NIO Inc, China’s $12 Billion EV Startup Becomes 2nd US Exclusive Listed Pure EV Maker --After 10 Years of Successful EV Trailblazing, NASDAQ Listed Kandi Technologies Shareholders Welcomes NIO Aboard.
While NIO and TSLA compete for the top 5% of China EV Consumers, KNDI takes the 95% Scooter and Bike Class out of the Rain and Heat…
Abstract: Contrary to what a number of articles have reported, now NYSE listed NIO, Inc. is not the first China based pure EV maker to list in the US, although NIO is the first IPO to trade. A question. Is the untested EV startup NIO without its own plant, or manufacturing license, backed by Netease, an internet gaming company, with its $1.67 BV/Sh and $12B market cap, really worth a 60 times higher Market Cap than time tested profitable NASDAQ listed Kandi Technologies, (KNDI) with only a $200 million market cap? Well since the market thinks TSLA is worth $55 billion, maybe so, but what’s KNDI’s story? KNDI is a ten year NASDAQ listed China based pure EV company with 400,000 annual capacity through its four plants (three new), backed by China’s top auto-industrialist, Li Shufu, who has over $200 million of his personal cash invested. The same Li Shufu, listed on China top ten wealthiest who is unquestionably China’s top auto Industrialist. Li is Chairman and 44% owner of Geely Auto (HK 0175), China’s largest and fastest growing non-state owned automaker, sole owner of Volvo, London Black Cab, largest Daimler holder and a myriad of others companies though his personal holding company, Geely Holdings. Re. KNDI in particular, Li owns 50% of Zhejiang Kandi Electric Vehicles Co. (Kandi JV) the actual automaker arm for all KNDI-Geely Global Hawk EVs. KNDI owns the balance. As later discussed, in May Li recently invested an additional $83 million cash into Kandi JV matched by KNDI.
I am writing this piece not to just rehash the abundance of articles, both pro and con on NIO. But more as a history of what trials and tribulations a true China EV pioneer (and its long term shareholders) like KNDI has had to face in China. KNDI, who from a 2009 startup ended 2015 as China’s #1 pure EV maker, found itself having to go through fighting big auto lobbyists and the bureaucracy in paving the way for rich upstarts like NIO. However, this is all history now as I explain below. It appears that the China government has finally settled in on long term rules and regulations setting up KNDI for a quick move back to the top. Why? A $160 million cash windfall to KNDI is likely to happen by year end and Chairman Hu has recently resumed his insider buying. As of this year, KNDI has finally made it to the true growth side of the “Valley of Death Curve” after several false starts. If you like NIO at its current price, you will love KNDI. The more investors who come to realize just how truly huge the EV potential is in China for all automakers, with five times the US population but only 20% of the per thousand capita auto saturation, the better it will be for KNDI. So, believe me, KNDI’s, US welcome aboard to NIO is sincere.
How it began
Listed on NASDAQ, June 11, 2008 as symbol KNDI, Jinhua, China based Kandi Technologies (KNDI) with first trade at $5 a share, entered NASDAQ through a merger with a shell company just in time for the historical global recession. Significantly profitable at the time of listing due to its now Legacy off-road recreational vehicle (ORRV) business showing KNDI exported over 40,000 various vehicles mainly to the US in 2007. However, this business was choked off almost overnight with the global financial collapse. Realizing exporting only was a perilous long term path, management made a quick decision to address the internal China market. But not with ORRVs, but instead its first generation electric vehicles which had secretly been under development for a few years. As you will see later, going to EV’s was a natural evolution for its Founder Chairman, CEO, Hu Xiaoming. However, though an exciting change, it did not stop KNDI stock from dropping 90% with the collapsing stock market over that first year. In its first year on NASDAQ, KNDI had developed its first EV the Kandi Coco, a Low Speed Electric Vehicle (LSEV), exporting and selling over 2000 in the United States in 2009. This truly made KNDI not only China's first EV maker trading in the United States but also first in selling China electric cars here. This Pioneer position was quickly rewarded with a stock price recovering most of its prior years loss. (Note. to save confusion after Kandi Technologies forms the JV with Geely Auto, which also is a Kandi company, in this piece I will use KNDI referencing the Company that is on NASDAQ and Kandi JV referencing the 50-50 JV with Geely)
Having made the decision to address the low end EV market available to the 95% of the billion plus China sector that was on bikes and scooters, at the start of its second year, mid 2009, KNDI announced it had developed a small highway speed two seater EV, the KD5010. Almost simultaneously, KNDI announced it had formed a three way partnership with China’s dominant 90% Electric Utility State Grid listed Fortune Global #2 along with top auto battery maker Tianneng Power, an amazing feat for such a small unknown EV start-up. The 600 KD 5010 EVs would initially be marketed in the city of Jinhua China beginning Dec. 2010. (Making my first trip to visit KNDI commensurate with the opening ceremony, I can attest it was quite the celebration).
