufu. If Private Equity investors are excited backing the “understudies”, you can bet they would love the opportunity to back the Boss. But then we know that is true since Li has already recently been raising Private Equity for his less than two-year-old Unicorn Start-Up, CaoCao as discussed in my prior article.
Valley of Death
Looking at the above Valley of Death curve and reading the prior report, KNDI JV with NIO close behind, are the only two Unicorns who justifiably are on the third column up-curve. Likely two to three in the above table will not survive independently. Even NIO had a close call. Looking at the financials in its IPO, Offering Memorandum show NIO was “touch-and-go”, burning over $1.55 Billion the first half of 2018 or about $8.5 million a day prior to its IPO. And with only $668 Million cash left on June 30, NIO was probably down to less than a few weeks cash left by IPO day. However, they did get the IPO successfully completed, along with a $650 million follow-up convertible, so it now has a good chance of making it. For those who know how to search the China media with Google auto-translate, the betting was heavy against Weilai making it, had it failed in getting its US IPO completed. But, Management did what it had to do, getting all the equity rounds of financing. However, all of its equity rounds left its original founder, William Li (Li Bin) with less than 17%.
On the other hand, KNDI JV and its two Founding partners, KNDI and Geely Holdings, fought off early dilution and successfully “ground it out” through “The Valley of Death”. As detailed in my last writing, when the JV needed a fast $183 million injection last year in order to qualify for its own OEM license; instead of taking the easy way out and dilute with outside equity at a time sales and production was halted due to complete fleet replacement underway to meet new PRC requirements, each partner put up $81.5 million keeping their 50-50 ownership in tack. This delay in dilution was a HUGE win for KNDI shareholders. Right about the time the JV had to come up with that cash, May of 2018, Private Equity money was flowing profusely in China, so I am sure temptation was there, but Management, knowing it was the worst time for the JV to get a fair valuation due to extenuating circumstances made the right move. It doesn’t take a business genius to know that a vibrant operating company, with a new fleet of vehicles, will appraise much higher than a company with nothing but idle plants.
With the new fleet of four EVs completed and PRC approved, it appears KNDI JV generated over $100 million in sales in Q4, a fivefold jump over Q3 2018 sales of $19 million. Now comfortably profitable, the timing for a small 10%, $200 million “A” Round Private Equity offering leaving each partner with 45%, sometime shortly after year-end numbers are reported next month looks just about right. Then, as sales ramp up significantly the balance of the year, a small 15% public stock offering (7.5% from each side) at the $3 Billion level, (not the least bit unreasonable when weighed against the value caps of the seven China Unicorns) would raise an additional $450 million. However, for this to happen, KNDI’s share price would have to increase to at least $18 a share for a successful Private Equity10%, $200 million “A” financing round. While this price is still too low, as it only gives KNDI value to the 50% ownership of the JV on a $2 Billion financing, at least it is in the “ball-park” to do a KNDI JV financing at this level.
While detailed in the last report, let’s take a quick look at KNDI’s own businesses and assets.
For starters, add to $18 JV value, another $3+ a share from the sale of land use rights and buildings for its own Jinhua China legacy manufacturing facility and headquarters building (on the books for around $9 million) currently in sale negotiations with a Government buyer. 10K Pg. 8
─Also add at least another $4 from its own profitable battery business where it holds its own license along with other OEM EV parts like motors, AC units, and even its profitable US-based SC Autosports Division which will also be soon selling KNDI JV EVs in the US. All this would total at least $25 a share with the JV valued at only $2 Billion. Raise that to $3 Billion for the public offering and KNDI value jumps to around $35 a share.
If one is having a hard time following the logic of this all, just think about the old Yahoo (now Altaba-AABA) and its owning 11% of Alibaba shares. Trading around $70 and as high as the low 80’s not long ago, basically, all it owns of serious value is Alibaba shares which gives AABA a $42 Billion Market Cap. If BABA goes up, or down, AABA somewhat “tracks” the same move. So, if KNDI JV goes up in value, then KNDI stock should at least reflect 50% of a similar move since KNDI reports its JV ownership on the equity basis. So in this case, one might say that AABA is a proxy for BABA. If they get too far out of line, a fund might sell the overvalued one and buy the other. For this reason, if KNDI JV is valued at $2 Billion, then KNDI should “track” at least $1 Billion when its own assets are added.
