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February 11, 2013

Kandi Technologies, Corp. Is Expanding Deliveries

The following white paper on Kandi Technologies Group, Inc. by KCM Krajniak Capital Management is a guest post at Software Times. All the opinions expressed are the sole responsibility of the authors. Software Times, its owner and editor are not investment advisers and do not provide investment or finacial advice.

Kandi Technologies, Corp (KNDI) is now beginning to deliver electric vehicles into their government encouraged, subsidized EV Lease and purchase programs. The vast disconnect between Chinese and Western media leaves Kandi Technologies' global EV leadership story undiscovered by most investors.

In offering China a viable Quick Battery Exchange model that enables vehicle to grid (V2G) battery storage supporting China's smart grid V2G/B2G effort, Kandi Technologies is being pulled forward as the People's Republic of China's EV leader through multiple associations with The State Grid Corporation, Provincial Governments and Municipalities who provide subsidies along with other supportive purchase and development policies.

EV model JNJ6290EVEV model JNJ6290EV
In brief, Kandi (among many models) produces an introductory level 2 seat EV model JNJ6290EV as seen being driven by this Hangzhou Tax Authority Employee.

Without the battery, the 'Naked' EV sells for approximately $6300. China Air Lithium Battery manufactures the batteries which are sold to State Grid who owns the changing stations. When the QBEx car battery runs low, they drive into the State Grid station and replace the battery by robot through the rocker panel within moments.

The 2 factors differentiating Kandi as the global EV leader over others including the impeccably manicured Tesla (TSLA) are profitability from its legacy operations and EV sales pipeline:
EV model JNJ6290EVKandi has recently received approval for their Kandi Van.
  1. Kandi has maintained profitability retaining $23 million during the process of bringing their cars to market. Tesla has lost nearly $1 billion.
  2. Kandi clearly is nurturing a long term vendor/partner relationship with the world's biggest customer; The Chinese Government. Tesla is hoping new customers continue to adopt their products after the initial curiosity wanes.
In this white paper I will introduce and share the progress of the ongoing Government encouraged development and marketing projects Kandi has underway in the Cities of Jinhua, Hangzhou, Shanghai, the Yangtze Delta Region, and the Provinces of Zhejiang, Shandong, and Hainan.

From this illustration of projects' progress investors will be able to determine that Kandi is China's EV leader and also well on their way to being the world's indisputable EV leader.

Jinhua City

Status: EV Deliveries Have Begun

Jinhua is Kandi's home city and initial proving ground for the marketability of Kandi's 2 seat EV and QBEx technology. The first batch of subsidized individual purchases of cars occurred in October 2011. The program was quietly halted and subsequently resumed after the State Grid had the opportunity to unveil the QBEx process at the Hangzhou EV show in August 2012. Kandi's Q3 2012 10q shows deliveries of 471 cars into Jinhua. This is supported by a local news video promoting the launch of Kandi's Jinhua 4s dealership and this local news article covering a car crash which included a Kandi EV. Somebody needs to take delivery of a car before it can be crashed.

Zhejiang Provincial 'All-Encouragement' Effort

Status: Evidence of Deliveries Beginning

The province of Zhejiang (pop. 47,200,000) announced supportive polices to expedite the priority purchasing of EVs at all levels of administrative institutions. This directly benefits Kandi as evidenced by the delivery of EV's to the Hangzhou Local Tax Bureau and the announced 100 Taxi order.
"Xinhua Zhejiang Channel, December 8 (Reporter Yue Deliang), Zhejiang Province, the government decided to accelerate the industrial development of energy-saving and new energy vehicles, to clearly build Hangzhou, Jinhua, two new energy automobile base....

Zhejiang Provincial Government encouraged at all levels of administrative institutions, public service organizations, the general public service vehicles for state-owned enterprises, commercial vehicles, specific business vehicles and fixed within the region duty law enforcement vehicles, such as priority procurement, the use of pure electric vehicles;
encourage vigorously promote the use of energy-saving and new energy vehicles in the city bus system; accelerate the promotion of pure electric vehicles in the field of city taxi. (END)"
This is obviously an open ended encouragement where predicting how many agencies in the province will comply is difficult.

Hangzhou 20,000 EV Lease Program

Status: Anticipated to Begin around Chinese New Year

The 20,000 EV lease program is a joint venture between multiple parties including The State Grid Corporation, China Air Lithium Battery (CALB), the City of Hangzhou and Kandi Technologies.
CALB manufactures the batteries which are sold to State Grid for use in the QBEx V2G process with Kandi's EVs. Kandi sells the cars to CALB who then lease them at a subsidized rate to consumers. Hangzhou provides supportive policies.

