Kandi Technologies Group Inc (KNDI) 2019 Q2 法說會逐字稿

Welcome to the Kandi Technologies Second Quarter 2019 Financial Results Call.

Today's conference is being recorded.

At this time, I'd like to turn the conference over to Kewa Luo, IR Manager.

Please go ahead.

Thank you, Jenny.

Hello, everyone, and welcome to Kandi Technologies Group, Inc.'s Second Quarter 2019 Earnings Conference Call.

The company distributed its earnings press release earlier today, and you can find a copy on Kandi's website at www.kandivehicle.com.

With us today are Kandi's founder, Chairman and Chief Executive Officer, Mr. Hu Xiaoming; and Interim Chief Financial Officer, Ms. Zhu Xiaoying.

Mr. Hu and Ms. Zhu will deliver prepared remarks, followed by a question-and-answer session.

Before we get started, I'm going to review the safe harbor statement regarding today's conference call.

Please note that the discussions today will contain forward-looking statements may our -- 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 results may differ materially from views expressed today.

Further information regarding these and other risks and uncertainties are included in the company's annual report on Form 10-K for the fiscal year ended December 31, 2018, and in other documents filed with the U.S. Securities and Exchange Commission.

Kandi does not assume any obligation to update any forward-looking statements except as required under applicable law.

As a reminder, this conference call is being recorded.

In addition, an audio webcast of this conference will be available on Kandi's Investor Relations website.

I will now turn the call over to Kandi's founder, Chairman and Chief Executive Officer, Mr. Hu Xiaoming.

(foreign language)

[Interpreted] First of all, hello, everyone.

Thank you for joining our second quarter 2019 earnings conference call.

Due to the suggestions I have received from a lot of shareholders, I'd like to make some changes to our conference call.

As the information we have already disclosed in the news or -- and 10-Q, I'm going to skip those, including the CFO's remarks.

So this way, I can leave more time to talk about some new comments that we haven't talked about in the news and leave more time for the shareholders to ask questions.

(foreign language)

[Interpreted] The second quarter is still not very satisfying because of the JV Company's pending restructuring.

This cost to the loss of the JV Company, which resulted in Kandi's overall loss.

However, Kandi's traditional business such as, EV parts and off-road vehicle sales, I believe that they have achieved very good results during this quarter.

(foreign language)

[Interpreted] In the first half because of the restructuring of joint venture, as a result, Geely is becoming the controlling shareholder with about 78% equity stake in the joint venture.

So Geely has started with business plan refining and updating all our -- all the JV's EV models to accommodate the new subsidy policy that government has come up with.

If we continue to produce and fill the original models then the result is going to be losing more money.

So that's why, right now, we are still at the stage of refining that this plan for the JV Company.

(foreign language)

[Interpreted] So from now on, we are going to have a completely new EV lines that are going to be utilized Geely's technology, their supply chain system and to come up new products.

(foreign language)

[Interpreted] One model we're going to launch is the -- going to have a more advanced technology.

However, the cost is going to be 30% reduced compared to the old model.

(foreign language)

[Interpreted] This model is close to be launched.

And I believe it has a lot of energy in terms of price and performance and technologies.

(foreign language)

[Interpreted] So that's why I said in my comments in the news we released on Wednesday that with all -- with the new products that are going to be launched, I believe JV Company will be able to achieve exciting future growth under Geely's leadership.

(foreign language)

[Interpreted] So this is the obstacles that JV has been going through.

And I like to share with you about updates with JV's recent development.

(foreign language)

[Interpreted] Additionally, we have finally received the dual production license.

And once we get that, I believe, we're going to get additional support from local governments.

(foreign language)

[Interpreted] Besides what's happening at JV, our traditional business, off-road vehicle, is also going through some changes still.

(foreign language)

[Interpreted] For example, the UTV we used to produce that only has a few functions such like store, some products.

But right now, based on the younger generation's demand, we're going to have a UTV upgraded to have such as air conditioning and other features.

