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.
Abstract: Mid December, I published an article Titled: “Based on China EV Maker NIO’s US IPO Pricing Model, — Here Is A Documented Case For The Upcoming Kandi-Geely JV Public Offering To Take Partner Kandi Technologies (KNDI) Stock To At Least $24 in 2019” In that article, I predicted that Nasdaq Listed Kandi Technologies (KNDI), 50% owner of Kandi Electric Vehicles Group Co., Ltd. (KNDI JV) co-owned with Geely Holdings (GH), wholly owned by China’s top auto-industrialist and 9th wealthiest man, Li Shufu would likely end its three year wait to receive a rare China OEM Manufacturing license as soon as years end. If and when that happened, I predicted the triggering of a number of events that would lead to a KNDI JV IPO by year-end 2019 that would require 50% JV partner KNDI’s own US-traded shares reach a share price several multiples of the $4.14 price trading at that time. As it turned out, while not quite making it by year-end, that critical event did happen and was announced by KNDI on January 9th. Regrettably, the confusing headline, “Kandi Pure Electric Vehicle Project Received Approval” and even the text body, obscured the real essence of likely the most significant KNDI event since the signing of the Kandi-Geely JV in 2013.
With this award, it was my initial intention to publish a follow-up article detailing upcoming expectations on the path to the now all but certain KNDI JV IPO for later this year; however with all of the recent substantial, unexpected events publically reported by the company in just the past month, that article would have grown much too large. Instead, I have elected to first publish this interim article basically only covering the significance of these recent announcements and also clarifying financial misconceptions created by the Kandi JV affiliation. Misconceptions that are the likely cause of at least a 75% disconnect between KNDI’s trading price, and real-world China EV company valuation. Not a day goes by when I am not asked, “KNDI should be a multi-billion dollar company, what is that is keeping away normally intelligent investors”. In my follow-up article next week, I will give specific, unimpeachable evidence, that paired with its 50% JV new status as a licensed China EV OEM, will force the issue easily surpassing my December prognostication of a $24 KNDI. But for now, in this report, I am going to explain and answer in depth like never before the key points and questions short-sellers and even a lot of intelligent investors claim are the reasons they believe KNDI is not a good investment. If you are one of these “doubters”, it cost you nothing to read this but time. So in a year or so, with KNDI stock up four or fivefold, you will have no one to blame but yourself for missing the opportunity.
Let’s start by dealing with the confusion caused by the misconceptions mentioned in the abstract, then follow with each PR and their significance closing comments. 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.
Confusion Between KNDI and the KNDI JV
Aside from being a 50% owner of the JV, KNDI does have its own business lines which exclusively generates all of its revenues. KNDI is a licensed battery supplier, an OEM for EV Battery Management Systems, EV motors, EV Air Conditioners, and a myriad of other smaller OEM parts. Prior to 2018, effectively all parts sales were exclusive to the KNDI JV. With the vertical integration acquisition of Jinhua An Kao Power Technology Co., Ltd., Jinhua An Kao, a company that has designed a unique system of pure electric car battery replacement technologies that is in demand outside of the JV contributed some $10 million for the first three quarters to KNDI revenues. Additionally, with the acquisition of SCAutosports, Ltd. (SCA) A Dallas TX-based Distributor of Off-Road Recreational Vehicles late Q2, 2018, an additional $4 million in outside revenues were generated in its first quarter on board (Q3 18). SCA is also taking the lead Distributor position bringing KNDI JV EVs to North America, with first sales likely in Q1 2019. As of Q3 2018 10Q filings, the percentage of KNDI revenues derived from selling parts to the Kandi JV has dropped to 61% from more than 90% just two years ago.
Now Let’s Look at the KNDI JV and its Effect on KNDI
Erratic JV Sales: Due to changes discussed in depth later in this report, a complete KNDI Fleet replacement (4 EVs) to higher range EVs became required by new PRC rules in 2018 had to be done. All the EVs were approved for sale by the controlling authority, China Ministry of Industry and Information Technology (MIIT) in Q3. KNDI JV sales for the 3d Quarter of 2018 which include liquidating some older outdated units were only 1,505, generating Kandi JV revenues of only $19.9 million and a loss of $5.9 million. Conversely, thanks to its expanding diversification, KNDI revenues, which DO NOT include any revenues from the JV Sales, only parts sales and services, was almost double the JV sales revenues with $38 million. A loss of $6.5 million (GAAP) and $5.1 million non-GAAP was reported which included loss contributions of $2.95 Million from the JV and an extraordinary $5.7 million R&D expense. Add these back and KNDI would have been nicely profitable.
