Kandi Technologies Group, Inc. Q1 FY2021 Earnings Call

Greetings and welcome to the Kandi Technologies First Quarter 2021 Financial Results Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Kewa Luo. Thank you, Kewa. You may begin.

Thank you, operator. Hello, everyone. Thank you all for joining us on today's conference call to discuss Kandi's results for the first quarter of 2021. We issued a press release covering the results earlier today. That press release is available on the conference website, as well as from Newswire services. On the call with me today are Mr. Hu Xiaoming, Chief Executive Officer and Chairman; and also Mr. Alan Lim, Chief Financial Officer. Mr. Hu will deliver prepared remarks in Chinese, which I will then translate. After that, we will have a Q&A session. Before we continue, please note that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's actual 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. Please note that unless otherwise stated, all figures mentioned during the conference call are in U.S. dollars. With that, let me now turn the call over to our CEO and Chairman, Hu Xiaoming. Go ahead Mr. Hu.

Hello everyone and thank you very much for joining us on the call today. The total revenue for the first quarter is nearly $16 million and this has far exceeded the level of the same period last year. Since last year we have seen a promising growth opportunity from the short distance small EVs in China, led by a brand called Wuling. Ever since they launched the short distance EV, it has taken the lead in this market. Additionally, high-end electric utility terrain vehicles in the US are favored by many younger generations. We have now focused on mass markets by developing vehicles for these segments, at a cost of RMB 30,000 or less, which is approximately US$ 4,700. For China, we are developing a neighborhood EV, while for the US, we are working on fully enclosed high-end air-conditioned pure electric four-wheel drive UTVs. We expect to launch both vehicles this year. Based on the financial statement, you will see a bottom-line loss due to our investments in R&D for the new product. However, looking at the gross margin, we have achieved over $4 million, exceeding our expectations. In February, we entered into an equity transfer agreement with Geely to sell Kandi's equity interest in Fengsheng. By exiting the Fengsheng partnership, we are no longer constrained by the non-competing restriction. With the freedom to pursue EV opportunities more aggressively and with additional cash, we can accelerate our growth. In addition to developing new products directly, we can enhance our competitiveness through acquisitions. We are actively looking for targets suited to Kandi's development roadmap and have been communicating with potential collaborators. In the first quarter we completed the relocation of our facilities. In early April, the old factory site was passed over by officials of the Jinhua development zone, and we expect to soon receive the remaining amount of ¥160 million or around US$25 million. At the same time, we are also moving our US subsidiaries headquarters to a newly purchased building in Dallas. Looking ahead, we are entering the rest of 2021 with an incredibly strong balance sheet that can fund all the initiatives we can imagine. Our teams in both China and the US enjoy the productivity of new efficient and attractive facilities. We are free of the constraints from the Fengsheng partnership and can fully exercise our creative potential. With our strong advantages combined with the industry tailwinds of support from both the Chinese and US governments for EVs, the future of electric mobility and for Kandi is as bright as we can imagine. We look forward to reporting exciting progress in the quarters ahead.

Let's now start the Q&A session. I will take the English questions and translate for Mr. Hu. Since our CFO Alan is really sick today and has lost his voice, I will translate the answers in English on his behalf. Operator, please go ahead.

Thank you. We will now be conducting a question-and-answer session. Our first question comes from Arthur Porcari with Corporate Strategies Incorporated. Please proceed with your questions.

