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China Kandi: Are its electric vehicle plans for real? Or realizable?

July 30, 2013

China is committed to having an electric vehicle industry. But just what kind of EVs it wants, and when, is still being decided.  Meanwhile, investors looking to cash in on China’s EV industry seem to be looking for a good way to benefit from a yet-to-be-finalized government policy.

Take vehicle producer Kandi Technologies (KNDI).  www.kandivehicle.com  Its stock price has surged recently. http://www.nasdaq.com/symbol/kndi/stock-report    The stock, traded on the Nasdaq exchange,  closed up 11.41% as I write this on July 26.   What prompted this surge?  News of Kandi’s delivery of 100 pure electric vehicles to the Hangzhou EV sharing system. http://www.nasdaq.com/press-release/kandi-technologies-announces-the-delivery-of-first-100-kandi-geely-co-developed-pure-evs-for-the-official-launch-of-hangzhous-public-ev-sharing-system-20130726-00318 That’s a pretty small number.  But, Kandi said it will deliver up to 10,000 EVs within a year.  This from a company that sold fewer than 4,000 low-speed electric vehicles in 2012.

So is the stock surge that justified?  No way.  We have no proof yet that Kandi is able to turn out a quality BEV.    It is better to wait and see with Kandi, methinks, unless you have a big appetite for risk.

I sent a rash of questions to Kandi’s New York-based IR folks to try to get a better feel for the company and its products.  Besides asking if the 100 BEVs were low-speed (“we don’t have such information available to the public yet” I was told),  I asked these questions:

  •  China’s central government has not issued new guidelines for subsidies for electric vehicle purchase. How important are subsidies to Kandi’s growth?
  • How large do subsidies for pure-electric vehicles need to be to significantly boost demand?
  • Does Kandi think leasing or selling electric vehicles is the best business model?
  • Will individual buyers or fleets ultimately be the largest market in China for pure electric vehicles?
  • Does Kandi have plans to enter the fleet market and if so with what type of vehicle?
  • ZZY EV, the company that is buying some BEVs from Kandi to use in Hangzhou, expects to deploy 5,000 to 10,000 rental EVs within one year. So is it closer to 5,000 or 10,000?
  • Will all these vehicles be provided by Kandi?
  • Go-karts still represent the majority of Kandi’s production. Yet Kandi has been aggressively adding EV production capacity at a several locations. What makes Kandi think it can produce high-quality pure electric vehicles in volume?
  • When might we see Kandi EVs for sale in the U.S.?

The IR folks answered none of my questions.  The reply:  “Many of your questions are not yet publicly disclosed. We are now in the preparation for upcoming 10Q. Our legal counsel doesn’t encourage us to participate in any interview at this moment.”

I am not sure that the 100 BEVs Kandi delivered to Hangzhou are the same as the Super-mini cars like the one below. But they probably are.

I await with great interest the next filing from KNDI.  Do I think all my questions will be answered? Hardly.  Next time I am in Shanghai I must try to arrange a visit to Kandi in neighboring Zhejiang.   Meanwhile,  Kandi’s existing filings offer some a somewhat disturbing picture, or at least it disturbs me. Maybe I have spent too much time in China and seen too many big words from companies followed by small actions.  Nonetheless, I take the caveats in Kandi’s filings with the U.S. Securities and Exchange Commission very seriously.

A little background:  Kandi is a vehicle manufacturer based in the east China province of Zhejiang.  Its primary business is still the production of go-karts, with a healthy serving of All-Terrain Vehicles thrown in.   The two accounted for 81% of Kandi’s revenue in 2012.

Its electric vehicle business does seem to be picking up, however.  Although sales to Hangzhou have just begun, according to the numbers in Kandi’s SEC filing for 2012, revenues from its pure electric Super-mini cars nearly tripled to $19 million in 2012 compared to 2011.  I’m pretty sure the Super-mini cars are low-speed urban BEVs.

