Is Kandi Technologies “Hidden” Billion Dollar Asset Soon To Be Unlocked?

Based on a recent China media article, a huge perceived hidden value totaling over $2 Billion could soon be unlocked for both Geely and KNDI.

ABSTRACT :   On April 12, 2016 I published an article on China based, NASDAQ listed Kandi Technologies (KNDI)  titled “ It’s Time To Expose The Billion Dollar Hidden Asset Of Kandi Technologies, China’s Innovative #1 Pure Electric Vehicle Developer… ” The “hidden asset” was its 50% ownership with China’s top passenger car maker, HKSE listed Geely Auto (00175.HK)  in a 50-50 Electric Vehicle developer and manufacturing Joint Venture which in less than three years has risen to the #1 position in making and selling Pure Electric Vehicles (PEV) in China. Aside from topping the list in EV sales, to date it has developed and received China certification for sale on five separate PEV’s. Even more amazing is the currently private JV which began full operations in January 2014, has been profitable in each of its first two years with 2015 EV unit sales of 24,200 creating revenues reaching $363 million and Net Income $23.3 million. This in spite of CapEx  and R&D spending to develop the five EVs, plus build and acquire four EV Manufacturing facilities in three Provinces with total current capacity of 330,000 EV/yr.  In addition, it begin construction on a 5th totally state of the art $300 million, 100,000 capacity Manufacturing facility in a fourth Province. Total investment in the five facilities upon completion of the 5th early next year will approach $1 Billion.  Company Guidance for 2016 JV Revenues calls for at least a 50% increase in revenues and production of “at least 35,000 units.  Reported production target made by KNDI on its 2015 YE results Conference Call is 400,000 unit annual production rate by 2020 justifying the need for its building out such large capacity.

Outside of its 50% JV ownership, KNDI is an EV Parts Manufacturer and Supplier whose own unconsolidated 2015 revenues were $201 million, consolidated GAAP income of $14.7 million, $.31/sh, and non-GAAP adjusted net of $28.5 million, $.61/sh . Due to SEC and IASB reporting rules, since KNDI does not own “More” than 50% of the JV, KNDI cannot consolidate its share of JV financials into its own financials with the exception of Net Income. With the stock closing yesterday at $6.65 per share down 35% YTD and down 70% from its 2014 high of $22, it is quite obvious there is little to no value being given by the market for its 50% JV interest.  With a recent out-of-context and/or misquote, by Geely in the China media late Thursday, which likely caused KNDI’s recent sharp drop from a $7.18 last Thursday close to an intraday low of $6.32 on Monday paired with a clarification article of Geelys error on Tuesday (causing a partial recovery on Tuesday) a disclosure also appeared that might signal an “unlocking” of the JV perceived value and a possibility that KNDI may soon be able to consolidate its share of JV Revenues.

Last Friday KNDI’s JV partner Geely, announced it was selling its 45% stake in a second EV JV it had entered in early 2015 .    This “other” 50-50 JV has a Chinese name that translates as “Know Beans” and also “New Oceans”. But for the sake of this article, I will refer to it as “New Oceans”. New Oceans has developed and is selling two slightly different, 2 seater Micro EVs, but does not currently have its own operating Manufacturing facilities. Its cars are made and licensed under the Zoyte Brand which to add confusion, is another long time China automaker.  While New Oceans does own a former Geely Facility, which was Geely’s only contribution to earn its 50% in the New Oceans JV (Geely put in no cash only this shuttered Geely ICE facility.  In the KNDI JV Geely put up $80 million cash plus a then Geely owned Shanghai based Manufacturing facility to earn its 50% KNDI JV interest), but it was reported last week that this New Oceans facility will not be fully operational until Sept. 2017. So effectively for now, privately held New Oceans is not much more than a group of investors still “farming-out” their EV manufacturing to Zotye.

In an interview Friday with Geely’s President about Geely’s sale of the New Ocean interest , the reporter asked him if Geely was also planning on selling their share of the KNDI JV. The Geely President was misquoted in the published article which said that Geely was also planning on selling their interest in the KNDI JV. While this article did not make it to the US media, it was all over the China Media Friday and over the weekend.  Though not published by main stream media here, it was picked up from the China Media using Google search and translate and spread to several Social Media Investment websites in the US causing concerned liqidation. Additionally some 30% of KNDI shares are held by Asian holders, so it is quite likely a large portion of KNDIs large drop since that Friday article came out was caused by ignorant shareholder fear that Geely was disenchanted with the success of the JV. Over the weekend, Geely, realizing its President’s comment was misrepresented, and rightfully put out a clarification article early Tuesday US time  that they were not selling their KNDI JV share, but might sometime in the future “adjust” their holding. Here is a translated image copy of the “clarification”.

KNDI Geely JV Current Value Over $2 Billion?

