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Kandi Technologies -With Only A $280 Million Market Cap, When Announced, Can A Surprise $167 Million Cash Windfall For A Forgotten Asset, Trigger An Upside Perfect Storm?

By: Arthur Porcari
Harvest Exchange
June 1, 2018

Kandi Technologies -With Only A $280 Million Market Cap, When Announced, Can A Surprise $167 Million Cash Windfall For A Forgotten Asset, Trigger An Upside Perfect Storm?

ABSTRACT: Based on recently released SEC filings, Kandi Technologies (KNDI) irrespective of the current stock price has apparently made a giant value leap from a $5.50 single digit speculation to a grossly undervalued $15 “Value” stock. How? Add the “surprise” $167 million in the headline, to a $16 million government cash grant, along with a $156 million debt repayment owed KNDI by its 50% owned Kandi Geely joint venture and the total $340 million far exceeds KNDI’s current $280 million market capAdd this to the 4 billion RMB ($626 million-$12/sh) 2017 value appraisal reported in its Q2 17 10Q and you are at the $15/sh level.Until recent 10K and 10Q filings and respective Conference Calls, the $167 million windfall was a total unknown only appearing after the Jinhua local Government proposed buying KNDI owned land use rights to a legacy property from KNDI which is currently carried on its books for under $9 million. The Offer? An amazing “in excess of 1 billion RMB” ($167 million).

On a different notea $16 million Hainan government grant payment will be paid to KNDI on first sale of the new K23 expected by late June. The $156  million balance is short and long term debt owed KNDI by its KNDI-Geely JV. The PRC owes the JV an accumulated $200 million, with a major payment now expected in June.  This latter amount, though solid based on collateral and quality of debtor (PRC Government owes Kandi Geely JV, who owes KNDI), has been considered speculative only re. timing. The payments were held back due to a two year PRC moratorium on all EV subsidy payments to all EV makers. The near term likelihood and size of payments from these various sources to KNDI adds to its extreme current undervaluation

Additionally; KNDI’s 50-50 Kandi Geely JV with its China top 10 wealthiest partner, Li Shufu’s wholly owned Geely Holdings, has completed the replacement and received new certification on its whole new four EV fleet. On average the new EVs have an increased range almost double the old to as much as 300+km.  Also in the SEC filings, is a strong indication the PRC (NDRC) is about to resume issuing special EV licenses after a year’s moratorium, giving KNDI and the JV confidence the prior long awaited government promise of it being “next” could happen any day now.

All the above and more will be explained in detail with confirmation reference links in the body of this article. This windfall could not be timelier based on KNDI’s major events and strong turnaround earnings performance the past two quarters. With all this new info only exposed to what up until now could only be considered a small captive retail shareholder base; paired with a huge reported short position, investors could now see this high beta stock make its tenth repeat of an almost annual 45 day or less, double (see chart at end). But even better, with this much “hard evidence” of massive non-dilutive cash coming, a totally new fleet, and other factors,  KNDI could likely be setting up for the long-awaited upside Perfect Storm envying KNDI’s epic early 2013 six month move from $3.50 to $22.50 on millions of shares a day average volume.

 

Notes: Please excuse the excessive length of this article, but with this turnaround now happening, I felt it was more important to new prospective investors and possibly some institutions to also give some historical background on the Company. I would not expect anyone to read it all during market hours which is the reason I put it out on a Friday for a weekend read.  So be sure to “bookmark” the article so you can read it all at your own leisure over the weekend. Addionally, when I use “KNDI” in the article, I am referring to Kandi the public company, not the Kandi Geely JV. Also, KNDI is the Managing Partner of the JV. KNDI’s Chairman/CEO holds the same positions within the JV as with KNDI and is responsible for all day to day operations

 

On May 11, as mentioned above, China-based NASDAQ-listed Kandi Technologies (KNDI) with a $250 million market cap, reported an unexpected strong Q1 with a year-over-year normally seasonally weak first quarter increase in most financial parameters to include revenues up 95% to $8.5 million vs. $4.3 million, net income of $3.7 million or $0.07 a share positive versus a loss of -$23 million or ($0.51) a share last year. But the biggest surprise came in reported first quarter EV sales of 3,295 units vs. zero last year. I say surprise because neither Kandi JV nor KNDI normally report monthly EV sales, though the China media does attempt to report on all China EV companies and had reported zero sales for the quarter. The stock reacted to the results with an intraday jump of 14% on 1.25 million share volume, more than ten times average volume

Starting with that good Q1 18 earnings report (particularly when paired with its very strong prior YE 17 Q4 of $.11/sh), here are seven more company confirmed positive Perfect “storm warnings”, each when announced, could cause gap openings of $1 to $4 a share. There is even a “heads up” being given by KNDI short-sellers. From an all-time high of over 7 million shares short, the latest reports saw covering to drop the short interest below $5 million to a 4.7 million five year low. (see table further down

Key points to be proven up in this article

  1. Likely $167 million dollar ($3/sh) cash sale by KNDI of its wholly owned Jinhua China Manufacturing Facility to a Government entity.
  2. Expect resumption of payments of $200 million dollar National Government subsidy owed in the next 30 days or less, KNDI owed $156 million of this by the JV.
  3. Completion of its newest $250 million, 100,000 capacity Facility in Haikou, Hainan Province along with Hainan “commissioned” custom EV (K23) opening up a $16 million final Grant payment owed KNDI.
  4. After a one-year Government hiatus on new special EV manufacturing licenses, awards about to commence Kandi/Geely JV notified it would be next
  5. All new four EV fleet each with extended ranges from 200 to 350 km as of June. All old models retired.
  6. 5 Billion RMB ($790 million or $15/sh) current liquidation value reported by the Company.
  7. KNDI JV Partner, Li Shufu, sole owner of Volvo has engaged Goldman, Morgan and Citi to underwrite an IPO for Volvo with pricing expected up to $30 Billion.