So, here is the real question. How will we know if KNDI JV is getting ready or is already in the process of doing a Private Equity Financing?
Well, KNDI’s stock price has to go much higher than current. Having it trading at such a discount to parity to an initial JV $2 Billion market cap creates problems. In all of my 45 years as a market pro, what we have here is something I have never seen. Usually, when talking about bringing a 50-50 JV company public or raising Private Equity at levels as high as $2 Billion, the two partners have always been both much larger than the JV; either in value if private, or in market cap if public, so a similar problem that we have here does not exist. However, since KNDI does have this dilemma, my guess is for starters, that KNDI Management needs to do something to get KNDI stock much higher. Either report the JV selling a lot of cars or more importantly, put out a lot of news with sizzle. Let’s face it, the seven Unicorns sure didn’t raise more than $11 billion in private equity; and NIO is being valued at $8 Billion based only on cars sold.
KNDI reports all significant events happening in the JV along with its own news releases. For instance, the six releases covered in depth in the prior report, in the first 34 days of this year, more than in all of H2, 2018 is likely a signal something is happening.
1. Kandi Technologies Announces the Receipt of Extend Supply Chain Finance Program of RMB 1.6 Billion (USD 237.2 Million)02/04/2019
2. Kandi Announces Appointments of Interim Chief Financial Officer and Vice President of Finance 02/01/2019
3. Kandi JV Company Signs a Cooperation Agreement with Youxing Technology to Provide 20,000 Electric Vehicles Within 3 Years for "Cao Cao Zhuan Che" Ride-Sharing Platform 01/29/2019
4. Kandi Signs Framework Agreement with Zhejiang Ruibo to Serve as the Primary Vehicle Provider of 300,000 Electric Vehicles Within 5 Years 01/22/2019
5. Kandi Pure Electric Vehicle Project Received Approval 01/09/2019
6. Kandi Technologies Reports the Receipt of RMB 100 Million (USD 14.5 Million) in the Third Subsidy for R&D Expenditures 02/02/2019
If that doesn’t get the stock going, then you can bet the investment banker working with the company will have a solution. Ever notice how TSLA’s stock always seemed to run up just before a stock offering? For that matter, even NIO ran up just before its $650 million convertible bond offering.
But one thing for sure, if you see the stock start running up big on no news, this is a big tell, “something is afoot”. (Funny how the stock ran up big on heavier than normal volume last week with no news) All it will take is to have one or two opportunistic funds or greedy deep-pocket investors, who sees and understands the rare “outlier” opportunity this report is disclosing, to start buying aggressively. Or maybe one of the major short seller traders with half a brain reads this report and decides to “forget about the cheese, just let me out of the trap” and front-run the balance of the 6.1 million shares short. Then before you know it, you have a repeat of the five-month stretch from late 2014 which saw KNDI stock go from below $6 to over $22 trading millions of shares a day.
Chart Courtesy of Stockcharts.com
Will a KNDI JV IPO finally create the trigger to attract Sell-side analysts?
When first doing due-diligence on KNDI, one will note that it has very few “long” Institutional Investors and never has had any Sell-Side analyst coverage. However, it does have a fairly strong institutional interest, like all China and EV stocks; but as a 20% short position, primarily made up of deep pocket hedge funds. KNDI’s professional short-sellers have been around for more than half a decade, battling daily with a lot of loyal individual investors. Why? Because KNDI has basically no “Long” Institutional following. Why? Because never in its decade on NASDAQ, has it ever had a single sell-side analyst covering the stock. But that should change with the KNDI JV IPO.