So we're also going to upgrade the UTV models to meet the market demand.

(foreign language)

[Interpreted] And also, one more thing.

I'm very excited to update you is about battery exchange.

That's something we're always passionate about.

But -- however, there was a seminar hosted on July 31, that -- the seminar is about the exchange batteries.

(foreign language)

[Interpreted] And in the seminar, the speakers, once again, acknowledging the importance of exchange -- quick battery exchange.

And you know that in the past years, the quick battery exchange received a lot of misunderstanding.

But right now, they finally came to realize that how important this is and how efficient it's going to be working for EVs.

So going forward, this is going to be our laid out great foundation for our EV's development such as our collaboration with Ankao, I believe this is a very good news for us.

(foreign language)

[Interpreted] That's all I have for today, and I will leave the rest of the time for our shareholders to ask questions.

And then I can share more with you in detail.

Operator, we can start to take some questions.

(Operator Instructions) And we will hear first from Michael Fearnow of Focus Tech Investments.

And I enjoy your type of conference now -- that you're now doing.

And my question relates to the press about this recent slowdown in China overall and to some extent expecting our sales, it seems in this kind of environment that the ride-share, like Didi and Caocao would greatly benefit.

So would Mr. Hu give us his input as to how it'll affect Kandi going forward?

I'm sorry, Mike.

Can you repeat your question that -- just the real question part.

Yes.

It relates to the slowdown in overall business in China and affected, to some extent, auto sales in China.

I would think that, that would benefit the ride-sharing services, such as Didi and Caocao.

If that is so, would Mr. Hu give us his input on how it should affect Kandi's business going forward?

Okay.

(foreign language)

(foreign language)

[Interpreted] Yes.

The market has been having reduced policies -- subsidy policy to support the EVs recently in this year.

That's why I mentioned earlier that if we continue to produce and sell the old EV models, we're going to continue to lose money.

However, the new models we are developing together with Geely is going to reduce at least 30% cost and have more features, technologies that we can offer.

And including the online ride-hailing market, that's going to help us to gain more market share to survive in this kind of slowing down market.

We'll go to our next question from Mike Pfeffer of Oppenheimer.

With no response on the line, we'll have to move to our next question.

At this time, we'll move to Walter Hill with Carty & Company.

Since we haven't seen the Q2 '19 10-Q yet, based on last quarter filing, Kandi had just under $160 million in short-term liabilities and $198 million in total liabilities reported.

This already is way down from $217 million in Q3 of 2018.

Assuming the JV pays back the $65 million that owes Kandi and LI Shufu and Geely pays the balance of some $63 million and still owes Kandi for the purchase of the 22% interest in the JV, Kandi's total liabilities would dropped under $70 million against a book value of some $240 million for a debt-to-equity ratio of less than 0.3.

Totally ridiculous for our current market cap of only around $260 million.

And this does not even take into consideration the additional $160 million to $200 million sales value of Kandi's legacy Jinwa facility, which has only some $7.8 million in debt against it.

As grossly undervalued as Kandi is, why wouldn't Kandi consider selling the Jinwa facility and then increase the buyback to 100 million or more of its outstanding shares in the open market, which, by the way, would increase Mr. Hu's ownership back above 50%.

Thank you for your question.

(foreign language)

(foreign language)

[Interpreted] First of all, I really appreciate that how closely you follow up Kandi.

I can tell from the numbers that you're very familiar with our financials.

So I really appreciate that.

Of course, that our current market cap is extremely undervalued by the market.

I think this also due to the misunderstanding or battery exchange in the past years and JV restructuring and our own performance.

That's why, right now, we are going through all these business refining.

And we believe that once we upgrade our business to meet the new market conditions and to improve our internal operational results, we will be able to regain market recognition and the market share will eventually return to a reasonable range.

The company's buyback shares also showing the company's confidence in the company's future.

So for that, we are very confident in that we are going to achieve all these.

