Kandi Technologies Group Inc (KNDI) 2021 Q1 法說會逐字稿

Greetings, and welcome to the Kandi Technologies First Quarter 2021 Financial Results Call. (Operator Instructions) 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 year 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.

(foreign language)

(interpreted) Hello, everyone, and thank you very much for joining us on the call today.

(foreign language)

(interpreted) The total revenue for the first quarter is nearly $16 million, and this has far exceeded the level of the same period last year. And since last year, we have seen a most promising growth opportunity from the short-distance small EVs in China, which led by a brand called Wuling. Ever since that they have launched the short-distance EV, that has take the trend in this market.

And also high-end electricity utility terrain vehicles in the U.S., which is really are favored by a lot of young generation. We have now focused on mass markets by developing vehicles for these segments with a cost of RMB 30,000 or less, which is approximately USD 4,700. For China, we are developing a neighborhood EV. For the U.S., we are working on fully enclosed, high end, air conditioned, pure electric 4-wheel drive UTVs. We expect to launch both vehicles this year.

And based on the financial statement, you will see a bottom line loss, which is due to our investments in R&D for the new product. But if we're looking at the gross margin, we have achieved over $4 million, which is beyond -- which has exceeded our expectations.

(foreign language)

(interpreted) 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 noncompeting 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 by acquisition. We are actively looking for targets suited to Kandi's development road map and have been communicating with potential collaborators.

(foreign language)

(interpreted) In the first quarter, we completed the relocation of facilities. In early April, the old factory site passed spectrum by officials of the Jinhua Development Zone. We expect to soon receive the remaining amount of CNY 160 million or around USD 25 million. At the same time, we are also moving our U.S. subsidiaries' headquarters, to a newly purchased building in Dallas.

(foreign language)

(interpreted) Looking ahead, we are going into 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 U.S. 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 minds.

With our strong advantages, combined with the industry tailwinds of support from both the Chinese and U.S. governments for EVs, the future of electric mobility and for Kandi is the best we can imagine. We were looking forward to reporting exciting progress in the quarters ahead.

(foreign language)

(interpreted) Let's now start the Q&A session. And I -- we will take the English questions and translate for Mr. Hu. And because our CFO, Alan, is really sick today and he already lost his voice, therefore, I will translate the answer in English on behalf of him. Operator, please go ahead.

(Operator Instructions) Our first question comes from Arthur Porcari with Corporate Strategies Inc.

Congratulations, it was a really nice Q1. Let me first note, had the company not taken that $22 million R&D charge in this quarter, or some $0.30 a share, which was 20x more than you spent last year, it would have been a very profitable quarter. But let me go on to the subject of my questions, but a little background first.

My question has to do with Kandi's ridiculously undervalued share price. Despite the massive EV stock correction underway from crazy enthusiasm, any company just touting EV affiliation, at current levels, there's only one public company in the EV sector whose stock is trading below its year-end 2020 book value, which, by the way, has gone up, and that's Kandi with around $5.50 per share at year-end. And that book value includes over $2 a share of cash and short-term investment and no debt.

The next lowest is still trading over 2x book and the average is around 7x book. And if you add in Kandi's pro forma profits already assured this year of another $0.65 a share from the profits of the Jinhua and Fengsheng cash -- I'm getting a strange tone over here, so I don't know whether this is going through or not. But anyway, I wanted to say, the cash -- sales being booked this and last quarter, Kandi's book value with almost 40% cash should by year-end be up to around $6.25 a share.

Now, in this current environment, I've not heard of any EV company or top management buying shares of their own company. Historically, Mr. Hu, just 3 years ago, bought some 430,000 shares with an open market value of over $2 million with 1 block as high as $5.52 a share. And less than 2 years ago, Kandi bought about 0.5 million shares for its account, also at prices above the current.

On the other side, Kandi sold shares worth $160 million late last year at around $9 a share. If Kandi wants to make a statement as to just how ridiculously 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, would Kandi or Mr. Hu consider buying some shares here around or below book value?

Okay. Thank you for your question. (foreign language)

(foreign language)

(interpreted) Thank you very much for your question and background you have shared. My answer is very simple. We know the company's market value is seriously undervalued and we believe the company's valuation will soon be more rational and be back to the reasonable level. And next quarter, the statement will look even more promising. But we don't have any current plan. If we do have any action plan, we will announce to the market.

That's kind of what I expected, but great that we're going to have a good strong next quarter and rest of the year.

Our next question comes from Michael Fearnow with Focus Tech Investments.

My question has -- relates to 2 parts. One is clarification on your hoverboard activity. And the other will relate to reproduction by the company of their annual conference call and quarterly conference calls.

Anyway, the first part of my question, there seem to be some confusion on how many hoverboard powertrain units were sold last year due to some confusion when Seeking Alpha reproduced the 2020 conference call transcript. The transcript said 150,000 hoverboard motor units were sold, but the [UFO], at that point in the transcript, clearly says 460,000 units were sold. Also, the Seeking Alpha said Kandi was raising their price by 50% and it seems the CFO said 15%.

