Kandi Technologies Group Inc (KNDI) 2022 Q2 法說會逐字稿

Greetings, and welcome to Kandi Technologies Second Quarter 2022 Financial Results Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to the IR Manager, Kewa Luo. Please go ahead.

Thank you. Hello, everyone. Thank you for joining us today to discuss Kandi's results for the second quarter of 2022. Earlier today, we issued a press release covering the results. You can find the press release on the company's website as well as from newswire services. 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 call today are in U.S. dollars.

With that, let me now turn the call over to our CEO, Hu Xiaoming. Go ahead, Mr. Hu.

[Interpreted] Thank you, Kewa. Hello, everyone, and welcome to Kandi's earnings conference call today. I'm proud of outstanding efforts made by our team to deliver solid results despite many challenges in the economic environment caused by (inaudible) COVID and the Ukraine/Russia conflict. Early in the second quarter, there was an unprecedented supply chain disruption in China due to prolonged lockdowns in major cities, especially Shanghai. Despite these headwinds, our team rose to the occasion. We have continuously refined our business strategy, and we saw the positive impact of this effort in the second quarter. This relative success in a harsh environment was enabled by our flexible business model. We are constantly innovating to find new products to address emerging areas of growth. A great example is the category of off-road vehicles. Our off-road vehicle revenue in the second quarter increased by 84% year-over-year. In the first half of 2022, we introduced the all-electric golf [Crossovers]. Monthly production jumped to 2,000 units from just double digits in March. Customers are thrilled with our new products, and demand is high. With the trend of electrification of vehicles, we intend to develop a variety of new all-electric off-road vehicles such as UTVs, ATVs and so on. We will launch those new products as the year goes on. Also vehicles represent a substantial market opportunity around the world. Industry sources estimate that this product category will grow by 19% a year for the next few years, reaching a market size of $2.2 billion in 2028. We will work hard to capture a share of this growth by soon introducing more new vehicles and building our marketing and distribution ability. Going forwards, by strategically adjusting our business, we believe our near-term efforts in all electric off-road vehicle sector can make it a market leader. In addition, regarding our battery exchange equipment and battery exchange service, we have cutting-edge battery-swapping technology in the EV market in China. However, research in the waves of COVID and the lack of healthy growth in the China EV market are impacting the battery swap effort. What I mean here by the lack of health growth in the China EV market is referring to many Chinese EV manufacturers are competing in loss in order to capture the market share. We will monitor market dynamics and improve operations moderately. We will accelerate the battery swap business once China's domestic electric vehicle market is healthy and stable. Meanwhile, we will continuously refine our business strategy to make Kandi more diversified and competitive. Let's now start the Q&A session. Kewa will take any English questions and translate for me. Operator, please go ahead.

Thank you. (Operator Instructions) Our first question is from [Harold Gebury], who's a private investor.

I have 2 questions having to do with Kandi's [temporarily cable] highway speed EV cars, both in China and the U.S. Question one. Back in April, a China auto web portal reported that the Kandi K23 has been relaunched in China as the Henghe HRQ-7000-BEV01. Can Mr. Hu explain the rationale and significance of this (inaudible) what it means financially to Kandi, both now and in the future. It does say that Kandi is the assembler of the car.

[Interpreted] To address that, Henghe is a trademark and basically a brand we use for all the EVs we cooperate with Hengrun. Our corporation with Hengrun is mainly that we're responsible for the production of the electric vehicles that enable the battery swap mode. We produce the motors, the parts, and then Hengrun will add up our parts and assemble to be a whole vehicles. So basically, the cooperation is mainly to achieve the compliance in terms of the production and sales in the PRC market. In terms of the impact of financials, it definitely increased our sales of the EV parts.

Question two. Facebook Marketplace has a small used 2-door white UTV EV with the Kandi name on the grill that looks exactly like the Henghe HRS1 in China. It's being sold by the Dallas-based iDrive1 dealership. There's not a lot about this car on the net. I notice that the Chinese version is a full-speed 102mph car as compared to the U.S. 35mph limited car. What is Kandi's relationship to this small EV?