(foreign language)

[Interpreted] And also, I like to add on regarding to Jinwa's facility, since right now, I don't really need a cash urgently, so I'm not rushing to selling that part.

But -- however, I believe the longer it lasts, the longer -- the more value it is going to become.

And yes, that's all.

And we'll hear next from [Li Gau], a private investor.

So I have three questions, these should be short ones.

So the first one is about the license that Kandi just received it from MIIT.

It was excellent to see Kandi JV finally being awarded its long-overdue manufacturing license from MIIT.

To the long-time holders of Kandi, this is an exciting inflection point.

We have waited over 5 years for.

For the sake of new investors, could Mr. Hu please explain why being -- why are there only 14 EV maker, which does not even include Tesla or NIO, also more than 200 perspective EV makers in all of China to receive this dual award, is still big for Kandi.

(foreign language)

(foreign language)

[Li Gau], do you like me to translate?

Or you want to translate?

No, you go ahead, please.

Okay.

So Mr. Hu was saying that to Kandi -- Kandi has waited for 5 years to receive the dual production license.

But for himself, he actually has waited for 30 years to receive this license.

It's really, really valuable.

And in terms of what kind of benefits Kandi going to receive after having the dual production license, there are a couple of things.

First, again, in the past, we were accused about battery exchange, and the government came up with a lot of misunderstanding on this kind of business model.

And it certainly impacted Kandi JV to receive the approval for the license.

That's why it has been delaying for this long time.

But right now, this is finally got cleared.

Second of all, as everyone knows, in the past that JV Company was producing and selling EVs through Geely's license.

So now once the JV has its own license, no longer need to rely on Geely's license.

And this is a big step forward.

Thirdly, after the license is received, the Jiangsu -- Kandi Jiangsu is going to -- definitely going to receive a lot of support from the local government.

And in fact, Jiangsu's license is the first that received in Nantong.

So this is definitely a big deal.

And [Li Gau] mentioned that out of 200 manufacturers, there were only about dozens, about 14 EV makers got a license.

But I have to say that those 200 car manufacturers, most of them are traditional carmakers.

However, these -- over dozens of maker -- EV car makers, they are EV makers.

So we are, I think, about 17th manufacturer to receive this.

And I believe there will be 1 more to be approved.

After that, I think there won't be -- no more dual production license will be granted to an EV produce -- EV manufacturers.

So indeed, this is very valuable.

And I really appreciate this investor is closing -- closely following up and support to Kandi.

And right now, we do have the money, and we also have the license.

I think what's come next is the execution.

That's why I keep saying that I'm very excited that JV going to under Geely's leadership, with their resources and technologies and their network, the Kandi's JV going to have a very good future.

Yes, that's...

(foreign language)

Also, I like to mention that the moment we receive the final documents about the approval of the production license, I got very emotional, even I had tears in my eyes.

But I really couldn't believe that once the press release went out, the market didn't really react the way that we were hoping for.

And for that, I'm kind of disappointed.

Just a joke on the side.

So -- and a follow-up on this question.

So we, long-term shareholder, follow the license very closely, especially there's some value-added to the company.

So we understand that many Chinese EV start-ups did form a joint venture or bought out some old car company, which has the production license.

For example, Aiways just formed a -- acquired a bidding Yuan stake in Jiangling Motor Holdings.

So Mr. Hu, what kind of value you think this license alone added to the JV Company?

(foreign language)

(foreign language)

[Interpreted] I think it's very hard to evaluate the license itself, how much value is in dollars going to add it to.

Well, you mentioned the transaction, it's complicated than it seems.

However, for us, I think, it at least adds a couple of fold to our current value.

So another question is about, Mr. Hu mentioned in -- on the last conference, actually, Mr. Hu also just mentioned, after we received the license and also after the JV reorganization, local government will give Kandi JV a lot more support.

He mentioned a number about something closer to RMB 10 billion investment or some kind of cash or I don't know what kind of form from the government.