For the nine months of 2018, KNDI JV reported total EV sales of 6,599 EV units, revenues of $73.2 million and a net loss of $87,000. KNDI had Gross Revenues of $62.7 million and net loss of $1.4 million GAAP which included $7.9 million R & D expense and $43,000 from the JV loss.
While neither KNDI or the JV, report monthly sales, the China Media does attempt to report monthly sales which, at least historically in KNDI’s case, are wrong about 40% of the time. For example, China Media reported zero sales in Q1 for the KNDI JV leaving out the 3,295 actually reported by the Company in its Q1 Earnings release and SEC filings. Even at the end of Q3, through eleven months, China Media is reporting total KNDI JV sales of only 7139. Initially, China Media reported December sales of only 876, claiming EX3 sales in December of only 816 which when reported, cause significant selling in the stock. Had that number been accurate, along with the wrong listing of no EVs in Q1, KNDI JV sales would have only been a reported 8,015 which would have been the worst year in the last five. HOWEVER, A week later, a revised number of December 2,393 EX3 sales was published. Adding back the omitted Q1 numbers and using the more realistic later supplied 2,453 December Sales, brings Q4 unit sales up to 6,288 and full year to KNDI’s second best with 12,877.
Based on these numbers and the mix of higher priced EVs in Q4, the JV should report Q4 revenues up more than five-fold over Q3, $19.9 million to approximately $102 million. Since the KNDI JV is currently private and KNDI cannot consolidate any of the KNDI JV numbers except bottom line, only a small condensed balance sheet and income statement are allowed as footnotes to KNDI’s 10K and 10Q filings. Bringing the JV public in an IPO will further dilute KNDI’s 50% ownership so KNDI will still not be allowed to consolidate the JV numbers, but it will then require the KNDI JV to publically file its own numbers making valuations of both companies much more transparent.
A much larger influence on getting an accurate financial picture of KNDI independently is to understand the number of financial sacrifices KNDI makes for the overall good of the JV.
For example, the KNDI JV currently has three manufacturing facilities with annual capacities of 100,000 EV units each. Two Facilities were built in the past five years, one by the KNDI JV, in Rugao, Jiangsu Province and the other built by KNDI in Changxing, Zhejiang Province. The latter was contributed to the JV as part of its original capital contribution in 2014. A fourth 100,000 capacity facility, much more costly at over $300 million and upgraded, has recently been built and completed outside the JV by KNDI itself in Haikou, Hainan Province. The reason KNDI and not the JV built this facility is that it was built under very attractive terms negotiated by KNDI prior to the start of the JV, so the decision was made that KNDI would build it and once completed, sell it to the JV. This sale transaction is likely to be announced and completed in the very near future. So you can see in just this one instance of many, that KNDI has been carrying a lot of expenses and debt on its books that skew the appearance of its own numbers to the negative, at least temporarily. This ties into the Jan. 4 PR of KNDI receiving $14.5 million and will be discussed more in depth later in this report in the PR section.
More examples: Much has been said in the World media of China providing very attractive EV subsidies for the past eight years. However, until recently what has been covered up, is that China has been very slow in paying subsidies due. For this reason, KNDI JV sales have been very erratic. As one of only two contending pure EV makers (as compared to Internal Combustion automakers (ICE)) KNDI JV has had to suffer a seemingly never-ending change in subsidy requirements beginning in 2016. The Business Model KNDI developed was simple and straightforward. It would make small inexpensive EVs solely for city use in a Carshare environment with KNDI’s patented Quick Battery Exchange feature to alleviate EV range anxiety. It made no sense to Founder Chairman Hu, to make a city car with a speed of over 100km and range of over 120km when exceeding any of those numbers in a congested China city in a day would be legally almost impossible. With EVs and their heavy expensive batteries, once his core numbers have to be increased, costs, both initial and operationally go up exponentially.
Through 2015, Hu’s argument and the China government were in agreement so KNDI’s EVs were entitled to a significant subsidy. However, in 2015, KNDI JV made and sold over 24,200 EVs in China putting this unknown “start-up” in the #1 slot for all China pure EV makers. This shocking event caused an uproar among ICE/EV carmakers who were reluctantly being pushed into making EVs, so together, an incredible lobbying effort was made to try to snuff out, this “upstart” by getting the Government to start raising subsidy requirements. These new requirements, which went into effect in 2016 were not even announced until January of 2016 mandating a range of at least 150km. In KNDI’s case, it required KNDI JV to stop production completely for a whole quarter with no sales as they upgraded all of their EVs. Because of the compact nature of their cars, this was not simply a matter of a bigger battery but actual body modifications were also required.