Likely $167 million dollar ($3/sh) cash sale by KNDI of its wholly owned Jinhua China Manufacturing Facility to a Government entity

 

KNDI 100% Owned Jinhua, China Facility

While to date still not reported in a press release KNDI did footnote this prospective sale in their year-end 2017 SEC 10-K filing (pg 8) as I have pasted below.  Since  the year end 10k was not filed until after the YE conference call ended, the first public back and forth discussions of this huge cash windfall was in the Q&A of the recent first quarter conference call. Pertinent section from the CC is also copied and pasted and blow

On December 13, 2017,(pg8) Zhang Xuhui, Director of the Jinhua Development Zone (the “Development Zone”) Management Committee along with other two folks visited Hangzhou to discuss with Chairman Hu Xiaomingregarding to the commercialization of Kandi Vehicle’s 400 acres land from the industrial us after acquiring, as well as the company relocation to Jinhua New Energy Industrial Park… …the value of the land around the factory area has been greatly increased since the land became for commercial use after the government’s revised allocation. If the negotiation is reached to an agreement, it is expected that Kandi Vehicles will receive more than RMB 1 billion [$167 million] in cash compensation from the Development Zone.

And here is Chairman Hu responding to my question and commenting on the Jinhua sale on KNDI’s recent Conference Call

(Q1 18 CC Transcript pg. 13)

Arthur Porcari

“...So, let me ask now, hidden in the recent developments of that 10-K, that never mentioned on the call, was the following regarding a possible Kandi land use rights sale to the Jinhua government of Kandi’s—not the JV, but Kandi’s 400 acre old legacy off-road vehicle facility in Jinhua. The quote from the 10-K, “The land around the factory areas has been greatly increased since the land became for commercial use after the government revised allocation. If the negotiations reach to an agreement, it is expected that Kandi Vehicles will receive more than RMB 1 billion in cash compensation from the development zone.

If I’m correct, such a sale would give Kandi—and again not the JV, but Kandi—almost US$160 million in cash for a little used asset which is being carried on the books at less than $10 million. This alone is well over half of Kandi’s total market value. What’s the likelihood—so, taken into my question, what is the likelihood that this will happen, and if it does, would the Company commit to take a portion of this to significantly buy back its grossly undervalued shares

Hu Xiaoming

“Based on the Jinhua government proposal, this land around our Zhejiang factory will be changed for commercial use. Therefore, the government plan of taking the land and factory, and the relocation, looks pretty promising, but as when this happens, how this is going to happen, is totally up to the government and their own schedule. Once we have more details on the government’s plan, we will update the market

In terms of how the Company is going to utilize the compensated money, we will use that for the needs of business development and to maximize our shareholder value, which is always our goal.”

This is the original KNDI legacy facility purchased by KNDI in 2002 for its original off-road recreational vehicles and first gen EV manufacturing, for some $11 million. This property is currently housing the Corporate Headquarters of the company, along with some small continuing production of Electric off road vehicles, battery assembly and R&D, with most of the facility currently being leased out. If KNDI sells the property, the Government will also assist in relocating existing KNDI Jinhua China business. As you can see from the CEO comments on the CC, the Company is inclined to accept the offer when formalized

As mentioned, the Jinhua property is no longer a necessary asset to the Company. Subsequent to KNDI and Geely Holdings forming their 50-50 JV in 2013 with KNDI as Manager, they have built three new state-of-the-art EV facilities to include: Changxing, Zhejiang Province (2012 100,000 ann cap, cost $170 million),  Rugao, Jiangsu Province (2016 100,000 ann cap, $200 million), and Haikou, Hainan Province (2018 100,000 ann cap, $250 million).  Additionally in 2013, the JV acquired a 100,000 capacity, Shanghai Maple Guron facility from Geely for $160 million. (Note: with skyrocketing commercial property costs in China, it is likely both the Changxing and Shanghai Maple facilities are now worth considerably more than cost) The aforementioned Haikou facility has only recently been completed and has begun trial production of a new generation EV, the K23

According to the 2017 10K, the Jinhua offer was a solicitation made to KNDI by the local government, not initiated by KNDI.  As you can see the first meeting with the Government was December 13th 2017. Over the last 15 years the value of the property has increased an amazing 15 fold. (When I visited the Company in late 2010 Chairman Hu told me he thought Jinhua was worth around $40 million) It would seem that if the government is serious about acquiring the property and since prices are escalating. But I believe it goes without saying that one would want to own the stock before the company makes such an announcement for the gap up open on the news could be immense.  However even if it doesn't happen right away this is clear evidence that the market has given no value for this almost passive, but massive asset which alone we now know is clearly worth over $3 a share in cash and rising.

 

Expect resumption of payments of $200 million dollar National Government subsidy owed in the next 30 days or less, KNDI owed $156 million of this.