[Interpreted] Yes, so basically we are using the same laid out -- the frame -- from the cooperation with Hengrun. And why we can order (inaudible) -- and why we cannot offer the full-speed EV in U.S. is basically because we have not yet met the airbag technical requirements by DOT, especially for the safety issues. Hence, we can only offer those are the UTV or NEV version in the U.S. market at the moment.

Last question. The iDrive1 dealership in Dallas also seems to be a primary seller with a big inventory of both the K32 NEV truck and the $3,500 Trail King electrical bike. How are they selling overall, and will the K32 ever be considered for sale in China as a full highway truck?

[Interpreted] So there are 2 questions here. First of all is about the question for the iDrive1. That's the dealer in Dallas, and so our U.S. entity, (inaudible), sells the products to all the dealers, including iDrive1. And as for the specific sales of those dealers, we won't be sure, because they may have some other products that's not provided by us. So we don't have too much information for the wholesales per se. And as for the K32, that's the UTV that we designed specifically for the U.S. market, because it's in the scale of the fully enclosed -- the EV type, and in China, there's no such market demand. So at the moment, we don't have the plan to sell it to China yet.

The next question is from Terry Mclemore of Mclemore and Associates.

I wanted to cover a little bit more on the battery swap with Hunan Hengrun. There was a press release back in January that announced the initial framework to that battery swap. Can you tell me, has that deal been activated?

[Interpreted] So the project we're working with Hengrun is progressing in an orderly manner. In June this year, the Henghe brand H23 -- the model H23 -- has already completed the relevant procedures at the Ministry of Industry and Information Technology of China, such as the (inaudible), such as the environmental protection policies, and then the tax exemption. So basically we have complied and fulfilled and completed the license of the sales in China.

Okay. Is the Kandi brand going to be used on that ride-hailing program, and is that for the 300,000-vehicle program for the battery exchange?

[Interpreted] So, for the sales in the (inaudible) platform in China and other channels, the reason we are working with Hengrun is because they have the production license and qualifications. So the brand Henghe will be the trademark and the brand that we cooperate with Hengrun in our EVs for the China market down the road. So they'll be in Henghe. In the future and in the right timing, we may use the brand Kandi again. But for now, we will adopt the brand Henghe as our sales of the product in China.

Okay. Finally, what does each partner primarily contribute, and what percentage goes to Hengrun and what specific products and services?

[Interpreted] So for our cooperation with Hengrun is similar as the model we used to work with (inaudible) in the past. So basically we're responsible to manufacture the parts of those EVs and then sell them to Hengrun, which will assemble and sell it to the customers and even through our own source of customers. So basically we are taking different steps in the whole flow, and so there's no such percentage of the products, because we're working on different flows.

The next question is from Michael Pfeffer of Oppenheimer.

With Kandi's stock price trading at such a massive discount to cash, working capital and shareholder equity, and Kandi sitting on a huge cash stockpile, why hasn't the company been more aggressive in completing and even adding to last year's announced $20 million share buyback?

[Interpreted] At the moment, because of -- there's all the huge influence from the first outbreak of the COVID, the resurgence of the COVID and the lockdown in PRC market, plus the military conflict between Russia and Ukraine, the whole international economic situation and the conditions is very severe and uncertain. And in such a condition

(technical difficulty)

Interpreted the management believe that we should

(technical difficulty)

Interpreted to cope with the upcoming uncertain economic situation. We want to go through this -- the time, and -- in the meantime, we know that the share price of the company is seriously undervalued -- understated. However, we believe that, with the gradual adjustment and refinement of our business strategy and then the improvement of our company's financial performance, the share price will back to the reasonable level. The management believe that, in the current economic situation, it's not a good move to blindly rely on the buybacks to increase the stock price, because that may not be a prudent or consistent move. But definitely we will do the -- repurchase the shares as planned.