Much like the silent delay that Jinhua experienced from November 2011 until after the State Grid could announce QBEx at the August 2012 Hangzhou EV show, the Hangzhou 20,000 EV Lease Program has experienced a similar unexplained delay.

Articles announcing the resumption around Chinese New Year are becoming common in the Chinese media. We are starting to notice a common theme that the Chinese like to have grand unveilings.

The Hangzhou Lease program website posts the delayed start to occur around Chinese New Year and China Smart Grid article posts the delayed launch to coincide with Chinese New Year as well.
"Another good news: the private leased the Hangzhou public concern "electric vehicles, the government subsidy policy, is also expected to be introduced before and after the Spring Festival."
Even though the launch of the Hangzhou Leasing program has been delayed, Kandi's recent press release announcing the addition of 4 new Hangzhou lease operators to participate in the project gives an implication that the delivery of vehicles will be pursued aggressively.


Status: Supportive Policies Are Being Enacted

Shanghai has issued its first free EV license plates which compares to 75,000+ Yuan to win an internal combustion engine license plate. For the approximate price of one Shanghai license plate a consumer could purchase 2 Kandi EVs.

Shanghai intends to build 50 changing stations over the next 3 - 4 years.

Yangtze River Delta Region - EV Regional Interconnectivity

Status - Early Phase

This is effectively an effort to coordinate the construction of changing stations along highways connecting cities within the region. Sourcing continuing information on this project will likely be about as fruitful as sourcing information on the construction of a series of new build small town gas stations.

DFDaily.com offers a description of The State Grid's interconnectivity project along with publishing details on the funding of the project.

"The general coordinator of the first convening of the project will start on December 6, the Yangtze River Delta area of electric vehicles energy supply integration research by the National Grid Company, Zhejiang Electric Power Company led the ultimate goal is to achieve the Yangtze River Delta area of electric vehicles charging for electric service networks Province interpersonal interconnected. Currently, for existing Shanghai, Hangzhou, Suzhou, Nantong, Hefei included in the Country "Ten City, one thousand energy-saving and new energy vehicle demonstration and extension application engineering and government subsidies for private purchase of new energy vehicles," the pilot; initially built in the first half of this year, the Shanghai-Hangzhou Su electric vehicles intercity interconnection project is China's first inter-provincial city electric car intercity interconnection project, 9 Smart filling station has been set in the service area of Huhang, Zhajiasu, Shanghai-Nanjing Expressway."

100,000 EV Short Term Rental Program

Status: Morphing Pleasantly

Debuted at the August 2012 Hangzhou EV show, the EV short term rental program consists of a series of automated parking garages located near high congestion areas and travel centers where temporary use is necessary or the costs associated with owning a vehicle are prohibitive to the individual.

Vertical Parking Garage
A temporary version of the automated rental garage concept was erected at the 2012 Hangzhou EV show. By going vertical and automated, Kandi can hold up to 200 EV's ready for rental in a 35 x 35 square foot plot of land.

Although debuted in Hangzhou for the Hangzhou market, recently while giving the Keynote speech at the 2012 Global EV conference in Hainan, Chairman Hu's remarks have offered a tone of expansion for the EV rental model beyond Hangzhou into Hainan which leads to the expectation of it evolving to other regions as well.
"In Mr. Hu's remarks, he discussed in detail of the Kandi's newly unveiled pure Electric Vehicle short-term rental/sharing model for public transportation. Mr. Hu said that in Kandi's short-term EV rental model, only pure EVs will be made available to the public as rental cars which will be serviced by a network of "smart" vertical parking and charging garages throughout the city including the airport, train stations, business centers, apartment complexes and other places that are the focus of commuter traffic in and around the city. This network system will provide centralized management of EV sharing service, EV maintenance and battery charging as well recycling. Mr. Hu believes that the short-term EV rental model is a viable step to speed up the adaption of pure EV because it provides convenient and affordable EV sharing to ever growing eco-conscious urban drivers seeking for an easy, occasional rental, without the hassles of paying for gasoline, car maintenance, insurance and taxes.

Mr. Hu explained further that as a consequence of the rapid economic development and fast-paced urbanization of China in the past decades, traffic congestion, scarce parking, environmental contamination and energy shortage problems have not only affected people's daily lives severely, but also constrain the sustainable development of Chinese economy. Therefore, Kandi's innovative pure EV sharing program for public transportation will be a feasible solution to alleviate urban traffic pressure and scarcity of parking. The new model also aims to tackle the obstacles of EV industry development and to lay groundwork for future transportation revolution."