For whatever reason but likely to help cull out the many underfunded and over-exuberant EV startups, Federal subsidy payments  to all auto EV makers are now more than two full years  behind with last payments made for first half of 2015 in early 2016. This has not been so much a problem for the 98% of automakers, who also sell ICE vehicles thanks to consecutive years of record sales and cash flow from sales of gas powered cars, but it has been very stressful to KNDI and the JV since it only makes EVs. The problem is the government says the maker must advance the full subsidy discount at the time of sales to the buyer, then “trust us for at some time in the future we will reimburse you but without interest”.  (Subsidize the subsidy) For this reason KNDI and its JV had to marshal their resources to not only stay in business but to also keep modernizing their fleet. Management’s decision was to cut production and update the fleet rather than spend limited cash making and selling EVs at a temporary cash flow loss. Painful at the time, but now looking very wise

The amount Kandi JV is now owed by the Government has grown to staggering $200 million as reported on the last CC! The JV has only been able to continue its growth because KNDI has effectively advanced over $156 million, mainly in parts to the JV in exchange for JV “IOU”s which by the end of Q1 18 made the JV by far KNDI’s biggest creditor at $156 million. This might be a scary thought for most companies to have 60% of their market cap owed them by one creditor, but not too concerning when one realizes that 50% is KNDI owing to itself from its half of the subsidiary and the other half owed by partner Li Shufu, one of the richest men in the world. Rest assured, Li Shufu who personally bought his 50% interest in the JV in late 2016 for almost $200 million in cash and assumed liabilities, is not about to let it go into default and have KNDI assume full ownership through foreclosure now that the Company is so well positioned

One also might wonder as shorts have been pontificating, how is it that KNDI is so comfortably able to provide this huge advance without having to tap the equity Market.  First of all, KNDI would foreclose on the JV before it is going to dilute KNDI by any equity raise.  Secondly, it doesn’t need equity cash for as KNDI states in each of its quarterly financial reports they have sufficient resources available from various lending sources and have no need for Equity financing. Banks in China consider the subsidies owed by the federal government to be top quality paper and have had no problems in lending almost full value against what they feel is an inevitable subsidy payout

The inevitable Subsidy Payout Seems to Finally Be At Hand. --Needless to say at each conference call for the last 3 years the invariable subsidy question is asked. “Do you expect to get subsidies soon?” And the redundant answer had been effectively “We hope so”. However, on the YE 2017 CC in March, the answer from the CEO was a bit different.  “Hopefully by June”.  On the last Conference Call, Chairman Hu, gave an “eye opener” of an answer. Here is the exchange with a shareholder from the Q1 CC transcript.

Michael F:

Subsidy payments, my understanding is, from the last conference, Mr. Hu indicated it would be paid—hope to be paid by June of this year. Does he still expect that to happen? My understanding is that the arrear payments due are approximately $150 million. There’s also $127 million owed to Kandi from the JV. When the subsidy payments are finally paid, can Mr. Hu address how that will affect the payments owed from the JV, as part of the answer to the subsidy question

Hu Xiaoming (translator):

 Okay. So, for your first part of the question, on the subsidy payments for 2015 and 2016, right now, it’s already in the process of clearing and settling, so we are still expecting to be finalizing receiving in June or July

Also, I’d like to clarify. I think, where you mentioned about the owed amount of money from the government to JV and from JV to Kandi are different than the real number. As for now, there is RMB 1.3 billion, approximately 200 million USD owed from government to JV, and just a little bit short of USD 100 million owed from JV to Kandi. So, once JV has received part or all the subsidy and will prioritize the payment back to Kandi .

 

The real eye opener here was the, “It's already in the process of clearing and settling, so we are still expecting to be finalizing receiving in June or July”. If the company is aware of the “clearing and settling”, and it for once hasn’t “kicked the can down the road” from its March “June” expectation, it appears to be a real “heads up” that payment to JV and then KNDI may finally be imminent.

While I certainly would not expect the Government to come up with the whole $200 million owed on the first payment, conservatively, it would not be surprising to see a quarter to a half now, followed by another quarter in Q3

Completion of its newest $250 million, 100,000 capacity Facility in Haikou, Hainan Province along with Hainan “commissioned” custom EV (K23) opening triggers a $16 million final Grant payment owed KNDI.

The Hainan Government cut this deal to build the plant with KNDI in 2015, not with the JV. KNDI was entrusted to not only build the $250 million facility ground up, but also awarded a $45 million R&D grant by the local government to build a custom EV for Hainan Province, the K23. The first two thirds have been paid to KNDI over the past year with the final payment worth around $16 million USD due any day now.  The situation here is somewhat unique in the Hainan provincial government for whatever reason did not want to contract with the JV to build this new state-of-the-art facility and develop the K23 specialty EV.  Instead they signed the contract for the new facility and EV with KNDI. Much of the debt other than what is owed by the JV is debt for cash advanced for the new facility.  Once production of the K23 begins in July, the JV will assume half ownership in this new facility as well as half the KNDI debt likely giving KNDI an additional cash bump not covered here

https://orders.newsfilecorp.com/files/2079/33783_a1522383138087_1resize.jpg

Kandi Model K23 production launch ceremony

Hainan Province has recently been featured worldwide in media as a fully declared “Tourist Destination” by the PRC.  It is a southern Province which juts out into the South China Sea and has a climate similar to Hawaii or south Florida. Since it is in the South China Sea, it has the cleanest air in China. President Xi, and the Provincial Government have announced that in addition to the Beach tourist industry, Macau style gambling will also be added. But of most importance to KNDI is that both the Federal and Local Governments mandated in April, the abolition of all gas powered cars over the next decade in the whole province.

