Kandi Technologies (KNDI), Can It Possibly Get Any Better Than This? Don’t Bet Against It!

In five weeks, it will be 43 years since entering the investment world as a young ignorant stock broker with Merrill Lynch. After some three years I was fortunate enough to collaterally join Merrill’s Investment Banking team in formulating new Energy related products for its retail customers. Thanks to Merrill’s excellent training and guidance, my stay was not long before I left out on my own to start and lead the first new full service stock brokerage firm in over ten years in Houston in 1978. Ten years later, due to extensive completion from discount brokerages brought on by the advent of “deregulation”, I left the industry, but not before gaining extensive knowledge of all facets of the brokerage industry, with heavy weighting on Investment Banking which included; underwriting, both as Managing and participating underwriter of over 50 IPO’s, over 100 private placements and even a few Reverse Takeovers. Additionally, I worked alongside our Research team as well as headed our OTC trading unit.  

During the 27 years since exiting the industry as a full time professional, I have been a consultant and shareholder, both paid and unpaid to several dozen emerging pre-public and public companies. Several, such as Waste Management (NYSE-WM) have grown to be multi-billion dollar Companies , BUT NEVER, have I seen anything even approaching the potential and performance already delivered that China Based NASDAQ listed Kandi Technologies (KNDI) is offering today .

While in 2007, I was fortunate enough to find KNDI on the first day its stock started US trading on the OTC-BB market as a profitable Off Road Recreational Vehicle (ORRV) maker and exporter. I looked at it as potentially another emerging Polaris (PII). For whatever lucky reason, when given the opportunity to meet its founding CEO, Xiaoming Hu in New York at the time of its NASDAQ listing, I broke out my credit card and booked a flight. While neither of us spoke a word of each other’s native language, through both translator and “physical presence”, something inside me told me that this man was head and shoulders above any other thousand CEO’s I had ever met. (Subsequently, two personal trips to visit the Company in China in late 2010 and 2013 have further confirmed this.)

But in 2010, watching Hu gamble his rapidly growing and profitable 100% exporter of ORRV’s and transition out of its proven multi-hundred billion industry, to the extremely high risk EV Industry initially gave me concern that he may have lost his mind. Though I must admit, the thoughts of having Trillion dollar potential in a China market, desperate for poor air environment solutions, did carry considerably more speculative excitement then ORRV’s being exported to the US.

As time went on and many much larger and better financed companies were failing in the EV industry, KNDI hardly missed a beat in its almost seamless total business transition to include both earnings and revenue growth. What makes this even more amazing was accomplishing this while doing a 100% reversal in his market from exporting to internal consumption and with no early Government assistance. Watching KNDI so rapidly grab the #1 position in China EV’s, it is no wonder Mr. Hu, unquestionably a  true Innovator was bestowed the “ 2014 China's annual Green Car - Innovator Award ”.

For those who follow Mad Money host Jim Cramer, appropriately just Monday evening a week ago, the primary topic on his show was Companies that reinvent themselves.

“ I love reinvention ," Jim Cramer announced to his Mad Money   viewers Monday. That's how companies take themselves to the next level. But reinvention also takes time and great skill, and that's why most investors shun reinvention when they see ”

If there ever was a Company that Cramer should “love” it should be KNDI.

Lets look at what he has accomplished with KNDI in just the past three months.

• Took KNDI to #1 in China Pure EV (PEV) sales and #3 World-wide in September, and #1 in October by       Double     in China Pure EV Sales. #1 total Year to Date and #3 World-wide.
  
• Lead the formation of an EV Strategic Agreement with Alibaba, ZTE, UBER & 4 others.
  
• Opened Its 1st MPT Location under Strategic Partnership Real Estate Giant Forte Fosun.
  
• Launched & Made Initial MPT Sales of its 3rd PEV, high tech K17 In Hangzhou & Nanjing.
  
• Kandi Technologies Announces Initial Direct Sales of 1,000 Model K10 Units to Tianjin.
  
• Ministry Approval and Released for sale its higher speed and range 2nd Generation, K10 & K11
  
• Based on Q3 Numbers, Upgraded to a “Conservative BUY” by McLean Capital Research based on Strong Cash         Flow and Financial Condition.
  
• Given the highest 10 out of 10 Fundamental Rating by Thompson Reuters
  
• Completed & Began Testing of new Hi-tech Robotic 100,000 capacity Facility in Jiangsu Province.
  
• Changed Kandi-Geely JV EV’s branding to Geely’s globally recognized “Golden Hawk” brand to enhance direct        consumer sales both nationally and for 2016 Export.
  