Why no analysts? Because KNDI did not come public by way of a US underwritten IPO like NIO or TSLA. In an IPO with underwriters, the “syndicate” usually led by one or more “Managing Underwriters” along with an array of lower bracket underwriters each make a very good commission or Underwriters fees creating a good incentive to keep both Company and shareholders happy in hope of future business. For this reason, these Underwriters have what’s known as “Sell Side” analysts on their payroll. Do not confuse the “Sell” in the sell side as being an analyst who caters only to short sellers. It is Sell Side analysts who publically “cover” and “rate” stocks (as compared to “Buy Side” Analysts who typically are in-house analyst working for a specific client). These Sell Side analysts provide research and opinions for an array of their Firms clients both individual and institutional. Typically, once an analyst starts coverage, they usually stick with the issue in perpetuity, good or bad.
In KNDI’s case, at the time it listed, it did not need to raise any money so right or wrong, it decided to go public in the US by merging into a dormant publically trading entity, or shell company in 2007. It listed on NASDAQ on June 11, 2008, just prior to the Global stock market crash. So no IPO, means no investment banker, so no free analyst coverage. After surviving the crash and entering the EV sector, KNDI itself did raise some $150 million in a series of privately placed stock offerings in the high teens. However, because these fundings were privately placed with the same two transactional funds, no stock research coverage was provided.
Lack of coverage is a situation that still follows the Company today. However, I expect the analyst situation will change dramatically once the KNDI JV IPO takes place. As I covered in my last report, it is my belief that due to partner, Li Shufu and his Geely Holdings longtime relationship with the Investment Banking team of Goldman Sachs and Morgan, he will go back to them for the KNDI JV Private Equity and IPO. These are the same two that Li publically disclosed he had hired with a lot of fanfare to bring his Volvo public last year. While that deal was tabled due to a wide disparity between Li’s price of $30 Billion and a lower price due to a softening auto market, I would think the Banking team, wanting to stay in Li’s good graces, would be happy to handle the KNDI JV Private Equity and IPO.
How is this going to help KNDI get analysts since it is not KNDI itself doing an offering? It is my professional belief that coverage would be extended to KNDI for at least two reasons: once the KNDI JV is public, as discussed above, there is an inherent ongoing trading tie-in between the two companies. Additionally, since KNDI Chairman Hu is also the Chairman of KNDI JV, I suspect he will make coverage of KNDI one of his criteria to whomever is selected to underwrite the IPO. Should this happen, it would be a very positive and long overdue leveling of the battlefield of the KNDI “Terra Cotta Warriors” retail investors fighting the “Mongol Horde” short-sellers.
Last, but most important question: What indications is there that KNDI JV Management is even interested in bringing the JV Public, or as Chairman Hu often references, “enter the capital markets”?
Chronology of KNDI Management’s public comments on the KNDI JV entering the capital markets and/or IPO and Subsequent Events likely related.
The first indication was on April 13, 2015, when KNDI published a press release on behalf of the KNDI JV headlined:
Kandi Technologies' Subsidiary Joint Venture Company to Explore Public Listing in China
Note the last line in the PR expressing confidence a public listing could be achieved “within the next two years”. While this was the honest intention at that time, several unknowns subsequently appeared. I.e. All China stock listings required a mandatory three consecutive years of profitability. Management knew KNDI and the KNDI JV was about to report a very positive 2014 full year net of over $7 million just days after this PR and anticipated profits to continue. That would have given them two years’ time to report the three years of profits. As it turned out, 2015 was even much more profitable than 2014 with JV net income of over $23 million. But then, as explained in the prior report and to a lesser extent above, a number of EV rule changes in China that were very prejudicial to EV companies specializing in small “City Cars”, emerged, so the string ended with a $14 million loss in 2016 taking the KNDI JV out of the China listing requirements for at least the following three years once the JV became profitable again.
When the JV IPO PR came out, KNDI was about to report its own 2014 results, its first full year in the JV.
Beginning in late 2013, the KNDI JV had manufacturing facilities in Shanghai and Changxing each with 100,000 annual capacity. For part of the year, the Kandi JV was operating the Shanghai Facility and KNDI itself, the Changxing facility, which KNDI had recently built and completed by itself in 2013. KNDI subsequently contributed this $160 million facility to the newly formed KNDI JV along with $80 million debt, as its initial $160 million capital contribution to earn 50%. The EV “products” sales were full EVs made and sold directly by KNDI. The EV “parts” sales were parts sold to the JV by KNDI, to include batteries (KNDI has a battery license), Battery Management Systems (BMS), EV motors, EV AC units, certain body parts and a number of lesser EV parts.
