Kandi Technologies Group, Inc. Q2 FY2020 Earnings Call

Greetings. Welcome to the Kandi Technologies Second Quarter 2020 Financial Results Call. At this time, all participant lines will be in a listen-only mode. A brief question-and-answer session will follow the formal presentation. Please note that this conference is being recorded. At this time, I will turn the conference over to Kewa Luo with Investor Relations. Please go ahead.

Thank you, operator. Hello, everyone. Welcome to Kandi Technologies Group, Inc. second quarter of 2020 earnings conference call. The company released the results earlier today and the press release is available on Kandi's website. With us today are Mr. Hu Xiaoming, Kandi's Founder, Chairman and Chief Executive Officer, and Mr. Jehn Lim, Chief Financial Officer. Mr. Hu will deliver prepared remarks, followed by a question-and-answer session. Before we get started, please note that today's discussion will often contain forward-looking statements made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's results may be materially different from the expectations expressed today. Further information regarding these and other risks and uncertainties is included in the company's public filings with the SEC. The company does not assume any obligation to update any forward-looking statements except as required under applicable law. As a reminder, this conference call is being recorded. In addition, an audio webcasting of this conference will be available on Kandi's Investor Relations website. I will now turn the call over to Kandi's Founder, Chairman and CEO, Mr. Hu Xiaoming.

Thank you, Kewa. And hello, everyone. Welcome and thank you for joining us on the call today. Despite the challenges posed by COVID-19 and a decline in customer demand, our business results for the second quarter were satisfactory. We achieved a profit of $4.1 million, and our gross margins slightly improved to 18.2% compared to 17.4% in the same period in 2019. Kandi is making progress and we are prepared to recover due to our focused and aggressive efforts. In the second quarter, we concentrated on preparing for the online car-hailing business, and our EV sales in the U.S. made significant strides in these areas. First, we delivered our fully automatic intelligent battery change system to a rideshare operator in Haikou City on August 2, 2020. Installation has been completed and it will soon enter trial operation. With strong government support, battery swap stations are now categorized as infrastructure construction in China for the first time. We believe that our fully automated smart replacement will be well received by the market and boost the sales of our electric vehicles. Second, our wholly-owned American subsidiary, SC Autosports, has made substantial progress in preparing to launch EV sales in the United States while continuing to grow our off-road vehicle offerings. We are thrilled to announce that our virtual launch will occur on August 18, marking the kickoff of our presale, which will be a key milestone in the company's history. As a technology innovator, Kandi is dedicated to delivering high-quality products with excellent performance at affordable prices. Let's now move on to the questions. To save time, our CFO, Mr. Jehn Lim, will answer your questions directly in English. Since Jehn has only recently joined us, if there are any questions he cannot answer, Kewa will translate and I will provide a response.

Our first question comes from the line of Walter Hill with Carty & Co.

Last quarter's conference call and, Mr. Hu said, 'as this business is developing quickly, we will consider merging Yongkang Scrou and Jinhua An Kao into a single specialized power train technology company and evaluate the possibility of raising capital in China's capital market to fund growth. The raising capital in China's capital market to fund growth was eye-catching. My questions: Since the company borrows money all the time, for Mr. Hu to specifically bring up capital markets for future growth, it would seem he is talking about raising equity for the joint subsidiaries with either a private equity round or IPO for the combined subsidiaries or both. If so, it would seem a perfect way to unlock hidden value, in that such a combination of two subsidiaries could, in his hot market, be valued up to $1 billion in a first-round private equity financing if, in fact, the 300,000 Kandi EV program with An Kao's QBX is underway and the Hangzhou Chic hoverboard program is underway with Yongkang Scrou. This new combined high-tech company would look like a natural listing on the new Shanghai technology STAR stock exchange, where, by the way, Li Shufu is in the process of co-listing Geely.

Hi, everyone. First of all, it's my pleasure to meet everyone on the call today. As for the questions, first of all, we have renamed the Jinhua An Kao to Zhejiang Kandi Smart Battery Swap Technology Company, Ltd. in the second quarter. Of course, we will continue the Yongkang Scrou under its name. As for the questions, we are actually evaluating the possibility and the option of the aforementioned companies, whether they are listed on the Science and Technology Innovation Board or we'll explore the possibility of any other private equity investments. So, at the moment, we're exploring the options and the possibilities. When there are any plans further, we'll probably announce to everyone.

The next question is from the line of Fred Rasher with Cleantech.

We have had a lot of information out on Kandi America with the upcoming US virtual release of the K23 and K27. While it is clear that Kandi has a 100% interest in the K23 sales, the K27 seems to be very similar to an EV that is made by Kandi's partner in the 300,000 EV government-accredited ride hailing company, Jinpeng. If this is the same EV or it has been modified by Kandi from the original Jinpeng model, if so, will Kandi be working with Jinpeng on other models? Also, just what is it that Jinpeng is responsible for in the 300,000 EV program? Thank you.