• Entered Agreement with Swiss Based Micro-Mobility (Inventor of the Razor Scooter) to Develop the Microlino EV.

Let me discuss each of the above points further, but let me also suggest if you only know little about KNDI, you read Seeking Alpha Author Bill Watts August Article, “ Kandi Simply Explained, And Its Valuation ”. Additionally, I suggest you peruse my last three KNDI articles on Harvest which gives a lot more background leading up to many of the events discussed here as well as more in-depth discussion on valuation both now and in the future.

Took KNDI to #1 in China Pure EV (PEV) sales and #3 World-wide in September #1 in October by Double in China Pure EV Sales. #1 total Year to Date and #3 World-wide.

As China’s true “first adopter” of Pure Electric Vehicles, KNDI, initially on its own and later through its Managing of the JV with Geely Auto, it has ended each year since the serious start of EV’s in China, 2013, in the #1 unit sales position. At the end of 2013, all before activating its 50-50 Joint Venture with China’s top Passenger Car Maker, HKSE listed Geely Auto, KNDI led all EV sales with 4,694 units all made and sold by KNDI. At the end of 2014, KNDI, while managing the JV, again ended in the #1 position in China with 10,963 units sold. Now through10 months, approximately 17,200 have been sold.

Considering the trillion dollar potential of the EV market in China, it is not surprising to see KNDI’s early adopter leadership finally being challenged by the dozen or so major auto manufacturers over this past year. While starting 2015 with its historical rate of lower Q1 sales, new entry competitors filling the “channel” seemed to be “blowing away” KNDI in H1, 2015. Investors and short sellers not familiar to KNDI’s pattern or business model seemed to be “buying into” this false presumption causing a severe decline in KNDI’s share price and record amount of short selling. The latter reached an incredible 7.75 million or 24% of the float with stock borrow rates passing 90%! (More on this later) But the rules of caveat venditor, true to its past history, saw KNDI roaring back in sales so strong in recent months that in September with 3301 and October with 4581 , both months without counting 2 door K10 sales , put KNDI #1 in all sales including Hybrid EV’s (PHEV).  In October it actually doubled its closest competitor Pure EV (PEV) competitor and even beating BYD’s top selling PHEV by 30%

Historically, KNDI has sold in the vicinity of 35-40% of total years sales in the last two months of each year. Should there be a repeat this year, which certainly seems possible based on recent announcements, it is set up to easily beat the upside of its recently reported guidance of 20-22,000 units for the year and continue its string of 100% plus annual unit sales growth.

For those who follow the China Media monthly sales reports, let me clarify a few points. Some may try to argue the “hair-splitting” of differentiating between PHEV and PEV sales. While both are considered “New Energy Vehicles” in the China Media and both qualify for the same Government Subsidies, this was not always the case in China. Since it is the desire of the PRC to ultimately do away with carbon emitting vehicles, originally, the PRC ruled that PHEV’s would only be eligible for approximately half the subsidy of PEV’s. But due to heavy lobbying by major China Internal Combustion Engine (ICE) car manufacturers, finding it much more economical to convert ICE cars to hybrids, the Government acquiesced and offered PHEV’s the full subsidy. So in the long haul, I believe it is safe to say that in the future PEV’s will be much more in favor by the PRC than PHEV’s.

Another point regarding the monthly EV Media reporting which is specifically related to KNDI is that for some reason, the “reports” only include KNDI’s K11 four door Panda models assembled in their 100,000 capacity Shanghai facility. The sale of K10 two door EVs assembled in the new (2013) 100,000 capacity Changxing facility do not show up on the official list. This even though several other EV manufacturers who only offer two door cars do show up.

The Company has stated that it does not report sales numbers at this time except quarterly. Any numbers reported in the China Media must come from sources outside of KNDI. However, in a recent correspondence with the Company, I have been told they would look into how the numbers are being fostered and will attempt to have all KNDI branded EVs included.

Lead the formation of an EV Strategic Agreement with Alibaba (BABA), ZTE, UBER & 4 others.

On Nov. 12thth, just two days after the Company’s Q3 Investors Conference Call, KNDI issued a press release disclosing an event that by any measure should be defined as “Monumental” . An event that no sophisticated investor, fund or analyst would argue; had Tesla (TSLA) and its Chairman Musk, replaced KNDI and its Chairman Hu in position, TSLA stock would have immediately added a few billion market cap.

