While KNDI (KNDI) appears quite cheap at 1.5x 2020 sales, I am quite skeptical about the company’s future. Both the Coronavirus and the decline in the oil price are not great for the stock. The company has not clearly stated it in the last annual report. Besides, the way KNDI presents its net income figure does not look good to me. Adding the most recent debt conversion and sale of assets, KNDI is not a buy, but may be a short.
Kandi Technologies And The Most Recent Sales Report
Kandi Technologies designs, manufactures and commercializes electric vehicle products (“EV”) in China.
I know that American investors are sometimes skeptical about financial figures communicated by the Chinese companies. While I understand their concerns, analysts should continue to assess the numbers released by Chinese companies. In 2019, the company’s most relevant products were EV parts, which represented 81% of the total amount of sales. Besides, 81% of the total sales originated from China. As mentioned in the last annual report, I appreciate that the amount of sales from one of the company’s affiliate companies was reduced to 11.7% of the revenue. With that, I encourage investors to review the amount of sales from affiliated companies. We don’t know Kandi’s influence over these parties. Remark that in 2018, the total amount of sales from an affiliate was equal to 43%.
With regards to the bottom line, investors need to be very careful. The company included two non-recurring items; the gain from equity dilution in the affiliate company and gain from equity sale. Including these two items, we get a net loss of -$7.18 million. However, if we don’t take into account these gains, I get a net loss of approximately -$31 million. It is a bit worrying. As compared to 2019, net losses multiplied by more than 5x. In my view, the fact that Kandi did not want to show the net income without non-recurring items makes it even worse.
Let’s understand a bit more the non-recurring items. It may give us information on the current operations of Kandi. As shown in the text below, the company is converting debt into equity. Shareholders will most likely not appreciate it. The larger the amount of shares, the less significant the intrinsic valuation of the shares.
“Gain from equity dilution was $4,263,764 for the year ended December 31, 2019, which was primarily due to gain from the March Affiliate Loan to Equity Conversion. Pursuant to the Transfer Agreement, the Affiliate Company converted a loan of RMB 314 million from Geely Group last year to equity in order to increase its cash flow. As a result, our equity interests in the Affiliate Company decreased to 43.47% in March, 2019.” Source: 10-k
Also, the sale of equity is worrying. Kandi sold 21.47% stake of one of its affiliate companies. With the company converting debt and selling assets, investors may believe that the company is not growing as it used to do:
“Gain from equity sale was $20,438,986 for the year ended December 31, 2019, which was due to the Affiliate Equity Transfer. In March, 2019, Kandi Vehicles agreed to sell 21.47% of its equity interests in the Affiliate Company to Geely for a total amount of RMB 516 million (approximately $72.3 million).” Source: 10-k
The Government And The Price Of Oil
After the coronavirus, I would expect the Chinese government to continue investing in pure electric vehicles. Notice that the Chinese government confirmed in a recent communication that the promotion of the automobile consumption will continue in 2020:
“On March 31, 2020, in order to promote automobile consumption, the executive meeting of the State Council decided to extend two preferential policies of new energy vehicle purchase subsidy and vehicle purchase tax exemption for another two years, which were originally due at the end 2020.” Source: 10-k
Besides, in the last annual report, Kandi does appear to be very optimistic about the future of the EV industry. Have a look at the following text. The company expects the EV market to increase in 2020. Also, please remark that the annual report was published once the coronavirus crisis had hit China:
“We believe China is the most prospective market for pure electric vehicles. According to a government forecast, China’s new energy vehicle sales are projected to grow to 2.1 million units in 2020, and its penetration is expected to reach 7% by 2020. We also believe that in the global automobile industry, there is great development space for the Chinese electric vehicle and core parts industry in the future.” Source: 10-k
What’s my opinion about this information? I don’t know whether the company and the Chinese Government got to know what happened to the oil price in April. In my view, with the oil price at its minimum level, I doubt that any market related to the energy industry will flourish.
Besides, the Chinese government may continue to invest. However, if there is no demand at all for such types of vehicles, I wonder whether politicians will decrease the amount of investment. Finally, in this regard, let’s point out that the annual report does not say anything about the most recent collapse in the price of oil. Should the company mention that the decline may diminish the amount of EV sales?
A Few Customers Account For A Significant Amount Of Shares
There is another risk that we need to point out. Kandi Technologies does not only finance its operations through government funds. In 2019, three customers represented 51%, 15% and 12% of the total amount of sales. This is a serious issue. If one of the clients or the government decides not to buy Kandi´s EV products, the decline in sales could be quite significant. On top of it, the trade receivable account also shows a significant customer concentration. Again, if one of the clients decides not to pay, the company’s net income could be drastically diminished.
The Balance Sheet Looks Solid
The current state of the balance sheet does not seem worrying. As of December 31, 2019, the company reported cash and restricted cash of $16 million, which is below the total amount of accounts payable of $72 million. It means that the company may have a liquidity issue. However, I don’t see a lot of debt. Loans, notes payable and bank loans are equal to $64 million. Kandi could easily obtain debt if it is required.
As per the last annual report, I am assuming 52.3 million shares outstanding. At $3.97, the market capitalization equals $207 million. If we add debt of $64 million and take into account cash of $16 million, the enterprise value equals $255 million. 2019 sales were $135 million with 20% revenue growth. Let’s assume the same revenue growth for 2020, so I obtain sales of $162 million. Hence, the EV/Forward Sales is equal to 1.5x. It looks extremely cheap, which makes me wonder whether the market believes the company’s financials. I am a bit skeptical.
Kandi Technologies And The Coronavirus – It Is A Risk
KNDI offered a bit of information with regards to the coronavirus. The company expects the automobile industry to return to the track. In my view, KNDI has not explained very well that the Coronavirus may create one of the most serious crises in the last one hundred years. In my opinion, it is a bit naive thinking that China will not suffer from a global financial crisis.
“COVID-19 has had a significant impact on the global economy and many industries, including the automobile and parts industry. However, as the outbreak in China has been gradually managed under control, the automobile and parts industry has also begun to resume productions. Stimulated by the various preferential policies of the Chinese government to promote economic development, we believe the automobile and its parts industry will return onto the track for the next development.” Source: 10-k
Kandi Disclosed That Short Sellers May Attack The Company
It’s interesting that KNDI has warned about short sellers in the last 10-k. Why would a short seller publish negative opinions about the company? If KNDI’s business model grows as the company expects, I would not expect a lot of short sellers.
“Techniques employed by manipulative short sellers in Chinese small cap stocks may drive down the market price of our common stock. As it is therefore in the short seller’s best interests for the price of the stock to decline, many short sellers publish, or arrange for the publication of, negative opinions or reports regarding the relevant issuer and its business prospects in order to create negative market momentum and generate profits for themselves after selling a stock short.” Source: 10-k
Conclusion
KNDI is trading very cheap at 1.5x 2020 sales. However, I don’t think that investors should buy the stock. I doubt that the company’s future sales will not be impacted by the decline in crude oil. In fact, I have not seen the decline in share price when the oil price declined. Also, I dislike that the company provides a net income figure including non-recurring items. Finally, the recent debt conversion and sale of assets do not look great. I would not short sell the stock, but I may understand those who do so.
Note: I don’t own shares of KNDI