So, as for the questions – first of all, K23 has a US version and a domestic car hailing version in China. As for the second question, does Jinpeng work in any other models? It is actually. The K27 US version is a model that is developed by us in cooperation with Jinpeng. And we believe as the corporations proceed further, there's a possibility of cooperating with Jinpeng to develop other models. This option is not ruled out. And therefore, the second question about the role of Jinpeng, first of all, Jinpeng has more than 2,000 dealers in third and fourth tier China cities across the country. So, in our 300,000 electric vehicle plan, Jinpeng will mainly use dealer resources to jointly promote the project. So, basically, we are utilizing the network and resources of Jinpeng.

The next question is from the line of Michael Pfeffer with Oppenheimer.

Regarding financials. From the filings, it appears that Kandi did collect some $32 million as the first payment in Q2 from the Jinhua government for the sale of Kandi's 18 years held Jinhua legacy facility, leaving some $42 million still owed to Kandi from Jinhua. Also, it appears Geely still owes Kandi some $26 million from Kandi's JV equity sale. Do you expect to receive the balance owed from each by year-end?

Actually, there's good progress on the two payments you mentioned. First of all, on July 9, 2020, Kandi received a second payment of approximately $70 million from the government under the repurchase agreement regarding the relocation of our Jinhua facilities. In addition, regarding the payment from Geely, on July 27 this year, we have received all of the remaining equity transfer payment from Geely, which is roughly $26 million. And so far, all of the equity transfer funds have been received from Geely. So, it's all been settled.

Does Fengsheng still owe Kandi for parts provided during the JV? And if so, how much?

It does. The company Kandi continues to provide the parts and components to Fengsheng. We still have the daily operations. As of June 30, 2020, the receivable from Fengsheng related to the supply is about $20 million.

And then, my last question. Thank you for your time. Also, if my math is correct, it appears that the Jinhua facility being sold to the government is carried on Kandi's books at a depreciated price of less than $7 million. So, if correct, when closed, based on a much appreciated $76 million sale price, Kandi would book a huge pretax GAAP profit of over $1 per share on this transaction alone. Can you address my guesstimate on this? And also, which quarter do you anticipate this will officially close and be booked?

Your calculation is basically correct. We actually recognize the amount in accordance with US GAAP. It's mainly based on the degree of the completion of how we execute the contract. As of June 30, the second quarter of this year, we have recognized $13.9 million in the gain from the disposal of such assets based on the return to the government. It's about 73,000 square meters of the brownfield land. It's approximately 21% of the land use rights we returned from quota plant. The remaining portion of the gain is expected to be recognized in the first quarter of 2021. That's the time when we expect to complete the whole agreement and the relocation process.

Our next question is from the line of Mark Kahnau with Swiss Liquid Future.

My question has to do with Kandi solely owned sub – An Kao's subsidiary. I was happy to see in the recent PR what appears to be the first sale of Kandi's patented proprietary 90-second battery swap system, which is unique, in that it can also allow a roadside emergency, in situ mobile swap in five minutes due to the battery location cleared off the weeds. Longtime followers of Kandi, this announcement seemed to trigger a series of potential huge events kicking off previously announced first four government-accredited Kandi-initiated ride hailing five-year 6 billion plus program for third and fourth tier cities in China. Early this year, Kandi had announced two different billion-dollar patents in this program. Xiaoming, Jehn Ming, my multi-part question is, one, since cars must be included in the deal, but not announced, can you tell us how many K23s are involved in this single transaction and approximately K23 sales price? And is this the launch of the five-year, 6 billion plus 300,000 EV program or a side deal?

So, it is. Yes. Is it a launch of our five-year, 300,000 electrical vehicle plan? So, Kandi will cooperate with Zhejiang Global and Jinpeng to build an online car hailing platform. We strive to invest 300,000 electric vehicles in the next five years. The platform will actually purchase no less than 56,000 K23 electric vehicles from Kandi in the next five years. The price is approximately RMB 90,000 per vehicle excluding subsidies from the government.

And my second question is then, it is understood that Kandi's pretended 90-second QBX unit are modular and therefore somewhat portable. How long does it take to set up and/or move such a unit?

So, our smart battery exchange system achieved one-click exchange in 90 seconds. Each system occupies an area about 50 square meters. And you can meet the exchange service of over 280 electric vehicles every day.

And my third question would then be, how many additional cars and stations can we expect this year? And what are the revenues per QBX unit for Kandi?

Since the project started in the second half of the year, the numbers of the cars and the stations will not be significant. It's definitely the direction of our future development to promote. As for the revenue from the QBX unit, please take a long look at upcoming financial reports with the figures we've incurred.