 

After a one-year Government hiatus on new special EV manufacturing licenses, new awards about to commence with Kandi/Geely J V notified it would be next 

Late Q1 last year, the Media gave Kandi JV national coverage in China with an article that it had recently been disclosed in a National Government Document that it would be next in line to receive the “Holy Grail” of EV Companies in China, its own EV manufacturing license.  With its own license it would no longer have to “piggyback” on Geely Auto’s license in perpetuity. With some 200 companies in line competing for an undisclosed but limited number of licenses to be granted, being “next” was big. While not mandatory, the JV Management considers getting its own license as the last step for the JV to open up a few select Private Equity participations to be then followed by a Shanghai Stock Exchange IPO or RTO/IPO. It was likely this news that triggered the decision to get the JV appraised which in turn caused KNDI to get its own fairness appraisal of 4 billion RMB or $12+ a share discussed further in this article

Excerpt from Car Prophet Mar. 2017

 

Based on a recent $4.5 Billion IPO/RTO valuation recently given BAIC EV, a spin-off of China’s second largest automaker with only one manufacturing facility, but about four times KNDI JV constrained 2017 sales,  KNDI JV should be valued at least $1.5 billion once it has its own license. This would make KNDI’s 50% JV equity interest alone worth $750 million in JV equity or some $15 a share on its own based only on the equity value of half ownership of the JV. Its own business value would have to also be added on top at that time

Kandi Geely JV now Finally About to get its own license? Looks that way. For some still undisclosed reason, even now one year later the government has not yet opened up any new licenses.  However, while not mentioned in a company PR or on the last CC but instead nested quietly in the recent Q1 18 10Q is evidence the doorway to KNDI getting its license may soon be opening as you can see from this Government Inspection team visit last month. 

Recent Development Activities: (pg 49

“...On April 8, 2018, the officials of the Department of Industry of the National Development and Reform Commission together with relevant personnel and experts formed a research group and made a special trip to the JV Company Rugao facility to conduct an inspection on the qualifications of Kandi Jiangsu for awarding production license. The group fully affirmed and highly praised the management and products at the facility. Through this inspection, we believe that the approval process of Kandi’s production license will be advanced in the near future..’.

What may have caused this “wake up” was likely KNDI’s JV Partner Li Shufu, China’s “Elon Musk” equivalent, top auto industrialists and Chairman of Geely Auto, who is also; sole shareholder of Volvo, London Black Cab, Lotus, Proton, and recent 10% and Largest Daimler shareholder along with several other auto companies. Li is also a high Government Official himself as a Representative of China NPC. Let me explain.

 I wrote an article featuring Li Shufu a few months back on Harvest which included his penchant for buying or starting auto companies cheap and putting them into his Geely Holdings "incubator" until he was ready to do his “magic”. When ready, he would “pick one out” and start publically supporting it. Something I picked up at that time from reading biographies of the man in China.  I speculated that soon Li would be “picking” the KNDI JV out of the incubator for promotion and begin outwardly showing support. It appears, that time has likely arrived

On giving a keynote speech this past March 27th at the 2018 Intelligent Networking International Symposium, while maintaining a very high International profile, Li broke precedence and prominently mentioned the Kandi-Geely JV to his international audience. This recent article below could not make it clearer that KNDI JV is now becoming a top priority for Li.

As you can see, this article has Li very publicly chastising the PRC Government in front of this International Audience. His target in particular, the NDRC (National Development and Reform Commission)- who is the controlling agency that awards EV Production licenses. He is verbally attacking them for not only inconsistencies in their own process, but almost directly accusing them of corruption. As you can see from this except from the article, he is mostly ticked off because his “Condi” (Kandi JV), likely the most qualified in China (four facilities 400k annual capacity) has been jerked around getting its own license too long.  Note: If anyone questions Li Shufu’s clout with the Government, notice that he gave this speech on this past March 27, after no Kandi JV license activity for over a year, eleven days later on April 8, the NDRC had its inspectors back for the second time to confirm that the JV still meets qualifications with kudos.

Source: “Who is the "go back door" come in? Li Shufu pointed to the issue of new energy vehicle production qualifications”  2018-03-29 12:46  Observer Network

Even after being told they were likely to get this license a year ago, Kandi JV is still waiting, but not likely for long. When licenses were first being issued, 15 Companies were selected “conditionally” and given two years to begin production. Now, only 5 of the 15 companies who had received conditional licenses a year and a half ago before the moratorium have met qualifications to get their full credentials. Li is effectively accusing these laggards of “bad will” at the time of getting the license having no intentions of building a company, but only to merge (RTO) with legitimate EV companies who are making EVs. He is inferring that there may have been some “cronyism” with Government Officials allowing this to happen.  Li’s willingness to ruffle feathers at the federal Government on behalf of KNDI is about as strong as any evidence of what his intentions are now with KNDI.

But wait, that’s not the only tea leaf showing Li’s resurgence in priority for KNDI and the JV. In December of 2017, he gave a first signal that KNDI itself was becoming a focus for him by putting his own 15 year protégé, Feng Shu, on KNDI’s own Board of Directors, this after putting Feng in as the JV President (KNDI’s  Hu is JV Chairman, CEO) in early 2017. Another recent tea leaf is the naming of Kandi JV’s recently announced first SUV, now called  the “Geely” Global Hawk EX3 rather than its original K26 designator. While this new JV Electric SUV is 100% owned by the JV, curiously, it is an electric version of Geely Auto’s (43% owned by Li and separate from KNDI partner, Geely Holdings) newly released top selling gas small SUV the X3 Vision. Though only released in January, the X3 Vision has already sold over 26,000 units and was responsible in March for 22% of Geely Auto’s total sales. I put the “Geely” in quotes above because this is the first KNDI JV vehicle that Li has added the “Geely” name as part of a JV EVs official name.