But what did KNDI have that caught the serious attention of such illustrious partners? Curiously, it was a new proprietary patented technology, developed by KNDI similar to what NIO announced in late 2017 and first installed in May, --a Quick Battery Exchange (QBEX).. Some background on KNDI’s founder/chairman Hu EV credentials might be appropriate here.
Starting from humble background, KNDI Chairman Hu is a truly a pioneer in EV's in China with roots beginning as general manager of China’s largest auto parts maker Wanxiang battery subsidiary in the late 1980’s. From this in 2002 the PRC appointed Hu as Chief Scientist to China’s aggressive 863 Project section dedicated to developing a plan to massively grow China’s lagging auto industry. At that time China had some 80 autos per thousand capita (as compared to the US with over 900). China knew that Internal Combustion Engined (ICE) vehicles was not a viable long term option for its 1.3 billion population both from a petroleum availability and pollution aspect. But if it was going to compete globally, it had to dramatically increase its four wheeled, enclosed mobility so big boxed items could be bought and transported. In 2003, Hu incorporated Kandi Technologies.
While KNDI’s Quick Battery Exchange program captured rave reviews by the China government as the likely and logical solution to range anxiety, to work efficiently, part of the technology has to be built into the EV from scratch. KNDI did this and is still doing it in its EV’s fleet. To digress a moment Tesla’s shareholders my also remember that Tesla made attempts at a battery exchange before aggressively deciding on its Supercharger station concept. KNDI’s patented solution was both simple and brilliant by allowing it's batteries to slide in and out on tracks under the vehicle rocker panels allowing both an automated robotic change in less than a minute as well as a mobile manual change in about two minutes. NIOs, QBEX is built into the EV, as was the case of TSLA’s, but both required a much more expensive and complex changing station to execute the change since it was done exclusively under the vehicle. But think about it. If you get stuck in a traffic jam in Beijing, wouldn’t it be nice to simply use your phone app to summon a quick battery exchange van to your location for a few minute changerather than have to be towed?
In spite of full backing of State Grid, the reason KNDI’s early concept QBEX was not introduced as a nationwide solution was due to heavy lobbying efforts by all the conventional auto makers being dragged into the market by the government who wanted to simply modify their gas powered cars into EVs. To the auto industry, this meant sticking batteries into every available orifice in an ICE vehicle. This certainly is not conducive for a Quick Battery Exchange.
KNDI chairman Hu, pragmatist that he is knew when to fold and put KNDI’s QBEX technology into mothballs. Curiously late last year chairman Hu announce the acquisition of a hi-tech China Company Jinjua An Kao, whose primary business is in developing quick Battery Exchange Solutions as you can see from this extracted quote from the PR. .
Since this acquisition was announced prior to the first announcements by NIO of it's QBEX, I'm sure KNDI’s Hu was and is quite happy to see NIO embracing his original basic QBEX concepts. But also, China’s current largest EV maker, BEIC NEV is also now testing a QBEX. It now appears Hu is ready to revisit QBEX as shown by his acquisition of the above company.
Back to the NIO offering.
Wednesday, NIO got its first taste of trading in the US. Expecting a range of $6.25 to $8.25 for a 160 million share offering of ADR’s, it was priced a tick above the low end at $6.26. In the first 10 million shares of trading, it ranged over a dollar and a half with a low of $5.35 to a high of $6.98 on volume of some 68 million shares closing nicely up at $6.60. Quite an energetic welcome aboard. As I am finalizing this report this morning, it is up over 76% trading at an amazing $12 giving it a market cap of over $12 Billion!
