Kandi Technologies (KNDI): The Business
Part II - The Business
This is part two of a four-part series on Kandi Technologies (KNDI). Part I was an introduction, and Part III and Part IV will look at the company's financial condition and stock price, respectively.
Kandi was founded by its effectively sole controlling shareholder Hu Xiaoming in late 2002 in Jinhua City, Zhezjiang Province, PRC as a prolific developer and manufacturer of two, three and four wheeled gas powered, mainly off road, recreational vehicles exclusively for the US export market. By 2007 KNDI rose to the status of being China’s largest exporter of high end Go Karts (more like mini-dune buggies) with a impressive15% of the total market. In addition, KNDI also developed and manufactured an array of ATV’s, UTV’s, Trike’s, etc. Unlike most start-ups, KNDI was financed from its inception through the end of 2009 without going to outside equity investors. Also, unlike most startups it has been profitable each year including the last two in spite of an almost total collapse of the export market for non-essential products as KNDI was offering.
With the Energy Crisis of 2008, a window opened for Mr. Hu to make what could now only be looked at as a perfectly timed Company transformation simultaneously on two fronts. He rapidly moved the emphasis of the Company to develop and market mini-electric cars and to develop these cars along with the Company’s legacy products for not just the export market, but also for domestic PRC consumption. Before anyone thinks that the move into EV’s was just the move of a stock market opportunist CEO, I suggest you check out this link for a short bio of his credentials as an earlier pioneer in mini-cars, EV’s and batteries.
Where does KNDI stand today on the EV front?
For openers, I suspect that most had no idea that KNDI was China’s largest exporter of pure 4 wheeled EV’s to the US with over 3500 mini-EV’s delivered the past twelve months. The initial sales were of a cute two seat convertible called a Coco, followed now by a more powerful hardtop with AC and power windows (Yes that is me in the car). The latter recently arrived at KNDI’s West Coast facility within the past few months and only last week reached its first dealer in my home city of Houston. In fact, thanks to Rick Erhlich of Houston Electric Car Company, Saturday I was able to take a head turning spin through downtown Houston. While both these cars are designated as Low Speed Electric Vehicles (LSEV), meaning they must be speed restricted down to 25mph in any state that doesn’t have its own specific requirements, Texas allows the speed to be set at 35mph. I can assure all; this car without the governor will go well past the 35mph restriction. With the addition of this air conditioned model (better for both hot and cold climates), and the existing and impending tax credits in several states, paired with the federal tax credit of 10%, I can easily see sales of 5,000-7,000 more export units over the next twelve months. These sales should also include the impending opening of their new EuroGroup market.
People's Republic of China (PRC)
While the KNDI's legacy export business is profitable steak, what is happening in China beginning this quarter is surely the sizzle. As mentioned above, Mr. Hu is Johnny come lately when it comes to EV’s. Last year the word came out that the China Government was going to go all in with incredible subsidies and grants to make China the Worlds #1 manufacturer and consumer of EV’s. Immediately all of China’s, and a number of other international auto manufacturers came running to the market with their big beautiful $30,000 plus full speed EV entrants. In June, the subsidy plan was unveiled giving PRC subsidies up to the equivalent of $8600 US per sale, additionally local Provinces and Cities also added subsidies. As we now know, this great deal has been about as successful as a Chinese firecracker in a typhoon. Why? The big guys will tell you it is because the subsidy is not enough. “If a buyer can’t afford $30,000, then they can’t afford $22,000 either". True statement, but… that’s not the main reason. There are at least two other more important reasons, and KNDI knew it.
The most important credo in
manufacturing is “know your market
. Something the big guys either forgot or ignored. In most of the world, EV’s for years to come will be either a second car, or a novelty market. Not so for China for at least two reasons. In China with its current minuscule cars per family ratio and huge 300 million urban emerging middle class, EV’s are likely to be a first and only car for quite a while. This group is evolving from bikes and scooters, so any economic enclosed vehicle they can step up to for a few thousand dollars is cause for excitement. But additionally, they would like to have the ability to get not just from point A to B, but on to the rest of the alphabet. Let me explain.
KNDI and Mr. Hu know the above is KNDI's market, in the same way Henry Ford with the Model-T and Ferdinand Porsche with the Volkswagen knew their market was for the common man. With most of the above potential consumers living in high rise condos, just finding parking alone will be a universal problem, let alone finding a place to plug in for an overnight recharge. Obviously this is not a good environment for a big expensive sedan. KNDI’s solution; make the car half the length of the sedan, sell it without the most expensive single item, the battery, and forget about plug in recharging (thought the KNDI vehicles do allow plug-in). And, BTW, this will make it a lot easier to get from A to C and beyond without waiting for hours for a recharge IF you can find a place to recharge. KNDI's solution; Build the car with battery quick change access and also build the battery changing stations.