Having met the new requirements, sales began again, however, by Dec. 2016, the word was out that another substantial range increase was going to be required for 2017. It happened and the range requirement went up to 200+km. More cost and time required, so more shutdowns for upgrades. And, you guessed it. In 2018, in order to get a decent subsidy, the government increased it again to over 300km range. With this latest revelation, Chairman Hu, decided in early 2018, to completely revamp the KNDI fleet and come out with all new EVs which would reach the 300km range. In fact, KNDI JVs new flagship EV, the EX3 has a high-end version that gets over 350km, or more than a base TSLA S model. But that wasn’t enough to make the ICE makers happy.
Until 2017, almost all of KNDI JV EVs were being put into CarShare service, a by the hour city rental service, like AVIS’s ZipCar or Cars2Go, but much larger. KNDI JV EVs were used exclusively through China's Nationwide MicroBus program managed by ZZY, with over 40,000 KNDI EVs in service. So just as this program was seriously ramping up, here comes another new rule, ─any EVs that were going to be used in a rental or lease program would now have to be driven at least 20,000 km before they could even be submitted for a subsidy payment. In large “traffic-jammed” cities in China of which MicroBus was now in almost 20, the average EV might be lucky to do 50km per day.
Where are the Subsidy Payments?
These new requirements were all stupid for City EVs but bad as it was, in mid-2016, the PRC also changed subsidy controlling authorities which caused a freeze in subsidy payments, a freeze that is STILL IN EFFECT. And to make matters even worse, while this order came down in early 2016, it was made retroactive to July 1, 2015! That’s right, KNDI JV, and all pure EV makers, have not received subsidy payments since the June 2015 cut-off. As bad as this sounds, what makes matters worse is the way the new subsidy rules work. In order to be eligible for the subsidy payment, the automaker must discount the EV for the full amount of the pending subsidy at the time of sale and only then put in a claim for payback! In KNDI’s case, on average KNDI JV has had to effectively “subsidize the subsidy” to the tune of about $7,000 per EV. Let's look at a KNDI annual sales graph.
Since entering the EV arena as China’s first legitimate pure EV only start-up in 2010, as you can see, almost 80,000 KNDI EVs have been made and sold. In 2016, KNDI reported full-year EV sales of 10,148. In 2017 it reported 11,487 and if we can assume the latest China reported Dec number of 2,392 is in the ballpark, 2018's sales of 12,887 bring the total KNDI sales for the last three years to 34,522. In the second half of 2015, its banner year of total sales of 24,220, KNDI reported total sales of 17,250 units. The last subsidy check KNDI reported receiving was for H1 2015.
This brings the total sales from H2, 2015 to Dec. 2018 to 51,772 EVs THAT KNDI JV HAS SOLD AND IS STILL WAITING FOR A SUBSIDY CHECK FROM THOSE SALES. (Meaning, KNDI JV IS NOW OWED MORE THAN $350 MILLION IN SUBSIDIES. 20% more that KNDI's ridiculous market cap).
At first, I am sure all those ICE makers where “high-fiving” each other in having successfully lobbied rules that by any normal metric should have wiped out all pure EV makers, and with a lesser leader, particularly KNDI since it was the sales leader of the pure EV makers. There is no question, this has far more serious effects on pure EV makers than the vast majority of EV makers who also make ICE cars. For the past three years, gas-powered autos have had a major boom in sales in China. The ICE makers have had a record run. In 2010, China sold only a total of 10.3 million cars. From 2015 to 2018, China has sold a total of 97 million cars of which some 2% have been EVs. So for an ICE maker who is making a fortune selling ICE cars, to come up with the cash to “subsidize” its EV sales is no big thing. Particularly in the last few years where China has been collecting a CAFÉ Carbon tax from its ICE makers whose fleet average is less than the cutoff. As of now, the carbon credits are still not transferable, so KNDI JV as a pure EV maker has a lot of credits going to waste. But, ICE makers can use their own EV credits to lower their tax. Supposedly, sometime this year, Carbon Credit trading is to begin in China which will finally give KNDI an edge since it will not have any tax itself and will be able to sell all of its credits.