 

All new four EV fleet each with at least double the range to 200 to 350 km as of June and July of this year. All old models retired.

At the end of 2017, KNDI’s fleet was made up of four EVs. The K10, K11, K12 and K17. The average range on the four was right at 160 KM and average price was around $13,000. The decision was made by management mid last year to basically produce a minimal amount of these legacy vehicles to “stay in the game”, but instead concentrate on new longer-range more efficient and profitable vehicles for the future.  The risk was worth it knowing that sometime they would finally receive the $200 million owed by the government. As earlier mentioned, by continuing to produce these older lower speed, less efficient vehicles the company will have to keep coming out of pocket to advance pay the subsidies to the buyers. This decision that has been pleasant for the short sellers though somewhat painful but the patient KNDI long holders by seriously degrading KNDI share performance.

So has this decision accomplished anything?  You betcha! The K10 and K11 have now been retired and taken out of the fleet.  The K-12 and K 17 are being replaced by a new more powerful K22 and K27 which through a Company announcement only last week have now received Government approval for sale, subsidies and sales tax abatement.  We don't know all the details on these last two cars yet but we know that their range has been increased to the 200km+ so they will get larger future subsidies. With the 200+km range, it is likely most sales of these two EVs will be for leasing either to ZZY, their own Micro-bus CarShare program which is currently made up of all Kandi JV EVs totaling over 30,000 along with a few independent operators. Their K17 and K12 already had a pretty big load of accessories and features as both these earlier vehicles had only been developed in just the past couple of years. Of the approximate 3,400 EVs that have been sold so far this year, likely they were the last of the K12 and K17 and also some left over K10s and K11s. But speaking of the EVs sold this year. We know they were legacy liquidations by the low price per unit sold. But in this number, I found most amazing and pleasant, the Financial Results of the JV reported in Q1.

 

As you can see above, the JV reported  3,295 non-specific EVs sold in Q1 and $33.7 million in revenues.  From this they generated approximately a lowly $10,000 in revenues per EV. This includes a future subsidy owed them. So this tells me these were old legacy cars that were being liquidated at large discounts. YET, in spite of the JV having to cover the overhead of carrying four mostly temporarily shut down facilities and other corporate expenses, amazingly, it was still able to make a million dollar profit with a 16.5% gross margin from sales of  these legacy vehicles.

A year ago, Chairman Hu told shareholders that the company and the JV will be concentrating on making most efficient EVs which could sell at a profit even without subsidies. If you are not aware, KNDI itself, in addition to its 50% JV ownership generates its own revenues and earnings by manufacturing and selling EV auto parts. It is now licensed to make both the battery packs and motors (along with other parts) and sells them to the JV and soon others.  It clearly appears that both companies have been successful in squeezing out profits even from these small numbers. If the JV can make a profit from 3200 discounted EVs, it should not take more than 40,000 or so units sold to add $50 million, or a dollar a share to its bottom line, half of which would go to KNDI along with whatever profits KNDI will generate selling this large number of parts, but likely at least a dollar a share in net

Just a reminder. Since KNDI only owns 50% of the JV, (less than a majority), under GAAP accounting, it cannot consolidate and report any of the JV revenues, only consolidate the JV “bottom” line profit or loss. So when evaluating KNDI, don’t get totally “hung up” on revenue numbers for KNDI (unless you add in half of the JV revenues). KNDI’s revenues come exclusively from its own parts sales. However, half the JV net income or loss is required to be included in KNDI’s numbers.

Now let's review.   The K22 and K27 are expected to go on sale in early Q3 primarily for use in leasing and car share programs. Kandi JV is the sole EV provider to ZZY (MicroBus) China’s largest carshare program now in some 26 cities (ten new cities added during the last two year slowdown) and over 30,000 Kandi EVs. Some 20,000 are in the city of Hangzhou alone, with the rest of the markets now expanding. Approximately a sixth of these carsharevehicles are going on four years old and likely due for replacement. So expect a strong performance in K22 and K27 sales in H2. Likely 8,000 to 12,000 units

The most stunning additions to the fleet are the new EX3 and k23.. The EX3 is expected to go on sale in late June the K23 in July. Let's get more detail on these two vehicles

The EX3- This new Kandi Geely EV was unveiled at the recent 2018 Beijing Auto show a few weeks ago to rave reviews. Out of over 200 new EV’s introduced at the show, the EX3 was selected by the Media for such article as

Compare this car to a fighter. Is that okay?

2018-04-29 16:2

9 Chinese carmakers that want to be Tesla

2018-04-2

And right after the release, but  prior to the sho

What to buy in the second quarter? 23 models available! Heavy cars really

Http://www.mycar168.com Source: Netcom  2018-04-03 09:35:48 Editor of the responsibility: Car Worl

(What makes this article so amazing is of the 23 models listed from all major International Automakers (ie. Audi, BMW, Volvo, Meredes, BYD, etc.). The Geely KNDI EX3 is the ONLY EV included on Global auto list..

