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). Its stock price has surged recently. 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. 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.”
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.
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….
Article by Alysha Webb, a freelance automotive journalist and founder of ChinaEV Blog.