One other comment: to be able to buy back shares at less than half book value, at a 25% to 30% discount to cash, seems like a no-brainer, particularly when compared to past buybacks at prices up to mid-$5 price by both the company and Mr. Hu personally, along with at least one other director. On the last conference call, a suggestion was made that the company consider looking into a more formal Dutch auction tender, something that would certainly bring a lot of attention -- positive attention to Kandi at this perfect time due to its strong cash position and likely revenue explosion ahead this year. The key to success with the Dutch auction is it will remind all that Kandi is trading under cash in the bank.

[Interpreted] So, as I explained earlier, we try to be conservative and keep our cash flow in the meantime, because we believe that the buyback may not be a long-term that will - a plan that will increase or refine our share price from a fundamental standpoint. We rather focus on our business strategy and operations. However, we would like to explore the Dutch auction -- the tender offer, and see if that works and if it makes sense to the company and if that makes sense in the current market. We will explore and get back to you guys later if we plan to do so. And besides, Mr. Hu and some other third parties repurchased a share price of Kandi at around $5 per share in last year. That shows that we have confidence in our company's future, and, ongoing, we will explore and determine whether - which are good time to have more repurchase the shares. But that's why we have the confidence in our company's future.

Well, it's probably a much better buy here at these levels, since it's half the price.

The next question is from Arthur Porcari of Corporate Strategies.

On last quarter's conference call and 10-Q, the company surprised the shareholders with the unexpected $70 million U.S.-based golf cart agreement, with units already being sold. Though this huge 2-part order in size was disclosed in the Q1 10-Q, this order was never announced as a freestanding PR. Yet the new product line, if target reached, as reported in last quarter's 10-Q, would likely generate revenues this year almost equaling Kandi's total revenues last year. Can you explain to us what possessed management back at the time in Q1, when everyone's business was crashing, for Kandi to suppress publicly announcing a new product order of this size at a time when Kandi's stock was also collapsing and has never recovered, along with the market? Also, from the comment in today's PR, it's safe to assume Kandi's golf cart business is expected to grow in future years. If so, how much?

[Interpreted] So our mindset was to establish the fundamental of the new business, because we always try to address our strategy. So our plan was -- want to get it materialized before we have a (inaudible) announcement to the public, but we'll definitely take that in mind and it'll be more (inaudible) in the future. As for the questions, basically, from March, we have already shipped out from China to our U.S. entity with a few of the dozens of the pieces of the golf carts. And from April and May this year, we started to deliver over thousands of pieces of the golf carts to U.S. However, because a majority of those deliveries is still in shipment at the moment, so we only recognize a few hundreds of the revenue of the golf carts for Q2. The rest is still on the way to U.S. entity. But from now on, it's no problem for us to have a consistent production of over 2,000 pieces per month, and so that's our situation for now.

Well, that's -- that sounds like a pretty good answer. 2,000 pieces per month -- at the retail level, that would be, what, $60 million a month? That's quite a number for a company that's sitting here with, what do we have, a $180 million market cap, only $18 million in debt and $230 million in cash. It seems to me like you should be in a position where you can start buying back some of those shares. But go ahead and put that -- send that on to them right now, Kewa -- just what I just said.

[Interpreted] Yes. I mean, definitely, that's -- we have a bright future in the golf cart productions, and we definitely can achieve a very good target of the sales in order -- the ideal and smooth circumstances. However, there's just a lockdown in (inaudible), which our facilities is located -- get locked down lately, and so definitely that will kind of have some impact and holdup of our productions. But down the road, we believe we can deliver a very good performance in terms of the golf cart productions and sales.

I may have misspoke a moment ago. I'm not sure if I said $60 million per month; I meant $60 million for the quarter. But again, that would be the gross amount at the retail level. So the past couple of conference call, there seems to be a continuous disconnect between Kandi's stock price and the reality. I don't know, it just seems like we ask the same question each time about if we're going to do anything about trying to increase the exposure. All we've done is we've actually gained and lost a couple of analysts during that time. And for us to be sitting here trading at a 35% discount to cash with no debt -- cash even went up this past quarter, as you said, $232 million in cash and $180 million market cap. It just seems like we get the same question every time -- 'Well, we know we must do better in trying to find analysts for the company' -- but it just never seems to happen. So my feeling is that we've got to do something. I mean, you have Blueshirt that's been getting paid for 4 or 5 years now, and all that happened is stock's gone down since then. What are they getting paid for? I mean, they supposedly have a great reputation in the world. But anyway, if you can pass that on right now, I still got a few more things to say, Kewa.