 

And here is KNDI’s Introductory PR on the EX3

Kandi Technologies Unveils All-Electric SUV Geely Global Hawk EX3 in Hangzhou”

What is amazing about this vehicle is it comes in two versions both with just about any feature including GPS you could image, but the main difference between the two are range and price.  One version, comes with a KNDI new generation patented Quick Battery Exchange feature mainly for City Driving and Didi Ride Hailing (Uber) use.  This allows for a complete battery change in less than two minutes and has a 200+km range. The second version has a range of 300+km and is for more rural consumer use in addition to ride hailing. This long range EV is first for KNDI who has specialized in only urban EVs to date. But due to the longer ranges and also quick charge, both EVs qualify for a much larger subsidy for the remaining three years of the program. So the cost to consumer after subsidy and sales tax abatement will be 7,000 RMB ($11,000) for the 200km+ model and 10,000 RMB ($15,000) for the 300km+

On the recent Conference Call, the Chairman Hu confirmed that both the EX3 and the also new K-23 Hainan Province EV were both developed with an eye on the Ride Hailing market which initiated for KNDI a few years back when KNDI and Uber China (now owned by DidiChuxing) struck an Agreement. Hu expects Ride Hailing to be a massive market with KNDI fully participating.  Additionally, he reported that the EX3 which goes on sale late June, already has several hundred new S4 (Independent) Dealers who have put down cash deposits to sell the EV. Additionally, the EX3 will also be a first in that it will also be made available through a number of Geely Auto’s massive S4 Dealer network. (around 1200

5 Billion RMB KNDI ($790 million) liquidation value.

When the company delivered its second quarter report last year, a comment reported in its 10Q PR raised some eyebrows. As previously allude, due to considerable interest by several wealthy parties to assist in bringing the KNDI- Geely joint venture public KNDI decided to get an appraisal of its own assets which include its half of the JV. As reported, the appraisal for KNDI alone came in at approximately 4 billion RMB ($656 million). This in spite at that time, the JV had delivered only 315 EV's in the first half of 2017 hitting KNDI with a H1 loss of $.75 a share($.50 due to R&D  From the PR

“Mr. Hu Xiaoming, Chairman and Chief Executive Officer of Kandi, commented, “2017 has been a challenging year for Kandi. The confusion surrounding the subsidy heavily impacted the Company’s business last year and we have been trying to regain the momentum this year. The management team is working hard to explore better growth opportunities. Despite second-quarter losses, Kandi Vehicles’ estimated value has exceeded RMB four billion, the management team will actively seek strategic investors based upon the estimated value to increase its competitive advantages.  The efforts the Company has made will lay a solid foundation to achieve strong business results.”

From Q2 17 10Q pg.62-63

Four Billion RMB is approximately $626 million USD or over $12 a share. A few days after this was disclosed, as you can see from the chart at the end of this article, KNDI stock started another of its annual hyperbolic doubles plus leaping from $3.50 to $9.90 in around 40 days on very heavy volume in spite of the huge first half loss reported

KNDI JV Partner, Li Shufu, sole owner of Volvo has engaged Goldman, Morgan and Citi to underwrite an IPO for Volvo with pricing expected up to $30 Billion

Just a quick news update on partner Li Shufu’s recent doings and how it could affect KNDI.  Li seems to now be ready to cash in on his eight years of incredible work on not only rescuing Volvo from Ford for $1.5 billion in 2010, but bringing it to profitability never seen before in its 80+ years. (Great international investor exposure for KNDI and the JV

Source: The Edge Markets

 

As sole owner of Volvo, with this IPO, depending on the pricing, Li could would be approaching Alibaba’s Jack Ma’s net worth and certainly making him the wealthiest Industrialist in China. But what does this do for KNDI?  A LOT!

First, as you can see, the Volvo IPO Investment Banking team is about as top notch as you can get.  As lead underwriters, they in turn will ultimately increase the “syndicate” to dozens of additional International brokers. But before this, in the process of doing their Due Diligence, they will investigate all of Li’s holdings to include KNDI JV and also its partner KNDI.  Now, a couple of years ago, the JV did publish a PR that they intended to bring the JV public.  The DD team will have this information.  As a former Merrill Lynch and Independent Investment Banker (IBK), I can assure you this depth of DD will be performed, plus IBK’s are always looking for “hooks” to new business. While doing DD, they will also want to vie for the IBK and Underwriting position for the Kandi JV IPO or RTO. This in turn will force them to do DD on KNDI as well, bringing KNDI “out of the shadows” to the International brokerage community.

Reading several of the articles on the Volvo IPO, it is clear that Li Shufu wants the deal done at the high end of the range. So much that he has even threatened that he will pull the deal unless the price is up around $30 billion. KNDI holders should be very encouraged by this knowing that when Li and Hu bring the JV public, he will also fight for a high price.

Background as to why KNDI has no analysts, but how this will change prior to the JV IPO.