Shandong Province

Status: Early Development

July 2012, Kandi announced a LOI with the Wei Feng Government in Shandong Province to establish a project company that will have a capacity to produce parts for 100,000 EV's, in return for supportive policies to help drive the adoption of Kandi EV's in Shandong. With Kandi "supportive policies" has been a common vague promise. The Zhejiang All-Levels Priority Procurement Encouragement suddenly gives Shandong's promise of "supportive policies" gravity.

The Shandong Province venture was recently reference by Chairman Hu in the press release accompanying the q3 10q.
"The recent Letter of Intent we have entered with the government of Weifang Binhai Economic Development Zone of Shandong Province and Wanning city government of Hainan Province will help us effectively expand into new markets and build order backlog for the years to come. We are confident that our business model will be soon replicated in many other markets throughout China given our successful track record, favorable central government policy, support from regional government and our strong alliance with industry partners," concluded Mr. Hu.

Hainan Province

Status: Beginning Development

To help promote the Hainan/Kandi relationship, Chairman Hu was invited to deliver the keynote address for the 2012 Global New Energy Vehicle Conference held in Hainan.
The company released details of their framework with Hainan in November 2012
"Having conducted months of thorough due diligence and rounds of negotiation since Kandi Technologies was invited to Hainan by both provincial and city governments, the Company has reached this Framework Agreement with Wanning City. Some of the main contents of the Agreement include the following:

A. The Hainan manufacturing facility will be built by Kandi. When fully completed and reaching its ultimate production capacity, the facility is expected to generate up to RMB 3 billion of annual revenue;

B. The Wanning City will list this Kandi project as a top priority and apply for various preferential policy supports from the province government in Hainan;

C. The Wanning City will provide Kandi up to 500 mu (or about 82 acres) of land at a favorable price to build the manufacturing plant;
D. Upon the initial investment by Kandi, Wanning City will work actively to gain national, provincial and municipal supportive policies for the EV industry, and will fully promote the use and acceptance of Kandi EVs as well as its business model in Hainan province. In principle, the government will have a special subsidy policy for no less than 20,000 EVs every year;

E. Kandi will receive favorable tax incentives and rebates from Wanning City;

F. Kandi agrees to complete the construction of the manufacturing base within two years of obtaining the favorable land-use rights.

Mr. Xiaoming Hu, Chairman & CEO of Kandi commented, "We are honored to be selected and invited by Wanning City to enter into Hainan pure EV market. We are also grateful for all the support we have received and soon to be granted by all levels of Hainan government, which will implement numerous tailored supportive polices for Kandi. The cooperation between Wanning city and Kandi Technologies is deemed as a great stride for Kandi to become the leading pure EV manufacturer and solution provider in China. In the meantime, Kandi is confident that we will establish a strong market share in Hainan province."


Status: Infancy

Zhev.com.cn produced: "Guangzhou new energy vehicles subsidy has been submitted for approval"

My Take

In my opinion the golden turning point cementing Kandi's global leadership was Zhejiang initiating without fanfare the All-Levels Encouragement. This gave gravity to the term 'supportive policies' and through the act of government purchasing brings into play the term "pipeline" when referring to the "pipeline" of partnerships and joint ventures Kandi is forming with municipalities and provinces.

This extended duration and expanding "pipeline" is something no other EV company including the impeccably manicured Tesla can claim. The unfortunate blessing of this "pipeline" as its blossoming rapidly is it becomes impossible to do credible sales and earnings projections at this point.

Hangzhou has had a delay and now seems to be coiling towards launching with a greater than expected delivery velocity after adding four new leasing companies. The 100,000 EV rental program has also been delayed but seems to be broadening in scope through Hainan and carrying a broader geographic tone. During these delays of these 2 highly celebrated projects, the 47,000,000 population province of Zhejiang has discretely encouraged all of its agencies and municipalities to purchase EVs.

We have had two launch triggers pulled between Jinhua and the Zhejiang All-Levels encouragement. Because of this we can now say with elevated confidence phrases like, "Once Hangzhou and the 100,000 EV lease program launch". When subsequent launches occur, we may find Chairman Hu's statement, "build order backlog for the years to come" from the Q3 2012 10q press release to be closer than anticipated.

The limiting constraint on growth seems to be production capacity not cash flow. CALB's purchase agreement states cars ordered will be paid in full 7 days prior to delivery. If vendors are paid on 30 days that's 37 days of free cash.

From my line of questioning to Chairman Hu at the Atlanta investor/analyst meeting, production capacity is easily upwardly scalable.