[Interpreted] Alright. So we understand your frustrations and (inaudible). We will, of course, try to expand our productions and self-scale in China EV market. However, you may have heard about our update. You may heard about the articles in China that it is still in an unhealthy conditions, that those major competitors, the EV production companies, they will just -- in order to occupy the market shares, they will sell with loss. Each car they sell, they may have a deficit or loss with a few tens of thousands RMB. It just doesn't make sense to us. Well, for them, they may have spent over billions of U.S. dollars to burn and to take up the market occupancy in China market. However, with the cash we have -- over $1 million of cash -- it's definitely not enough to compete with those companies, so we can only wait until when the market becomes more healthy in a more orderly manner. Then we can go in and expand our sales and the production scale. That's our plan. But at the moment, it would be unwise or doesn't make quite much sense to do so -- just to burn the money for no reason. So we'd rather be more conservative and wait until there's a better timing for us to expand the sales productions.

Alright. Well, anyway -- okay. So, based on the now reported first half and the balance of the golf cart order talked about in the 10-Q and some comments you just made, it looks like Kandi could actually had its best year ever, based on both business and financial conditions, this quarter -- I mean, this year. Very unique, based on current overall economic and market conditions. Yet, in spite of this likelihood, you still manage to keep this thing as the best-kept secret. You haven't answered me why. Why would -- we've only put one press release out of the company the whole year, yet in the past we put out 20 to 40 every year. The one press release was way back in January 10, and it really had nothing to do with the golf carts. So is this just going to be a new policy? You're just going to go dark? Or are you going to start putting out press releases again. It's just amazing. Pass that on, and I got a few more short questions, then I'm done.

[Interpreted] I hope you understand that it's still rather a transition period for us to adjust our strategy and refine our work plan to compete in the EV market. So -- and of course we understand that, if certain investors or shareholders are not satisfied, we cannot make them stay. But hopefully, we have given the confidence to have the shareholders stay with us to encounter such a transition period, and hopefully, we can enjoy the fruitfulness result in the future.

Okay. Just a couple of quick ones now. I'm sure Mr. Hu's not happy with what he's seeing. He and I go back together all the way to 2008, when this company started. In that year, he had, I think, 13.5 million shares of stock, and at the peak it was probably worth, I don't know, $65 million, $70 million. If you look at the stock he has today, he has more stock, and I know he's paid $5 million for the stock he's already bought. He's got more stock and, at today's price, it's probably worth closer to, I don't know, $25 million or $30 million. So he can't be happy with this, but he has done -- in my opinion; that's why I feel frustrated -- he's done a great job keeping us alive and well and safe, and yes, made us -- gave people an opportunity to buy the most undervalued stock in the world. It's certainly not going to go out of business. Maybe in this market, that's a great deal. But, getting off that bandwagon, I just got a couple of last questions here.

How much of an effect does the China tariff have on Kandi's golf cart, electric bikes, powersports and off-road business, and does the company anticipate the lifting of U.S. restrictions on these? And one last piece with it: next to golf carts, how much are the NEV and electric bikes expected to contribute to this year's revenues, and does management have an estimate for total sales in the off-road business this year?

[Interpreted] So first of all, about the questions for the tariff, there's no such tariffs on China imposed to our export because there's only a rebate, but then there's no tax or tariff charge on our exporters. For the shipping to the U.S., the U.S. Government, they charge 10% tariff of all the imports. So under the existing conditions, our sales price in the U.S. market is determined according to the existing tariff - the tax rate. If there's any future adjustment down the road, our sales price will also be adjusted accordingly. So basically, there's no such a significant impact to the company's revenue upon the change or adjustment of the tariff tax rate. And then the second question about our sales forecast. Well, because of the significant impact from the resurgence of the COVID, the lockdown, as well as the conflict between Russia and Ukraine, the whole market is uncertain. Definitely there will be an increase of golf cart in this year, but for the sales other than golf cart or the ATVs, we expect the sales should be similar to the level of 2021. That's our estimation.