So if I heard that correctly about that number, could Mr. Hu clarify this.

So what kind of support from local government after the manufacturing license?

(foreign language)

(foreign language)

[Interpreted] The government didn't indicate in a -- in much detail -- much more detail.

So once we have received the support, either in payment or anything else, we will update the market accordingly.

Okay.

Finally, a very quick question about the new car, Mr. Hu mentioned in the last conference and just now.

So is this the car with the 30% cost reduction and a very competitive on the market?

Is it the K8, you mentioned in the last conference?

If it is, when will that be ready for sale?

(foreign language)

(foreign language)

[Interpreted] It's not K8 you ask.

It's going to be a brand-new car that utilize Geely's technology.

It will be much more advanced in all -- overall features.

I estimate that it's going to come out at the end of the year.

But at this moment, I cannot release any more details.

And we'll go next to Arthur Porcari of Corporate Strategies, Inc.

Mr. Hu, I really do like this new format that you created right now.

It truly does prove to us long-term holders that Kandi may have finally hit an inflection point after 10 years.

As far as giving (inaudible), I've got a little bit still.

But I'm going to revisit and update some comments you had made in the year-end 2018 and the Q1 2019 conference calls, mainly, how did this year's JV hit its sales target along with Kandi's 100% owned Jinhua An Kao subsidiary, quick battery exchange unit, as Mr. Hu talked about earlier, and its relationship with the 300,000 government accredited EV programs Kandi has announced.

But I also want to congratulate Mr. Hu.

He's almost understated, but I'm glad he mentioned about the meeting that we've talked just last week at [Hangzhou].

He just -- Kandi really loves the people, was really a hero in quick battery exchange.

That's why Mr. Hu was so happy about it.

He invented and then turned it over to Kandi, the first patented quick battery exchange, which was originally approved by the MIIT as one of the only 3 models.

So 9 years ago, that was approved for global use in China.

But it was kind of overrun by

all the conventional manufacturers who were sticking batteries in every bumper and fender and everywhere else, and it didn't acquaint itself easily to quick battery exchange.

For that reason, it seemed to have got tabled for a number of years, but Mr. Hu always had his feeling that this was going to work.

So when they had that meeting last week, he also understated the fact that he was also quoted in all the articles that cover the media in China last week, as he truly is the father of this type of technology which is almost going to be mandatory, as I'll talk about in a moment, for quick battery exchange, for ride-hailing, in particular.

Go ahead and tell that to Mr. Hu right now.

Then I'll get into my question.

(foreign language) Go ahead, Art.

In the year-end conference call, Mr. Hu said, "Management team hopes the JV to achieve its projected goals of producing and selling 20,000 EVs in 2019." If Mr. Hu made this surprise forecast in March while being fully aware of the upcoming restructuring with Geely Holdings and Li Shufu at that time, and the company has already announced it was upgrading its business model to the much broader ride-hailing market, as shown by its signed agreements with Ruibo and China giants, such as China Resources and Didi Chuxing for 300,000 EVs over 5 years, along with an additional 20,000 EVs to Geely's high-end, EV unit arm, Caocao, over 3 years, is it unreasonable to assume with the recent approval of the ride-hailing K23 -- and I'd like him to talk a little bit more about the K23 -- that we still have a shot to a strong second half push towards achieving the 20,000 car target that was originally management's goal for 2019.

And I'll follow up with a couple more of questions after that.

(foreign language)

(foreign language)

[Interpreted] I want to mention that the EV model I talked about earlier, and this is really going to be the turning point for the company because it's going to reduce the cost and regain the market share once it's launched.

But right now, I cannot say much until the car is launched.

Regarding to our 20,000 EV goal, I think probably, it's not be able to realize this year since we're still on the stage of refining the business model and the product.

A follow-up on that question then.

The K23, it was approved recently, and that was a Hainan car, the way I understand it.