While admittedly it would not look good if Geely sold its whole position in KNDI JV similar to what they are doing with New Ocean, the last line comment in the above article about possibly “adjusting” their position could be a “tea leaf” opening the “lock” to the KNDI Geely JV value. With the KNDI JV holding bricks and mortar “hidden” assets of over a Billion dollars replacement value in its 4 (soon to be 5) Manufacturing Facilities, along with 5 approved China EVs, its top position in PEV sales in China, strong earnings potential, its strategic agreements with BABA, Uber, ZTE, Fosun and other China Giants, an additional Billion dollar valuation is logical.  Over the weekend, having only the Friday Geely article and its seeming desire by Geely to soon sell, I had a discussion with a Private Equity/Investment Banker with a top Hong Kong based Firm with strong knowledge of KNDI and the China’s EV market.  Asking him if he thought Geely would have any problem finding bids for their KNDI interest, he responded that there would be a lot of interest in the current frenzied market for entry into the very hot China EV Market. Particularly since the JV has already made public its decision to go public in China with an IPO sometime next year. Asking his opinion as to what JV should be currently worth, he responded “at least $2 Billion” if put up for sale.  That would make KNDI’s 50% JV worth a Billion or over $23 a share for the JV alone!

The Key To Unlocking the Value…

Right now, due to both partners owning exactly 50%, under International Accounting Standard Board (IASB) rules, neither company can consolidate any of the JV “numbers” except bottom line. Even if the JV hits its goal presented in a recent KNDI Conference Call of 400,000 EV production in 2020 , the $8+ billion in revenues still could not be consolidated by either Company.

HOWEVER,  if Geely decided to sell a portion of its holding and allow KNDI to buy as little as .01%, giving KNDI over 50%, then KNDI would be able to consolidate its subsequent majority share in all JV numbers into its own SEC financial statements making them much more transparent.  

For example;  because KNDI cannot consolidate its half of JV revenues, but can consolidate its half of JV earnings, it penalizes KNDI’s Gross Margins. As mentioned in prior articles, KNDI sells parts to the JV at below 3rd party market prices to assure retaining the JV business for Battery Packs, Battery Management Systems, Controllers, Motors, AC units and other parts.  However, it is willing to do so as it makes up the difference by legally adding half the JV’s bottom line to its own. This creates a suspicious environment on its SEC filings whereby before long, KNDI’s own Net Margins could exceed its Gross Margins! Additionally, from just a market perception point of view; if KNDI would have been able to add half of the $363 Million JV revenues last year to its own $201 million, it is not likely KNDI shares would be trading at a such a low $312 million market cap if it was showing $383 Million instead of $201 Million in total revenues.

But even more important, if Geely decided to sell a portion of their shares to a third party soon, it is likely they would get somewhere between $15-20 million per percentage point. With such a sale of let’s say a 10% interest, a value would then be put on the JV.  KNDI’s 50% share would then have a perceived value of up to $1Billion dollars based on such a third party investment. With its current market cap of around $312 million, which as explained, hardly covers the value of its own parts business, a massive jump in KNDI share price would be expected. Even more so exacerbated by the current huge 5.6 million share reported short position and low daily volume in KNDI.

Best of all worlds for KNDI  would be Geely selling 1% to KNDI and the balance of whatever they may want to sell to a third party. Then in addition to its perceived value, KNDI would also be able to consolidate its majority ownership.

Looking at the possibilities of Geely selling a portion of their 50% from just a public company business aspect, for the above reasons, Geely’s comment on possibly “adjusting” their share position, makes sense. Since KNDI is the “Operator” of the JV, Geely ownership is passive. Knowing KNDI Chairman/CEO Hu, he would never sell any of KNDI’s shares. So under the current environment, neither would ever be able to “book” JV Revenues anyway. Like KNDI, Geely’s shares are being given little, if any value by shareholders for their JV ownership, so it makes sense for Geely to maybe sell 10% of the JV shares at a price that not only gives them back their total initial investment to include, cash and plant value, but will still hold 40% of something that finally has an identifiable perceived market cap valued at some 15% additional to their current HKSE market cap.  

Near Term Added Value…

As mentioned above, KNDI gave guidance last month on its Q1 CC for total YE 2016 JV Sales of “at least” 35,000 units. On the 2015 YE CC, it further broke down expected unit sales to include a minimum of 20,000 of its new K17B 4 dr EV which wholesales for around $19,500. All EVs to be sold this year are new upgrades to both speed and range. I received information from a very reliable “boots on the ground” source in China three weeks ago that in just April and May, over 4500 K17 and K11B were built and delivered, with the Shanghai based K17 auto carrier stating he was told to expect to deliver a minimum of 2000 K17’s per month for at least the next three months increasing thereafter. The also new hi-tech K12 2 door being assembled in KNDI’s Rugao Facility, is expected to begin first ever sales in July and is expected to wholesale at least $17,500. With these facts in hand, it is obvious that the minimum 35,000 units this year will likely average at least $5000 per unit higher than the 24,200 units at $13,200 sold for last year.

