Earnings Call Transcript - KNDI Q2 2021

Operator, Operator

Greetings. Welcome to Kandi Technologies' financial results call for the second quarter of 2021. Please note that this conference is being recorded. I will now hand it over to Kewa Luo. You may begin, Kewa.

Kewa Luo, Moderator

Thank you very much. Hello, everyone. Thank you all for joining us on today’s conference call to discuss Kandi’s results for the second quarter of year 2021. We issued a press release covering the results earlier today. 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 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, Hu Xiaoming. Go ahead, Mr. Hu.

Xiaoming Hu, CEO

Hello, everyone and welcome to our conference call today. We are excited about our second quarter results. First and foremost, revenue was strong, driven primarily by growing sales in the intelligent mobility sector. Recall that last year when COVID-19 broke out, we made a strategic decision to find new markets for our technology. We identified the intelligent mobility sector as a great opportunity, especially since we believe our technology is better than our peers for this application. Today, you can see the wisdom of this decision in our sales numbers for the second quarter. Of equal influence was the completion of the Jinhua Facility relocation, which entitles us to the final payments, resulting in a significant increase in net income. This was a substantial inflow of cash, which we will deploy to grow our business. As a reminder, in March 2020, we entered into this repurchase agreement with Zhejiang Jinhua Development Zone. In the second quarter of this year, we vacated our old property and returned to Jinhua Development Zone on schedule. We also completed the move into our new facility, thanks to the efforts of our team members. This funding will support our R&D and other efforts to capture new growth opportunities. We believe that with a solid strategy and government support, our business can stimulate the local economy, creating new jobs for the people. We are proud to operate in this socially responsible manner. Talking about growth opportunities, I mentioned in our first quarter conference call that we see huge market potential in short-distance electric vehicles in China and UTVs in the U.S. market. We have been investing in R&D to further develop these two product lines and made progress in the second quarter. In May, we announced our K32 premium fully enclosed electric four-wheel-drive utility terrain vehicles. Early prototypes were produced at our factory in Hainan, China. The fully enclosed cockpit provides delightful comfort not typical for a UTV, including a built-in intelligent interactive system, integrated infotainment, and surprisingly strong air conditioning. We intend to sell these K32 in the U.S. by the end of this year. We will provide updates later this year. Last but not least, I would like to update you on acquisitions. As you know, during our last call, we were looking for targets suited to Kandi’s long-term development roadmap and who share the same vision. In July, we closed the acquisition of Jiangxi Huiyi headquarters in Jiangxi. Even though they are not large, they are one of the leading battery cell products in the industry. Jiangxi Huiyi’s core technology of lithium iron phosphate is among the industry’s most advanced. This acquisition aligns with Kandi’s vertical integration strategy and serves as a good channel to expand our battery sales footprint. We will focus on EV and power battery for now while keeping an eye on other consumer applications and acquisition targets that align with our strategies and long-term growth. Let’s now start the Q&A session. The CFO and I will answer your questions. Operator, please go ahead.

Operator, Operator

Thank you. I have our first question from Walter Hill with Carty & Company. Please proceed with your question.

Walter Hill, Analyst

In recent announcements, Kandi’s U.S. Kandi America has released both an electric mountain bike, the Trail King and a high-end air-conditioned premium K32 UTV. My question, the electric mountain bikes are very hot items, is the Trail King still being developed or is it available right now? And if so, what is the MSRP? And secondly, the PR stated that the K32 would be on the market later this year and I believe Mr. Hu just referred to that. The specs reported in the PR such as a weight of over 5,000 pounds 18-feet long, but only a range of 60 miles seem confusing, if not problematic. If it’s over 5,000 pounds, it seemingly would be too heavy to tow. So, the short range would seem problematic to get to the wilderness. And what would the MSRP be for the K32? Thank you.

Xiaoming Hu, CEO

Okay, thank you. First of all, regarding the electric mountain bike, our U.S. subsidiary has indeed conducted market research on the mountain bikes, and we noticed that this market is quite challenging. Currently, there are two models, one for the adult market and another for the children’s market. Both models have already been developed and will be available in the market. As for the adult model, production is completed, and we expect it to be launched in the U.S. market in September this year. In fact, it is currently available for customers to order. The MSRP for the adult model will be $3,599, and for the junior version, the MSRP will be $2,099. As for our K32 model that you mentioned, it is not finalized. We are still optimizing the K32 UTV. Our U.S. subsidiary has been working on market research and collecting feedback to adjust certain parameters and functions. We believe that typically, for UTV, a range of around 100 kilometers, which is roughly over 60 miles, should be sufficient. However, we are still trying to collect enough data to finalize all parameters and functions, after which we will determine the final MSRP based on the adjustments. So that concludes your last two questions. Thank you.

Walter Hill, Analyst

Thank you.

Operator, Operator

The next question is from the line of Mike Pfeffer with Oppenheimer. Please proceed with your question.

Mike Pfeffer, Analyst

Hi, thanks for taking my call. A few questions regarding full-speed passenger EVs in both China and the U.S. There have been several articles recently out in China that report a renewed interest by smaller EV companies to step into the ride-hailing business since DD’s proprietary rider app has been at least temporarily restricted and likely going to have to be significantly modified. While Kandi has nothing to do with the rideshare app for the 300,000 government-accredited EV-only ride-hailing program, its partner Ruibo might be involved. Is what happened to DD going to be a plus, a minus or a nonevent for the program that Kandi will provide cars? And then I have a few other questions. Thanks.