I am not sure who bought the 3,915 EV units Kandi reports selling in 2012 (compared to 1,077 units in 2011).  But, says the 2012 10K, “this increase (in EV sales and revenue) is primarily a result of certain beneficial local government policies that encourage the development of EVs.” Indeed, the price of the Super-mini cars decreased in 2012 because Kandi “adopted a new battery exchange business model” and started selling BEVs without the battery, says the 10K.  How much, then, of the EV revenue was government subsidies?  Hard to know.

Kandi does warn that that China’s EV market is heavily dependent on government policy:    “The Company’s EV products currently are mainly sold to Chinese domestic market, and the EV industry is supported by the Chinese central and local governments. Therefore, our EV products performance is significantly affected by the policies adopted by Chinese central and local governments. Any significant adverse changes in the Chinese governments’ supporting policies may negatively affect our results.”  http://blogs.worldwatch.org/revolt/chinas-electric-vehicle-development-failing-to-meet-ambitious-targets/

So the growth of the EV market is uncertain.  Still,  Kandi has added production capacity quickly.  In April, it announced the establishment of two plants with 100,000 unit capacity each to products EV key components and parts. Does that mean EVs? Not clear. At the same time,  Kandi also announced a 100,000-unit EV production line opening.

Additional red, or at least pink, flags in the SEC filings:  Kandi funds a substantial portion of its operations through short-term bank loans, a pretty expensive way to grow. And risky given the current crackdown on risky lending by China’s central government.

According to Kandi’s SEC filing for Q1 2013 operations:

“As of March 31, 2013, the Company has credit lines from commercial banks for $54,126,337, of which $32,794,193 was used at March 31, 2013.”

It continues:  “Historically, the Company has financed itself through short-term commercial bank loans obtained from PRC banks. The terms of these loans are typically for one year; upon our payment of all outstanding principal and interest in a respective loan, the PRC banks have typically rolled over such loans for an additional one-year term, subject to interest rate adjustments to reflect prevailing market rates. The Company believes these lending arrangements have not changed and that short-term bank loans will continue to be available on customary terms and conditions.”

Then there are the off-balance sheet obligations:   Kandi serves as guarantor for some $20 million in bank loans to other companies. It has also pledged some $6.2 million in land rights, plants, and equipment as collateral for other loans.  Those companies also guarantee Kandi’s loans.   Sort of like a pyramid scheme.

Said the SEC filing:  “It is a common business practice among companies in the region of China where Kandi is located to exchange guarantees for bank debt with no consideration given. It is considered a “favor for favor” business practice and is commonly required by the lending banks as in these cases. These companies provided guarantees for the Company’s bank loans as well. The banks involved in these guarantee transactions typically allow a maximum loan amount based on a 30% to 70% discount on the net book value of the pledged collateral.”

Kandi isn’t going it entirely alone in the EV world.  A few months ago it announced a joint venture with Maple Guorun, a subsidiary of China’s Geely Automobile Holdings Ltd. to produce electric vehicles.  The JV just received government permission to produce an electric sedan, which qualifies it to receive purchase subsidies.  http://green.autoblog.com/2013/03/30/geely-kandi-ev-partnership-electric-vehicles-china/

That didn’t move its stock as much as the 100-EV delivery, however.  Investors may have realized they were exhibiting irrational exuberance.   It is a few days later (Monday) as I finish this blog.  Kandi’s stock is down 0.38%.  Perhaps the market is also becoming skeptical, but not very….

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11 Comments leave one →
  1. JEFF RODENBERG permalink
    July 30, 2013 9:38 pm

    Alysha, your article has a very bias tone to it. After reading your article and noticing the one sided context in which you would try to make your points, I wondered what hidden agenda you must have to try and paint such a poor picture of start up company such as kandi? Then I saw some of the comments in the Alysha Webb productions section of your homepage. It was here in your comment exchange with Hugo Luke where your hidden agenda became clear.

