Kandi Technologies Group, Inc. Q2 FY2022 Earnings Call

Greetings and welcome to Kandi Technologies Second Quarter 2022 Financial Results Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to the IR Manager, Kewa Luo. Please go ahead.

Thank you. Hello, everyone. Thank you for joining us today to discuss Kandi’s results for the second quarter of 2022. Earlier today, we issued a press release covering the results. You can find the press release on the company’s website as well as from Newswire services. On the call with me today are Mr. Hu Xiaoming, Chief Executive Officer and 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 question-and-answer 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 obligations to update any forward-looking statements, except as required under applicable law. Please note that unless otherwise stated, all figures mentioned during the call today are in U.S. dollars. With that, let me now turn the call over to our CEO, Hu Xiaoming. Go ahead, Mr. Hu.

Thank you, Kewa. Hello, everyone and welcome to Kandi’s earnings conference call today. I am proud of the outstanding effort made by our team to deliver solid results despite many challenges in the economic environment caused by waves of COVID and the Ukraine-Russia conflict. Early in the second quarter, there was unprecedented supply chain disruption in China due to prolonged lockdowns in major cities, especially Shanghai. Despite these headwinds, our team rose to the occasion. We have continuously refined our business strategy and we saw the positive impact of this effort in the second quarter. This relative success in the harsh environment was enabled by our flexible business model. We are constantly innovating to find new products to address emerging areas of growth. A great example is the category of off-road vehicles. Our off-road vehicle revenue in the second quarter increased by 84% year-over-year. In the first half of 2022, we introduced the all-electric golf crossovers. Monthly production jumped to 2,000 units from just double digits in March. Customers are thrilled with our new products and demand is high. With the trend of electrification of vehicles, we intend to develop a variety of new all-electric off-road vehicles such as UTV, ATV, and so on. We will launch those new products as the year goes on. Off-road vehicles will present a substantial market opportunity around the world. Industry sources estimate that this product category will grow by 19% a year for the next few years, reaching a market size of $2.2 billion in 2028. We will work hard to capture a share of this growth by soon introducing more new vehicles and building our marketing and distribution capability. Going forward, by strategically adjusting our business, we believe our near-term efforts in the all-electric off-road vehicle sector can make it a market leader. In addition, regarding our battery exchange equipment and battery exchange service, we have cutting-edge battery swapping technology in the EV market in China. However, surges in COVID cases and the lack of healthy growth in the China EV market are impacting the battery swap efforts. What I mean here by the lack of healthy growth in the China EV market is that many Chinese EV manufacturers are competing for growth in order to capture market share. We will monitor market dynamics and improve operations moderately. We will accelerate the battery swap business as well as ensure that China’s massive electric vehicle market is healthy and stable. Meanwhile, we will continuously refine our business strategy to make Kandi more diversified and competitive. Let’s now start the Q&A session. Kewa will take any English questions and translate for me. Operator, please go ahead.

Thank you. Our first question is from Harold, who is a Private Investor. Please go ahead.

Hello. I have two questions. Sorry, having to do with Kandi’s temporarily cable highway speed EV cars both in China and the U.S. Question one back in April, our China Auto web portal reported that the Kandi K23 has been relaunched in China as the Henghe HRQ7000 BEV01. Can Mr. Hu explain the rationale and significance of this for Kandi to include what it means financially to Kandi both now and in the future? It does seem that Kandi is the assembler of the car.

Thank you for your question. Let me translate what you have so far.

So, thank you for your question. Henghe is a trademark and basically a brand we use for all the EVs we cooperate with Hengrun. Our cooperation with Hengrun is mainly that we are responsible for the production of the electric vehicles that enable the battery swap mode; we produce the motors, parts and then Hengrun will take our parts and assemble them into a whole vehicle. So basically the cooperation is mainly to achieve compliance in terms of the production and sales in the PLC market. In terms of the impact to financials, that will increase our sales of the EV product.

Thank you. Question two, Facebook Marketplace has a small use 2-door white UTV EV with the Kandi name on the grill that looks exactly like the Henghe HR S1 in China. It’s being sold by the Dallas-based IDrive One dealership. There is not a lot about this car on the net. I noticed that the Chinese version is a full speed 102-mile per hour car as compared to the U.S. 35-mile-an-hour limited car. What is Kandi’s relationship to the small EV?

Yes. So, basically we are using the same laid out frame from the cooperation with Henghe. And why we cannot offer the full-speed EV in the U.S. is basically that we have not yet met the airbag technical requirements by the DOT, especially for safety issues. Hence, we only get over those UTV or NEV versions in the U.S. market at the moment.