Congratulations on a really nice Q1. Let me first note that had the company not taken that $22 million R&D charge in this quarter, or approximately $0.30 a share, which was 20 times more than you spent last year, it would have been a very profitable quarter. But let me move on to my question. My question concerns Kandi's undervalued share price. Despite the massive EV stock correction underway from extreme enthusiasm, any company just touting EV affiliation at current levels faces challenges. There's only one public company in the EV sector whose stock is trading below its year-end 2020 book value, which has increased and that is Kandi, with around $5.50 per share at year-end. This book value included over $2 a share in cash and short-term investment with no debt. Other companies are trading at over two times book and the average is around seven times book. When factoring in Kandi's pro forma profits already issued this year of another $0.65 a share from the profits from Jinhua and Fengsheng cash, Kandi's book value, with almost 40% cash, should by year-end be approximately $6.25 a share. I have not heard of any EV company or management buying shares of their own company in this current environment. Historically, Mr. Hu, three years ago bought around 430,000 shares at an open market value of over $2 million, with one block as high as $5.52 a share, and less than two years ago, Kandi bought about 500,000 shares for its own account at prices above the current levels. Kandi sold shares worth $160 million late last year at around $9 a share. If Kandi wishes to make a statement about just how undervalued this stock is, a share buyback or significant insider buys could catch a lot of attention. So my question is, while sitting on hundreds of millions of dollars of cash and no debt, will Kandi or Mr. Hu consider purchasing some shares here around or below book value?

Thank you for your question.

Thank you for your question and the background you have shared. My answer is very simple: we know the company's market value is seriously undervalued and we believe that the company's valuation will soon be more rational and return to a reasonable level. The next quarter's statement will look even more promising, but we do not have any current plan. If we do have any action plan, we will announce it to the market.

Okay. Well, thank you very much. That's kind of what I expected, but I hope we have a good strong next quarter and the rest of the year. Thank you.

Thank you very much.

Thank you. Our next question comes from Michael Fearnow with Focus Tech Investments. Please proceed with your question.

Yes. Good evening. My question has two parts. One is clarification on your hoverboard activity and the other relates to the reproduction of the company’s annual and quarterly conference call. In the first part, there seems to be some confusion about how many hoverboard powertrain units were sold last year due to inconsistencies in a transcript. The transcript stated that 150,000 hoverboard motor units were sold, but the CFO at that point in the transcript clearly said 460,000 units were sold. Also, it was indicated that Kandi was raising the price by 50%, while the CFO said it was 15%. So, there’s confusion about the hoverboard sales numbers and any price adjustments resulting from this transcript issue. My second question relates to the importance of reproducing the official transcript of the call, particularly in view of the increased institutional ownership of the company’s stock. Could Mr. Hu please address this issue?

Thank you for your question.

Thanks for your question. We really encourage all the investors and analysts to participate in our company’s live calls to discuss and ask questions directly to increase the understanding, rather than relying solely on the transcript released after the call. More importantly, some transcripts may not even be accurate because the live translation can lead to misunderstandings. Therefore, in order to avoid any confusion, we think it’s better not to issue the official transcripts by submitting to the SEC. Additionally, from what I have found, most listed companies in the United States do not provide their official transcript to the SEC. Therefore, our current practice aligns with industry norms.

Kewa, did Mr. Hu address the question about what was actually said on hoverboard sales in the conference call? Can he clarify those numbers?

Thank you for your question.

Okay. To clarify, 460,000 is correct, and the price increase is by 15%.

Okay. Thank you. That helps. So my understanding is the company does not plan on reproducing an official transcript of these calls. Regarding the hoverboards, during the year-end call, they projected a target sales of 3 million hoverboard units for this current fiscal year. Does Mr. Hu still believe that is a reasonable estimate? Thank you.

Thank you.

Based on the orders we have received so far in the second quarter, we believe the target of 3 million motors for the hoverboard is achievable.

Well thank you and I look forward to a successful future.

Thank you.

Thank you. Our next question comes from Mike Pfeffer with Oppenheimer. Please proceed with your question.

Hi. Thanks for taking my questions. A footnote appeared in the 2020 10-K addressing an R&D expenditure initiated in December for about $19 million for the development of a new Kandi EV. This amount presents the advanced payment to a third party for designing a new model as well as related research and development and consulting work. The company entered into a research and development contract with this third party on December 1, 2020, with a total contract amount of $38.3 million and an advanced payment of $23 million per the contract. To my knowledge, there's been no previous information divulged by the company on this matter unless this is also the mysterious Kandi sports car mentioned on the last conference call and also in the 10-K. My first question is: is this the previously mentioned sports car or a different EV? In either case, can you provide details such as size, market (US, EU, China), speed range, number of seats, price range, and an estimate of completion and release dates?