Why such a large range? My guess is the same crew of non-believer short sellers that have attacked both TSLA and KNDI non-stop for the past six years is already positioning NIO. And since NIO is Chinese, it could be even more of a target as has been the case of KNDI who has seen its stock under continuous attack for the past five years, a situation that has caused almost annual 100% stock swings in a months’ time. However in spite of its current low price as seen in the table below, KNDI has recently seen its short jump another 20%+ in just the past five months since US trade tariffs came on the horizon. This in spite of the fact that tariffs have little to do with KNDI. Obviously the unrelenting attack must be algorism based for as you will see later on in this article, KNDI is now in the best position it has ever been to make its annual 100%+ move up. If you don’t believe me, believe its Chairman Hu, when he announced on the Aug. 11 Conference Call he was going to resume his open market stock purchases to the tune of $3-5 million over the following six months. Always a man of his word, with his latest SEC Form 4 yesterday has already surpassed the first 100,000 shares for around $400,000. As seen from the SEC link, this a continuation to the half million shares he bought at higher prices to $5.15 early last year. Considering Hu is already KNDI’s largest holder with some 12.5 million of the 51 million outstanding to see him spend 13 times his $31,000 annual salary should tell a logical investors something. So this massive short increase at these levels is a ballsy move by short sellers to bet against this battle tested CEO with such a thing stock. But do read on, Hu and KNDI’s recent SEC filings also have given strong evidence of near term happenings that could create severe pain to KNDI non-believers.
In hindsight I'm sure the KNDI chairman Hu is feeling a bit envious seeing NIO as a startup raising over a billion dollars in the US market and a $12 billion market cap while KNDI sits with a $200 million market cap at a 20% price discount to where it traded the first day at listed on NASDAQ 10 years ago. Even more stunning, it is also trading at a 20% discount to its $244 million book value which has grown tenfold in as many years while the stock has actually declined. I suspect he would have reason to be melancholy when reminiscing late 2015 when Kandi JV was the top seller of pure EV's in China three of the last six months and covered all over the China media. That year it sold over 24,200 units topping all pure EV makers in China. However as you can see from the chart below KNDI shareholders did have exciting times in 2014 when the stock soared from a low volume sub $4 to $22.5 trading millions of shares a day 8 months later. Quite painful for a few shorts at that time.
Chart courtesy of Bigcharts.com
Why the big move in 2013?
What led up to the 2013-14 dramatic move up was a combination of a 50-50 Joint Venture formed initially with Geely Auto, then a mid-level China EV maker who’s own stock was languishing below $HK2 and KNDI’s innovative development a China based CarShare program called Micro-bus which is now the largest Car-share in the World with over 40,000 KNDI EVs in over 20 China cities.
More on the JV below, but re. the CarShare. What a brilliant concept for KNDI. While KNDI does own a 9.5% interest, this was separately funded under the name of Zuozhongyou Electric Vehicle Service Co., Ltd, (ZZY) to the tune of a few hundred million by two VC funds, Chairman Hu and Li Shufu five years ago. Though winning numerous awards, to include: “Grasp the pulse of the times and build the future of the industry” and “ AAA Enterprise of Service Quality Credit Assessment of Hangzhou Automobile Leasing Enterprises 2016-2017 Integrity Enterprise" Double Award” in just the past few months, a recent Government Subsidy requirement change now requiring all lease and rental sales to reach 20,000 before subsidies will be credited has slowed down KNDI sales to this segment according to Chairman Hu on the last CC. What makes this such a brilliant set up for KNDI is that all ZZY EVs must be KNDI EVs, so as in the case of razor blades, a build in loyalty market for KNDI has been established as replacements are need forever.
Chart courtesy of Bigcharts.com
The Kandi Geely JV. As mentioned above initially was a JV formed between KNDI and Geely Auto, the HKSE listed Geely Auto seen above in the chart. However there is also a second Geely company called Geely Holdings who’s only tangible common thread is its largest shareholder. Geely Holdings as mentioned in the abstract above is a private company 100% owned by Li Shufu one of China's ten wealthiest men and unquestionably Top Auto industrialist.. Li is Chairman and owns 44% of Geely Auto, 100% of Volvo, 100% of London Black Cab, and varying major interest in half a dozen other know companies like Lotus and Daimler,. Unquestionably by any measure, he is the best possible partner KNDI or any EV start-up could ever have hoped for in China.
