Kandi Technologies Group Inc

-0.02 (-0.79%)
: $2.51 0.00 (0.00%)
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Why Kandi Technologies Has Massive Risk and Opportunity



Kandi Technologies is an electric vehicle (EV) maker in China, and is truly a pure play. In 2008, the company became the first such company in China.

On a broad best scale, The Chinese government is heavily promoting the adoption of EVs in a marked effort to reduce pollution, which is as serious a risk to the country's future as anything else. The government offers substantial subsidies for EVs that have hit just under $10,000 per vehicle. That push from the government increases KNDI's potential market, and sales for KNDI have grown 45% year-over-year and 168% over the last two-years.

While those sound like incredible numbers, it turns that KNDI is actually under performing the overall segment's growth rather substantially and the stock is getting punished for it. In January of 2014 China was selling ~600 EV's a month. By December of 2014, the country was selling 27,000 EV's a month (that's more than a 40-fold increase) (Source: Seeking Alpha).

We'll see that while operating margins have increased year-over-year, in fact margins over a longer time frame are dropping as the company burns through cash at a fast pace. In fact, if we just plot the cash ratio through time for KNDI below, we can see the large drop which puts the company's cash position at levels seen in in 2010. The cash ratio is the ratio of a company's total cash and cash equivalents to its current liabilities. As an aside, a cash ratio of 1 is rarely seen and is not the barometer to use to check for solvency. But, a cash ratio below 0.10 is remarkably low. For example, TSLA has a cash ratio of 0.67.

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I also note that KNDI's cash from operations has turned from a positive $275 million to now negative $250 million. KNDI has launched other interesting programs including MPT (Micro Public Transportation) which allows for hourly leasing (and longer term) of EV's in order to increase adoption rates. MPT stared in 2013. There is substantial competition in China for KNDI including outsiders like Tesla (TSLA) and General Motors (GM). There's a lot to look at with KNDI, so let's get started.

Technicals   |   Support: 7.2   |   Resistance: 9.04   

Swing Death Cross Alert: The short-term 10 day MA is now below the 50 day MA.

KNDI has a one bull (lowest rated) technical rating because it's trading below the 10-day (short-term), 50-day (medium-term) and 200-day (long-term) moving averages.

Here are the consensus estimates for next quarter. Note that last quarter's actual result is included at the far right.
Earnings Date EPS Revenue (Mean) Revenue (Median) Last Quarter (Actual)
2015-08-10 $0.00 $ M $ M $44 million M Provided by ZACKS

Let's look at the core elements that drive the company's fundamental rating.

Fundamentals Rating Summary

Revenue (TTM US$ Millions) 174 120 65

Operating Margin (QTR) 1.046 0.93 1.15 RISING

Net Income (TTM US$ Millions) 32 -37 6 RISING

Levered Free Cash Flow (TTM US$ Millions) -76 44 -84 FALLING

Capital Expenditures (TTM US$ Millions) 53 26 47 RISING

Stock Returns and Chart

KNDI is down -38.3% over the last three months and down -37.9% over the last six months. The stock has returned -44.1% over the last year.

Before we dig into the fundamental trends that drive the rating, let's look at a two-year stock chart with regression channel and 10-day momentum (on the bottom).
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Now let's examine the visualizations of the critical financial measures.

Revenue (TTM US$ Millions) 17412065

Revenue (TTM) is trending higher meaning that it has increased for at least five consecutive quarters (eight quarters in this case).

Note that KNDI is growing revenue by 44.8% year-over-year. Any number over 20% has an added impact on the fundamental (star) rating. Further, the company is at an all-time high in revenue over a trailing-twelve-month period to $174 million. This is the good news. There is bad.

What do all these numbers mean?
KNDI's fundamental rating benefited these results:
1. The one-year change was positive.
2. The one-year change was greater than +20% (an extra boost to the rating).
3. The two-year change was positive.
Finally, the up trend (consecutive quarters) in revenue benefited the fundamental (star) rating.

Let's look at Revenue (TTM US$ Millions) in the chart below.

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Operating Revenues/Operating Expense 1.0460.931.15RISING

Operating revenue over operating expense simply shows us how much revenue (in dollars) is generated for every dollar of expense. The ratio must be (at a minimum) above 1.0 in order for a company to turn an operating profit. For the latest quarter KNDI showed a ratio of 1.046. While the number is higher than exactly four quarters ago, in fact, the trend is negative. The vast majority of that downward pressure comes from totally collapsing gross margins, which stand at 14.3%, down from 23% in the quarter ending Dec 31, 2013.

Let's look at Operating Revenues/Operating Expense in the chart below with the gross margn % in the orange line.

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Levered Free Cash Flow (TTM US$ Millions) -7644-84FALLING

Levered Free Cash Flow (FCF) (TTM US$ Millions) is a critical determinant of stock price since market cap is the present value of all future free cash flows. For KNDI the metric is falling (it was $44 million last year). For the most recent trailing-twelve-months the company reported Levered Free Cash Flow (TTM US$ Millions) of -$76 million. It's now been four consecutive quarters where FCF (TTM) has been negative.

Combined with a weakening cash position and sales that are growing slower than the industry at large and you have yourself a bearish thesis for this stock.

For our next chart we plot Levered Free Cash Flow (TTM US$ Millions) in the blue bars through time. Note the falling bars from a year ago (four quarters ago).

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Capital Expenditures (TTM US$ Millions) 532647RISING

Capital Expenditures (CapEx) (TTM US$ Millions) in the most recent quarter for KNDI was $53 million and is now at an all-time high. CapEx is up 106% from last year's value of $26 million and but up just 12% from two-years ago. There's no doubt that KNDI is starting to pour money in to CapEx and that means management is making the necessary moves to add capacity. The question is whether that capacity have a home (sales).

In our final time series chart we plot Capital Expenditures (TTM US$ Millions) in the blue bars.

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There's simply no doubt that EVs are the future for China and growth will be ridiculous. It's a massive shift of priorities from a government that now recognizes pollution not as an annoyance, but as an existential threat to a growing economy and country. The bullish thesis for Kandi Technologies reads like this: Sales are growing, the government at large is committed at a huge scale to making EVs work and the company was there first. It has been creative in its practices with Joint Ventures and MPT.

The bearish thesis reads like this: While sales are growing, they are growing substantially slower than the overall segment. Cash is shrinking as CapEx rises and competition is building both from Chinese based companies and from Tesla, General Motors and Volkswagen. Gross margin % is collapsing and free cash flow is now negative. Competitive forces are revealing a weak company underbelly that may tailspin into solvency issues in the future.

Both of these arguments hold water. One of them will be correct.