A retired former ML Investment Banker & Regional Stock Broker Dealer/Invesmet Banking firm President with 47 years Market Experience
Kandi Technologies: A Rare “Defensive” and Hyper-Growth Company..
To define any public company as such, would by definition to most be considered and oxymoron. But to find one, would seem like the ultimate investment.
As most serious investors know, a “Defensive” stock is one that typically outperforms the Market in times of economic slowdown but also usually lags in an upward market. The term Defensive Stock is usually synonymous to non-cyclical stocks , or companies whose business performance and sales are not highly correlated with the larger economic cycle. These companies are seen as good investments even when the economy sours.
Whereas; A Hyper-Growth Stock is that of a company whose earnings are expected to grow at a wekk above-average rate relative to the market.
Contrary to my normal lengthy detail laden articles on China based, NASDAQ Listed, Kandi Technologies Group, Inc. (KNDI). I am going to keep this latest “timely” installment somewhat shorter and stay on the titled subject. For those who missed them, or want more detail on the latest happenings in KNDI, I encourage you to visit my two recent articles:
And;
“ Kandi Technologies, A NASDAQ Traded China Stock With A Share Price To Fundamentals Disconnect Of Gargantuan Proportion”. – July 20, 2015
Howerver due to current calamitous conditions in both US and China Stock Markets of late, paired with the continuous drop in KNDI shares, perhaps a short timely reminder as to why KNDI might just be the perfect speculation in this sea of investment turmoil.
While the “jury” is still out regarding the future of Electric Vehicles in most World markets, particularly in the US with likely cheap oil prices for the foreseeable future, the story is totally different in KNDI’s homeland and for now, sole market.
While I fully expect a KNDI export market to open in the next year or two (after all, prior to 2013 KNDI was one of China’s top profitable exporters of “Off Road Recreational Vehicles”), for now I think most would agree, a China populous of over 1.3 billion with a current level of only around 80 passenger vehicles per thousand (Compared with 800 per 1000 US ) leaves a sufficient sized potential market to satisfy any investors wildest growth dreams. Ironically, one of KNDI’s biggest US Market handicaps is the fact that they are a China based Company, but if they weren’t, would you really want to own a US stock exclusively concentrating on penetrating the potential Trillion dollar China EV market?
Try as they may, KNDI short sellers and detractors will continuously try to contradict KNDI’s Founder/CEO Hu Xiaoming’s claim that KNDI, through its 50-50 JV with China’s top pure passenger car maker Geely, was #1 in Pure EV (PEV) production and sales in 2014, continues to hold that status through H1 2015 and is expected to end 2015 still in the top position ending the year with between 20-25,000 units sold. These numbers may not sound all that great right now, but as reported on its Aug. 11 Q2 Conference Call, the CEO is quoted as saying “I am confident we will reach 400,000 EV sales by 2020”. About 100,000 less than what Tesla’s Elon Musk has analysts expecting keeping TSLA’s market cap some 100 times higher than KNDI’s $300 million. This in spite of an expected sales price per car for KNDI in 2020 expected to be >$20,000 and TSLA some $60,000; and the fact that KNDI has been profitable in seven of its last 8 years on NASDAQ and TSLA is not projecting a GAAP profit until 2020.
Anyway, as mentioned above, I want to keep this short and only give this small snippet to highlight that KNDI by any definition is a “Growth” Company with “Hyper” potential. Read my two articles linked above for the whole story.
Kandi is a “Defensive Stock”
From a EV Macro View -For the past month, hardly 5 minutes goes by on CNBC where China isn’t being blamed for all of the World’s Financial Crisis’. Sooo. KNDI is a China based company, therefor it “must be in trouble like all the China based companies” Right? No Very Wrong!
First of all, no matter what is going on in any World economy, there is always some percentage, no matter how small, of Companies that not only do well, but can actually benefit from a deteriorating economy. Is KNDI one of these? You Betcha!
Let’s now look at this both from a macro China EV and later a KNDI specific view.
In 2012, Xi Jinping became the President of the People's Republic of China while simultaneously holding the positions of; the General Secretary of the Communist Party of China and the Chairman of the Central Military Commission. Undoubtedly the most powerful man in the Country. Three of his top self-proclaimed mandates after reaching office included facilitating a “soft-landing” as China makes the major transition from being World’s top exporter of widgets, to an internal growth economy; clean up the deadly urban pollution and eliminate Government and Corporate corruption.