Hainan had paid Kandi some -- itself some $44 million or $45 million to develop.

What is the status of the K23?

And then I still have more behind that.

(foreign language)

(foreign language)

[Interpreted] For the K23, it's also going through the upgrading and utilize Geely's technology because right now, what K23 has in the supply cost is still very high.

So we are going to -- upgrading that model as well.

And there's another EV model that right now is going through the developing stage.

Yes, the Hainan is the one that we're going to export to the U.S. And that one also, we're aiming to reduce at least 30% cost.

So yes, so the Hainan facility right now is also going through a dramatic change to upgrading all our products.

Maybe a follow-up on that.

The Hainan facility, the way I understand, is still owned by Kandi -- us Kandi, not the JV.

In a past conference call, I think Mr. Hu mentioned something along the lines of whatever is made in that facility basically would be revenues derived exclusively to Kandi but run through the JV.

Is that correct?

Are you asking right now -- are you asking whether Hainan is under Kandi, but whether it's going to be run through by Geely, right?

Right.

And if it is -- yes, that anything we license under Geely, anything that's made in Hainan, whether it be products or SKDs or parts, that's -- revenue is all to Kandi.

Is that still correct?

(foreign language)

(foreign language)

[Interpreted] Correct.

Great.

Okay.

In the past, and this goes back -- I want to touch right now on the media.

In the past conference call, Mr. Hu also stated that ride-hailing EVs will be expected to do some 8,000 kilometers per month or about 266 kilometers per day.

That's ride-hailing now, like Didi Chuxing or Caocao.

If that's the case, considering the city use, [EG&C] would have to be driven at least 2 shifts per day, making the quick battery exchange almost mandatory for a ride-hailing EV due to recharging times.

Based on Kandi's QBEX used in car-share doing much fewer kilometers per day, each EV, it would -- in the old days, this is back when we had to car-share, would take 4 batteries: 2 in the car and 2 on the charging rack.

But now with these much higher rates expected from ride-hailing, would it be more realistic to assume that each car would have to have as many as 6 batteries: 2 in a car, 4 on the charging rack?

(foreign language)

(foreign language)

[Interpreted] Now we are planning on launching EV models with a driving range of over 300 kilometers to the online ride-hailing market.

Therefore, 1 shift of -- will be enough for the online ride-hailing.

And this is not going to exceed 300 kilometers, and -- oh, I mean, 1 shift for the online ride-hailing will not exceed 300 kilometers, and the 2 shifts per day will be good to go.

Therefore -- because each battery only needs 6 hours to charge, and each day can charge 4x.

And as long as the battery exchange companies equip the battery with each 1 versus 0.3 kind of ratio, in fact, it's 0.25 ratio.

But however, we give it -- give or take, so it's 1 versus 0.3 ratio.

It should be operating normally.

Okay.

And Kandi, of course, will provide all of those parts and the batteries to continue, that's correct, in addition to the car parts?

You mean for exchange -- the equipment parts, right, and battery.

Is that what you're asking?

Yes.

I'm asking that -- as is been in the past, Kandi will still be the provider of all the batteries, the initial ones that are with car and the ones that will be in the charging racks.

Kandi will be providing another...

(foreign language)

(foreign language)

[Interpreted] Yes.

We're not only supplying the battery, also supplying the battery exchange equipment, which is a totally automatic system.

Each battery exchange only takes 10 seconds.

10 seconds?

Okay.

All right.

I want to -- from that, that touches on my next to last point here.

And this has to do with his comment earlier about Jinhua An Kao.

Kandi purchased Jinhua An Kao for some $30 million-plus in December 2017.

Considering Mr. Hu and Kandi were already experts in the QBEX deal, as we said earlier, being the first to introduce QBEX with its own government-approved system back in 2010.

Jinhua An Kao must have an exceptional system to have Kandi give up its own patented technology and pay so much for this new technology.

How much will Jinhua An Kao be selling each system for?

And how many swaps per day could each system deliver?