Xiaoming Hu, CEO

Okay. So, let me summarize your questions to Mr. Hu. For Mr. Hu, that is definitely a positive for us. Our car-hailing platform company is involved in the whole market. BB used to occupy over 80% or 90% of the whole market, which created a monopoly in the China PLC market, but now it’s more open to different other platforms becoming involved in this business. So, this is definitely a positive for us.

Mike Pfeffer, Analyst

Okay. Thank you. And then where does the overall program stand? And then I have a second question, please. Thank you.

Xiaoming Hu, CEO

Our accredited car-hailing platform program is progressing in an orderly manner. Later this year, we plan to have a launch event for this program. Please stay tuned.

Mike Pfeffer, Analyst

Okay. And then the kandiamerica.com website now lists both the K23 and K27, NEV Plus, the K23 and K27 full road speed passenger cars available for deposit. Is this a sign that Kandi is close to releasing the new 2022 model passenger EVs for U.S. sales? And is this the reason there has not been an official grand opening for the new 60,000 square foot Dallas showroom bought by Kandi?

Xiaoming Hu, CEO

As for our new venue in Dallas, it’s already in use. Due to the pandemic, we did not hold an official grand opening ceremony, but it’s not correlated to any launch event of our upcoming models; it’s definitely just the pandemic that caused us not to hold the ceremony earlier this year.

Mike Pfeffer, Analyst

Okay. Thank you. And then one last question, what is the status of the Kandi design new sports car costing Kandi close to $40 million in R&D this year? Thanks.

Xiaoming Hu, CEO

Regarding your last question, the $40 million R&D expense we spent this year is not solely for the sports car model. Indeed, apart from the sports car, we also invest our R&D amount into different models such as UTVs and compact EV models. We expect, for example, the upgraded version of the K23 should be available by the end of the year. Overall, our R&D for different models is progressing effectively. Thank you for your question.

Mike Pfeffer, Analyst

Thanks.

Operator, Operator

The next question is from the line of someone with Region Consulting. Please proceed with your question.

Unidentified Analyst, Analyst

Yes. Good morning or good evening, everybody. Regarding the hoverboard parts business, when Kandi first got into the sector in late 2019, it was manufacturing complete hoverboards for U.S. exports for Walmart and others. As of last year, it appears Kandi switched to making parts and became a supplier to an assembler. A few questions. Is Kandi still just making parts or is it still in the complete assembly business? Referring to the parts, are they just the battery, just the motor or both? And does Kandi still aim for 3 million units to be delivered this year? Any idea or projection for next year already?

Xiaoming Hu, CEO

Okay. Thank you for your question. Regarding our company’s hoverboard parts business, we are still primarily making the parts instead of the complete assembly business. As for the parts, they include both the battery and the motors. About our sales target, as you may know, last year, our company sold over 500,000 motors. This year, we are working hard to achieve our target of 3 million units, although global shipping issues may slow down our sales a little bit. However, we are trying our very best to meet the 3 million unit motor sales target. Based on this foundation, we expect sales to increase next year. Thank you for your question.

Unidentified Analyst, Analyst

Thank you. Could I add another question to that, please?

Xiaoming Hu, CEO

Sure, please.

Unidentified Analyst, Analyst

So for the third quarter, do you have any projections of how many units you will deliver for those hoverboards?

Xiaoming Hu, CEO

Regarding our current orders for the third quarter, we estimate the sales of the parts may reach as much as 1 million units.

Unidentified Analyst, Analyst

That’s impressive. Thank you. That’s impressive. And touching on what Mike from Oppenheimer already asked about DD, since DD seems to be encountering obstacles in its continuing growth. Do you think this would help Kandi to roll out their QBX quick battery exchange model any faster than before?

Xiaoming Hu, CEO

Regarding your question, yes, it will definitely help. Because of the constraints from DD, it opens new market opportunities for different car-hailing platforms, like us, who are primarily focused on the battery swap system. So that will help us, although it will take some time for such progress to materialize.

Unidentified Analyst, Analyst

Thank you so much.

Xiaoming Hu, CEO

Thank you.

Operator, Operator

Next question is from the line of Mark Kahnau with Swift Liquid Future. Please proceed with your question.

Mark Kahnau, Analyst

Good morning and good evening, everybody. My question has to do with Kandi’s grossly undervalued share price. Despite the massive EV sector correction underway from early irrational enthusiasm for any company touting EV affiliation, at current price levels, Kandi is the only company in the EV sector trading below its quarter one 2021 book value. Kandi, with $5.33 per share, has a book value that includes around $2.42 a share of cash and short-term investments. Visionary Kandi has no debt. The next closest is still trading over 2x book value, with an average of 3x to 6x book. This is likely the reason why in this current market environment, we have not heard of any EV company or their top management buying back their shares. In Kandi’s case, a couple of years ago when it had negative working capital and a $3.50 a share book value, both the company and Mr. Hu individually bought open market shares at a high of mid-$5. Here is my question to Mr. Hu: Does Mr. Hu think Kandi stock is a good buy at $5? And if so, will either Mr. Hu or cash-rich Kandi itself buy stock, at least below book value levels? If buying under book value is not a good deal for a company, why would any shareholder want to buy the stock here at a higher price?

Xiaoming Hu, CEO

Thank you for your question. To address your question, Mr. Hu believes that Kandi stock is indeed a good buy at $5. Depending on the upcoming market conditions, the company will definitely consider the issues related to stock buybacks at the appropriate time. Our overall consideration will be based on future conditions, and we will definitely evaluate this at the appropriate time. Thank you for your question.

Mark Kahnau, Analyst

Thank you.

Operator, Operator

The next question is from Frank Blatterman, Private Investor. Please proceed with your question.