Up until recently, China Media has had no problem “hyping” EV subsidies and the fact they would soon be ending in 2020. But not a word against the Government for not paying. Certainly, if we were talking about the US Government holding back payments for several years, the media and damaged companies would be all over it. But this is China, and embarrassing the Government by bringing this up just wasn’t done. That is until one reporter back in November broke this story. (Her fate we do not know).
If you read the whole article from the capture below, you will see that for the first time, there is media confirmation that this “slow-pay” is affecting the whole EV Industry with delays going back to 2015. While likely a disappointment to KNDI short sellers who like to whisper that KNDI Management has been lying about the subsidies owed and was never going to get the past subsidies, it is at least somewhat comforting to know that even giant, State Owned Enterprise and largest ICE automaker BAIC and its New Energy Division is starting to feel the subsidy hold-back pain as exhibited by its Deputy GM’s lip-slip to the reporter. He is talking about more than a Billion dollars owed BAIC.
As I mentioned above, next year, 2020, should be the last year of any subsidy payments by the National Government. Rest assured, that day cannot come too soon for Mr. Hu and KNDI JV. Finally, both Pure EV Makers only, and ICE/EV Makers for once will have to compete on a level playing field. Rest assured, after what KNDI JV has had to go through not only surviving but doing it well, no one will be able to compete with KNDI EV in its class. Plus as mentioned above, KNDI JV as a pure EV maker will also have a lot of carbon credits to sell, assuming that the program is in full effect.
But what should be most amazing is in spite of having to continuously come up with cash, while KNDI has had a dozen Insider buys and no sales in the last couple of years, it has had no equity-related financing since 2014 when it raised some $150 million with the stock in the upper teens.
Another Trick Mr. Hu Had Up His Sleeve
When I wrote the last article, I was going to add one more speculation, but the article had grown so long, I decided to pass it to my next article. I have visited the Company and Chairman Hu in China twice. As mentioned above, both trips it became very clear that Hu was dedicated to one thing ─bring a low priced four-wheeled passenger transportation system to the 800,000,000 city dwellers in China. Conceptualizing and then implementing the Worlds largest CarShare, with over 40,000 vehicles was just the tip of the iceberg to Hu. In the existing Microbus program, three years ago, the program manager, ZZY, worked initially with UBER ride-hailing, but when bought out by Didi Chuxing. they worked on a program where Didi driver, rather than having to buy his EV, could just “hang out” at one of the CarShare locations, (which are only a few KM apart) and wait for a call in his area. One he got the call, he would jump into a KNDI K17 four-door, start the carshare rental meter which was only around $3.00 an hour, handle the Didi fare, then stop the rental meter by dropping the car at the nearest CarShare location.
At the time I wrote that last article, I had told several investors of my feeling that Mr. Hu was never going to give up on KNDI JV being the EV provider for the inner-city masses. And why would he? When KNDI JV provides EVs for CarShare or Ride Hailing, there is a built-in loyalty buyer for another car after the first car is taken out of service in a few years. The only reason Hu had basically stopped accelerating the program last year was the stupid rule mentioned above, that required rental or leasing sales to delay even applying for the subsidy for 20,000 km then having to wait a few years to get it. With the finish line for subsidies now less than two years away, it would make more sense to use the cash savings to build a consumer sales business as well and keep his powder dry until next year when subsidies drop again to an almost insignificant level.
Well, to my surprise, two weeks into the New Year, Bloomberg published an interview article with Chairman Hu where he disclosed that KNDI JV soon to be entering a 5-year agreement to provide 300,000 KNDI EVs for a new Government Approved Ride-Hailing program in China. A few days later, KNDI made its own announcement with more details on the program. More on this further in the article.
So, is it any wonder why KNDI and the KNDI JV have had such an erratic sales record? Not knowing when they are going to get their huge subsidy payments, only that they know that every time they sell an EV, KNDI JV is out of pocket another $7000. But luckily, China banks consider Government subsidy receivables as “blue-chip” and have no problem making low-interest loans against them.