Re. Q2 expected to report the second week in August

As reported in my most recent article , with all new and upgraded KNDI branded EVs completing certification in early April, total JV sales for April and May were 3,127 units. May alone was 2,598 with 2,235 being the higher priced K17 and 363 being the $18,000 4dr K11B.  May last year saw a total of only 700 KNDI PEV Sales of all types. Total unit sales for Q2 2015 was 4,446, all being either the old 4 dr K11A or 2 dr K10 units which generated an average of approximately $15,500 per car.

So with June historically being a strong month for EV sales, the JV reaching at least the top end of the Company’s 5,500-6,000 unit guidance, looks pretty easy with another guidance beat likely. At the higher unit sales price and increase unit sales over 2015, the JV should see at least a 50% revenue increase in Q2 and a likely a double over the JV’s Q2 2015 net of $2.4 million.  While the Company has not yet given guidance for Q3, in order for it to comfortably reach its 35,000 unit sales guidance for full year, Q3 unit sales should reach between 11,000 to 13,000. Or around a double from Q2 2016.  So aside from a larger bottom line contribution from the JV in Q2, if the JV is going to reach around 12,000 unit sales in Q3, KNDI will be selling double the parts with a significant portion delivered by the end of Q2 in preparation for Q3 production.

Looking at Q2 KNDI numbers specifically . Remembering that KNDI does not book any JV revenues, but does book half the profits so last year KNDI had GAAP net income of $5.4 million with only $1.15 million contributed by the JV. Adding both the Q2 2015 JV contribution of a double or more and a likely double in parts sales, KNDI itself should easily reach $10 to $12 million in net or $.22 to .26 per share in net income Q2 2016. This with expected quarterly ramp-up putting KNDI on par for net income of at least a$1.00 a share for 2016.

Brexit or other Global effect on KNDI…

In several past articles, to include one I just published a week ago that KNDI, by any definition is in a business sector that is fundamentally immune from any Global or local economic downturn:

“If you are concerned about Regional or World Economic downturn, KNDI, particularly at the current ridiculously low level should be part of your portfolio. No matter what happens in China, or the World for that matter, EV’s in China, if for no other than health reasons are Government mandated and will prosper. For even more comfort, in addition to rapidly growing consumer direct sales, KNDI JV is the sole provider of EVs to China’s largest CarShare Program and single source EV leasing Company which have both KNDI and Geely as minority shareholders. The latter two industries will always prosper in a down economy.”

So what happened on Friday? Brexit surprisingly passed and the Global Markets go into a tailspin with many down 10% or more. Well not ALL Global market. Ironically, both China mainland exchanges, the Shanghai SE and the Shenzhen SE both had hardly a downtick.

As you can see from the three small charts above that represent trading of KNDI and the two Mainland China markets, After a small 1.4% Shanghai SE downtick on Friday and even smaller for the Shenzhen SE, each of these exchanges to include today (last night US time), haveupticked each day since to equate to quoted price some 2% higher than at the close just before Brexit was disclosed. Amazingly, the talking heads rationale for this positive action in China seems to be that with Brexit causing such Global concern, China is now being looked at as a more “stable” investment environment!

Ironically, due to the timing of the misquoted Geely comment paralleling the Brexit crash, KNDI also crashed some 12% before starting a very light volume recovery of 3.6% yesterday.

Conclusion: As any long term KNDI shareholder will attest, it takes a very intelligent investor who knows how to do Due Diligence in both China and the US, to suffer through the frustrations the stock has delivered over the past few years. In contrast to Tesla’s Elon Musk, KNDI’s controlling shareholder Chairman/CEO, Xiaoming Hu is a very conservative man of few words, but incredible performance.

Aside from the mandatory announcements like Quarterly/Annual earnings reports were Hu has consistently beat his guidance, until a deal is completed, interim Company announcements are rare. In fact, other than required announcements, aside from an upgrade of Auditor to Global firm BDO and attendance at a few Global Institutional Investor Conferences, it has been five months since KNDI’s last “Breaking News” press release.

However, based on recent China Media reports, where KNDI gets excellent coverage (comforting since China is where KNDI currently does all its business), at least two significant announcements should be forthcoming in the next few weeks. The Official Ceremonial opening of the JV’s news state of the art Rugeo, Jiangsu Province 100,000 Capacity Facility along with first sales of its new K12 and a very sizable $100 to $120 Million China Subsidy check due the JV for sales made in Q3 and Q4 last year. Aside from this, there are several other major events that could be announced at any time, but with less clarity as to timing at the moment. Some of these “outliers” to include Uber and BABA can be found at a recent article I published in May titled: “ Kandi Technologies Update: Fundamental Advances Over Last Three Weeks Sets Stage For Incredible Year Ahead…  “. And of course I strongly recommend you read the article linked toward the top of the Abstract above referencing the Billion Dollar Hidden Asset.

Disclosure : The author is long KNDI stock and Public Stock Options