Thank you. Sorry, last question. The IDrive One dealership in Dallas also seems to be a primary seller with a big inventory of both the K32 NEV truck and the $3,500 Trail King electric bike. How are they selling overall? And will the K32 ever be considered for sale in China as a full highway truck?

So there are two questions here. First of all, about the question regarding IDrive One. That’s the dealer in Dallas, and our U.S. entity, SC Autosports, sells the products to other dealers, including IDrive One. As far as specific sales of those dealers, we won’t be sure because they may have some other products that are not provided by us. So, we don’t have too much information on the whole sales per se. And as for the K32, that’s a UTV that we designed specifically for the U.S. market, due to the scale of the fully enclosed EV type. In China, there is no such market demand. So at the moment, we don’t have this plan to sell it to China yet.

Thank you.

Thank you.

Thank you very much. The next question is from Terry. Please go ahead.

Yes, thank you. I want to cover a little bit more on the battery swap with Hunan Hengrun. There was a press release back in January that announced the initial framework for that battery swap. Can you tell me if that deal has been activated?

So, the project we are working on with Hengrun is progressing in an orderly manner. In June this year, the Henghe band H23, the model H23, has already completed the relevant procedures at the Ministry of Industry and Information Technology of China, such as the product announcements subject to environmental protection policies and tax exemptions. So basically, we have complied with, fulfilled, and completed the licensing for sales in China.

Okay. Is the Kandi brand going to be used on that ride-hailing program and is that for the 300,000 vehicle program for the battery exchange?

So, for the sales in that current platform in China and other channels, the reason we are working with Hengrun is because they have the production license and qualifications. So the brand Henghe will be the trademark we cooperate with Hengrun EVs for the China market down the road. So, there will be Henghe. Yes, in the future and at the right timing we may use that brand Kandi again, but for now we will adopt the brand Henghe for our product sales in China.

Okay. Finally, what does each partner primarily contribute and what percentage goes to Hengrun and what specific products and services?

Yes. So, for our cooperation with Hengrun, it is similar to the model we used to work with GLE in the past. So basically, we are responsible for manufacturing the parts of those EVs and then sell them to Hengrun, who will assemble and sell them to the customers and even to our own source of customers. So, we are taking different steps in the whole flow. And so there is no such percentage of the products because we are working on different flows. Hopefully, I answered your question.

Yes, it does. I appreciate it. Thanks for your time.

Thank you.

Thank you. The next question is from Michael Pfeffer of Oppenheimer. Please go ahead.

Thanks for taking my question. With Kandi stock price trading at such a massive discount to cash working capital and shareholder equity and Kandi sitting on a huge cash stockpile, why hasn’t the company been more aggressive in completing and even adding to last year’s announced $20 million share buyback?

So, thanks for your concern. At the moment, there are huge influences from the outbreaks of COVID, the resurgence of COVID and the lockdown in the PLC market, plus the military conflict between Russia and Ukraine. The entire international economic situation and conditions are very severe and uncertain. In such an environment, the management believes that we should be cautious to cope with the upcoming uncertain economic situation. We want to navigate through this time. In the meantime, we know that the share price of the company is seriously undervalued, understated. However, we believe that with gradual adjustments and refinement of our business strategy and improvements in our company’s financial performance, that the share price will return to a reasonable level. The management believes that in the current economic situation, it’s not a good move to pioneer with buybacks to increase the stock price, because that may not be a persistent move, but definitely we will conduct repurchases of shares as planned.

One other comment, to be able to buy back shares at less than half book value at a 25% to 30% discount to cash seems like a no-brainer, particularly when compared to past buybacks at prices up to mid-$5 by both the company and Mr. Hu personally along with at least one other director. On the last conference call, a suggestion was made that the company consider looking into a more formal Dutch auction tender, something that would certainly bring a lot of positive tension to Kandi at this perfect time due to its strong cash position and likely revenue explosion ahead this year. The key to success with a Dutch auction is that it will remind all that Kandi is trading under cash in the bank? Thanks.

Yes. So as I explained earlier, we tried to be conservative and keep our cash flow because we believe that buybacks may not be a long-term plan that will consistently refine our share price from a fundamental standpoint. We would rather focus on our business strategy and operations. However, we would like to explore the Dutch auction, the tender offer and see if that works and if that makes sense to the company and in the current market. We will explore and get back to you later if we plan to do so. Besides, Mr. Hu and some other parties repurchased shares of Kandi at around $5 per share last year, which shows that we have confidence in our company’s future and we will explore and determine whether we take the time for more repurchases, but definitely we have confidence in our company’s future.

Well, it’s probably a much better buy here at these levels. It’s half the price. Thank you.