    Hugo Luke PERMALINK
    July 15, 2013 2:16 am
    Hi Alysha:
    I need your Email address to send you important new EV technology to redirect China’s EV approach to next generation fuelless alternatives…Thank you.
    Regards
    Hugo Luke

    Alysha Webb PERMALINK*
    July 15, 2013 3:12 am
    That sounds intriguing. Send it to alyshawebb@yahoo.com
    Alysha
    REPLY

    Hugo Luke PERMALINK
    July 15, 2013 3:34 am
    Thank you for your prompt response. We must inform China’s EV decision makers to change the present plug-in, charge station, battery swap strategy. Our EV uses only one battery in tandem with a green generator. Email info on the way.

    It seems very clear to me that your latest article on kandi is an effort to assist Mr Luke in his efforts to alter China’s ev strategy for the betterment of his own Ev pursuits.

    • July 30, 2013 9:49 pm

      Hi Jeff,
      You are incorrect. I have no ties to Hugo Luke. We exchanged emails, he wanted me to fly to the Bay Area to see his company’s product. In the end I declined. I have never seen his company’s technology and I am more skeptical about it than Kandi’s. I think Kandi has technology but I think it is unproven.

      I have no hidden agenda. I am merely skeptical of Kandi. It has made many big statements. I await proof of the company’s technology. Until I see that I will remain skeptical. Others are free to form their own opinions.

      By the way, do you honestly think Mr. Luke could “alter China’s ev strategy for the betterment of his own EV pursuits?” Why would the Chinese government care what he thought/did? Why would it care what I thought or said for that matter?

      Alysha

  2. July 30, 2013 9:58 pm

    Yes, some of these questions will be answered with time. But you omitted the fact that recently Kandi raised $26 million from an investment fund. The fund seems to be pretty confident in the business model going forward, as does SGCC (China’s largest utility) who is their partner and features Kandi prominently, as does the city of Hangzhou.

    You say: “Maybe I have spent too much time in China and seen too many big words from companies followed by small actions.” Well I guess building China’s first EV rental garage which is well documented in the media is a small action, and Kandi’s partnership with Geely is just happen stance.

    But you are wrong about the price movement: the Geely/ Kandi sedan MITT approval announcement surged the stock to 8.50. The recent announcement of 100 delivery was only a small blip comparatively. Please get your facts right, especially if you are going to write such a biased assessment.

    • July 30, 2013 10:18 pm

      Um, the City of Hangzhou built the garage, I believe. Part of its five-year plan to promote EVs. And the previous surge was just that, a previous surge. Percentage-wise, this was also a surge. Does it not seem strange to you that the stock is fluctuating in value so wildly? I just checked and it is down 3.42%. In any case, you are of course welcome to your opinion. Had I written a blog wildly praising Kandi you would no doubt have been happy. If it turns out I was wrong, I will be happy to write a blog saying I was wrong.

  3. Robert Wahl permalink
    July 30, 2013 11:27 pm

    Hello Alysha,

    As you have noted, the Kandi stock has been fluctuating wildly. This has been a big concern on the Kandi private board. We know it is because of a company/person who has been shorting the stock. As Art Pocari has noted many times in his numerous articles, the short hits the stock hard anytime that there is good news. He also hits it hard when there is no news–such as today. Yesterday the stock went up approximately 35 cents early in the day. Then spent the rest of the day backtracking to where it ended the day before. This is the short beating it back down. This has been a common occurrence for a couple of years now.
    You seem to know a lot about Kandi and that is good. I am surprised with the knowledge that you have on Kandi, that you penned in your blog “When might we see Kandi EVs for sale in the U.S.?” Kandi has sold EV’s here in the US and continues to. As you may be aware, no EV companies or vehicles are making much head way here. The American consumer is not ready for it and the infrastructure here is barely being built out. There is no incentive at this time for major EV sales here. But Kandi EV’s have been sold here and continue to be sold. I am happy that you flagged some of the growth in facilities that Kandi has been able to do in China. But then you phrase the following sentence as this growth has additional red or at least pink flags along with other items noted in their reporting in their SEC filings. I do not believe that building out of 3 plants capable of producing 100,000 units whether cars or parts as bad or setting off red or pink flags. Although you put the idea in peoples heads that these plants may or may not be built for EV production and parts, If you are correct, then I also do not think it bad that these plants may be multi functional and build out internal combustion parts and cars. I do highly doubt that they are for anything else but EV’s but will not be disappointed if some business were to come from companies building internal combustion engines.
    With your knowledge of Kandi, any chance that a future posting will list both the pros and cons to this stock.
    I want to thank you for the posting this in your blog. I feel the more news out there about Kandi will help grow the audience for this company and for that I am grateful.

