KNDI Top Growth & Short-Squeeze Prospect for 2015

KNDI Technologies Group ($KNDI) is the #1 electric car (EV) manufacturer in China, with 14,398 pure EVs sold as of Dec 31, 2014, the first year of t heir innovative  Car-Share program, which is already operating in 9 large municipalities  including Shanghai, Guangzhou and other prefecture-level cities .  The Sept 30, 2014 Form 10Q disclosed that they are negotiating with the city of Beijing as well .

They also operate group leasing programs , both to 'communities' (Chinese apartment tower complexes) and to corporations (CIBC, Alibaba, etc ).  Alipay can be used to pay for rental or lease transactions.   

 Kandi management has been pushing this car-share model through government channels for 5 years. PRC “white papers” have referenced Kandi repeatedly, and Kandi is obviously the government’s “golden child” in China’s gargantuan effort to solve their urban air pollution and traffic congestion problems. 

Government Subsidies

All Kandi models are   eligible for the maximum federal and local subsidies , which have already begun to flow directly to the company, and will continue at least through 2020 . Kandi does not sell cars directly to consumers yet, but to ZZY, the company which operates the car-share program , and in which Kandi owns a minority interest (see Geely Joint Venture section below). 

These mini-bus style 2-door and 4-door cars, which rent for $3.25 per hour (lower than taxi rates) or lease at extremely low monthly rates, are designed to be scrapped and recycled after their useful life in 3-5 years. 

Government Endorsement & Incentives

Kandi Car-Share has been endorsed formally and publicly by the highest levels of the Chinese gov't , with the MIIT Minister Wan Gang saying in a widely disseminated speech that Kandi car-share is recognized as a critical component of the Chinese public transportation system.   He also promised further infrastructure support from the PRC gov't in the near future. 

It was a not-too-subtle nudge directed at the provincial officials who haven’t met their electric vehicle quotas yet, which is one of the 5 priorities of the current 5-Year Plan.  More than half of the 88 EV-authorized cities had already contacted Kandi before Minister Wan’s endorsement, which was already above and beyond the existing government policies designed to incentivize consumers to buy and use electric vehicles, such as the 10% sales tax waiver, free unlimited parking for EV’s, and restrictions on license plates and city access for non-EVs. 

Car Share Program

Kandi has no competition yet, and can make strong demands of local governments which have a mandate to do business with them.  Kandi has at least a 2-year head start on all possible competitors, and will have signed agreements with almost every metropolitan area in China before anyone else can organize a similar business, much less test and debug it as Kandi already has.

In Hangzhou, where the pilot program ran in 2013, Kandi car-share sites are already ubiquitous in elevator-operated custom garages, at sidewalk bike-share stations, train stations, hotels, shopping centers, medical facilities, and are often seen being driven by city dwellers doing errands and travelers from the countryside coming into the city for the day to shop. 

Cars can be rented from one site and dropped off at any other.  Kandi’s customers used to rent bicycles, but with a Kandi mini-car they can bring home more purchases, pick up the kids at school on rainy days, and small businesses are even using them to make deliveries or service calls. 

ZZY’s operations department tracks each car’s location and the status of its battery on a massive control panel. Roadside service is always within 30 minutes away.  Kandi car-share eliminates range anxiety and takes care of recharging the batteries overnight.

The program is extremely popular in Hangzhou, which is a popular tourist area, and gets quite a lot of publicity throughout China on all media. There are even “EV weddings” in Hangzhou, where the entire wedding party and guests travel in a Kandi ‘caravan’ to their ceremony, photo sites, and reception.  Hotels that offer Kandi rentals are often booked far in advance.  The beautiful “West Lake” area has been a prime site for Kandi cars, which don’t disturb the pristine environment people travel to see.  Hainan, an island in the south known as ‘the Hawaii of China’, will begin offering Kandi car-share in 2015, where it is expected to be similarly popular in their tourist economy.

ZZY has recently partnered with large car dealership chains in some provinces to obtain parking sites, cooperative marketing, and provide another opportunity for car dealers to offer retail customers EV leases as sales of gasoline car drop due to the government policies that favor EV’s.

Joint Venture with Geely – Manufacturing & Marketing

Kandi has a 50/50  joint venture with Geely ( named Kandi Electric Vehicles) to assemble the car-share vehicles and administer the car-share programs. Kandi manufactures most of the parts, including battery management systems, which are shipped to the JV for assembly and sale. The JV also owns 19% of ZZY, and manages the operation.

The JV is not consolidated by either company, but accounted for as an investment.   KNDI CEO Hu Xaoming said recently that it is "very likely" the JV will have a public stock offering . Where and when are to be determined.

Two new JV factories will open in 2015 (Rugao and Hainan), raising total manufacturing capacity to 400,000 cars/year (with the existing two factories in Shanghai and Changxing).   Kandi also has a parts manufacturing facility in Jinhua.  With new cities quickly signing up for car-share following the gov't endorsement,  Kandi revenues, which will likely more than double in 2014  vs 2013, and are  expected to triple in 2015 .   