Okay.

(foreign language)

(foreign language)

(foreign language)

(foreign language)

(foreign language).

Okay.

[Interpreted] Art, I want to correct myself for last question's answer.

It actually takes 90 seconds to change the battery, not 10 seconds, sorry.

So to answer your question for this one, that -- Mr. Hu is saying that battery exchange technology is just constantly upgrading and changing.

So An Kao's system is also very advanced.

And they have one, which is a fully automatic power change system, which -- the price does not exceed RMB 800,000, so -- which is very competitive.

And based on what NIO has, it's going to cost like over CNY 1 million.

So we believe that what An Kao has is very competitive.

And this only takes about 90 seconds to change the battery pack each time, so you can kind of calculate how many times can it -- it can change.

$800,000 to $1 million (sic) [CNY 800,000 to CNY 1 million] is much higher than I was expecting.

And the 300,000 ride-hailing program, like the existing contract agreement that we have with China Resources, the 76th largest corporation in the world according to Fortune, where they're going to be responsible, as I said earlier, in acquiring these systems to be used in the 300,000 car accredited system, about how many of these units would he anticipate we could be selling?

Just for the 300,000...

(foreign language)

(foreign language)

[Interpreted] Mr. Hu is saying that right now, it's hard to estimate.

The program is going to last for 5 years, so it's good demand.

And we're going to update you as we go forward.

Okay.

Well, a lot of surprises in this call.

And yes, again, the new format is great, and it does apparently really show the shareholders that there is a change happening at Kandi and something that Mr. Hu deserves, and I think, so do the shareholders.

Thank him very much on behalf of all us long-term holders.

(foreign language)

And we'll hear next from Michael Pfeffer of Oppenheimer.

Regarding the $20 million company share buyback, is this being done as a more complex 10b5-1 plan, which would allow purchases with no blackout but can take several months to implement?

Or just a conventional share buyback with pre-earnings blackout periods?

And then I have a couple of other questions.

Okay.

(foreign language)

(foreign language)

[Interpreted] Like you said, in fact, the procedures for the share buyback are quite complicated, and especially that we have to open accounts and we have to get approval for the funds until -- and transfer to overseas.

It takes a long time.

But however, the preliminary preparation work has been pretty much done.

So we have engaged with a very professional brokerage firm to design the share buyback plan, and we are anticipating to start buying back the stock next week, hopefully.

And the plan is still the same.

Okay.

I guess -- so I assume what you're saying it's not a 10b5-1 plan.

It -- but maybe if you could just get an answer on that.

And secondly, do you expect to complete the $20 million stock purchase by year-end?

And lastly, will Mr. Hu continue to add to his $4 million Kandi market purchases?

(foreign language)

(foreign language)

[Interpreted] First, whether or not it's 10b5-1 plan, I cannot confirm with you.

This is going to be handled by the brokerage firm.

And before it's finalized, I cannot comment on that.

Second of all, like we said in the press release, we're going to buyback up till $20 million shares from the open market.

So it depends -- depending on the market condition.

In terms of whether or not I'm personally going to buy back shares, this also depends if the market still undervalue our stock.

As necessary point, I will buy back.

But once again, once I have a -- if I buy back, there will be a Form 4 release.

But right now, I cannot guarantee whether or not I'm going to buy back shares personally.

And at this time, I will turn the call back over to the management team for any additional or closing remarks.

(foreign language)

[Interpreted] Thank you, ladies and gentlemen, for attending today's meeting.

I'm very glad that our new format of the conference call is very welcomed by our shareholders and new investors.

We are going to do this next time as well, the same time from reading the information that were already disclosed in the filings and news, so we have more time to interact with our shareholders to answer more questions.

If you have any additional questions, please don't hesitate to contact our Investor Relations, and we look forward to speaking with you again next quarter.

Goodbye.

And again, that does conclude the call.

We would like to thank everyone for your participation.

You may now disconnect.

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