And can An Kao custom design and sell QBX stations for other manufacturers and battery setups?

Yeah. Our smart battery swap system has registered more than 20 patents and a number of copyrights. But then our position is mainly to provide such a system to the power swap companies instead.

My last question would be, other than selling the EVs and QBX stations, can Kandi participate in any other revenue source affiliated with you and Jinpeng?

Yes. Apart from the streams you mentioned, Kandi will own a small share in the company, which operates the car hailing platform. So, then we will have a small share of revenue from that operation as well.

The next question is from the line of Mark Miller.

From the last conference call, Mr. Hu stated, recently, we have been in discussions with Mr. Ying Jiawei, if I'm pronouncing his name, CEO of Hangzhou Chic Intelligent Technology, a high tech company that is well recognized as a major exporter in the intelligence balanced scooter sector. We have agreed to have Kandi start using its power train system to produce balanced scooters for this company. Hangzhou has accumulated more than 500 technical patents in the balanced scooter sector and is the originator of the balanced scooter products. Last year, Kandi announced that one of its subsidiaries, Yongkang Scrou, if I'm pronouncing that correctly, initiated a relationship with DGL, Walmart's largest high tech China buyer, to provide up to 71 million in hoverboards for their premium Hover-1 brand, which Consumer Reports called the second most demanded Christmas gift last year. Some small portion of that deal was booked by Kandi in quarter four, but as addressed in the last conference call, due to COVID-19, the business was curtailed. However, at that time, Mr. Hu felt that this was still a viable order for later this year as the virus abates. Can we get some update on this DGL deal? And can Mr. Hu also give us a better feel for the Hangzhou Chic deal and what it could mean for Kandi? And then, one more specifically, just what is Kandi providing for Hangzhou Chic? Are they making the whole hoverboards or just the motors and how big can this deal become? Thank you.

As for the agreement with DGL, the order of DGL has resumed production in July. We expect that the deal can be completed by the end of this year, with about 300,000 units to be completed by the end of the year. For the second question, Hangzhou Chic has begun to use the motors produced by Scrou and the battery packs produced by the Smart Battery Exchange, which is formerly called Jinhua & Co. After the project is sorted out, the end result is expected to exceed over RMB 500 million.

What was booked in quarter four? What number do we have there? Of the 71 million.

Well, I guess, we will – currently, we're working on the plan and I guess the quarter four data will be released during our year-end financials for 2020.

Okay. But I'm assuming – when he says small portion of the deal was booked by Kandi in quarter four, do we have a number here that was actually – that we booked in sales from last year?

A small portion of the sales was booked, but I think we can refer to the financials of last year for better details.

Our next question is from the line of Arthur Porcari with Corporate Strategies.

Sounds like we have our new chief financial officer on board. Welcome aboard. Some of us think you took a long time to have someone that could interact on these conference calls the way you are. Mine's going to be a little bit long now. I'm going to preface my question by saying I'm a long retired brokerage firm founder and Kandi investor. I've never received any compensation whatsoever from Kandi or Geely or other management. I get accused for it all the time on the chat board. So, I want to put this on the record in front of the company. In the last decade, I've visited Kandi in China twice along with publishing over 50 articles on the company. Based on the massive new interest in Kandi, I want to preference my question today with background on an area outside of the US EV sales that alone should justify a much higher price today than it could soon be monetized. To move on here, Kandi has been a partner with Geely Holdings, wholly owned by Li Shufu, a top five wealthiest in China since 2013. Due to his controlling ownership in Geely Auto, Volvo, Proton, Lotus, and a half dozen other auto companies, Geely is considered the largest privately owned auto conglomerate in the world. Additionally, it owns 75 plus percent of CAOCAO, a top China ride hailing company, which just surpassed 2 million trips per day. A year ago, Geely Holdings felt it was time for the JV, then called Kandi Electric Vehicles Group, which had sold some 60,000 EVs since inception to either go big or go home kind of a quote and offered Kandi a sweet deal by buying the 22% interest of its 44% JV share for a 40% premium to book value. This at a time when most Chinese EV companies were going out of business. In fact, that was back at the time when actually NIO went below $2 a share when Li Shufu bought Kandi's piece out at a 40% premium. Earlier this year, Geely changed the company's name to Fengsheng. It's currently building two EVs under the Maple badge. Now, for clear control, Mr. Li also committed to provide whatever debt capital necessary to Fengsheng to grow. After this transaction, Fengsheng, which is now jointly owned 78% by Geily Holdings, 22% Kandi, saw the JV dissolved and replaced by a corporate structure converting Kandi's 22% JV interest into equity shares. Much in the same way that Kandi ended up owning the Alibaba stock, we won't be booking any of these revenues for the company. I'm going to stop right there if we need to.