As you can clearly see from this China media article and press release on the event, this Strategic Agreement designated "Car sharing 4.0 and West Valley Declaration”, signed by Jack Ma, Chairman of Alibaba (BABA), Li Shufu, Chairman of Geely, Hou Weigui, Chairman of ZTE, Hu Xiaoming, Chairman of Kandi, Liu Zhen, Head of Uber China, Han Feng, Transportation & Finance Division President of Minsheng Bank, Qiu Changheng, along with Vice President of Alibaba, Sun Zhenge, Vice President of ZTE and Yao Zhenghua, Chairman of Zhejiang ZuoZhongYou Electric Vehicle Service Co., Ltd.  --was clearly conceptualized and delivered by KNDI Chairman Xiaoming Hu. These China giants represent companies worth some $300 Billion.   In a later article on the “agreement ”, additional interests and responsibilities of the major parties are addressed as follows:

“…Condi vehicles will be provided for the rental of electric-vehicle, and vigorously develop automatic driving technology; these electric cars will pre Ali "Yun OS" operating system, Ali, Ali's communications will be high German navigation, Ali cloud computing, music and other kinds of shrimp set of applications in which the vehicle has a function of mobile intelligent terminal; ZTE will promote a wide range of wireless charging mode of use, to solve the charging problem faced by new energy vehicles; Minsheng Bank will provide financial support for the above items.

In addition, Uber Liu Zhen, head of China's strategy to the new fiscal reporters that China will work with Condit Uber car's auto operations have left, right qualifications Zhejiang Electric Vehicle Service Co., Ltd. to cooperate to launch green Uber service and price subsidies .”

I found the last paragraph regarding Uber’s desires particularly interesting and obviously missed by the stock market. Particularly in light of a $5+ billion dollar jump in TSLA’s market cap a few months ago when a discussion began by a rumor that Uber’s CEO mentioned that he could have an interest in working closely with TSLA if they had autonomous, self-driving EV’s in five years. (While the above article seems to have misplaced it, the KNDI PR clearly states that ZTE will be also working with KNDI on developing an “active driving” EV, or automatic driving technology.)

Commensurate with the signing of this agreement as you can see by reading the PR and/or the full China Media article, KNDI released its first 200 of its new state-of-the-art K-17, (video) 4 door EV equipped with technology partially contributed by Alibaba and ZTE. (More on this new EV later in the article.)

While some might argue that “this program may have exceptional potential a few years down the road, but too early to be meaningful right now,” I wholeheartedly disagree. If instead of KNDI it were the likes of BYD, Ford, GM etc. that may be true. However, IMO, putting this team together and the nationwide publicity giving both credibility and publicity to an “up-start” like KNDI, is Priceless. Particularly as they are rapidly rolling out new CarShare cities. (13 now going to 18 by year end to include 7 of China’s largest cities) and Direct Consumer sales. (Who, if affordable, wouldn’t want to be a first adopter of a K17 EV co-developed by this illustrious group?)

I might also speculate the possibility that one or more of these “deep-pocket” partners may have interest in participating in a “Private Equity” pre-China IPO investment in the 50-50 Kandi-Geely JV tentatively scheduled for as early as mid-2016. Considering the JV should do close to $400 million in sales by this years end, up from zero 25 months ago, and again profitable, such an investment possibility should not be ruled out.

Opened Its 1st MPT Location under Strategic Partnership Real Estate Giant Forte Fosun.

Several months ago, I wrote an article for Harvest specifically discussing Fosun a giant China conglomerate. But for now, let me just repeat a quote from MT Management Today to give some flavor of just how significant this relationship can be.

“ Like most Chinese firms, Fosun is little known in the West, though it is in fact one of the country's most outward-facing businesses. Founded in 1992 by a philosophy graduate and three genetic engineers at Fudan University, it has risen to become China's largest privately-owned conglomerate, listed on the Hong Kong stock exchange since 2007.

To say its interests range widely is an understatement. Fosun has grown from its pharmaceutical and real estate roots in China, and is now involved in such varied businesses as banking, mining, steel, insurance, medical care and online games.

Chairman and majority shareholder Guo Guangchang told the BBC last year that he has visions of being a Chinese Warren Buffet…”

As you can see from this link from the original China Media announcement of the Strategic Agreement signed in May (Company never did PR this in the US, though did confirm the ongoing relationship on the Nov. 10 CC), what makes this deal so monumental in its own right is their access to prime urban real estate throughout China. Specializing in building and managing both hi-rise Condo’s and shopping centers, the concept is for Forte Fosun to add MPT CarShare locations to both existing and new projects. A “win-win” for all in that they can offer the value-added “perk” to their tenants and condo owners of having direct access to KNDI EV’s at prices as low as $2.50 to $3.00 an hour.