How this affects KNDI and its balance sheet directly, is that KNDI has also had to individually carry some of the load. The vast majority of the KNDI debt are loans it had to make to buy raw materials to manufacture OEM parts sold to the JV who in turn have not been paying in cash, but instead accruing Accounts Payable to KNDI. (A recent PR which involves this subject will be discussed below) While this might look bad to investors who are ignorant of the facts I have been saying here, theoretically, with the whole KNDI JV as collateral, and one of China’s wealthiest men as the sole owner of the other half of the JV, while costing KNDI some interest, there really is only a minuscule risk to that debt. In fact, if one looks at the condensed JV balance sheet In the latest KNDI filing, one would see that the JV ended the quarter with positive Working Capital of over $140 million. This likely thanks to a recent $183 million infusion split 50-50 between KNDI and Li Shufu. KNDI made their half by giving back $81.5 million in KNDI JV receivables, and Li Shufu put in his half in cash.
As Hu said in prior conference calls, when the money does start coming in, it will be in tranches. Based on the rising tide of complaints by all EV companies as seen in the image above, who are equally suffering the subsidy payment delays, I would guess a 40% chance KNDI JV gets at least a $100 million payment by the end of Q1, or 80% chance by the end of H1. And an additional 40% chance for a total of $200 million by year-end.
Let’s look at the recent tide of Press Releases and a Couple of High Profile Articles
In the first 34 days of this year, KNDI has already put out more “breaking news” press releases than in the whole second half of 2018. No one can argue that each is of considerable substance. What is pleasantly comforting to me, is that I was only expecting two of the six. The first two which I forewarned investors in my last article were soon coming. In addition to the Company PR’s, both Bloomberg and Investors Business Daily published separate articles each having to do with KNDI being the First China EV Company to launch their EV sales in the US.
Recent KNDI Press Releases
Kandi Technologies Reports the Receipt of RMB 100 Million (USD 14.5 Million) in Third Subsidy for R&D Expenditures 2019-01-02
This was the final payment, pursuant to an agreement with the Hainan Provincial Government, where Kandi Hainan was granted a total of RMB 300 million (approximately USD 43.5 million*) in grant payments to support its research and development expenditures for a new electric vehicle ("EV") model. To date, Kandi Hainan has now received the entire subsidy totaling RMB 300 million (approximately USD 43.5 million). This money was paid directly to KNDI, not the JV, As mentioned above, it was KNDI, not the JV, that built the $300 million 100,000 capacity Hainan Facility. But in addition to building the Facility, the Hainan Government awarded KNDI an RMB 300 million separate Grant to design, build and manufacture a special five-passenger EV designated the K23, for the Tropical Island Province of Hainan. The final payment was to be made once all approvals by Government, Federal, State and local have approved the car for sale and production begins. The payment was actually made to KNDI the last day of December, so anticipate that this $14.5 million will be reflected on KNDI’s 2018 10K Balance Sheet and Income Statement. Without a doubt, this was a “real feather in KNDI’s cap” to be chosen and individually paid over even the KNDI JV to undertake this “start to finish” new EV.
Kandi Pure Electric Vehicle Project Received Approval 2019-01-09
This regrettably very confusing announcement, reports what is probably the second most important KNDI event ever, second only to the formation of the Kandi-Geely Joint Venture. I say “confusing” because admittedly, even I had to read that announcement twice since nowhere in it was the word license even mentioned. Were it not for the inclusion of this one line in the original announcement, which I knew dealt with only one issue, that of getting a China EV OEM license I would have been totally confused what the announcement was about. “ The approval was granted pursuant to the provisions of Announcement No.22 - the "Regulations on the Administration of Investment in the Automobile Industry" ("Auto Regulations") published on December 18, 2018 by the National Development and Reform Commission (the "NDRC")” Additional confirmation was in hundreds of China Media articles like the one below, all praising KNDI JV snatching one of the last licenses.
KNDI IR claims the way it was described in the PR was the translated wording that KNDI JV received from the NDRC. So, for whatever reason, that is the way Chairman Hu wanted the PR worded. Regrettably, a huge news opportunity lost, but this event is so big, that whatever risk might have been conjured up by short-sellers and other obstructionists, are now permanently gone and the real company value likely doubled with the news.
This license is, in fact, the “Holy Grail” of all China EV maker “Wanna-bees”. A China OEM License does not only allow a company to make, register and sell EVs for itself by itself but also creates a new revenue source in being able to offer Private Label services. These services can be from as little as “borrowing the license” as KNDI JV who always made its own EVs in its own plants but had to borrow Geely's Auto license until it got its own; to full service where all steps of production are done by a licensed OEM similar to NIO who uses JAC Auto to make and licenses their complete EV after which NIO puts its own brand label on the car.