While the JV started as a 50-50 partnership with Geely Auto, because of a change in the government requirement for an EV company to get its own EV Manufacturing license, in October of 2016 Li Shufu personally acquired Geely's 50% interest for approximately $120 million cash and liability assumptions from Geely Auto. That requirement change being that in order for an EV company to get its own independent license a company must have no shareholder with an existing auto license (as Geely Auto did) own more than 20% of the applicants shares. So Geely Auto was taken out at a profit by its Chairman, Li and the JV received an agreement in perpetuity to continue to allow their license to be used by the Kandi JV. Additionally, in lieu of a license fee, Kandi JV buys some body parts from Geely Auto. Thus for now, leaving KNDI in a similar agreement as NIO has with JAC motors but with significant differences.
The EV Manufacturers License. As mentioned Kandi JV was and still is in a similar situation that NIO is in, which is being forced by the PRC to partner up with a licensed auto manufacturer in order to register and sell their cars. But in Kandi JV's case all its EVs are built in the Kandi JV’s own facilities and only needs Geely Auto at the last step of registering the vehicle with a VIN number. In the case of NIO for now, all their cars come under the large China automaker, JAC license and additionally JAC also is involved in the manufacturing. .
What does it take to get an Independent Manufacturing EV License? Some background first. In the mid 2000s overwhelmed by all the auto license owners China put a moratorium on any new auto maker license with a strong recommendation that the smaller either merge or close down. Way too hard to regulate 200 companies. If you don't have a license you have to make and sell under somebody else's license who does. In early 2016 the government opened a window for a special EV only license. Immediately over 200 wannabe and real automakers applied for a license under this program. Under much conflict the program was quickly shut down after an initial 10 conditional licenses were issued. Conditional meaning if you have enough money and some plans to build a plant and you know somebody, you have two years to build a plant and start selling EVs. If you don’t meet this requirement, you lose your conditional license and have to start over.
A few months later in early 2017 the license window was opened again this time to even more than 200 applicants. Five more new conditional licenses were issued and again quickly shut down for further reevaluation of the program. It would seem obvious with Kandi having 4 plants totaling 100,000 in capacity each and well over 50,000 of its EVs on the road, that it should have gotten an early license. However after having been inspected early 2016, Kandi JV was notified it met all qualification and was told that it was 6th in line when the window opened again. So needless to say all were stunned when the window opened but then closed a few days later with only five new conditional licenses issued. Chairman Hu inquired and was told that Kandi JV would be next as soon as the window opens again. In fact a few months later due to a confusing notification on the National Development Reform Commission (NDRC) ministry website, the media thought Kandi JV had been approved. Though KNDI did not put out the news, the media did put out numerous articles attesting to this causing a jump in KNDI’s price only to have to retract those articles a day or two later.
While the government was being quiet about these starts and stops KNDI powerful partner Li Shufu with his extremely high profile actually gave a speechwhich was covered by the China media all but directly accusing the NDRC of cronyism and even dealing under the table in their licensing procedure. As you can see from this speech, he effectively accused the government of accepting early application who likely never had any intention to build their own plant but either planned to sell or combine their license in the form of a merger similar to a reverse merger of a stock, while ignoring his “Conti” (Kandi JV). To this day only seven companies of the original 15 have graduated to a full license with most of the rest approaching with their two-year deadline.
Here is an extract from Li Shufu’s speech.
Kandi JV Partners Geely’s Li Shufu with KNDI’s Xiaoming Hu
On the Q2 Conference Call, KNDI/JV Chairman Hu, mentioned, as well as noted in the 10Q that In May of this year Kandi JV was notified that it was again approved through re-inspection, However, another curveball; a recent rule change to push out the weak was put in place doubling the minimum corporate paid in capital requirement to 2 billion RMB, equaling around $300 million, Kandi JV would now have to meet this new requirement to receive the license. Here is an extract of this section from the 10Q:
Pg. 38 Q2 2015 10Q
How KNDI and Geely Holdings each paid their $83 million contribution. Considering KNDI’s total market cap is only around $200 million, it boggles the mind how KNDI could come up with this cash so quickly to satisfy this new government requirement and not have to go outside for any additional equity capital. Later in this article you are going to hear more about some $220 million in subsidy money owed the Kandi JV by the PRC Government and how it was used to make KNDI’s share.
But first, Kandi JV had to build and sell the cars to be owed subsidies by the Government. In order to make the cars, KNDI had to effectively advance some $150 million in parts over two plus years and in exchange it would hold the IOU from the JV as collateral for loans it made to buy the materials to make the parts. The bank allowed KNDI to borrow the money to buy materials against this IOU this since it in turn was collateralized by the IOU for subsidies from the Government.