Launched & Made Initial MPT (CarShare) Sales of its 3rd PEV, high tech K17 In Hangzhou & Nanjing .

As mentioned above, the K17 is the initial “ Showcase” EV (photos) for the “Car sharing 4.0 and West Valley Declaration” Strategic Partnership with Alibaba, ZTE, Uber etc. While “rumor” and “spy shots” of this exciting “hi-tech” little 5 door started to appear around 18 months ago, the advances made and full release in so short a period of time is pretty amazing. While PRC certification was received several months ago, as of last check with KNDI a few weeks ago, local subsidy approval in the first two cities for limited direct to consumer sales (Beijing & Shanghai) was expected to be received late November-early December. However, the company did open a few week window in August for early adopter pre-sale reservation with deposit for 500 cars in each city which was quickly oversubscribed.

Until the signing and announcement of the Strategic Agreement, even close KNDI watchers were not aware that this hot EV was going to be put into MPT CarShare service so quickly. But as you can see from the recent press releases, 3,200 units have already been ordered for just the two cities of Hangzhou (pop. 9 mil) and Nanjing (pop. 16 mil).

Kandi Technologies Announces Initial Direct Sales of 1,000 Model K10 Units to Tianjin .

The significance of this announcement is not the size of the order, it is with who the order was placed. Pang Da is one of the largest Independent ICE dealers in China. As you can see from the PR, they have over 1200 outlets in 28 provinces. Here is a map showing their “reach” in China from their website.

Additionally, what I found interesting about this initial sale is that Pang Da, who historically has been a dealer in selling cars, has taken this order to begin a MPT Carshare in Tianjin, one of China’s largest and most cosmopolitan cities. And initially they are only taking K10’s with this first order. Typically the average MPT location has about 60% K10 and 40% four door K11’s. I would think a follow-up order for K11’s or possibly K17’s would be forthcoming.

Ministry Approval and Released for sale its higher speed and range 2nd Generation, K10 & K11

Until just a few months ago, all of KNDI’s EV’s were exclusively made and sold into the various MPT CarShare operations. Since these were all for urban use, speed and to a lesser extent range was not important, since none of the cities had speed limits over 80kmph. (Though a few roads do have a restricted high speed lane that caps at 100km) Because of this, there was really no need to put in the extra cost for an additional 20kmph. Late last year the PRC decided to raise the qualifications limits to participate in the Federal subsidy program from 80kmph, to 100kmph. This new rule is going into effect Jan. 1, 2016. While increasing the top end to 100kmph, range was also increased from 120km to 150km. Though as in the case of any car, range can be affected by conditions and the driver. Though never reported by the Company, one of their dealers, Founding Automotive (E-Kingo) , one of China’s top ten auto retailers, held a contest where 50 of some 500 who signed up, competed to get the longest range out of a single charge of this new Gen model. Here was the results:

Super durable power, to show impressive strength  

…Among them, Mr. Huang Dizhao mileage to 270 km , with an average of 13.5 km per kilowatt achievements won the first place, amazing! Several test drive said they have reached a top speed of over 100 km , with ordinary fuel vehicles have not much difference. After a test drive in person, East a king of new energy vehicles, "run fast, run far," the traditional image simply to a 180-degree turn!

Car founding thoughtful relevant responsible person said, the competition , 20 test drive average mileage in excess of 210 km , can be seen this big city of Chengdu, the founding Condi new energy to cope with a variety of road vehicles in terms of commuting in no problem. Many also said the test drive site, filled with a battery run 200 km no problem!

(Google Translate cannot pick up the pictures. Here is the original article with pics )

A point that should be made here is that based on a recent contact with the Company, most of the K10 and K11’s sold through Q3 have been the older generation. As long as they are sold by year end, the buyers still get the full subsidy. Since the older gen cars are fully satisfactory for the MPT programs, there has been no problem in placing them since they were sold at a significant discount to the new Gen EVs. To my knowledge, all of the old K11’s were sold out by Q3 end, with some K10’s being sold in early Q4. KNDI started discounting these older cars mid Q3, so I would expect higher revenues and profits per car to show up the current Q4 and beyond.

Based on Q3 Numbers, Upgraded to a “Conservative BUY” by McLean Capital Research based on Strong Cash Flow and Financial Condition.

McLean Capital Research specializes in Cash Flow Analysis which it sells to Funds and Brokerage firms. The above linked report was provided by Fidelity to its clients. As you can see from this independent rating service, Integrity Research Associates , the quality of McClean Research is highly ranked.