Thank you for your question.

The sports car project is still underway. Because of the high requirements for the sports car, especially for the airbags, it will take more time to be ready for market launch. Currently, we are focusing on developing short-distance small electric vehicles and high-end electric utility terrain vehicles. As I mentioned earlier, due to Wuling launching their short-distance EVs in China, the market has become very active. We are working on two vehicles: the short-distance small EV and the high-end electric UTV for the Chinese and US markets. We aim to launch both vehicles by the end of this year.

Sorry, yes, I was on mute. Who is the third party? Are they only involved in the design R&D? Is Kandi building the final release vehicles? If so, at what facility?

Thank you.

The third party is a domestic automotive R&D technology company in China. They are primarily responsible for designing and research development as well as providing a complete set of molds, fixtures, and inspection tools. However, the production of the vehicle will be independently handled by Kandi.

Okay. Thank you. In China, historically, of the approximately 90,000 EVs Kandi has made and sold over the past 10 years, the majority have been sold into commercial service, whereas very few were sold directly to consumers. How and to what market will Kandi be selling this new EV?

Thank you.

The short-distance small EVs are targeting office workers and rural consumers in the domestic Chinese market. The fully enclosed high-end air-conditioned electric 4-wheel drive UTVs are aimed at the US market.

Thank you, and just one clarification. Can Mr. Hu tell us which facility will be building the final production of these vehicles? I don’t think he clarified that.

Thank you.

Both vehicles will be produced in Hainan. In the future, all electric vehicles will be produced at the Hainan factory.

Great. Thank you so much for your time and best of luck.

Thank you.

Thank you. Our next question comes from Carl Shore with Wring Wring Consulting. Please proceed with your question.

Good day and congratulations on your quarter. I’m impressed with the improvement in gross margin from just about 18% to 27%, that's a 50% improvement. My question is: it seemed on the last conference call that the wrong impression was left that Kandi was projecting for a total of only 3,000 EVs from all sources for this year. Based on this assumption, it appears wrong since the CFO stated on the conference call that we have at least 3,000 orders of EVs featuring the smart battery swap. This initial number was based only on the orders from the first two cities where Kandi initiated a five-year, 300,000 EV government-accredited ride-hailing program. While 3,000 EVs might seem a small number, it does appear to me that it's just the start from this one program alone. For this program to work, it's not just EVs that are needed, but there are key collateral products required, which are all provided by Kandi's owned subsidiary. Essentially, you have the whole value chain, including building the battery exchange units and additional batteries required for the exchange. The total revenue from these first 3,000 EVs alone would come in at around $70 million, almost matching all of Kandi's 2020 revenues from a new revenue source that didn't exist even a year ago. So the question comes in four parts: A) with the three program partners, Kandi, Jinpeng, and Ruibo, which is responsible for re-soliciting new cities and local operators? Also, approximately how many cities in China meet the specific program's targeted demographic of third and fourth-tier cities?

Hi. Can I just translate the first question?

Yes, please do.

Yes, thank you.

This project is being operated by the company Zhejiang Ruiheng Technology, and there are approximately 2,000 third and fourth-tier cities in China that meet the requirements of this program.

Amazing. So how many cities are in active discussions to add to this program?

Thank you.

So far, Ruiheng Technology has been negotiating with more than a dozen third-tier cities about their intention to cooperate and launch online ride-sharing EVs featuring the battery swap model. We expect to start launching in these cities within the year.

Okay. And how does that interface with Kandi's recently signed strategic cooperation agreement with China National Electric Utility State Grid, which is essentially a monopoly all over China, serving every city? Is that a separate approach, or does it interface?

Thank you.

Zhejiang State Grid Electric Vehicle Service Company is also a partner in these projects. They are also involved in the online ride-sharing program, so there won't be any conflict.