If you read my last article, you would know, I gave a heads up, should KNDI JV achieve this highest honor, it would be the “lynchpin” unlocking a full bore effort to bring the KNDI JV public. I suggested an IPO valuation around $2 Billion Market cap with a 20% IPO raise which would require KNDI shares, based on arbitrage value of its remaining 40% ownership trade at a minimum of $900 million market cap or around $17 a share. Additionally, add $3+ per share for the $160 million likely sales of its own legacy 400 acre Jinhua China facility as mentioned in a recent SEC filing, and at least another $4 for the rest of its business and you get a logical KNDI Value of $24 a share. That number is far too low now.
However, when I wrote that article, I was under the assumption that while KNDI would get the “next” license which it did, others makers would soon follow under similar requirements. In actuality, this assumption could not have been more wrong. Under the old rules which expired two days after KNDI was awarded its license, there were no minimum numbers of EVs that had to be built under another’s OEM license. Under the new rules, before even being allowed to apply, the applicant must have successfully built and sold a minimum of 30,000 EVs in the trailing two calendar years. Under the old rules, there was no immediate requirement to build or buy a manufacturing plant before applying for the license. Under the new rules, an applicant must have a plant with a minimum annual capacity of 100,000 units. In fact of the total of 17 licenses that have now been issued all under the old rules, other than KNDI JV with four facilities, (more than any of the other 16), five still do not have an operational facility and could be subject soon to losing their license. Without considering how long it will take after applying for the license, just reaching the minimum levels to apply will likely take both NIO and TSLA at least two years before they can even apply.
So, it doesn’t take a lot of imagination after seeing the new rules, to envision KNDI with its four facilities and 400,000 capacity, to now be a target OEM for a number of the startups who must now sign up with someone in order to reach their 30,000 unit first target. But most importantly, at least for the next couple of years, little if any new competition will be coming into the China EV market under the much more stringent rules. Unquestionably, this is a giant leap for KNDI and the JV.
Kandi Signs Framework Agreement with Zhejiang Ruibo to Serve as the Primary Vehicle Provider of 300,000 Electric Vehicles Within 5 Years 2019-01-22
As mentioned above, here is a program, if and when completed, could end up generating over $10 Billion in sales for the KNDI JV over the five years. A little side story here. When I visited the company in late 2013, right after the launch of the CarShare program, one-day having lunch sitting next to Mr. Hu, I asked him what he expected the lifecycle to be on a CarShare EV. While sipping his soup, he put up three fingers and from my translator, he had spoken “three years and then we recycle”. Puzzled by his answer, I responded back. “You mean to sell the car, about how much do you think it would be worth?” His response was simply “no we will recycle, melt down the car and use the materials to build new cars”. Quite a stunning comment left without further clarification. Well, to my knowledge the existing CarShare was not “melting down” its EVs so I almost forgot about this discourse. That is, until this PR was published, and I saw this line about the new Ride Hailing car rules. “Additionally, the vehicles must be totaled after a designated period of use, which means that the used vehicles then become less valuable.” Makes one wonder if Mr. Hu might have come up with the recycling strategy for the whole government.
The reason I used $10 billion as the estimate, is not because I expect the EV price to reach $30,000. At today’s price, the top of the line EX3 dealer price is around $19,000. If KNDI JV provides 300,000 EVs over five years to the program, the early EVs would have passed their lifecycle and be replaced so 300,000 would be more like 500,000. From what I understand, this all EV Program will mostly include KNDI’s four-door K27. The second from the top of the line, and will be mainly for a budget type of Ride-hailing. But to show KNDI JV does not discriminate, a few days later, KNDI announced a similar agreement, but for the very much upscale, White Glove chauffer Ride-Hailing program with currently $3 billion capped China Unicorn Cao Cao Zhuanche who currently uses only top of the line Geely and Volvo EVs.
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 2019-01-29
Youxing, the parent company of Cao Cao, both are Companies started by Li Shufu in his Geely Holdings Company, KNDI's 50% JV partner. To date, it has some 27,000 top of the line Geely and Volvo EVs in the service and it is rated seventh in size for Ride-hailing. It appears Li has set this company up to be an independent IPO. To date, it appears it had 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. Point of interest. The CEO of Cao Cao, Liu Jinliang was CEO of the KNDI JV for a few years before Li tapped him for his current position with Cao Cao. Researching him back at that time, I remember that he has been Li Shufu "go to" guy for going on thirty years. BTW, if Li Shufu can raise almost a half billion for his two-year-old Cao Cao startup capping it at $3 Billion, imagine what he is going to do with his KNDI JV where he has written personal checks for over $200 mill for his 50%.