It is McLean’s theory that Cash Flow is just about the most important measure of a Company’s health. Since they only do Cash Flow, they do not give price or time targets.

One of the major contentions of KNDI short sellers is that KNDI will run out of cash and be forced to do a financing. Curiously their main contention against the Company has been based on the argument that KNDI’s cash flow was weak. At least that was their contention prior to Q3 financial results being published.

Note that McLean gives KNDI one of only 3 BUY recommendations of the eleven they report on in its Industry Sector. Above Ford & GM with HOLD status and TSLA with a SELL rating.

Considering KNDI is effectively a “Start Up” with a very high growth rate, (similar to TSLA), to also be ranked so high as a “Conservative” investment from a “Cash Flow” basis is quite amazing.

Given the highest 10 out of 10 Fundamental Rating by Thompson Reuters

And here is another recent Upgrade after Q3 reported. This Thompson Reuters sheet is a compilation of several independent rating services. Once again, for KNDI to receive the top rating for Fundamentals with a 10, and TSLA with only a 6, should give comfort to KNDI holders.

Completed & Began Testing of new Hi-tech Robotic 100,000 capacity Facility in Jiangsu Province.

In late 2013 KNDI announced the beginning of construction of a new 100,000 capacity EV Assembly plant in Rugao, Jiangsu Province China. While the Company has not yet formally announced the completion of this facility, it has now been completed and is in testing phase as you can see from the linked article. This is the second 100,000 assembly facility KNDI itself has built from groundbreaking. The first completed in Changxing China in 2013 and is now producing their K10 two door EV’s.

As compared to the Changxing Facility, this new facility at a cost of approximately $190 million is much more heavily automated with robotics. As you can see from the article, it will be the primary assembly facility for KNDI’s new “Urban Beauty” K12. A two door micro EV expected to be released right after year end.

(Once again Google Translate did not accept the picture and News video that was embedded in the translated link above. Here is the direct link to the original article which has a video showing just how impressive this facility is)

With the completion of this facility, along with Changxing, Shanghai and Jinua, JV annual capacity has now increased to 330,000 EVs per year .

Changed Kandi-Geely JV EV’s branding to Geely’s globally recognized “Golden Hawk” brand to enhance direct consumer sales both nationally and for 2016 Export.

Early on in the JV, there was some question as to why Geely, except from putting up some cash and technology, seemed to almost be a “silent partner” in the JV. Most notable was that Kandi was the name attached to the actual JV and all of the EV’s carried the “Kandi” brand. Also noteworthy was KNDI and its Chairman were not only running the JV, but also the various facilities.

My personal opinion for this was that Geely Chairman Li Shufu, while having confidence in KNDI’s capabilities, was not going to risk embarrassing himself or his Company by having too high a profile on this “Kandi developed concept” early on. Apparently, KNDI has now “passed his test” with Geely now contributing a brand that historically was one of Geely’s early-on best sellers, which not only raises awareness, but also it is a Brand that is known not only in China, but also in some 50+ countries that Geely does business in.

At the end of KNDI’s recent Conference Call, Management stated that they expect exports to begin in 2016, which seems to confirm my main suspicion as to the Branding Change. However, the JV name remains the same with Kandi exclusively on the banner and running all the operations.

Entered Agreement with Swiss Based Micro-Mobility (Inventor of the Razor Scooter) to Develop the Microlino EV .

Speaking of exports, here is another “hidden morsel” that has not yet been disclosed by the Company, though it has by the contra-party the latter of which mentioned a relationship with KNDI (not the JV) to jointly develop a modern EV variation of a 50-year old BMW developed ICE car the Isetta. When I first contacted the Company about this, I was getting no response. Subsequently, when following up with the head of Micro Mobility , Wim Ouboter, the contra-party, he did confirm that there was an active agreement in place and that KNDI had already begun working on two prototypes in Jinhua. Now Ouboter and his company should not be taken lightly. With minimal research, it was easily found that his Company is well known in the “scooter” industry Worldwide with outlets for his high end scooters in over 80 countries. In fact, he is the inventor of the multi-billion line known as “ Razor Scooters ”.

Upon further follow-up with KNDI, I was told that yes there is an agreement in place, but in the very early stages of development. When I asked why this was so secretive, I was told that Micro Mobility had KNDI sign a Non-Disclosure Agreement so as per the agreement they were not making any disclosure. However, since Ouboter had already gone public on the relationship, they would at least confirm the legitimacy of his disclosures.

