"Beijing issued heavy air pollution warning, part of the vehicle all day ban"
http://www.d1ev.com/48099.html
To pull a Google Translated Quote: “ According to the early warning measures, during the orange warning period, on the basis of the regional limit traffic management measures in the implementation of the peak working hours during the working day, the national I and II emission standard light petrol vehicles (including driving school coaches) and the construction garbage, slag and gravel transport vehicles Tianquan city prohibit the road (except for clean energy vehicles).”
What that means: On smoggy days, motorists might just find out they can’t drive their light petrol vehicles.
What that means to us: The political cluster which was Clean Energy Vehicle subsidy policy has just been shattered wide open. In the West we think “$600 toilet seat” when we hear “government supportive policy”. In China, the term ‘supportive policies’ means the government shoots your competitor.
At 22 million new car buyers per year, that makes 65,000 people shopping for a new car each and every day. That’s 65,000 car buyers having to decide what to buy on each of the days their government says, “Sorry It’s too smoggy to drive that gas engine vehicle”.
For US based investors, the ability to participate in the clean energy vehicle shift is rather limited. For cars BYDDF, GELYF, KNDI. For batteries, it’s CBAK, HPJ and KNDI actually touches both. BYDDF gets you an automaker who’ll shift drivetrain as the market demands. Geely will get you an automaker who’ll shift drive train as the market demands while aggressively partnering with EV companies to build that foot print. KNDI through its Global Hawk JV is an EV pure play. Their numbers will ramp with adoption of EV. On the battery side, KNDI sells into Global Hawk. The other battery manufacturers haven’t captivated me enough to cause comment.
For the sake of all who live in these horrifically polluted regions, I’m excited to see the PRC finally getting the policy mix productive in driving healthier conditions.
KCM’s Endeavor in the Space
At KCM we’ve been following China’s need to detox itself for a while. As a bit of a masochist and champion of the little guy, it’s been a fun space for me to follow. I’d like to share some of what I’ve found and enjoyed along the way. If there is anyone else in the market who finds this enjoyable or productive, great!! Feel free to pass it around.
Punch Line First
With his multiple form 4 indirect buys , KNDI CEO Hu Xiaoming coveys that he knows how to wield control of the most powerful listing structure in the public markets.
The Back Story
Prior to 2012 the shorts were very reasonable in their attitude toward KNDI. Go-kart maker, no r/d, the promotors, the auditor, the accounting, Chinese RTO, Chinese bureaucracy… Yep.
For those unfamiliar, shorts were so confident that KNDI should be delisted they churned hundreds of millions of naked shares through the tape through late 2013 and much of 2014 in order to squelch the take up by investors in this at the time 19 million share float listing as it transitioned to become an EV maker. 3 trips to the Reg SHO Threshold List between mid 2013 and mid 2014.
file:///C:/Users/todd/AppData/Local/Temp/msohtmlclip1/01/clip_image002.jpg
At the peak of the chaos through 2014 and into Feb 2015, the company disclosed an SEC inquiry and eventually the unfathomable. The SEC issued a no action letter.
How Did KNDI get an SEC No Action Letter?
Ever since the Jinua 3000 EV trial program where Zyote leased KNDI its manufacturing license for $50 per car, whenever Hu has gotten himself into an entrepreneurial pickle, someone has opened the trap for him. Events such as Hainan reimbursing KNDI for the construction halt and relocation of the soon to be complete factory along with providing a $45 million r/d grant.
Hu left his position with the National 863 program with QBEx patents. Nobody leaves their employer with patents. Can’t imagine the Chinese government is much different in that regard. But Hu had the patents and contributed them to KNDI. Huh??
And as a matter of bringing KNDI into compliance with Western expectations, Henry Yu was brought on as Audit Chair in 2012. His well-earned geopolitical reach and high regard for compliance have been invaluable to the company.
Someone has shorted the snot out of a company which has implied nation to nation COP21 level importance. Analogous to plowing, “The bigger the truck. The bigger the stuck. Someone’s really truckin’ stuck.”
The 2015 Markdown Began
Feb 2015, a no action letter and 7.9 million shares short of a company floating about 32 million shares the SEC said “A pox on all your houses. Like Vernon vs Roy and Osgood vs Roy , sort it out amongst your selves.”
Immediately following any company p/r, news item, or filing ensued a 3 – 5 day bear raid. It’s just a market reaction to news you know. Something like 31 out of 32 news items in a row.
All that effort and today there’s still 5.4 million shares short. They can move the price. But it’s a bit tricky getting ‘em in.
Sure institutions live on long after their human counterparties die. Sure one can work the positon as it rises. Sure one can hedge; maybe as long as the options specialist writes out of the money calls. Potential reward for the consortium of short sellers is another $27 million or so if it delists plus or minus trading gains along the way.
At the end of 2016, Hu buying in roughly 50,000 share increments really moved the stock quite a bit. Looks kinda hard to find real shares eh??
Here’s the Conundrum
Even though December sales numbers are out elluding to a beat of lowered guidance, The March 10k will be pretty damned ugly, but it’s looking like the company won’t need to raise capital as the PRC EV subsidies from 2015 are finally being processed. The “out” whereby the company issues shares to the short sellers is looking unlikely as well.
Shorts have had wonderful latitude in moving the share price. I suppose short sellers can take it down again. But they haven’t freed up many shares going low so far. Hard to imagine now that insiders have established buying, and China is implementing vehicle restrictions during elevated smog periods that there will be too many weak holders stopping out now.
Hu’s Coachable
In an activist sense, it looks like someone has gotten to Hu. Who knew Hu’s Coachable?
The company has gone nearly radio silent. It’s as if someone has explained to him that the incessant p/r’s bring in new weak holders who get pushed right back out by the algos. Ceasing the inflows of hot traders removes a source of revenue for the machine operators.
It’s as if someone has explained to him that the best thing anyone first looking into a stock can find is a long string of form 4’s. “What do they do?” “I don’t know yet, but they sure like to file form 4s. Damn!?! Those are buys.”
More importantly, KNDI has the most powerful listing structure; neither hi, nor low can any acquirer make Hu go. Half the company is in escrow in China. KNDI is the other half trading here. Hu owns approximately 28% or so of the trading shares. So no matter how low the shorts take it down, no value investor in the world can buy a large enough stake to take control of the company. The bad side of this, there is no support from institutional value vultures. The magical side, Hu gets to set his own net worth. When Hu buys, share scarcity increases. His entire honeypot takes upward pricing pressure.
Back to the Punch Line
In the past quarter, Hu purchased roughly 250,000 shares across multiple small buys. He took in about 0.5% of the float. He did this with his own money.
We’re Long
At KCM we’re long KNDI. It’s not a recommendation. Seriously, do your own dd. This is still very early for most.
Evven though, KCM is primarily a deep value shop, from time to time I’ll post an update on KNDI simply because I like the company and it's in a societally important space. Once it achieves broad coverage and is no longer an uncommon find I’ll look for something else on the frontier which captivates me.
Enjoy,
Todd Krajnia