My personal feeling about the value of this deal is “top notch” for a couple of reasons. For one, yes, it is incestuous. But one thing you can bet on, this $60 million deal is about as real as anyone could ask for. Li is planning on bringing Youxing, Cao Cao public in the next year or so as you can see by its “Unicorn” status. There is no way he would risk screwing up the IPO by even announcing, let alone putting inferior EVs, particularly incestuous EVs in with his top of the line Geely and Volvo EVs.
Kandi Announces Appointments of Interim Chief Financial Officer and Vice President of Finance 2019-02-01
This Announcement, while IMO, poorly executed, was long overdue and very good news for KNDI shareholders. I say “poorly executed”, because of timing and some wording. Over a short time, the outgoing CFO was in office, I have had one personal phone conversation with him and maybe half a dozen e-mails. The phone call was early and seemed fine, but once in office for a while, getting simple answers from him for non-inside information seemed to be a fool’s errand. I am talking about getting clarification answers from public disclosures by the Company. If I were lucky enough to even get a response, it was usually either a “yes”, “no” or “we will cover that in the next filing”. It is a good thing that KNDI has not been out soliciting analyst, they would not put up with those type of responses.
However, in fairness to Bing Mei, I recently discovered he has had his mind on other things, mainly medical which has caused him to spend most of his time with his family in the US for the past year. I can image Mr. Hu’s frustration of trying to get out the 10K, while his CFO was 12 time zones away. The good news is Bing appears to have been primarily an English Speaking Figurehead CFO for the Kandi Technologies Group holding company. The Interim CFO Zhou, who has an excellent resume herself, was the original KNDI CFO but replaced a few years ago due to her not speaking any English, has non-stop been the “working” CFO of all the KNDI Subsidiaries. So there should be no worry that financials will as always be filed on time as per SEC rules.
Now for the really good news. IMO, the appointment of a VP Finance, English speaking, Wang Yuanyao who, though only 36 years old, yet has such an amazing resume is a big win for KNDI. That from being a KPMG Auditor, US Sarbanes-Oxley expert, to a US-based NYSE listed Owings Corning executive, to a Chief Investment Officer, Director, and CFO for various subsidiaries of Fosun Group, one of China’s largest Conglomerates. Again, under the “poorly executed” subject, IMO, this appointment should have been made with a separate press release. I assume we will all meet Ms. Wang on the next KNDI CC.
Kandi Technologies Announces the Receipt of Extend Supply Chain Finance Program of RMB 1.6 Billion (USD 237.2 Million) 2019-02-04
Under the category of “You Can’t Make This Stuff Up”, NIO with a $8B Market Cap, no OEM license, no owned manufacturing facilities, and a billion dollar September financing in the bank sold only 2,575 more EVs in Q4,with 8,860 units sold than KNDI's 6,288 Q4 units sold, announces it is going to do a dilutive Convertible note and its stock jumps 15% since the announcement. KNDI, with only a $280 million Market Cap, an OEM license, Four owned and self-operated plants, on the other hand, announces a $237 million, low-interest non-dilutive Government loan and its stock drops over 10%.
This announcement is really big for KNDI, more than the KNDI JV. As mentioned above, historically, KNDI would be called upon by the JV to “take paper” instead of cash for parts it sells to the JV. At the peak, JV debt to KNDI reached well over $200 million. KNDI, of course, would have to borrow the money to buy the raw materials and pay interest on those loans. Now, with this almost quarter of a billion dollar supply chain credit facility awarded the KNDI JV, the JV will be able to use this facility to pay KNDI and other supply chain suppliers cash for the parts they provide upon receipt of the goods. A Big win for KNDI. But once again, like the Hainan $44 million grant to KNDI specifically, a second Province where KNDI JV has a plant is really opening up the checkbook. Shows the respect China local Governments have for KNDI and how stupid cheap KNDI’s stock price has become.
One last point from this article ─Get serious about this quote from KNDI Chairman Hu Mr. Hu Xiaoming, Chairman and Chief Executive Officer of Kandi, commented, "the JV Company has garnered significant attention and support from the government. After receiving the manufacturing license, there has been an increase of support; I believe this positive relationship will continue on into the future. The management team of the JV company views 2019 as an exciting year for renewed interest in and growth of Kandi's pure electric vehicles, and we anticipate a productive year full of achievements and milestones for the Company.".