In follow-up correspondence with Micro Mobility, Ouboter basically stated that while he felt there was a large market for the new Electric Isetta or “ Microlino ” as it is now called at least in Europe, he felt there was an even larger market in China. He went on to say that after researching many potential “Partners” qualified for him to do business with in China from a development, manufacturing and marketing point of view, Kandi was by far his first choice and he had high hopes the relationship with KNDI would fully expand Globally.

My personal take on this though KNDI is still reluctant so say more than a relationship confirmation at this time, KNDI has applied (and expects to get) one of the few limited EV specific China “New Car Manufacturer” licenses. The licenses are expected to be awarded early in 2016. Once this is received, KNDI can, if they decide to, deliver on all aspects of what Ouboter envisions without the need for Geely.

Conclusion.

I don’t think any rational investor can argue that it has been an exciting fundamental ride, particularly the past few months. But from a market point of view, zero respect has been given to KNDI’s stock price. Some may argue that KNDI’s growth over the past 18 months since the stock hit its $22 all-time high has not been as fast as expected. But one must also remember that back in 2010, the PRC projected that there would be some 2 million China made EV’s on the road in China by 2015. As it turns out, it looks more like around 275,000 will be achieved China-wide from 30+ automakers with KNDI being the single largest contributor at around 18% over that time. This year alone, KNDI will likely exceed its past percentage; and based on continuing revelations of new cities, products, business models and partners, there is little reason to believe that KNDI will not maintain a similar percentage up to and beyond the 5 million units now projected by the PRC for 2020.

Some may argue that “before KNDI gains any sustainable credibility, it has to gain significant traction in Direct Consumer Sales. While KNDI has now recently entered the direct sales market, I totally disagree with the aforementioned premise. I believe the business model of early saturation in setting up proprietary MPT CarShare and Leasing programs in China’s largest cities is by far the fastest and best road to continuing sales growth success.

Here is why. When an auto manufacturer sells primarily to retail consumers, he must spend considerable amounts of money to maintain consumer loyalty in hopes of a resale. And even after doing so, there is little evidence that he is going to get a recurring purchase from said consumer. What KNDI is accomplishing with its CarShare model is a guaranteed recurring sale every three to four years replacing MPT EV’s. Almost a “razor blades” type of concept. KNDI EV’s that were put in service early-on in 2013, likely will be replaced twice before 2020.

However, it must also be pointed out that Direct Sales does have an important position in the Company’s future growth.  If an MPT user has a pleasant experience with the rental, it is not unlikely he or she would give preferential consideration to purchasing a similar vehicle in the future. This not only from “brand awareness”, but also from a “confidence in durability” point of view. This particularly likely in the case of the hi-tech K17.

By this year’s end, KNDI will likely have delivered for sale approximately half the number of EV’s that TSLA will deliver. This up from a third of what TSLA delivered in 2014. By 2016, KNDI should deliver 50 to 60,000 EVs compared to TSLA’s reduced expectations of around 80,000 . At current levels a KNDI EV sells on average about a quarter of the price of the average TSLA.

KNDI’s current market cap is $470 million, TSLA’s is $31 billion. Ignore fundamentally that KNDI is profitable and becoming more so from a cash flow aspect in particular compared to the opposite from TSLA. Does anyone think it makes logical sense that TSLA should be trading at a 66 times higher market cap than KNDI ? Better question, does anyone believe that this type of fundamental disparity can continue indefinitely?

OK, so TSLA has Analysts that have their Institutional clients in the stock so heavily, they can’t afford to do anything but forgive Musk’s continuous shortfalls and pray for a turnaround. Whereas KNDI doesn’t have any Analysts Yet. In recent months KNDI has done a series of Institutional meetings, primarily in Asia. The problem to date in attracting Analysts is not the fundamental growth of the Company. It is that somebody is going to have to pay those analysts. That somebody is usually the Investment Banker the analyst works for. With KNDI’s rapidly growing Cash Flow, and now that the PRC is actually starting to pay subsidies in advance, there is no need in the foreseeable future for KNDI to need any outside financing that would be supplied by Investment Bankers.

However, all is not lost. As mentioned above, the KNDI Geely JV is intending to go public in Mainland China mid 2016 after its second full year of Audited Financials are reported. (A requirement for listing). This in fact will require the services of an Investment Banker, very likely one with US Affiliations. With the JV on track to do a Billion in revenues in 2016 up from $13 million in 2013 and also be profitable, it will not be the least bit unlikely to see the JV IPO pricing with a $2-4 billion market cap for a 20% IPO. While this will dilute KNDI’s percentage ownership in the JV to 40% (KNDI value of $900 million to $1.9 billion), as in the case of Alibaba and Yahoo, which saw a major jump in Analyst coverage in Yahoo when the BABA IPO was announced, I expect the same to happen to KNDI beginning in H1 2016.