I see. Given that the initial order should be around 3,000 EVs, what do you expect for total EV sales for this year 2021 from all sources? Would that be more in the vicinity of 8,000 or 10,000 or more EVs?

Thank you.

The number of vehicles we plan to launch for the online car share market is 3,000. However, it’s important to understand that while we signed contracts with two cities — 2,500 and 1,000 — the delivery of these vehicles will be rolling, so it will take time. The number of vehicles that will be sold directly to consumers will depend on market conditions. As of now, I would estimate the sales number for this year at 3,000.

Okay. So that's a conservative estimate. Thank you and best of luck for the remainder of the year.

Thank you very much.

Thank you. Our next question comes from Frank Ledermann, a private investor. Please proceed with your question.

Yes. Good morning, Ms. Luo. And good evening, Mr. Hu. The Economic Development Zone of Jinhua has reported that Kandi's factory is one of its key development projects and is designed for and equipped for an annual output of 5,000 sets of battery replacement equipment along with other products. My question is, why do you have such a large manufacturing capacity for quick battery exchange stations, since the prior reported number of stations and services only represents a small fraction of this number? Do you expect to actually need all this capacity? If so, when might this capacity be fully utilized?

Thank you for your question.

The vehicle battery swapping for electric vehicles has been affirmed and supported by the government and relevant state departments since last year. This is just the beginning of battery swapping operations. It will take time for market penetration. I believe the market demand in the future will be tremendous. Thus, the production capacity of 5,000 sets will indeed be fully utilized.

Can Mr. Hu provide a timeframe for when a significant portion of that capacity might be in use?

Thank you.

Starting in the second half of this year, we should see an increase in production. However, reaching the full production of 5,000 sets annually will take several years.

Okay. Thank you.

Thank you.

Thank you. Your next question comes from Yasser Yak, a private investor. Please proceed with your question.

Hi. Thank you. Do you have any updates regarding the listing for the battery powertrain subsidiary? Whether it’s in the U.S. or in China? Can you provide any ideas regarding the timeline?

Thank you.

The management team is evaluating the possibilities of listing the company in China and in the U.S. I understand that some investors have suggested doing a rights offering in the U.S., and we are still evaluating the pros and cons. However, based on the current situation, I believe battery swap technology has better prospects for listing in China. I think Kandi should have a listed company in domestic China since we are headquartered in China. Nevertheless, we are still assessing all plans.

Okay. My second question relates to the operator similar to Zhejiang Ruiheng. We know that there are many clear positive factors in China that you can go through. The question is, since we currently rely on one entity, Zhejiang Ruiheng, does it mean you have a significant risk? Are there any plans, or is Kandi currently pursuing another entity with similar capacity as Zhejiang Ruiheng to help sell Kandi cars and systems in the future?

Thank you.

I want to clarify that Ruiheng itself is not operating in all the cities. Ruiheng is the leading partner in this project and will negotiate with each local city to find local partners to perform the actual project. Therefore, there isn't a significant risk associated with relying solely on one operator.

Okay. I understand. However, having a similar company with the same capacity as Zhejiang Ruiheng would be beneficial, that's my question. Instead of only relying on Ruiheng to find operators in local cities?

Thank you.

Since Ruiheng is just the beginning of this initiative and we have only signed 3,000, they will likely engage with more operators in the future. For now, we only have Ruiheng as the current operator, but in the future, we may consider engaging more companies like Ruiheng for this project.

Okay. Thank you very much.

Thank you.

Thank you. There are no further questions at this time. I would like to turn the floor back over to management for any closing comments.

Thank you again for attending today’s call. On behalf of the Board of Directors and the management team of Kandi Technologies Group, I would like to reaffirm our commitment to continue working hard to pursue the EV market more aggressively in China, as well as expedite the applications of our expertise in battery swap systems to maximize shareholders' value. With supportive policies from the government and sufficient cash and working capital, we believe the coming years hold a multitude of opportunities that can deliver strong operating and financial results in the coming quarters. This concludes our call today. Thank you once again for attending. You may now disconnect.