So what KNDI did was take $83 million of what the JV owed KNDI, forgave the that amount of debt to the JV and received more shares of the JV to maintain its 50% ownership. Li Shufu, on the other hand actually had to pay in $83 million in cash to maintain his 50% ownership. Confusion over this transaction is likely the cause of the stock dropping as much as it has since the Q2 results were published showing a massive $70 million drop in working capital on KNDI’s balance sheet from positive $60 million working capital, to a $10 million working capital deficient caused by this transaction. In all its ten years, KNDI always kept a strong positive working capital position, so to a short seller or less knowledgeable shareholder, this looked problematic. IMO, this was one slick trick whereby KNDI Chairman Hu took the Government owed delayed subsidy “paper” that some were beginning to think would never be paid and gave it back to the JV with government blessing using it as good paid in capital. This lowered the amount still owed KNDI backed by subsidies to only around $65 million Even better, since Li Shufu had to put in all that cash, The JV is now in excellent financial shape to start building a lot of EVs the balance of this year. (point of note. So Li Shufu, with his recent $83 million cash contribution has now put in some $213,000 million cash up for his 50% of the JV. KNDI also owns 50% plus a quite profitable parts business, yet the Market only gives KNDI a $200 million Market cap!
But Wait!! KNDI must have had a bank loan collateralized by this $83 million. Right? What is collateralizing the loan now? Thought you would never ask. With all of the seemingly negative turns thrown against KNDI as an EV pioneer, it is only right that something huge and pleasantly surprising would pop up. And did it ever. And the timing could not have been better.
KNDI’s $160 million hidden windfall. I mentioned that KNDI started out by manufacturing ORRV. . In 2003 when it entered that business, KNDI acquired a 400 acre piece of 99yr “land use rights” with six big warehouses, a five-story office building and a seven story worker condominium. All of which was used as its original manufacturing facility and headquarters. Over the years, KNDI has kept that property for itself independent of the JV and used it for its General headquarters as well as operating facility for its battery and R&D division. Late last year the Jinhua government re-zoned the area causing a major increase in the land use value of this property. The city of Jinhua is an industrial city and one of the fastest growing in China. Has seen property (land use) values skyrocket causing a government Development Zone entity to initiate discussions with KNDI about acquiring this property from KNDI. While never mentioned in a PR or 8K it was mentioned in the first quarter SEC filing showing the value offered was in the 1 billion RMB area or around $160 million US dollars. Here is a clip from the SEC form 10K.
Pg. 8 10K
Looking at KNDI’s recent balance sheet, individual “land use rights” totals only around $12 million since inflating asset value cannot add to this value. On the last conference call when asked about this property Chairman Hu was quite excited and told shareholders it was looking very promising but maybe a bit more or less than $160 million. Certainly with only a $200 million market cap, the market is clearly ignoring this quiet disclosure which could turn into reality at any time now. But in the meantime, the banks that had been carrying the KNDI $83 million had no problem taking on the Jinhua property as substitute collateral. A point to note. KNDI currently has a Book Value of $4.80 a share. Should this property sell in the next few months as is likely, After tax Book Value should increase to around $375 million or $7.00 a share. With a whole lot of cash, you can bet Hu will be buying back shares for the Company as well.. Pair this with other points from the Q2 CC where Chairman Hu stated he felt confident a large subsidy installment payment by the Government should happen in October allowing the JV to pay more down on what is owed KNDI along with an additional $16 million in cash owed KNDI (not the JV) by Hainan Province. His expectations was that all would be paid by years end. One would think this should give uncomfortable thoughts if one is short KNDI.
NIO as in the case of TSLA, Proves the axiom of “the more money you give them, the harder it is to turn a profit”. . As we know, TSLA and NIO both lost a lot of money their first three years in production and TSLA is still losing money. Why? Because they had the money to lose. On the other hand, let's look at the KNDI JV which was originally funded for $180 million split between KNDI and Geely.
As you can see from the below table extracted from the KNDI 2015 10K, the JV audited BDO results on top and KNDI’s own BDO numbers below were quite respectable particularly considering the JV only started to generate its first revenues in Q4 2013. Since it is a 50-50 joint venture, neither KNDI nor Geely were allowed to consolidate any JV revenues, only its bottom line under SEC rules. In other words, if you really wanted to do an “apples to apples” valuation of KNDI, you really should add half of the JV revenues to KNDI’s revenues. I say this knowing that if KNDI owned just a fraction of one percent more than Geely, you would see KNDI taking and reporting its full 50.01+ percentage share.