US News Media Articles
Chinese Maker of $20,000 Mini Electric Cars Plans to Crack the U.S.
Basically, a very good article clearly recognizing KNDI as the China first-mover bringing passenger EVs to the US. Since KNDI’s wholly owned KNDI JV EV Distributor, SCAutosports, is in Dallas, TX just a couple of hundred miles north of me in Houston, as mentioned in my last report, I have visited the facility. A very impressive active fully packed 300,000 sq. ft. warehouse generating over $1.2 M revenues a month solely from its Off-Road Recreational Vehicles. So I am pretty much up to speed on this project. US EV Sales are expected to begin this quarter with only one or two items left to be resolved. Likey were it not for the Government shutdown, which began just as SCA was about to get its EVs into the DOT VIN Database, everything would have been ready for sales right now. But hopes are still high for the “good to go” by quarters end.
Re. The Bloomberg Article has two significant errors and one major error. The latter likely the reason the stock actually went down the day the article it was published. The significant errors were In this paragraph:
The reporter attributes Mr. Hu with saying the K22 (two-seater) would sell for less than $20,000, well, this is true, but it will actually sell for a lot less, more like $8,000. The top-of-the-line EX3, which after large subsidies in China really is selling for around $14,000; but in the US, will actually sell for under $20,000 after $7,500 US credits and even cheaper after state and local credits are added.
But the big Blooper was this paragraph:
This is totally false. KNDI JV already has a 100,000 capacity Plant put into production in 2017 in Jiangsu province. What the writer was erroneously referring to, was what he read in the recent announcement about KNDI getting its license (see above). Where it stated that KNDI JV “…received an approval notice from Jiangsu Development and Reform Commission regarding Kandi Jiangsu's annual capacity of 50,000 pure electric vehicles project ("EV Project") on January 8, 2019.”
What made this particularly bad for KNDI was not only did he get this totally wrong, but he attributed the comment to Mr. Hu. This error was not surprising due to the poor and confusing way that the original Announcement was written. But this Bloomberg error was particularly problematic at the time since there was so much confusion about the “Licensing” announcement. At that time, the rumor being spread by KNDI short-sellers and detractors was that the potentially and rightfully “blockbuster” announcement about KNDI JV getting the OEM license was not the PR meant to announce the license. This Bloomberg SNAFU all but confirmed to the shorts and their minions that they were right and the rest of knowledgeable investors were wrong.
Admittedly, even I had to read that announcement twice since nowhere in it was the word license even mentioned and were it not for the inclusion the below line in the original announcement, which I know dealt with only one issue, that of getting a China EV OEM license I would have been totally confused what the announcement was about. That line being, “ The approval was granted pursuant to the provisions of Announcement No.22 - the "Regulations on the Administration of Investment in the Automobile Industry" ("Auto Regulations") published on December 18, 2018 by the National Development and Reform Commission (the "NDRC")” KNDI IR claims the way it was described in the PR was the translated wording that KNDI JV received from the NDRC. So, for whatever reason, that is the way Chairman Hu wanted the PR worded.
China's Kandi Will Use These 2 Electric Cars To Launch U.S. Broadside
Investors Business Daily 2019-01-17
While this article also has a few pricing errors, it does not have the Jiangsu error and it has a lot of very good, different information than the Bloomberg Article. I suggest you take a few minutes to read this article as well.
In Conclusion: As I am editing this article, it is the middle of the Chinese New Year. All China stock markets and brokerages are closed so not much chance for any China-based company putting out any news this week since all plants and Government offices are also shut down. While it is very difficult for an average Chinese to buy a NASDAQ listed stock, we have been seeing a marked pickup in early morning KNDI buying out of Asia lately, but not this week. For these reasons, I am not surprised to see the Stock getting taken down today, likely by opportunistic, but foolish short sellers that have no idea what they are going to be coming up against over the next few months. KNDI’s current short is at the high side of a five year 5.5-6.5 million range. But that is what long term target fixation does to both longs and shorts when you are lazy and don’t keep up with changes.
I promised in the Abstract ”. In my follow-up article next week, I will give specific, unimpeachable evidence, that paired with its 50% JV new status as a licensed China EV OEM, will force the issue easily surpassing my December prognostication of a $24 KNDI. You won’t be disappointed.
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 has been dropping all links. 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
Originally Published at: 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.