KNDI has long been maligned by its short sellers and detractors stating; “There must be something wrong with KNDI since it has no Analysts following it”. This could be an easy assumption for anyone who doesn’t understand how analysts are found or has not followed the Company for years and know how KNDI’s CEO thinks. To an investor with knowledge, the comment is false at face.  Yes, KNDI doesn’t have any analysts following; thankfully they have NEVER had any analyst following. Why?  A few reasons to include

KNDI came public eleven years ago by a reverse merger so it did not have any brokerage firm “paid” to bring it public, so no incentive for early analysts to come on board. Most IPO’s start with a few analysts from their IPO syndicate members.   Subsequently, the few equity offerings KNDI did between 2010 and 2014 were privately placed with the same two hedge funds (pricing as high as $19), not conventional Wall Street brokers. So no analysts came with those deals. As a former Brokerage Firm founder and President, I can assure you small public companies want to early on have “Sell Side” analysts following

Contrary to what many think. Sell Side analysts are not analysts who work with Short Sellers.  They are the analysts who work with retail brokerage firms like TDAmeritrade, Merrill, Goldman, Oppenheimer, etc. who provide research usually for free to their firms clients as incentive to do business.  If their firm has an investment banking relationship with the Company, in other words, makes money from the brokerage firm, they can afford to pay their Sell Side analyst to follow the stock. Bottom line, No Analyst is going to risk being the first to follow any stock unless they get paid by someone.  After one or two analysts start following, then others may piggy back on for credibility, though unpaid. However, once the JV is public, due to arbitrage if no other reason, KNDI will inherit many of the JV analysts

But on the positive side for KNDI. Since they never had any coverage, they have not “burned any bridges” with analysts. Many of us were encouraging KNDI Chairman Hu to push for some analysts in 2015, a year that KNDI was the reported top pure EV Company in China with over 24,000 units sold. It would have been easy for him to do it at that time since KNDI was nationally reported in China as the top monthly EV seller in four months in H2 15 and tracking first for pure Evs each month in H2.  It would also have been easy to envision KNDI, with the support of analysts run back up to its speculative 2014 $22+ high. However, in hindsight, with all of the changes and confusion that appeared in the China EV industry in 2016, causing companies like KNDI to all but shut down to redesign their future way of doing business, KNDI was lucky it didn’t have any analysts so it didn’t burn any analysts when sales went away due to reconstructing the business model. So now, all future analysts can consider KNDI with a fresh slate and open mind

The bottom line on this subject is the current opportunities that exist for the KNDI JV, particularly now that Li Shufu is starting to get almost as much publicity world-wide as Elon Musk. His 50% personal ownership in the JV is still generally undiscovered by investment bankers, brokers and funds. If you clicked on the Volvo link above to read the full article, you will see that it lists almost all of Li’s other investments like London Black Cab, Lotus, Daimler etc. but does not mention Kandi JV.  But that will be changing very soon as smart investors will use KNDI as clearly the cheapest and most undervalued way to “piggy-back” on Li Shufu early. 

A few small comments showing the “turnaround” before I wrap this up.

In years past, KNDI has “broken out” its 4th quarter numbers from its 10k full year numbers. Last year, mainly due to over $40 million in onetime R&D write-offs, KNDI reported a full year’s loss of over $28 million, but for some unknown reason, they did not “break out” Q4 on the PR though they did in a  10K footnote.  As it turned out, Q4 3017 was by far the best KNDI Q4 in several years.  As seen below, the $5.5 million net or $.12 a share in net income backed up now with $.07 in Q1 2018 makes for some great tea leafs of a major turnaround.  When asked on the CC why the Company did not break out these Q4 numbers? Mr. Hu apologized and basically admitted it was an oversight. (Could you imagine Elon Musk making that mistake?) Well that is history and should be a heads up to shorts and longs alike, “This EV is Leaving the Garage” irrespective of who is riding in it.

From: SEC Form 10K 2017 (page 28)

 

Overvie

During the fourth quarter of 2017, we continued our revenue growth momentum since the third quarter of this year and recognized total revenue of $ 42,851,870 as compared to $ 17,250,372 for the three months ended December 31, 2016, an increase of $ 25,601,498 or 148.4%, primarily due to increased EV parts demand from the JV Company and its subsidiaries for their production needs. Gross profits for the three months ended December 31, 2017 was $ 5,088,428, an increase of $ 3,190,916 or 168.2%, from $ 1,897,512 for the three months ended December 31, 2016. Gross margin for the three months ended December 31, 2017 was 11.9%, an increase from 11.0% for the three months ended December 31, 2016. We recorded a net income of $5,445,902 in the fourth quarter of 2017 compared to a net loss of $8,826,416 in the fourth quarter of 2016, largely due to increased revenue and gross profits in the fourth quarter of 2017.

 

In Conclusion.

As any of the writers of the 30+ Seeking Alpha attack articles going back to 2010 written with share prices as low as $4, had predicted, KNDI should not still be here today. But it is, bigger, better and more undervalued than ever. In a strange way, KNDI also has a similarity to TSLA in that it has been one of the consistent highest percentage short stocks on NASDAQ.  But dissimilar to TSLA in that TSLA has a very strong institutional following who more than offset the short. KNDI does not. Not because of business performance, but because KNDI has a low profile CEO and is in an “orphan” status of trading only in the US and business only in China. But this must soon change

From an all-time high short of over 7 million shares in 2015, to its current three year low short of 4.7 million shares before the small earnings bump increase, credit to some shorts is due. At least 2.3 million shares of short sellers have been wise enough to cover over the past three years. And even more credit given to the recent + 800,000 who have managed to cover on light volume the past six reporting periods prior to this last period which included the strong earnings bump. But just like longs, shorts also get “set in their ways” about a stock and until destroyed on margin calls (ask Bill Ackman), most of the remaining 4.85 million short will remain in denial until squeezed out at much higher prices.  But, now likely sooner due a lot to the facts I have laid out here, upside volitilty with volume should start appearing as It will likely be these shorts will likely “trigger” a massive upside move that I believe is imminent

 

Below is a quick long term chart I put together which shows an interesting annual pattern in KNDI trading. As you can see from the green ovals, eight times over the past nine years, KNDI has launched into an unexpected run-up of over 100% in period of 45 days or less. For at least the last six years, KNDI has had a sustained very high short position of at least 13-18% of float and Days to Cover averaging over 20. This heavy short is the likely cause of the rapid 100% moves. Having been closely involved with KNDI since the beginning, I have discovered a trend that tends to forecast the annual moves and I am seeing it form right now

I saw it last year which enticed me to published a Harvest Article on August 24th with the stock at $3.50 a few days later the stock began the last move up you see on the chart below, which took it to $9.90 in 40 days with really no significant news reported by the company.