Okay. Well, that'd be fine anyway. Well, we'll just see what happens next quarter, but it sure seems to me like this could be a record year for the company, and it may be a record year for a low price as well of the stock, which is a great opportunity for those who are smart enough to take advantage of it, but to each its own. Thank you very much, and great job coming up with this new product line. It looks like it's going to be huge in the U.S. from what we've seen with all the dealers that have been added on recently.

Our next question is from [Frank Blatterman], who is a private investor.

Is there any agreement, written or oral, or Chinese law that prohibits Kandi from exporting street legal and highway capable cars for any country, including the U.S.A.?

[Interpreted] The main reason that we have not offered our full-speed EV product in U.S. is because that we have not the technical requirements of the airbag safety requirement standard by the U.S. DOT. As a matter of fact, there's none -- no one of the China-based EVs product has fulfilled such requirement has been over in the U.S. market, even though the mechanism is rather self-ratification process. However, if something happened, we are in big travel if we have not met such standard and yet we offer the sales in the U.S., because the airbag safety standard in the U.S. is just higher than the rest of the world, like the EU or the China region. Even though there is no such written or oral document or agreement to prohibit us to do so, but we're just taking -- doing the right way to make sure that, first, we can fulfil such standard, then we can offer the full-speed EVs in the U.S. market. We just take it by the correct order.

I do have a second question, and then a third one. Second question. Are other modifications needed, besides the airbags, for the K23 and K27 to be highway legal in the U.S.? Is that the only thing that is needed to make them sellable here in the U.S.?

[Interpreted] Yes, the major obstacle is really the airbag safety requirements and the technical standards requested by the DOT. Other than that, we have pretty much fulfilled the rest of the requirements.

And my final question, why has Kandi not devoted whatever resources are needed to quickly design and incorporate the needed airbag changes to bring Kandi's vehicles up to DOT standards for highway use, to take advantage of this opportunity to sell inexpensive vehicles in the United States due to the high gasoline prices and the climate change issue? It seems to me that this is not brand-new technology. China has some of the best engineers in the world. Why haven't we devoted whatever resources we have to, to getting this done? And that's my final question.

[Interpreted] So thanks for your concern and suggestions, but as we mentioned in the past question, the requirements of the airbag safety standard, it is much higher than those in China and even EU because, well, in China and EU, basically we have the similar standards. But in U.S., we have to tackle different issues such as the -- for different size of the passengers, the drivers. And then it's not just a matter of one single company being able to tackle. It's rather the whole industrial skill set level for the whole country for -- that would work together to tackle such issue. So at the moment, we are trying very hard to do so. but I guess we have to wait until the whole standard being boosted in terms of the country level in China. So -- but anyway we try our very best to improve, though the time line can't be determined at the moment. Meantime, we will focus on the NEV market and the sales in the U.S., and in the second half of the year we will launch more different models on the NEV to improve our market occupancy in the U.S. market. So our focus now will be NEV, but definitely we'll work on the safety requirement in the meantime.

I understand what you're saying. It just seems that this is old technology at this point, and it should not be all that difficult to achieve, considering the resources that are in China with the engineers and the fact that other companies are manufacturing electric vehicles -- I'm sorry, gasoline vehicles in China and seem to have solved the airbag issue for export to the U.S. in their manufacturing plants, but no reason for you to comment on that.

[Interpreted] So thanks again for your question and your concern, but I guess we don't think there's anyone, even the gasoline vehicle, has been sold by the China companies to U.S. market yet. So basically that applies to all the automotives from China-based companies.

Thank you very much. Ladies and gentlemen, that is unfortunately all the time we have for questions, and I'd like to hand back to Kewa Luo for some closing comments.

Thank you. Thank you again for attending to this conference call. If you have any more questions, feel free to contact us via email or our Blueshirt IR company. We look forward to updating you on our next earnings call in November. This concludes our call for today. You may now all disconnect. Thank you. Bye-bye.