While he has done a respectable job in the corruption area which really resonates world-wide making heads of China companies with stock listed outside of China “think twice” before violating their corporate trust, it has now become obvious that wrangling the China economy is more than yeoman’s duty laden with perils beyond his immediate control. However, the third area of tackling a clean-up of the primary cause of inter-city pollution, Internal Combustion Engine (ICE) vehicles, is a project much more under his control. In an unforgiving Country such as China, while an “economic slowdown” is a stealthy problem, heavy pollution is something that is clearly evident to all of his constituents on a daily basis. So he better at least get this problems “right”.
On August 11th, KNDI put out a PR announcing the JV’s receipt of a RMB366 million ($59.6 million) subsidy payment from the PRC which not only finally “caught up” all subsidy payments for EV sales through June 30, 2015, but actually advanced a small portion of Q3 15’s expected sales of 5500-6500 cars. I say “small portion” as the amount advanced seem to pretty much correlate with the 1950 EV’s sold in Q3 of last year, though only a third of what is expected in Q3 this year.
The significance of getting this first “advanced” payment, from a Macro point of view, is a clear signal that no matter what else is happening in the China Economy, EV manufacturers are going to be taken care of.
BTW, before I move on to the KNDI specific areas showing KNDI as a “Defensive” stock, let me clarify a point that should have been obvious to intelligent KNDI longer term followers having to do with repayments of a $101 million note that KNDI was holding for parts sold to the JV as reported in its last 10Q. Those who understand, or read my last two articles linked above, knew that the purpose of this short term loan to the JV was to “share the burden”, both by KNDI and the JV, while waiting for the PRC subsidies to be paid, due to its position as “parts provider” to the JV. The intention of this note was effectively a “credit facility” that KNDI provided for parts sold with repayment to be made when subsidies arrived. In addition to the $59.6 million mentioned above, an additional $44 million PRC subsidy payment was also received by the JV on June 30th, the last day of Q2. However due to the last minute receipt of the cash, there was not enough time left to make a cash transfer from the JV to KNDI in time to show up on KNDI’s Q2 10Q.
So KNDI short sellers and protagonists have been saturating the Social Media with harbingers of financial doom for the company due to the loan which equated to a third of the total market cap of KNDI. It has come to my attention from a very reliable source that most of the total note of $101 million has in fact been paid down by the JV from these two subsidy payments and should be reflected on the next 10Q, leaving KNDI in a very strong current cash position to build and deliver the parts for the record EV sales expect this quarter and beyond.
From a KNDI specific view- As a true disruptor and visionary three years ago, KNDI CEO, Hu , came up with a unique concept toward EVs in China. Rather than starting out selling EV’s “one-a-time” like most start-up companies might do, instead he envisioned fleets of tens of thousands of small self-serve, CarShare, hourly rental KNDI EVs positioned within the Municipal Transit Systems (MTS) of all of China’s major urban areas as a “last-mile” solution of the MTS. The City of Hangzhou alone (Pop. 7 million) is estimated to need as many as 100,000 EVs when the project is completed.
Located throughout the city would be various MTS EV parking locations with charging points to include independent high-rise parking garages, prime hotel locations, shopping centers, high-rise condominiums, subway outlets, train stations and airport location, but all tied in as part of the various city’s public transportation systems. Hu elected to go this more difficult route within the City infrastructure rather than try to duplicate this as a private venture for several reasons to include:
By making each of these part of the city infrastructure, Hu knew KNDI branded EVs would receive a higher direct cash subsidy (since the PRC gives each city an additional EV subsidy for EV expansion within the city’s MTS) along with effectively free advertising by the MTS . But he also knew that he could not accomplish this as an “a-la-carte” proposal. So in his wisdom, he proposed a “turn-key” solution whereby KNDI would provide not only the vehicles, but also the business model and operator (ZZY) to run the program. The City would assist in providing suitable locations and electricity to charge the EVs.
But while the City of Hangzhou seems quite happy with this “add the last mile” Strategic Agreement to their Transit System at little cost, KNDI CEO takes his CarShare strategy to a new level by signing a Strategic Partnership agreement with one of China’s largest publically traded conglomerates, Fosun --through their giant Commercial Realty Division, Forte Fosun, to expand the KNDI branded Micro-bus (CarShare) program at the private level throughout China. This is being done not only by adding CarShare locations to new shopping centers and high rise residential condominiums, but also by adding locations in older developments with parking garages. This a true “win-win” for the various cities, KNDI and Fosun. The big advantage to Fosun (at no additional cost to City or KNDI) is by adding easy access to mostly covered CarShare EV’s for their tenants, Fosun creates an additional incentive to prospective tenants to choose Fosun properties over the competition.