 

Source: BigCharts.com

The recognizable pattern is after a period of decline followed by at least a month of stabilization, the stock starts losing volume and Days to Cover moves up. Quicker, larger heavier volume moves higher are immediately followed by sharp but temporary lower volume reversal.   Once things quiet down, the short goes into a “pattern of disappointment” by helping the stock higher in the first few minutes of trading to reach high of day early, then follows with hundreds of 100-200 share “wash trades”, slowly pushing the stock lower the rest of the day. This technique discourages new buyers with consecutive and steady downticks the rest of the day closing it around the low. If you are looking to position KNDI in size and don’t have time to watch it, wait until a half hour after the open to start and use at least some limit orders. But also, save some for late the end of day. Usually a large bid and offer mysteriously appear in the last minute or so of trading to stabilize the close. This is the time to buy some size. 

The earnings announcement of a couple of weeks ago came right as this pattern began to set up around the $5 level. The last earnings report was somewhat unique in that it was the first time in a couple of years, KNDI managed to make a sustainable 10% up move in price and not retrace it on the same day. But with that move came a small “Gap” up in the price. While I have never been a fan of “gap” technicals, I must admit, KNDI has never seen a gap to date that it didn’t eventually fill. Tuesday, when the stock hit 5.35, it filled the gap and seems now ready to resume its move up. Just one other trading point. With the light volume, the KNDI short tends to “fight” good news or positive articles. So if you took the time to read this all the way down here, you must like the story. And you should –its real. However, do not make any assumptions as to the validity of what you learned here by the way the stock trades today or even tomorrow; particularly if it goes down. There is no “upside” for a short to let a stock go up after a strong report. The better the report, the harder a short will hit it. Letting the stock move up easily might entice the curious to see what caused the move and increase the audience. More likely, a short will usually try to dissuade others from reading the article by making the stock look like “dogs breath” the first day or two.

Bottom line recap: As shown above, huge fundamental “kickers” are also lurking this time setting up a sustainable move.  IMO, and confirmed by the Company in filings and CC, KNDI itself is unquestionably going to be coming into as much as $340 million in CASH from $200 million subsidy debt repayments to the JV who in turn will start paying down the $156 million owed KNDI, a $16 million grant and $167 million sale of the facility land use rights, likely 75% plus this year and a big chunk of it beginning any day now. The only variable is no longer, if, but when. It now is only is the timing. This near term windfall alone exceeds the total market cap.  When was the last time you had such a clear “heads up” like KNDI has been quietly slipping out in SEC filings? So you for sure want to be as long the stock as practicable before any of these “shoes fall” and a multi-dollar gap opening.   

Since KNDI has been able to not just exist, but continue to grow in spite of all this debt and money owed them, can you imagine what CEO Hu could do with all of this CASH!  For starters, I would think he would want to buy back a sizable chunk of shares. When asked that question on the CC as you can saw above, his answer was; “a primary goal was to increase Shareholder value”. To Hu, it would be safe to assume “shareholders value” would likely be at least the $626 million appraisal he received last year ($12 per share) plus the proposed $167 million ($3.25 a share) by the Jinhua Government for the sale if its Jinhua Facility Land use rights. These alone total over $15 a share.

As you can see below, a bit over a year ago, KNDI CEO, and an Outside Director Henry Yu, neither of which  have ever sold a share, and Hu’s salary is around $32,000 annually, both went into the open Market and bought almost 450,000 open market shares with Mr. Hu buying over 400,000 shares and paying as high as $5.15.

 

Final Wrap:  If you are getting a bit apprehensive about raising interest rates, tariff trade warsand other factors which could top out the US stock markets, I suggest diversification of some of that “house money” you made in this great bull market into orphan KNDI at a 75% discount to its past high price and 66% discount to its appraised value. Rest assured, with all KNDI sales and revenues coming only from China, tariffs increasing internal demand would be a positive not a negative. Less foreign completion. Add to this the absolute need for EVs in China due to pollution and lack of petroleum resources confirms the EV market will continue to grow irrespective of what happens in the US market. With a ten year history of trading in the US and all of the growing pains of an early adopter behind, if KNDI hasn’t gone out of business by now, it never will. 

A last point to put things in China EV growth perspective. The US ranked #2 has some 910 mostly ICE gas powered cars per 1000 people. China, ranked #73 with 154 mostly ICE cars per 1000 people.  Considering China has four times as many people,, the China market would have to grow more than 15-fold to catch up with the US. So considering that KNDI, even last year with many months of no sales, still ranked in the top ten in sales by year end, the risk reward with KNDI is excellent with just status quo growth and exceptional with its tie in with Li Shufu. Then throw in a few hundred million cash in the next few month, near term appreciation can be incredible.

 

Author Disclosure:  I own KNDI Common and Listed Options

 

 



Originally Published at: Kandi Technologies -With Only A $280 Million Market Cap, When Announced, Can A Surprise $167 Million Cash Windfall For A Forgotten Asset, Trigger An Upside Perfect Storm?