So How Does KNDI Generate its own revenues? KNDI’s strong revenues were primarily due to its main operating business of being an OEM parts supplier to the JV, This includes batteries, Battery Management Systems, motors, AC, and several smaller parts. Today, KNDI provides the Kandi JV in excess of 60% in dollar value of all its EV parts. With this said, KNDI’s strong net income for 2015 was made up of 50% of the JV net income and the balance from its own sales. .
So let's look at it this way. In 2015 the JV did $362 million in revenues and sold 24,200 EVs. From prior Conference Calls to include the last (extract below), Chairman Hu has stated and confirmed his 2020 target for EV sales is still to be on track for 200,000 units. So let’s say he hits the 200,000 or half existing capacity in 2021. That could mean some $3 billion in JV revenues and while I am sure the margins will grow with volume, let’s just say $100 million in bottom line. In this case KNDI would get to book $50 million of this profit plus whatever profit it could generate from 60% of KNDI JV parts purchases. Plus whatever expanded business, it is in at the time. Makes the current $200 million market cap look pretty silly and might give you a clue why Chairman Hu is buying stock. Here is the excerpt from that part of the CC
From Q2 2018 KNDI Investors CC
In comparison to NIO, one would really have to look at the Kandi JV numbers (top set in table above), the actual EV maker, not so much KNDI itself. (notehow the Kandi JV became profitable its first full year) However an important point, before anyone makes the assumption that KNDI itself is not a “real” automaker, one should take in consideration that KNDI’s Chairman/CEO holds the same Chairman/CEO position in the JV. He in fact not only runs all of the JV operations as well as KNDI’s, he also built from the ground up three of Kandi JV’s four 100,000 annual capacity each EV facilities in Changxing, Zhejiang Province, Rugao, Jiangsu Province, Haikou, Hainan Province at a combined cost of over $600 million and the fourth which was contributed by Geely, in Shanghai is an additional $200 million. Geely is in fact a passive investor in the JV, whose formal name is Zhejiang Kandi Electric Vehicles Co., Ltd. While Geely is not mentioned in the name, as of earlier this year, KNDI JV’s all new fleet of four EVs, the K22, K23, K27 and EX3 SUV are now all branded as Geely Global Hawk EVs. All of which were designed by KNDI’s design team.
In the case of the K22 and EX3, KNDI through a recent acquisition of a US based PowerSports company, now named SC Autosports, LLC, Kandi JV has now become the first China based pure EV company to begin active sales of a full speed purely China made EV in the US. The K22 will sell after US tax credits for less than $9,000 and the EX3, for less than $20,000. The EX3 is in the final stages of US DOT testing and will likely be available for sales in Q4. Through its 100% ownership of SC Autosports, KNDI will be the US Master Distributor of all of their EVs creating a third revenue source. While too early to tell, at such a low entry point after US tax credits, the EX3 should be an excellent seller in the US.
In China, KNDI has three variations of the EX3 as you can see from this translated China based stat sheet. As of now, it is the mid-version on this sheet that will be sold in the US. After substantial subsidies in China, a China consumer can aquire this same mid-version for around $12,700 US. The top of the line EX3 adds: in car WiFI, GPS, fast charging and a 236 mile (380km) range to its already long list of options, after subsidies will sell for around $14,100. Since this EV is very similar to Geely’s second best ICE seller this year, the X3, the EX3 selling for about the same price but electric, should be a really big winner when it goes on sale any day now.. All three EX3 models have now been fully certified waiting only for its sales tax free certification. From the CC, sales likely began in late September, but KNDI does not report the JV sales numbers monthly.
Aside from the obvious very high profile and deep pockets, NIO has a very distinct advantage coming ten years later to the party. As a KNDI holder for ten years who has visited the company twice in China, I can assure you it is nothing short of miraculous that a pure EV Startup like KNDI even had a chance as you can surmise so far. It is no wonder Chairman Hu was named 2014 China Green Car Innovator of the Year Award winner. If only because he knows how to survive. Between the bureaucratic maze and big auto lobbyist forcing government rule and requirement changing every few months, KNDI should have been out of business two years ago.