Yeah, thanks. Move on. At the time of the transaction closed last year, Geely Holdings total cash cost basis to acquire 78% equity was around $330 million, which happened to be more than Li Shufu paid to acquire his initial controlling equity interest in Geely Auto, London Black Cab Company, Proton and Lotus all combined. Again, I'm just trying to show how important Geely thinks this relationship with Kandi is. By dissolving the JV, Geely Holdings then became exclusively responsible for some 400 million in Fengsheng's payable as of the last report we had late last year. Since that time, using Geely Holdings' credit, restructuring Fengsheng, designed and built two EVs for sale with subsidy and sales tax exemption. All under this new Maple badge. On July 11, the smaller, heavily equipped Maple 30X went on sale in China with five different reasonably priced versions due to China's subsidies, which have now been extended to at least 2022, the consumer costs could now run for only $9000 to $11,000. The second – I'm going to have my questions here in a moment. The second EV, a midsized Maple 60V crossover SUV is specifically built for ride hailing. As announced, Li Shufu has just received government approval and has not yet been priced. It's expected to go on sale later in Q3. All told, I believe there's somewhere around 15 cars that Geely has announced in the China media that they plan to have made and sold no later than the year 2024 in Fengsheng. And by the way, I think that also includes a sports car and a pickup truck, what's said in the interview. Okay, now for some questions. Is Geely keeping Kandi updated on Fengsheng's sales? If so, do we know how many EVs were sold in July? If that can't be disclosed right now, does Mr. Hu feel Fengsheng sales will be announced monthly, like most other Chinese EV companies, on the MIIT government website? That's one of the few questions. First of all, I would like to thank you for your follow in the past years and your long-term support means a lot to us. It's valuable. And apparently, you brought up a lot of information. What I would like to first say is that since the beginning of 2019, Geily positioned our joint venture, which is now called Fengsheng, as an enterprise to compete with the new forces in the manufacturing of the auto industry. Although all the shares have been transferred to Geely, it's actually the Geely Technology Group Co. Ltd. instead of Geely Holdings. We believe that after the equity restructuring of the joint venture company, even though we hold a lower shareholding percentage owned by us, Kandi, with Geely's ability to operate and the resources in the automotive sector as a controlling shareholder, we believe that we will now be rewarded with even more benefits and income from Fengsheng than what the 50% of equity from the original joint venture can offer. This can ultimately maximize the interest of us as a shareholder. And now, we as a non-controlling shareholder, we try not to be involved too much in the management of Fengsheng in order to let Geely do what they do best. And regarding your question about the sales, I think that Fengsheng sales should be at similar levels as the figures announced by the majority of other Chinese EV companies on their website.

Do you expect them to actually report though? So, you're saying yes, you do expect that to be shown up there even if Geely does not individually – since they're private, they don't have to announce Geely Holdings is private. They don't have to announce it, but it would probably show up there. And that's what we're going to have to rely on that?

We believe that the service will be somewhat similar as other China EV companies on the MIIT website.

Do we expect Kandi to be the only partner actively reporting those numbers? You have been diligent in sharing updates from Fengsheng. Will those figures also be released when they reach a meaningful level?

Yes. We actually as a partner of the company will be informed and join the meeting regularly from time to time. So, when there are new updates or any significant data pops up, they will report to us as well.

I know that Mr. Hu's on the board of directors of Fengsheng as well, so I'm sure he is being kept updated. A few more quick questions. Before the COVID virus, Geely was targeting sales of 30,000 Fengsheng units this year. Is this still a Geely target or goal? And is Geely sharing any of the current sales estimate so far they may have for the balance of the year? And if so, maybe what about next year?

The permit, it is impacted actually by the pandemic. I think the sales target for 2020 will be adjusted for sure. Currently, there's no definitive sales plan confirmed yet by the company.

Okay. When should we expect the 60V sales to begin? New car.

So, the 60V has been approved by the government and is expected to be launched in the market by the end of this year or early next year.

Okay. Geely reported a few months ago that Fengsheng will be developing and selling 14 different models including the pickup and sports car by 2024, with a total of – three cars total this year. Is that still their game plan as well as we know it?

Well, this plan was announced a few months ago during the Maple brand launch content and the presale launch event of that 30X, the first piece out. And what you mentioned should be consistent with Fengsheng's plan, although there should be two models for this year instead of three.

Thank you. At this time, we've reached the end of our question-and-answer session and I'll hand the floor back to management for their closing remarks.

Ladies and Gentlemen, thank you for attending today's call. On behalf of the Board of Directors and the management team at Kandi Technologies Group, I would like to reaffirm our commitment to working diligently to maximize shareholder value by focusing on growing our EV business and delivering strong operational results. Thank you very much for your support. We look forward to speaking with you in the next call. If you have any additional questions, please feel free to contact our Investor Relations department. Thank you. Goodbye.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.