While nothing is perfect, KNDI’s decision early this year to start also selling EV’s directly to consumers might see a few less EVs sold directly in case of a major economic slowdown in China, however at after subsidy cost to the consumer “out of pocket” of only $7000 USD for their 2 door K10, --$8500 for their 4 door Panda K11 and $9500 for their classy new Hi-tech computerized K17, higher priced competition would likely be hurt more severely than KNDI re. individual car sales. However, the lion’s share of KNDI’s anticipated EV sales growth over the balance of this year as outlined by the CEO on the Q2 CC will be in expanding both the Hourly MTS CarShare programs, not just in Hangzhou, but in the eight additional Cities already contracted and six more to be added for a total of 15 cities by YE 2015. And also by expanding its one to three year long term lease programs also available in the same cities.
Herein lies the real reason KNDI should be judged as a company whose growth is impervious to anything short of a catastrophic melt-down in China. Nobody will argue that in case of a severe slowdown, auto manufacturers, particularly ICE makers, will be severely hurt. The market for China auto stocks is already showing this. However, the key to the current 12 year plan in China to turn the economy internally is 1) to raise the average annual workers’ pay so he can 2) buy more consumer discretionary items like TV’s and microwaves. Items that you just can’t bring home on a bike or moped. Right now, China has about the same passenger cars per capita as the US had around the time of WWII. There is no question that economic expansion after the war grew dramatically along with the growth of passenger cars.
Once the decision was made by China late last decade, to go down the internal growth path and salaries were allowed to double or more, unless a severe devaluation of the wan, there is really no way “back” to a China leadership position as the World’s major widget maker and exporter. So passenger car mobility has to be increased significantly at any cost to the PRC.
If you can’t afford to buy a car and don’t own or have easy access to a passenger car and along with the car, a place to park it, your options to visit that big box store is pretty much limited to catching a ride with a friend, or take a taxi. Hiring a taxi for an hour is going to cost at least $10. However, taking a CarShare EV is going to only cost around $2.50-3.00 for the same hour, parking cost included. If you have access to parking, your options increase to include a KNDI long term lease which as you can see from this article that came out Friday; “ Geely push 5000 electric cars daily rental lease 13 yuan in Chengdu ” can cost as little as a bit over $2 a day in China’s fifth most populous city after all incentives.
To Summarize
KNDI has a very large short position of some 7 million shares against a float of around 31 million and total share capitalization of around 47 million for a $300 million Market Cap. KNDI has no long term debt --likely has at least $100 million in cash after the post reporting JV loan reduction discussed above, --has been profitable 7 of its 8 years trading in the US and carries a current trailing $.58 EPS GAAP. KNDI specific revenues for 2015 should come in this year up 80% around $300 million and EPS of $.80-.90 a share. The JV revenues for 2015 should come in around $500 million.
Asset-wise in plant and equipment, since 2003 KNDI owns 100% of a 30,000 annual capacity plant in Jinhua, --50% of a former Geely 100,000 annual capacity plant in Shanghai valued at $160 million since 2013, --50% of a Changxing 100,000 capacity facility designed and built in 2013 by KNDI at a cost of $190 million and 50% of a similar 100,000 capacity plant, also designed, built and is in testing by KNDI as of June 30, 2015 valued at $190 million.
KNDI has no known potential significant “rocks in the road” ahead and is now on its way to likely five consecutive years of 100% compound average growth as it production ramps up to its “guided” 400,000 unit production in 2020 irrespective of any economic challenges China may have ahead.
As you can see from the comparison chart of KNDI to the Shanghai SE index image below, there has been no related movement of KNDI in sync with the SSE until the last two and a half months when both have dropped precipitously at which time KNDI was already at its two year low and the SSE at a seven year high. Prior to this time, KNDI reached its all-time high of $22.40 in 2014 when the SSE was below 2,000.
If you read my last article, you will know that I am confident notwithstanding of what KNDI stock is doing day to day, that in the not too distant future, KNDI is destined to be a three digit stock, irrespective of who owns the shares at that time.
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