In the current market, we will explore the possibility of share repurchases and provide an update later. Last year, Mr. Hu and other parties repurchased shares of Kandi at approximately $5 each, demonstrating our confidence in the future of the company. We are considering whether to allocate time for additional repurchases, but we remain optimistic about our business outlook. Michael Pfeffer, an analyst, noted that these levels represent a much better buying opportunity, as the price is now half of what it was. Thank you.

Thank you. The next question is from Arthur Porcari of Corporate Strategies. Please go ahead.

Thank you. Good evening, Mr. Hu. On last quarter’s conference call and 10-Q, the company surprised shareholders with the unexpected $70 million U.S.-based golf cart agreement with units already being sold. Though this huge two-part order in size was disclosed in the Q1 10-Q, this order was never announced as a freestanding press release. Yet the new product line, if targets are reached as reported in last quarter’s 10-Q, would likely generate revenues this year almost equal to Kandi’s total revenues last year. Can you explain to us what possessed management back in the time in Q1 when everyone’s business was crashing for Kandi to suppress publicly announcing a new product order of this size at a time when Kandi’s stock was also collapsing and has never recovered along with the market? Also, from the comment in today’s press release, it’s safe to assume Kandi’s golf cart business is expected to grow in future years? If so, how much? Could you pass on and ask that question to Mr. Hu please?

Right. So our mindset was to establish the fundamentals of the new business, because we always had to adjust our strategy. Our plan was to materialize everything before we had a very concrete announcement to the public, but we will definitely take that in mind and it will be communicated in the future. As for the questions, basically, from March, we have already shipped out a few dozens of golf carts from China to our U.S. entity. And from April and May this year, we started to deliver over thousands of golf carts to the U.S. However, because the majority of those deliveries are still in shipment at the moment, we only recognize a few hundred of the revenue from golf carts for Q2; the rest are still on the way to the U.S. entity. But from now on, it’s no problem for us to have consistent production of over 2,000 pieces per month. And so that’s our situation for now.

Well, that sounds like a pretty good answer. 2,000 pieces per month at the retail level, that’s quite a number for a company that’s sitting here with a market capitalization of $180 million, only $18 million in debt, and $230 million in cash. It seems to me like you should be in a position where you can start buying back some of those shares, but go ahead and send that on to them right now, Kewa, just what I just said.

Yes, I mean, definitely, we have a bright future in golf cart productions and we can achieve really good sales targets under ideal and smooth circumstances. However, there has just been a lockdown in Heico, where our facilities are located, which has gotten locked down lately. And so definitely that will have some impact and hold up our productions. But down the road, we believe we can deliver very good performance in terms of golf cart production.

Okay. Well, based on the now reported first half, balance of the golf cart you talked about in the 10-Q and some comments you just made, it looks like Kandi should actually have its best year ever. Based on both business and financial condition this quarter, I mean this year. Very unique based on current overall economic and market conditions yet, in spite of this likelihood, you still managed to keep this thing as the best kept secret. You haven’t answered me why? Why would we have only put one press release out the company the whole year, yet in the past, we put out 20 to 40 every year? The one press release was way back on January 10th. And it really had nothing to do with golf carts. So, is this just going to be a new policy? You are just going to go dark or are you going to start putting out press releases again? It’s just amazing. I will pass that on and I got a few more short questions and I am done.

Okay. I hope you understand that it’s still rather a transition period for us to adjust our strategy and we find our work plan to compete in the EV market. And of course, we understand if certain investors or shareholders are not satisfied, but hopefully, we can show that confidence to stay with us as we navigate this transition period. And hopefully, we can enjoy the benefits of the efforts in the future.

Just a couple of quick wins now. I am sure Mr. Hu is not happy with what he is seeing. If he and I go back together all the way to 2008 when this company started, in that year, he had I think 13.5 million shares of stock. At the peak, it was probably worth, I don’t know, $65 million to $70 million. You look at the stock he has today. He has more stock and I know he paid $5 million for the stock he has already bought. He has got more stock and at today’s price, it’s probably worth closer to, I don’t know, $25 million or $30 million. So, he can’t be happy with this, but he hasn’t done anything in my opinion. That’s why I feel frustrated. He has done a great job of keeping this alive and well and safe and yes, maybe gave people an opportunity to buy the most undervalued stock in the world that’s certainly not going to go out of business. Maybe in this market that’s a great deal. But getting off that bandwagon, I just got a couple of last questions here. How much of an effect do the China tariffs have on Kandi’s golf carts, electric bikes, power sports, and off-road business and does the company anticipate a lifting of U.S. restrictions on these? And one last piece, with next to golf carts, how much are the NEV electric bikes expected to contribute to this year’s revenues? And does management have an estimate for total sales in the off-road business this year?