    Sincerely,
    Robert Wahl

  4. July 31, 2013 12:01 am

    Robert, Thanks for your message. I realized someone must be shorting the stock after I wrote my reply. And, I should have been more clear re: selling vehicles in the U.S. From the information I found online it appears the vast majority have been go-karts and ATVs, which are a very different category than a car that will be driven on the street, even if it is a low-speed neighborhood vehicle. Perhaps Kandi has sold some of those here too as the Coco. But not many, I believe.
    Re: the plants. My issue is that Kandi is adding a lot of capacity that may not be needed. Is that the best use of its funds? If it plans to supply what it hopes to be a burgeoning EV sector in China then it may be a good move. Time will tell.
    What I know about Kandi I have gleaned from closely reading its reports. I know China well having lived there for more than a decade, and I know the EV industry well. I would have liked to interview someone from Kandi, but my request was not granted. Perhaps next time I am in China I can go to Kandi’s headquarters and do the interview. I speak Chinese well enough to do the interview in Chinese if necessary.
    In any case, I will be happy to write a follow-up blog looking at the pros of the company, once I ascertain what they are. The JV with Geely may turn out to be a plus, but I am not sure about that. A person in China whose opinion I respect did say he thought Kandi was a company to keep an eye on. I will do that.
    Alysha

  5. Robert Wahl permalink
    July 31, 2013 2:28 am

    Alysha,

    Thank You for replying to my post. I will look forward to future posts by you on the China EV build out.

  6. Michael Schlemmer permalink
    September 16, 2013 6:31 pm

    What do your connections in China say regarding the timing of government EV subsidies? Chinese Press uses words such as “soon” & “imminent” but what does that mean to them?

  7. Lawrence permalink
    February 17, 2015 8:32 pm

    As Alisha points out, Kandi began life as a go-kart and ATV maker, moving into manufacturing, and exporting, the so called Low Speed Electric Vehicles (LSEV). It later teamed up with Geely Auto which already had an EV, in its Panda minicar lineup. But despite already both having their own electric vehicle models, these venture partners are now teaming up with Shandong Xindayang, another young LSEV maker, which makes the “Zhidou” LSEV. Xindayang has begun building the Zhidou for not only the venture partners, but also for another leading EV manufacturer, Zotye Auto, who like the venture partners, has its own EV models.
    It is a bit confusing we have to admit, but perhaps separating the men from the boys, would lead to clarifying. The boy LSEV makers in China, Xindayang, and others, many which are “not licensed”, cannot be lumped in with the “men”, i.e. the BYD, BAIC, Roewe, and others that are “fully licensed” by the government as New Energy Vehicles. It’s because of the tendency to do so, that I understand Alysha’s skepticism.
    Having said that…, now that Apple, Google and Leshi, all devoid of automotive experience, are proposing the building of so called alternative cars, that they expect to be taken seriously, maybe it’s an all new ball game, and that those of us who are used to a certain auto industry paradigm, are going to have to get used to it,
    Needless to say, your efforts to further clarify are welcomed, Alysha.

  8. November 15, 2015 1:00 am

    A lot has happened with Kandi in the last two years – time for an update?

    • November 15, 2015 1:12 am

      You are right, a lot has. If I have time I will write a blog on Kandi. I still have doubts but it does look more legit now.

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