Two last comments : Irrespective of whatever happens in the China, US or for that matter, World economy, it will have little or no effect on China’s dedication toward replacing carbon emitting vehicles, particularly in its urban areas which now have over half its 1.3 billion population. In no specific order, China President Xi Jingping has clearly expressed his primary goals upon taking office a few years ago as being to: martial a soft landing while shifting the China economy from export based to internal consumption, end Government and Corporate corruption and eliminate the toxic carbon pollution. The economy is such a macro issue that the average consumer does not wake up each morning with this as a primary concern. The issue of corruption, which has become a forefront issue particularly in the last week or so in the China media, while more noticeable, is still not an issue that brings daily concern to his constituents. However, the pollution issue is something every China resident wakes up to each morning.

The air pollution issue, as compared to the other two, not only affects the leaders of the Central Government, but all Government leaders down to the local level. So rest assured, the last industry that will be affected by Government cut-backs will be the EV industry.

If the “slowdown” in the China economy gets to the point that it is affecting the average urban worker to a point that some who had intentions of buying a vehicle pull back, it can only help both KNDI long term leasing ($130 a month) and MPT program. At about $3 an hour for an all-inclusive MPT rental, compared to a $12 an hour cab or even $9.50 an hour UBER, an urban resident is not going to choose going back to his scooter or bicycle.

DISCLOSURE:  I am currently and have been constantly long KNDI stock for over 8 years.

Feel Free to Copy, Disseminate, Syndicate and/or share with Financial Advisors. But please do provide a link back to this original article.

ADDENDUM

While I wanted this report to focus on the reasons to own KNDI, I also have often been asked why the stock seems to trade so “squirrely”. Rather than to take away from the points of my article, I have added this section below for those who might be curious.  

While the stock has doubled over the past two months, it is still trading 35% below its 2015 high and 60% below its 2013 all-time high , and is carrying a recently reported short of over 6.85 million shares or 21% of its non-insider owned float.

Yes the KNDI share price has effectively doubled off it late October low of $5.04, but all this shows is the temporary power and idiocy of some “target fixated” short sellers. With everything that KNDI has accomplished with basically uninterrupted fundamental performance, there is not now, nor has there been any reason in the last two years for the stock to even be trading as low as the current price, let alone the ridiculous October low.

While I do give credit to the “temporary power” of the short sellers for being able to disrupt KNDI’s stock performance relative to its fundamental growth, to what end have they accomplished? This is where the “idiocy” comes in. What have they accomplished for their own financial benefit? Absolutely nothing and in fact have likely lost a significant amount of money. Let me give you an example.

One year ago, KNDI’s short interest was around 7 million shares reported, just about where it is right now approaching 6.9 million or around 21% of the float. At that time, the stock price was around 13.25. Additionally, average daily volume was over a million shares a day, though now volume it only around 40% of that amount. To the unknowledgeable average investor, it might seem that a long term short holder is ahead if he shorted the stock at the year ago at 13.25 and held the position the whole time. The average investor would be wrong. Here is why.

In order to hold a short position, the short seller has to borrow shares from long holders. This does not come free. KNDI over the past year has been considered a “Hard Borrow”. To borrow “hard borrow” stocks, the short seller has to pay the lender a fee which varies on a daily basis. Currently, the average “borrow” rate is around 27%. Over the past year that rate has gone as high as 92% and as low as around 20%. So it is safe to say the “average” cost to hold the short for the one year has been at least 40%. This cost is calculated and charged daily but at an annualized rate. For example:

If you are short a hundred thousand shares of a stock trading at $10 ($1,000,000), and the borrowing rate for that day is 40%, then at the end of that day you will be charged approximately $1,095. If the stock is at $5 it would be half that amount and if at $20 double that amount. So you see if that short seller a year ago at $13.25 who might be looked at right now as “smart” with the stock down $3.25, his $325,000 paper profit has cost him $400,000 in fees to hold.

So multiply this $400,000 by 70 times to equate to the total short position today and you realize that the total short position on KNDI has cost the short sellers some $28 million over the past year. Now some might wonder who that $28 million was paid to. Well it was the brokerage firms who lent YOUR long stock to them that either you have in a Margin account, or to a lesser extent, some brokerage firms have set up a way for stock holders with stock in cash accounts to lend their shares and split the fee with those lenders. Now you know why Brokerage firms love short sellers and do nothing to “lobby” against short seller manipulation of their clients stock.