While JV Management has never been asked publically about their thoughts on listing in the US similar to NIO since the KNDI JV would not have been qualified for China listing (same problem BABA and BIDU encountered, causing them to list in the US), but with the success of the NIO listing, my guess is a KNDI JV US listing would now, not be ruled out. However, one of the many “tea leaves” I see steering the JV to a very quick IPO, was the announcement late last year of a new Shanghai-based NASDAQ type Stock Exchange, whose big difference was eliminating the three-year earnings requirement. This exchange is expected to start trading as early as this quarter. Since, both Hu and Li are “innovators” I believe it is quite likely grabbing an early listing on a new tech-oriented exchange might just be their “cup of tea”.
A couple of months prior to the above IPO announcement, Chairman Founder of both KNDI and the KNDI JV, Hu Xiaoming, had just been awarded the 2014 Green Car Innovator of the Year award -- something that would go over very well at a future IPO roadshow.
Note, the desire to bring the JV public was also disclosed in KNDI, Q1, 2015 10Q.
From the KNDI Q1 2015 10Q pg. 56
KNDI Nov. 9 Q3 2016 Conference Call
“…Second, the process of preparing the JV Company to enter into capital markets at the appropriate time and with a strong valuation is on the track as planned…”
“…In addition, we will enhance cooperation with Geely Automobile Holdings Ltd. (“Geely”). After Geely acquired 50% equity of JV Company, we plan to further restructure the JV Company. At the same time, as mentioned above, we continuously work on how to get the JV Company into the capital market, and we expect there will be a good outcome. If this plan can be executed smoothly, the JV Company will obtain a big development capital and larger space, which will benefit Kandi with good investment return and eventually benefit Kandi’s shareholders…”
“…There will be a lot of benefits. For example, if the JV Company is going to have any partnership with an A-share listed company, then the JV company is going to have access to the China capital market and resources and opportunities needed to become the Chinese leading EV company. So, there could be a lot of benefits, just to give you an example…”
“…The process of preparing the JV company to enter into the capital markets is on track as planned. Having its own license approval will definitely be a plus, but this won’t affect the JV company’s progress. I’d like to make a note that IPO won’t be the only approach for the JV company to enter into the capital markets. We’ll also configure a more efficient way to maximize the JV company’s valuation…”
In this above CC, Chairman Hu was evidently in some sort of active discussion at that time to bring the JV public. The first two quotes you see above was part of his opening statement. The last two were answers to shareholder questions. This is the first we heard of a possible fast track to going public by partnering up with an A-shares listed China company. This is what they call in China, a “back-door” listing, similar to a reverse merger in the US, but likely with a commensurate stock offering. And in China, it is quite common for top-notch young companies to undertake due to the “three years earnings restriction” I discussed above. Last year, China’s largest State Owned Automaker, BAIC, brought its NEV subsidiary, last year’s leader in pure EVs, public using this technique. Obviously, with the specific mention of Geely Holdings, Li Shufu must have been totally on board with the JV going public.
KNDI May 10, 2017, Q1 2017 Conference Call pg. 5
March 16, 2018, YE 17 Conference Call. Pg, 16
In Conclusion: In spite of ten years of abuse KNDI Founder/Chairman Hu has had to deal with as a public company, abuse mainly brought by short sellers who either authored or paid others to publish no less than 30 attack articles against KNDI. (Attack articles mainly during the “Chinaphobia” years of 2011 to 2014 against all US-traded China stock) Most were attacking Chairman Hu personally with no evidence of wrongdoing, but in one instance, even brought his Mother in China into the article by posting a picture of her condo! It is great to see Chairman Hu is still ready to re-enter the public company arena with his “second child” the KNDI JV, as can be easily seen by his past CC comments.