So we've got a confusion on the number of hoverboards sold and any price adjustment, which relates back to this -- the lack of official reproduction of the call. And I think this reproduction of the official transcript by the company is important, particularly in view of the increased institutional ownership of the company's common stock. So can Mr. Hu please address that issue?

Thank you for your question. (foreign language)

(foreign language)

(interpreted) Thanks for your question. We really encourage all the investors, analysts can participate in our company's live call to discuss and ask questions directly to increase the interaction, not just relying on the transcript released after call to learn what's going on.

More importantly, some transcripts may not even be accurate because the live translation can have some misunderstandings. So in order to avoid any misunderstanding, we think it's better not to keep the transcript of the conference call by issuing the official transcripts with the SEC. In addition, from what I have found, most of the listed companies in the United States do not provide their official transcript towards the SEC. Therefore, our current practice is in line with the norm.

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

(foreign language)

(foreign language)

(interpreted) Okay. He confirms, the 460,000 is correct. And the increase -- the price increases by 15%, 1-5, 15%.

Okay. That helps. So my understanding is the company does not plan on reproducing an official transcript of these calls, and then a follow-up question on the hoverboards. Also in 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?

(foreign language)

(foreign language)

(interpreted) Based on the orders we have received so far and in the second quarter, we think it's -- the number, 3 million motor for the hoverboard is achievable.

Our next question comes from Michael Pfeffer with Oppenheimer.

A footnote appeared in the 2020 10-K addressing an R&D expenditure initiated in December for some $19 million for the development of a new Kandi EV. Let me read it. This amount presents the advanced payment to a third-party for designing a new easy model as well as related research and development and consulting works. The company entered into research and development contract with a third-party on December 1, 2020, with a total contract amount of $38.3 million and an advanced payment of $23 million as per the contract. $3.4 million of the expense was incurred during the year ended December 31, 2020.

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 this the previously mentioned sports car mentioned in passing the year-end 2020 press release or a different EV? In either case, can you give us more details such as size of vehicle, market -- U.S., EU, China -- speed, range, number of seats, price range, estimate of completion and release for sale dates?

(foreign language)

(foreign language)

(interpreted) Thanks for your question. These -- the sports car project is still underway. And because of the requirements for the sports car are relatively high, especially for the airbags, so it's going to take rather a longer time to be ready for the market launch. But at the present, what we have been working on is the short-distance small electric vehicle and the high-end electric utility terrain vehicles.

Like I mentioned earlier on the call, due to Wuling company launched the short-distance EVs in China, the market has been really hot. And we are right now focusing on developing these 2 vehicles, the short-distance small EV and the high-end electric UTV for the China and U.S. market. And we are trying to working on the R&D of these cars with a total cost of less than RMB 30,000. The plan is that we are working on them to launch both vehicles in the market by the end of this year.

Hello. You still there?

Sorry, yes, I was on mute. Sorry about that. That was -- and who is the third party? And are they only involved in the design R&D? And [with] Kandi building the final release vehicles? And if so, what facility?

(foreign language)

(foreign language)

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

Okay. And the last question. In China, historically, of the 90,000-or-so EVs Kandi have made and sold over the past 10 years, both in and out of the JV, the vast majority have been sold into commercial service, ZZY, leasing, et cetera, very few to consumers direct. How and to what market will Kandi be selling this new EV?

Okay. (foreign language)

(foreign language)

(interpreted) So the short-distance small EVs are targeting the office workers and rural consumers in China -- domestic China market. And the fully enclosed, high end, air-conditioned electric 4-wheel drive UTVs are aimed to the U.S. market.

Okay. Just one clarification. Can Mr. Hu tell us what facility that you'll be building the final production of these vehicles? I don't think he clarified that.

Okay. (foreign language)

(foreign language)

(interpreted) Okay. Both will be produced in Hainan. And in the future, all the electric vehicles will all be produced at Hainan factory.

Our next question comes from [Carl Shure with Wring Wring Consulting].

Congratulations for your quarter. It appears that -- I'm impressed with the improvement in gross margin from just about 18% to 27%; that's a 50% improvement. That's major. And so here's my question. 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. I base this assumption as being wrong on the CFO stating on the conference call that he -- I assume that for all EVs in China so far, we have at least 3,000 orders of EVs that are featuring the smart battery swap.

So it [presses] for this being at least, so this number was based only on the initial orders from the first 2 cities where the Kandi initiated, 5-year, 300,000 EV government accredited EV ride-hailing program. So while 3,000 EVs might seem a small number, it does appear to me that it's just a start from this one program alone. However, for this program to work, there's not just EVs, but there are key collateral products required and all being provided by Kandi-owned subsidiaries.

So you have the whole value chain, including building the battery exchange units and additional batteries required for the exchange rate. So in my computing, the total revenue from just the first 3,000 EVs alone would come in around $70 million, almost matching all of Kandi's 2020 revenues or from one new revenue source that didn't exist even a year ago.