New Models in 2015

Four new models are expected to begin production and sales in 2015 , including a $37,500 mid-sized luxury model (K30) based on a popular Geely Emgrand which is intended for government fleet orders; two stylish mini models (“Beauty” and “Cowboy”), which will also meet international quality standards because there has been interest from European dealers for them, and a crossover SUV (K17) that will be the first  car to use a  new graphene-manganese based battery (exclusive to Kandi from Tiannjeng Battery Co) , which has 400km range, is much safer than lithium, and costs half as much.  Kandi cars are not technological marvels like Teslas, but are intended to be affordable by the newly emerging middle class Chinese consumer. Nevertheless, they are the  most technologically advanced EVs manufactured in China and all will qualify for the maximum subsidies .

Kandi also has a patented 'side-slide' battery pack under the car chassis which can be easily swapped out and replaced using a robotic arm system in 2 minutes, or by two men if a roadside replacement.

Financial strength

As of the nine months ended Sept 30, 2014, in this first year of car-share operations, Kandi reported a 167% increase in revenues over 2013, and .26 per share net income. The JV recorded $126million in revenue in those first 9 months, with a $6.8 million profit, of which Kandi recorded 50% as investment income. The full year estimate for JV revenue should approach $200 million, with a profit estimate of nearly $9-10million, of which Kandi will record 50%.

Kandi has issued additional stock strategically as needed before gov’t subsidies were received. Cash flow has been well-managed while building new factories, new models, and increasing staff and office facilities dramatically.  Federal subsidy money is now flowing at a regular and predictable pace, while deliveries of cars to various provinces has also generated local subsidies in multiple forms, from purchase price support to free land and infrastructure for car-share sites.  In fact, Kandi has been in a position to insist that this level of support be codified by the province/municipality before Mr. Hu will sign the car-share contract. 

Kandi’s Book Value was $4.51/share on Sept 30, 2014, (of which $1.35 was cash ), up from $2.36 at 12/31/13.  Despite having doubled the value of the company in its first 9 months of executing its business model, and despite exploding revenues for Kandi and the JV, $KNDI stock still sells at 2.8X BOOK VALUE .  Fourth quarter sales and profit are expected to be the highest of the year. 

Kandi’s Stockholders’ Equity grew by $121million to $210million in just 9 months, yet the stock trades at only $600million market cap!   How is this possible?  The next section explains why.  

Short-Sellers’ Nightmare Scenario

Although  $KNDI is clearly one of the top growth stock prospects of 2015, it also has a large short position – about 30% of the float – which seems to be getting desperate as the good news keeps coming. Shorts have been sponsoring 'hit pieces' on various financial sites and spamming social media, often using innuendo, inaccurate, misleading, or exaggerated claims to scare out weak hands. Only a few retail traders panicked.  Even several obviously coordinated bear raids have failed to start an avalanche of stop losses.

$KNDI has a small float, with insider ownership close to 40% and a very loyal long-term investor contingent (almost 10%) that has done thorough due diligence, including numerous on-site visits over 5 years, so they aren’t affected by scare tactics, making this the perfect set-up for a big squeeze. 

Institutional investors in this first year of car-share operations include  Morgan Stanley, Goldman Sachs (US and Asia), JPMorgan, and Guggenheim among others (6%).  Most have sent analysts to meet with management and tour manufacturing and car-share sites also.   An SEC request for documents in 2013 relating to a small options grant in 2009 is pending, but there has been no contact from the SEC for 8 months.  A violation finding is still possible, but a CEO fine should not impact Kandi’s share value. It is more likely there will be no sanction at all, since the company has provided documentation supporting the options.

Kandi’s daily trading volume averages about 1.5 million, but that has been determined to probably include coordinated activity among related accounts, which could be short-sellers creating volume to disguise the fact that there are few real sellers. (Evidence has been provided to the SEC, which has an open file on this, and FINRA is monitoring.)  On most recent days, there are very few shares available to borrow, and KNDI has been on the REG SHO list three times in the last year.

The untampered daily volume in Kandi is probably less than 500,000 shares, which means the 7.5million short shares would need weeks to cover.

At this writing there is not yet Wall St. analyst coverage of $KNDI, but recently at least two such analysts (who now cover $TSLA) have contacted Kandi IR and begun their review. Goldman Sachs Gao Hua has named the Kandi/Geely JV one of the winners in China’s auto industry, and is one of the institutional investors in KNDI.   There is analyst coverage of $KNDI by two venerable Hong Kong investment firms, Shun Int’l Secutities and Haitong Securities) and both are “OVERWEIGHT”.  And at Citi Orient Securities, Director Qi Hongwei recommended Kandi and said in a speech that he is “optimistic about the next two years of ‘barbaric growth’.”

Ready to Explode