Up until the September NIO NYSE IPO, I would say Hu’s focus has been exclusively on a China listing. Knowing Hu’s personal feeling that the KNDI JV, is already several times the Company NIO is, and he sees that NIO was so well received as an IPO, I would not bet against him choosing another US listing for the KNDI JV. However with the recent announcement of the new Shanghai NASDAQ type exchange; to be one of the first to list on that exchange would also excite he and likely Li Shufu. While I do personally know Chairman Hu about as well as any Westerner based on half a dozen stateside visits and two visits with him and KNDI in China, I have never met Li Shufu. However, I have spent hundreds of hours researching the man and could not be more impressed with what he has accomplished starting with nothing.
A few final thoughts. Clearly, from Chairman Hu’s comments on several past Conference Calls and past discussions I had with him on past visits ─ the question is no longer if the KNDI JV will be brought public, only when. It is my opinion that the timing will have nothing to do with how many EVs are sold over the next few months. If you read my prior report, you would know that KNDI JV’s less than aggressive posture on sales right now has nothing to do with demand. It has to do with Government subsidy “slow pay” to all EV makers. In that article, I provided a link to a consumer-driven China website where anyone can select any China vehicle and compare it to any other China vehicle and consumer sentiment on each vehicle shows up. In KNDI JVs case, the EX3 mini SUV is ranked in the 92nd percentile against all in its class and the K27, a slightly smaller SUV is ranked in the amazing 99th percentile. Here is a link comparing KNDI’s EX3 with the NIO ES8. While the EX3 shows the 92 percentile, the NIO shows it ranks in the 76th percentile against its class. (This site is interactive so it changes all the time and you can compare any individual China EV against any other)
It is also my opinion that the over $300 million owed the KNDI JV (and all other EV Makers) going back to Q3 2015, will finally start being paid in the next month or two. If I am wrong about the timeliness of the payment, then all the more reason the Private Equity first step will happen sooner since $200 million will make a lot of cars, a win for KNDI shareholders. If I am right and they also get the payment, a Double Win for KNDI holders.
In a recent quarterly Conference Call, Chairman Hu was asked to reconfirm his earlier target of 200,000 EV sales in 2020. For those who know how conservative Hu is, it was a bold statement. However, he did confirm this 200,000 unit target for 2020 as you can see below. Even if the JV gets paid the whole $300 million owed in back subsidies over the next few months, there is no way Hu could even get close to reaching 200,000 units in 2020 without a significant KNDI JV financing or two. Just more evidence a KNDI JV financing is soon to come.
From Aug 9, 2018 Investors Conference Call, Page 18
“…One last quick question – with a totally new fleet of Evs, does Mr. Hu still have his target for 2020 back on track from maybe 200,000 units, as he said in the March conference call this past year, as a target?
Achieving 200,000 Evs still is our goal. We will work hard towards that goal; meanwhile, we will also adjust our sales plan according to the market condition each year. We will try our best to regain Kandi’s leading position in the EV industry in China. This determination and goal are unchanged.”
One last reminder for KNDI’s own value: Should the KNDI JV reach it 2020 target of 200,000 EVs sold, it would generate over $3.5 Billion in JV revenues and strong profits. KNDI as an OEM sells the JV all key components to include all of the fleet EV battery packs, Battery Management Systems, EV motors, EV AC units, and some body parts. From sales to the JV alone, KNDI would generate close to $2 Billion in sales revenues. Profits from these sales and revenues as well as profits from its other units will be further massively increased by the required consolidation of its percentage share of the KNDI JV net income.
As in the case of the release of most of my articles and the KNDI Announcements, I would expect the larger “buried” short sellers will attack the stock to give the appearance that my report or KNDI announcement is not worth reading. IMO, this article is particularly troublesome for a short for he knows in his mind if I am right, we are not talking about the stock going from $6-8 and then drift back down. In this case, once it starts, a move to the $20 level is where the stock needs to go.
Authors Disclosure: I am long both KNDI stock and KNDI Publically traded Call Options.
If you are not seeing hyperlinks throughout this article, it is likely because you are reading it on Yahoo Finance who for some reason Yahoo has been dropping all links which in this article is particularly critical. However, just below, you should see one link that takes you to the original portal this article was released on, Harvest Investors. Click on that link and you should get the article with all back-up links.