Some More Detailed Subsidy Background. First let me give a general overview on how the subsidies in China were supposed to work. I say “general” because changes over the past two years we're being made on the fly by the Government and in some cases even retroactively. Due to the many changes, I can't even begin to try to be too specific, particularly in time. Effectively the manufacturers are required to “front” the subsidy reduction by discounting the sales by the subsidy amount to the distributor or dealer. Hypothetically, if the Dealer cost was $15,000 and the subsidy $5,000, the Manufacturer has to sell it to the Dealer for $10,000 and wait for the Government to pay him back the other $5000. If he doesn’t he can’t apply for the subsidy. This irrespective of the fact the maker likely has more than $10,000 in the cost of making the EV and has to take a cash loss on each unit while waiting. .Effectively the manufacturer is expected to subsidize the subsidy. This might not be bad if the subsidy was paid as originally stated, every six months. But regrettably that has not been the case. Kandi JV and others are still waiting for payments going back to mid 2015. All total, around $220 million owed to KNDI JV. Luckily the banking system in China considers these Government IOU’s blue chip paper and easily lends money against the IOU.
To major ICE type automakers, who for the last few years have had boom times, covering this temporary cost was not really a problem. But to an EV only maker like KNDI JV we are talking serious cash in the red. Obviously this puts a pure EV maker at a significant disadvantage.
The Most Consequential Rule Changes That Have Constrained KNDI JV. Until this year with its EX3, KNDI began exclusively as a maker of “city cars”, with most cars going to its Award winning, Micro-bus “last mile” CarShare program mentioned above.. Chairman Hu knowing that it was all but impossible to put more than 100km a day on a city car or go more than 100 kmph, kept the build price down by using smaller batteries and motors sufficient to meet the then subsidy minimum of 100 kmph and 120 km range. Makes sense due to the high cost of batteries in particular. In January 2016, due to big company lobbying, the Ministry of Industry and Information Technology (MIIT) the controlling ministry made the strange move of raising the subsidy range requirements to 150 km. Yes, they did it in January for that same year! Of course that rule change was directed at the 2015 volume leader KNDI, since all the ICE conversion EVs already had longer range so weren’t affected. This forced KNDI to stop sales and make changes to convert its whole fleet to meet the new requirements. A huge blow causing KNDI to go from the China #1 position selling 12,100 EVs in Q4 15, to zero in Q1 2016 while changing over. This was something that would likely put 95% of US businesses, out of business. Remember, at this time KNDI had two massive plants operating that needed to be mothballed and a third finalizing construction. Luckily the plant workers are not union and could be easily laid off.
While a setback, things were manageable up until KNDI JV not only had the audacity of leading the country in pure EV sales. But to cap it all off, KNDI announced entry into two major long term agreements totally 110,000 EVs. One with Pangda, China’s largest National independent car dealer and a second with a government entity in Shanxi Province. I guess this really raised the dander with the ICE makers that such a “nobody” auto start-up like Kandi JV would be outrunning them.
But this was just the beginning. After making the changes, sales jumped from 0 to 7,300 units in Q2, but shortly the rumor mill started whispering that the Government was going to raise the range requirements again to 200 km. Once again plant shutdowns and modifications were being made and the new EV the K12 came into the fleet. All together Kandi JV sold around 10,500 cars in 2016 and around 11,500 in 2017 causing the subsidy money owed to skyrocket past $220 million. Since there still was no subsidy payments and the government bill was increasing steadily with each sale, the decision was made by Kandi JV chairman Hu and his partner and 50% holder Li Shufu, to effectively halt new production, liquidate all old models and spend the first half of 2018 developing a completely new Fleet of EV's. Though 5,100 units were sold in H1, 18.
This brings us to the totally new fleet shown in the pictures above. Each of these new EVs will sell after subsidy for between $6,000 to $14,000 with additional subsidies accruing to the JV in the $4,000 to $6,000 range, leaving a nice profit margin. Thankfully the raw cost of batteries has dropped significantly and because KNDI itself is a licensed battery dealer and also developed a new high efficiency electric motor, for the whole new fleet, all of Kandi JV EVs now have a range of 300 to 380 km. This puts all KNDI EVs at the higher end of the new subsidy rules. So fingers crossed no further range hikes are likely before the subsidies thankfully expire in 2020.