Production capacity by hand assembly in Jinhua was 3,000 vehicles per month. With nominal automation this could quickly increase to 30,000 EV per month. It also seems reasonable that if they could produce 3,000 vehicles per month by hand in Jinhua, that could easily be replicated seeding new production facilities with a very low cost basis. 3,000 vehicles hand built in a steel building can achieve Hainan's 20,000 EV annual supportive policy purchasing target. How many months does it take to build a steel shell building?

The Bears Arguments

Over the past few years, the bears' arguments have evolved from "the cars will never come" into a litany of professionally generated hit pieces published on Seeking Alpha. It's been a curiously monumental effort at destruction applied to such a small unknown stock. For all of their efforts, the short interest has responded by remaining relatively constant at a meager 4.3% of the float; almost exactly where it was 12 months ago.

Why would anyone go through such an exhausting effort to cause investors to avoid and abandon a stock and then apply no noticeable effort to significantly increase the shares short?

None the less, all investors should consume as much information about their investment choices as possible both favorable and unfavorable. Take your time to read all the articles posted on Seeking Alpha.

The Fundamentals

The easy part of analyzing Kandi is its legacy ATV business which has allowed Kandi to maintain profitability during all but one of its publicly traded years. 2012 revenue is tracking towards $48 - $50 million including some EV sales, compared to 2011 top line of $40 million. Based upon trailing 5 years history, it's very conservative to expect the legacy ATV business to generate $43 - $45 million in revenue for 2013 while contributing $2 - $5 million net income; a nice, steady, stable business. Kandi has a little under 30 million shares outstanding with 17.46 million floating.

However the Kandi EV rollout has the strong potential to accelerate well ahead of our ability to source information. It's one thing to take the estimate of $6300 per car x an estimated 400 cars per month in Jinhua and add that to $6300 per car x an estimated 1,000 cars delivered per month in Hangzhou. Then make the statement; these 2 projects alone can add $26 million in sales per quarter to Kandi's base $10 million per quarter legacy revenue. It's not reliable to draw that conclusion because this ramp up is unusually fluid. With the existing disclosures, it's conceivable Kandi could have delivered 5000-7000 EV Q4 2012 between Jinhua continuing sales and placing inventory into their pipeline. We won't know until the 10k or the anticipated grand celebration during Chinese New Year followed by press releases.

Further adding to the potential of snowballing demand, Zhejiang has 47 million people. Does anyone know how many agencies and subsequently agency vehicles are subject to the Zhejiang Priority Purchasing Encouragement?

The Hangzhou lease program is late to start, but added 4 leasing companies to accelerate unit delivery. Last fall CALB anticipated 1000 cars per month. When will these deliveries start and has that 1000 per month target increased?

Hainan has given Kandi a 2 year window to complete the manufacturing facility. This is China; does Hainan require anything more than a steel building with a cement floor and a loading dock in order to achieve 3000 cars hand assembled per month? CALB is paying net -7 days. It's conceivable that Kandi can cash flow these expansions hand assembling from a pole barn then improving the facilities after they are operating. How soon can Kandi begin producing cars in Hainan?

We've mentioned nothing about the cities of Zhoushan or Beijing. As we saw with the stealth launch of Zhejiang All Encouragement, what other cities or provinces will bring programs on line without notice?

One Final Fundamental Fact

Tesla Market Cap: $4.2 Billion
Kandi Market Cap: $111.98 Million

Kandi would have to appreciate over 35 times to approach Tesla's market cap based upon the 1/25/2013 closing prices.

Analysts Are Going to Have to do Their Own Analysis

To value Kandi going forward, analysts and investors are just going to have watch for signs of deliveries as they expand. As new projects are brought on line recalculate their projections.


Much of the information contained within this white paper has been sourced through machine language or human translation. As with all translation there may be gains or omissions. KCM is long KNDI for investor's accounts at the time of publishing this paper. By the time you read this, our positions may or may not have changed. This is provided for informational purposes only; solely to provide readers a feel for the tone of KCM. Reliance upon it is done so at your own risk.

Many of the links were sourced at http://finance.groups.yahoo.com/group/KNDI/links

Krajniak Capital Management, LLC ("KCM") is an Investment Adviser registered with the State of Michigan.

KCM may only engage in providing advisory services in Michigan or states where it has completed a notice filing or is exempted from notice filing. This site is to provide general information to Michigan residents. The purpose of this Web site is not to provide investment advice to the general public. Investment advice can only be rendered after delivery of the KCM disclosure statement (Form ADV Part II) by KCM and the proper execution of an investment advisory agreement between the client and KCM.

Performance will vary between accounts. Past performance does not guarantee future performance. Current performance is likely to be different than past performance. When investing there is a risk of loss.

Originally published at Krajniak Capital Management
Kandi Technologies, Corp (KNDI) Expanding Deliveries

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