So the question comes in 4 parts. A, with the -- of the 3 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?

Can I just translate the first question?

Yes, please do.

Yes. (foreign language)

(foreign language)

(interpreted) So this project actually is being operated by the operators, and the name for the company is Zhejiang Ruiheng Technology. And they are approximately 2,000 third and fourth tier cities in China that meeting the requirements of these programs.

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

(foreign language)

(foreign language)

(interpreted) So far, Ruiheng Technology has been negotiating with more than a dozen third tier cities about their intention to cooperate and to launch the online ride-sharing EVs, featuring the battery swap mode. It is expected 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 basically a monopoly all over China, so serving every city? Is that a separate approach? Or is this interfacing?

(foreign language)

(foreign language)

(interpreted) Zhejiang [Tech] will electric vehicle service company, we are also a partner of these projects. So they are also involving in the online ride-sharing program, so there won't be any conflict.

I see. So given that the initial order should be around 3,000 EVs, what do you expect for all 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? What is...

(foreign language)

(foreign language)

(interpreted) The number of vehicles we plan to be launch for the online car share market is 3,000. Because you have to understand, even though we signed 2 contracts with 2 cities, 2,500 and 1,000, but these vehicles will be delivered on a rolling basis. It's going to take time. The number of vehicles that we'll be directly selling to the consumers is going to be depending on the market situation. So it's hard to determine an exact number. I would give a sales number of 3,000 for this year as of now.

Okay. So that's a conservative count. Best of luck for the remainder of the year.

Our next question comes from Frank Blatterman with -- who is a private investor.

The Economic Development Zone of Jinhua has reported that Kandi's factory is one of its key development projects and has been designed for and is being equipped for an annual output of 5,000 sets of battery replacement equipment, along with other products.

My question is, why have such a large manufacturing capacity for quick battery exchange stations since the prior reported number of stations and services only a small fraction of this number? Do you expect to actually need all this capacity? And if so, by when might this capacity be fully utilized?

Thank you for your question. (foreign language)

(foreign language)

(interpreted) These vehicle battery separation swapping for electric vehicles have been affirmed and supported by the government and relevant state department since last year. So this is definitely just the beginning of the battery swapping operations, but it's going to take time for the market penetration. And the market demand in the future I think will definitely be tremendous. So the 5,000 sets of production capacity will be fully utilized by then.

Can Mr. Hu give some sort of a time frame as to when a significant portion of that might be in use?

(foreign language)

(foreign language)

(interpreted) Starting the second half of this year, you -- we should see the pick in production. But however, reaching 5,000 sets of production annually is going to take years.

Your next question comes from Yaze Ya, a private investor.

So do you have any updates regarding the listing for the battery, powertrain subsidiary? Whether it's in U.S. or in China? Can you give us some idea, some color, time line?

(foreign language)

(foreign language)

(interpreted) The management team is evaluating the possibilities of taking the company to be listed in China and in the U.S. I understand that some investors suggest to do the rights offering in the U.S., and we are still evaluating the pros and cons. But as per the current situation, I think (inaudible) battery swap technology has a better prospect for listing in China. I believe that Kandi should have a listed company in domestic China since we were headquartered in China. But however, we are still evaluating all the plans.

Okay. My second question is, I think, to do with operator, similar to Zhejiang Ruiheng. So we know that we have a lot of (inaudible) in China that you can go through. Question means since we rely on 1 entity, Zhejiang Ruiheng for now, does it mean you have a significant risk? Do you have any plan? Or is Kandi currently pursuing another entity with similar capacity as Zhejiang Ruiheng to help to sell Kandi car and system in the future?

(foreign language)

(foreign language)

(interpreted) I want to clarify that it's not Ruiheng itself operating in all the cities. Ruiheng is the leading partner in this project, and he will negotiate with each local city and -- to find the partners in a local city to perform actual project. So it does -- it's not really having a risk with just one operator.

Okay. I understand. And just having a similar companies -- similar capacity at Zhejiang Ruiheng will help, that's my question, instead of only relying on Ruiheng to find operators in local cities?

Okay. (foreign language)

(foreign language)

(interpreted) Since Ruiheng is just the beginning of this initiative, and we have just signed 3,000, so maybe in the future, they will be engaging with more operators. But as of now, they are -- we just have Ruiheng, 1 operator, to work on this. But maybe in the future, we will consider having more company like Ruiheng to engage in this project.

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

(foreign language)

(interpreted) 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, but we'll continue to work hard to pursue the EV market more aggressively in China as well as expediting applications of our expertise in battery swap systems to maximize shareholders' value. With supported policies from the government and sufficient cash and working capital, we believe the years ahead hold a multitude of opportunities that can deliver strong operating and financial results in the coming quarters. This concludes our call today. Thanks again for attending. You may now all disconnect.

[Portions of this transcript that are marked Interpreted were spoken by an interpreter present on the live call.]