I said thankfully expire above because Chairman Hu has said on many occasions that he can compete with any automaker and beat most if given a level playing field.. Once the subsidies go away Kandi JV not only has a level playing field but assuming the government delivers on its promise to put in its carbon credit trading program in effect by 2019 Kandi JV and NIO, as pure EV producers will gain a distinct advantage over all others in that they will not have to use their own EV carbon credits to offset China's CAFE ICE standards of increasing each manufacturers average fuel requirement for their Fleet. While we have no hard numbers Kandi should have hundreds of Millions of dollars in carbon credit sales to augment its direct EV sales and go directly to the bottom line..
As in the case of NIO, who currently does not have its own license to make and sell EV’s in China, instead having to rely on third party auto maker Jianghuai Automobile Group Co., KNDI JV also will be going public, but likely in China, once it has received its own Manufacturer's license.
What the Kandi JV Going Public Really Means To KNDI. . With the latest $166 million dollars added as capital contribution to the Kandi JV, it now has a book value of around $310 million dollars and substantial cash, thanks to the Li Shufu $83 million cash contribution. Add to this it’s in place annual manufacturing capacity of 400,000 units per year. And then the recently added ability for the Geely Kandi Global Hawk brand to access Geely’s dealership network in China, It would not be unrealistic for the JV to start trading with at least a two billion dollar market cap, Now assuming 20% sold on the IPO raising $400 million, KNDI’s 50% share would reduce the 40% and be equal to at least $800 million or around $16 a share making the wrong assumption that the Kandi JV is all KNDI has. Wrong in that in reality it's OEM parts business and US distributorship should easily add another $8 to $10 a share in value.
Q2 10Q pg. 36
Let me leave you with this thought. Since KNDI has never had an IPO placed by a syndicate of retail and institutional brokerage firms, it has never had the luxury of having any analysts following it. While in hindsight this has probably been a good thing since it has had to plow through a lot of uncharted waters causing unpredictable results, so no analyst have ever been burned by KNDI. Contrary to popular opinion, somebody has to pay that first analyst to follow a stock. That somebody is usually a brokerage firm that has an agenda placing the issue for underwriting fees. Without analysts, you don’t get serious institutional holders. So you see, up until now, it has been “easy pickens” for institutional short sellers.
In Tesla’s case, and I assume now NIO’s, there are a large number of loyal long institutions more than capable of outweighing their short sellers to at least keep the playing field level. In KNDI’s case, it has been the Terra Cotta Warrior peons with their 100 to 1000 share orders, trying to fight the US Marines, loaded short funds with their 50,000 thousand share daily blocking trades and EOD bid raids.
Since KNDI has been able to survive without any outside equity funding for the past five years, now that they are about to sell the Jinhua facility for $160 million, it is not likely they will be doing any new financing for a while to attract underwriters and analysts, HOWEVER, as I mentioned above, the Kandi Geely JV will be going public before long. You can bet with Li Shufu’s name behind it, all the big names underwriters will want to be involved. Since Chairman Hu holds the same position in both companies, he will be negotiating the terms of the underwriting. I fully expect one of the terms which should go without saying should be to put their analysts onto KNDI as well. Why do I say “go without saying?” Let's look at a simple hypothetical.
If Hu and Shifu want to do the underwriting at $2 billion, the only way it could logically be done is to have KNDI trading at least parity of $16. (Like YHOO trades tracking BABA) If KNDI was only trading at $8 for example, then logic would tell you that a fund would by KNDI first until it at least reaching parity plus.
Bottom line. There are a lot of people who would like to get in early on a Li Shufu deal. Geely auto, Li’s only currently trading deal would not qualify as “early”. KNDI would and TMK is the only early Li Shufu bet available as of now, particularly for US investors.
So, if you are an investor with a little speculative blood, I direct you to the current short interest in the stock of some 5.6 million shares which has grown some 900,000 the past eleven weeks. Which shows around 40 days to cover. Look at this and make a decision.
“Should I believe the short sellers who are in denial and join them, or should I just watch, or should I take direction from Chairman Hu, who is buying shares, and Li Shufu who just put a fresh $83 million of his personal cash in the Kandi JV.“
BTW, Here is what Hu said on the last Conference Call..
Authors Disclosure: I own KNDI shares.
Originally Published at: NIO Inc, China’s $12 Billion EV Startup Becomes 2nd US Exclusive Listed Pure EV Maker --After 10 Years of Successful EV Trailblazing, NASDAQ Listed Kandi Technologies Shareholders Welcomes NIO Aboard.