Part IV – KNDI’s Stock Valuation
This is the last installment in a four-part series on Kandi Technologies (KNDI). Part I was an introduction, Part II took a look at Kandi’s Business, and Part III looked at the company’s financial condition.
What’s With The Stock Price?
KNDI, like most US traded China stocks is currently trading approximately 50% below its January high for the year, and 60% below its 2008 all time high. Unlike most, it’s numbers are growing dramatically. Perhaps not too a-symptomatic when one considers how little Wall Street knows about this company brushing it with the broad China Stock brush. The Company currently has approximately 21.7 million shares with the CEO owning 12.3 million. At the current price of $3.25 a share, it is obvious that either the stock has yet to be taken seriously, or the “market has little clue” as to what is about to happen with the opening of China sales this current quarter, or perhaps both. I suspect “both” is the correct answer.
While the reported short interest has dropped significantly to the recently reported 904,000 from month ago high of 1.18 million shares, so also has the volume. In January when the stock hit its high of the year, average daily volume (ADV) was in excess of 550 thousand shares. A month ago the ADV was around 175 thousand shares. This past two weeks it has dropped to under 50 thousand shares per day. With the solid base that has been built in the low “3’s” and the decreasing short position, it appears that the short sellers are now beginning to realize that this Company “just might be real”. But with the declining volume and still very large percentage of shares short, a question could be raised, did they wait too long to start covering? It is very likely that the Average “Days to Cover” could jump to 20 or more days when reported on Sept. 24th. As an old OTC Market Maker of ten years, years ago, who worked with a number of “old, but no longer bold” short sellers, I can attest that shorts don’t give up easy. But in a rapidly performing company, they do give up. Voluntarily or involuntary, in most cases, not until they are squeezed.
As in the case of most China stocks, KNDI’s short began with it’s large run-up late last year, accelerated when they announced their $10 million funding, and further accelerated with the sharp downturn in virtually all US and Shanghai Composite China stocks. IMO, the major difference in KNDI’s case is the, to date, almost total lack of hedge fund longs, leaving most of the float+ in the hands of long term investors who have done their homework and continue to patiently hold or add to their positions with each bear read attempt. At no time is this more telling in KNDI then by watching the stock action after one of their several very positive press releases or outside published articles. After their first PR of the year on January 4 which caused the stock to gap open at $.45 hit an inter-day high of $6.16 and close at $5.72 on all time single day record volume of 1.84 million shares, virtually every PR since, no matter how strong, has been met with aggressive raids hitting bids.
This is a common pattern in any stock that has a major short position in that the short seller will do whatever he can to kill enthusiasm and keep momentum buyers from jumping in and running him over. This works to a point, but once long funds and institutions start buying, particularly from a low daily volume base, the future quick upside moves can be impressive. The likelihood of this happening soon is anyone’s guess, but there has been a small but growing institutional interest in the stock, tripling since the beginning of the year. The top five each have positions almost too small to note, but each of these could easily decide on any given day to add a million shares which could be catastrophic to the short seller. Not so far fetched now that China sales are beginning.
As can be seen by the chart below, KNDI has strong support in the low $3 area. For the past month it has been trending higher and nudging up to the 50 day moving average at 3.32 and just above the upper Bollinger Band. This is a very similar pattern, but on lower volume, as was seen the month just before the extended heavy volume break-out on no news in early August.
Value Compared To Other China Auto Stocks
In deference to the short, an unknowing investor might look at the current 30 PE as rich, compared to other more well known China auto stocks. And if all one were allowed to look at was this number based on history, I might agree. But, let’s throw in another very important factor, “growth”, and look at what comes out. One important variable that should be taken into consideration in comparing other China stocks is; “where was the market for these other stocks during the 2008-9 economic downturn”? We know KNDI was exclusively exporting non-essential “toys for big boys” to the US, so obviously they took a big hit in both top and bottom line. But most other China stocks were able to ride out the storm selling domestically giving them reasonably good numbers last year allowing for a much lower 52 week PE.
For comparison sake I will use a modified one year Price to Earnings Growth (PEG) ratio. In the case of the other more well known stocks; I’ll take the current PE for the formula “dividend”, last years earnings and this year’s analysts consensus to calculate the “growth” to be used in the “divisor”. For KNDI since it has no analysts following yet, I will pass on my higher estimate and instead use well known and respected Wall Street pundit Jim Altucher’s estimate published in a recent story of around $.30 per share for the full year (ten times earnings), to be used along with last years earnings to calculate the divisor. Now we know with a PEG ratio the closer the number gets to “1.0” the more fully valued th
e the stock, the smaller the number, the more undervalued the stock. So let’s run a few of these modified PEG ratios. KNDI’s PEG ratio with a current 30 PE would be .05. Auto China (AUTC) with a current 7.5 PE, the PEG would be .14. China Automotive (CAAS) with a current PE of 15 would generate a PEG of .36. And Sorl Automotive Parts (SORL) with a current 10 PE would give a PEG of .53. I would have also added Wonder Auto (WATG) with its 12 PE, but since the analyst consensus is flat to negative growth for this year, the number would be meaningless. So using this comparison, each, other than WATG is undervalued, but KNDI is three times more undervalued than AUTC, seven times more undervalued than CAAS and ten times more unvalued than SORL.
A last, but important comment here that may shine positive for getting the KNDI story out to Wall Street. As previously mentioned, Mr. Hu doesn’t speak English. For that matter, neither does any other member of the Management team. Additionally, due to Mr. Hu’s conservative penchant for not putting anything out until it is done, to date, Company guidance has been out of the question. With no one here to field questions in English, there is no wonder no analysts and few institutions are following the stock. (Even the well respected China Analyst website after a recent rally in the price above $4 ranked KNDI as the #2 on it Aug. 8, “Top 10 Rebounding Auto Stocks” seems to have forgotten that KNDI is even a China stock as can be seen by this ( link.) However, during my last translated conversation with Mr. Hu a month or so ago, I brought up the possibility of the Company bringing a new top level Executive on board that is US based and bi-lingual. To my pleasant surprise, I was told that such a search was already underway. Last week I was further told from a normally knowledgeable source, that such an individual has been chosen and should be announced shortly.
Based on my assumption of the second paragraph above, China consumer sales revenues for the second half should be at least $15 million with $2.5 million net profit. Other China Government sales should reach $6 million adding $1.3 million net profit. Historical, conventional export sales, should reach $25 million for an additional $3.1 million net profit. Conservatively total is $46 million in sales and $6.9 net profit or approximately $.31 a share for the second half of the year and $.40 for the full year.
When one looks at the Company’s prior record year, 2008, on $40.05 million in sales they delivered $4.92 million net (eps $.25). All of those sales were on much less profitable all export sales requiring shipping costs to the US, plus US Distributor fees for their lower margined off-road recreational vehicles. With what could quickly be a majority of future sales being made in China selling directly to the Government and self distributes to dealers, 2010 margins should increase significantly over 2008 making my last half forecast quite reasonable.
In my 37 years in the market as both a market professional and investor, I have never seen such an apparently undervalued speculative Company with such a seemingly clear road ahead to potentially be a multi-billion dollar participant in a potential Trillion dollar space. I apologize for the length of this article, but if you have had the interest to get this far, then hopefully you will find as I, that Kandi is a “sweet” story at least worth “putting on your radar”.
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.