Mid last year while the rest of the auto makers were developing their big expensive cars, ten of the biggest got together and formed a group to address the re-charging issue as can be seen in this article snippet translated from this translated China news story:
“Not only the ‘external environment’ case, even the electric car production camp is also due to the formation of two different charging modes martial. Such as FAW, SAIC Motor, Changan and other domestic 10 vehicle companies jointly established in August 2009 electric vehicle industry alliance to promote plug-in electric vehicles and models of commercial standards.”
Late last year, KNDI, due to it’s ownership of a technological patent for quick battery change, led the formation of its own group. From the same article: (Condi is Kandi after Google translation)
“While Condi is with CNOOC Zhejiang, China Putian, Zhejiang days Battery Co., Ltd. and other energy giants could reach an agreement, set up a ‘Chinese electric car industry Promotion Alliance’, seeks to expand the change battery mode of influence.”
Now the big guys came up with the brilliant idea to set up tens of thousands of plug in terminals all over the country. With current average full charging times of up to six hours, there had better be a good triple feature movie theater nearby.
The KNDI lead group is currently building a series of Changing Stations similar to what Shai Agassi is trying to do internationally with his not yet trading already Billion dollar VC funded A Better Place company. Just drive you car in, let a robot arm change out the battery, and in less than two minutes you are back on your way to point C with a fresh battery. But KNDI’s group is taking the changing station concept to a more advanced level. When you buy your subsided car you buy it separate of the additionally subsidized battery which is leased from their same group for a pittance. Aside from the obvious lower initial cost, always a fresh battery, and ecologically friendly battery recycling, this is also a great deal for the car buying consumer in that his purchase price is cut in half and his resale value will not drastically decline with the age of the battery.
For KNDI this is an excellent situation in that in addition to selling their cars equipped with the quick change battery feature, they get paid a fee from the battery change alliance each time an exchange is made.
Now as is Not typical for a US company which might take years and millions of dollars to implement such a plan, KNDI, thanks to their contribution of the technology, has no capital requirement towards building out the battery changing infrastructure. The PRC, local Governments and KNDI's partners are covering all costs. And according to this translated China article the first six changing stations and main charging station are scheduled to be completed in October. But what is really big for KNDI is the initial commitment for the City of Jinhua to subsidize an initial 3000 cars of KNDI’s recently Government approved larger mid-speed car, the KD5010XXYEV which can cruise at 80kph with a 160km range between battery changes. After subsidy paid to KNDI directly after each sale to a dealer, the consumer cost at the dealership will be between $2500 and $3000 USD. An entry level that most emerging middle class can embrace. KNDI’s gross margins should exceed 35% on these sales.
Government and Municipal Orders
To date, KNDI has made initial sales for trial purposes to the China Postal Service in both Jinhua City and Hangzhou, cities totaling some 9.1 million in population. The most recent sale of 60 cars which are modified versions of the KD5010XXYEV sold directly by the Company with the batteries was made at approximately $10,000 USD per vehicle. Here is a video clip from a China TV piece aired in June. While it is in Chinese, the video alone shows an impressive operation. The green vehicles with the light on top you see throughout the clip and the plant manager being interview in front of, are the new China Postal vehicles. Much can be read as to the potential of Government sales through the below excerpt of this recent press release.
This initial order by the Hangzhou Postal Service is for vehicles to be used as a Special Postal Vehicle. Hangzhou, one of China's most prosperous cities, is one of the first five Chinese cities in which the Chinese government will begin to offer significant subsidies and special policy incentive to electric vehicle and hybrid manufacturers as announced by the Ministry of Finance on June 1, 2010.
The Company added that the initial order by the Postal Service totaled approximately RMB 4,080,000 (US $602,450). It was in response to a widespread call by government officials in Hangzhou for its municipal services to adopt alternative energy vehicles. The Company said the government approved Kandi EV emits no emissions, and meets all of the standards set by the Chinese government. After a finishing touch of green paint, it is anticipated the cars will be shipped and begin to appear on the streets of Hangzhou before the end of July.
"By improving the environment and raising the standard of service provided by the Postal Service in Hangzhou, we believe this sale will serve as an example of the potential for utilizing electric vehicles for mail delivery throughout all of China," stated Mr. Xiaoming Hu, Chairman and CEO of Kandi. He added, "We will continue to market our EV products to all major government agencies in China.
Continued in Part III
DISCLOSURE: Long KNDI
Arthur Porcari is a retired former regional stock brokerage firm President with 37 years stock market experience. His finance background includes, three years a stockbroker, ten years a brokerage firm President, an OTC Market Maker, twenty three years an Investment Banker to include 14 years as Managing Consultant to Corporate Strategies, Inc. a firm specializing in advising young public companies and companies about to go public on the Ways of Wall Street. He currently blogs on Seeking Alpha under Corstrat and has in the past been an on-air guest as well has a guest host on Business Talk Radio Network His passion and particular expertise is for small cap emerging growth companies.
He currently is and has been a shareholder of Kandi Technologies since it was first listed for trading in the US.