First of all, regarding the question about the tariff, there is no tariff imposed by China on our exports because there is only a rebate, but there are no taxes or tariffs charged on our exports. For shipping to the U.S., the U.S. government charges a 10% tariff on all imports. So, under the existing conditions, our sales price in the U.S. market is determined according to the existing tariff tax rate. If there are any future adjustments down the road, our sales price will also be adjusted accordingly. So, basically, there is no significant impact on the company’s revenue upon any changes or adjustments of the tariff tax rate. Secondly, regarding our sales forecasts, because of the significant impact from the resurgence of COVID, the lockdowns, and the conflict between Russia and Ukraine, the entire market is uncertain. Definitely, there will be an increase in golf cart sales this year, but for sales other than golf carts and ATVs, we expect the sales to be similar to the levels of 2021. That’s our estimation.

Okay. Well, we will just see what happens next quarter, but it sure seems to me like this could be a record year for the company. It may be a record year for a low price as well as the stock, which is a great opportunity for those who are smart enough to take advantage of it, but, to each its own. Thank you very much and great job coming up with this new product line. It looks like it’s going to be huge in the U.S. from what we have seen with all the dealers that have been added on recently. Thank you, and talk to you later.

Thank you. Operator, we can take the next question.

Thank you. Our next question is from Frank Batterman, who is a private investor. Please go ahead.

Yes. Thank you. Good evening, Mr. Hu. Is there any agreement, written or oral, or Chinese law that prohibits Kandi from exporting brief legal and highway capable cars for any country including the USA?

The main reason that we have not been able to offer our full-speed EVs in the U.S. is because we have not met the requirements of the airbag safety standards as mandated by the U.S. DOT. As a matter of fact, none of the China-based EV products have fulfilled such requirements for the U.S. market, even though the mechanism is a rather self-ratification process. However, if something happens, we are in big trouble if we haven’t met such standards, and yet we sell them in the U.S. because the airbag safety standard in the U.S. is higher than in the rest of the world, like the EU or the China region. Even though there are no such written or oral documents or agreements to prohibit us from doing so, we are just being prudent and doing the right way to ensure that first we fulfill those standards, and then we can offer full-speed EVs in the U.S. market.

Okay. Thank you. I do have a second question and then a third one. Second question, are other modifications needed besides the airbag for the K23 and K27 to be highway legal in the U.S.? Is that the only thing that is needed to make them sellable here in the U.S.?

Yes. The major obstacle is really the airbag safety requirements and the technical standards requested by the DOT. Other than that, we have pretty much fulfilled the rest of the requirements.

Okay. Very good. And my final question, why has Kandi not devoted whatever resources are needed to quickly design and incorporate the needed airbag changes to bring Kandi’s vehicles up to DOT standards for highway use to take advantage of this opportunity to sell inexpensive vehicles in the United States due to high gasoline prices and climate changes? It seems to me that this is not brand new technology. Kandi has some of the best engineers in the world. Why haven’t we devoted whatever resources we have to getting this done? And that’s my final question. Thank you.

So, thanks for your concern and suggestions. But as we mentioned in the past, the requirements for the airbag safety standard are much higher than those in China and even the EU because, well in China and the EU, we have similar standards. But in the U.S., we have to tackle different issues, such as the size of the passengers and drivers. It’s not just a matter of one single company being able to tackle, it’s rather the whole industry’s skill set level for the entire country that would need to work together to tackle such an issue. So, at this moment, we are trying very hard to do so. But I guess we have to wait until the whole standard is improved in terms of the country level in China. In the meantime, we will focus on the NEV market and the sales in the U.S. and in the second half of the year, we will launch more different models in the NEV to improve our market occupancy in the U.S. market. So, our focus now will be on NEV, but we will definitely work on the safety requirements in the meantime.

I understand what you are saying. It just seems that this is all technology at this point, and it should not be all that difficult to achieve considering the resources that are in China, with the engineers and the fact that other companies have managed to meet the airbag issue for export to the U.S. in their manufacturing plants, but no reason for you to comment on that. Thank you very much. Thank you for your time.

Thank you. Yes. So, thanks again for your question and your concern. But I guess we don’t think there has been any China company that has sold gasoline vehicles to the U.S. market yet. So, basically, that applies to all automotive from China-based companies.

Thank you very much. Ladies and gentlemen, that is unfortunately all the time we have for questions. I would now like to hand back to Kewa Luo for some closing comments.

Thank you. Thank you again for attending today’s conference call. If you have any more questions, feel free to contact us via e-mail or our investor relations company. We look forward to updating you on our next earnings call in November. This concludes our call for today. You may now all disconnect. Thank you. Bye-bye.