So now you also know why short sellers have no choice but to attack positive news releases (see what Cramer has to say about this ) like the one announced with Alibaba et. al. The last thing a short wants is to allow a stock to gain sustainable upside momentum which in turn could attract an even larger audience compounding its problem. Do they always win at this? Absolutely not. At least not in the case of pervasive strong fundamental performance such as KNDI is now starting to clearly exhibit. Rest assured, the doubling of the stock price over the past several weeks was not of the shorts choosing. Not only did they see their short profits cut in half, but they also have seen their borrowing costs double.

You might ask. Why don’t they just cover? Well, what this light volume tells all is that even at the $10 level, sellers, even short sellers are starting to get smart and not sell their shares. Pair this with the small availability of shares to borrow at any cost and the last trick left for short sellers is to manipulate the stock by buying shares early in the day running the stock up quickly in their separate cash accounts then take this hypothetical 100,000 shares bought and put in his “quiver” and use some of it to quickly reverse the trend with a portion of the acquired shares. What is accomplished by this stunt is that when hot money traders see the stock running they jump on board thinking this might be the breakout. So when the short starts selling some of the stock he bought he creates a selling panic by the hot money traders causing a significant down reversal.

After things quiet down, the short then takes additional shares out of his quiver and by using them with High Frequency Trading (HFT) programs can cause a slide the rest of the day. The psychology being that “no-one” wants to buy a stock that hits its HOD early and is eroding. His additional by-product of this technique is to make the “chart” look weak by creating long “candlesticks” that close at the low side. By using these techniques, his hope is he can keep the stock down by making it look weak without increasing his short position, but also is hoping that by the end of the day he has accomplished this and “net-covered” at the same time. But be aware, if the short still has an ample amount of shares left in his quiver at day’s end he will use some of the shares left to create a lower close… this particularly on low volume days like last Friday.

Remember a few important facts about short sellers. I worked with several closely in my Market Maker days several decades ago so I can speak with some authority. While HFT has sped up the tricks, they still remain the same. Short Seller in the case of KNDI are primarily hedge funds. They are run by a manager who often has no “skin in the game” other than to collect a percentage of profits, both paper and real. So he can shoot 50 or 100 thousand shares at will since it is not his money. On the other side of the trade for KNDI is mainly smaller retail investors: Investors who can be intimidated by short seller tricks. A common trait of short sellers is they have very big egos and have a hard time admitting they are wrong. If a Company goes against them, they rationalize that something is ultimately going to happen to collapse the stock they are short. Be it a financing, Regulator stepping in, or God forbid something happens to the Management. They live day to day.

So how do you “beat the short” in KNDI? Don’t worry about the short, embrace it. You or I can’t beat the short in the long run, only the Company can by performance and it certainly is doing its part. Embrace the short by using it to accumulate shares at ridiculously low prices. But accumulate “smart”. Don’t fall for his morning “run-up” trap by throwing in market Buy orders. Use limit orders. If the stock is quiet, use limits around the offer, but also keep some around the bids. Also save a little buying for around the close.

When you see the spread between the bids and offers opening up more than $.10, and the bids and offers are jumping around with no trades, it is a sign that the short is using HFT to quiet buyers and troll in sellers. Shorts know that there is any number of reasons why a person may be forced to sell some shares, but very few where forced to buy shares. So if he has to, he would like to buy as cheap as he can and sell as high as he can evidenced by the larger spreads. The best way to foul up this HFT tactic is to put in “real” bids, even if just for a hundred shares, but if you do put them in, leave them in. By putting in a real bid, the short cannot create the illusion of sell orders by simply lowering “his” HFT bids without actually selling some shares. Try it sometime and you will see what I mean. If you top their bid by a penny or two, you will likely be immediately joined or topped by several other bids.

Will a Short-Squeeze happen with KNDI? Probably, but when it happens, it can be so fast and furious, both up and down with an upward bias that if you are not long the stock and buy it on the “run” odds are you will likely get “whipsawed”. But the best of all worlds is a “rolling squeeze”. This happens when a short seller gets squeezed out and another one who thinks he is smarter than the first shorts at higher prices. This is the type of Squeeze TSLA has and likely the main reason the stock has held up so well. In a rolling squeeze the movement up can happen quickly, but much more orderly and has a much better chance to sustain the up-move.