Kandi Technologies Group Inc (KNDI) 2023 Q2 法說會逐字稿

Greetings, and welcome to the Kandi Technologies Second Quarter 2023 Financial Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kewa Luo, Investor Relations Director. Thank you. You may begin.

Thank you, operator. Hello, everyone. Thank you all for joining us today on our conference call to discuss Kandi's results for the Second Quarter 2023. 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. Xiaoming, who Chairman of the Board; Dr. Xueqin Dong, Chief Executive Officer; and Mr. Mr. Alan Lim, Chief Financial Officer. Mr. Dong 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 provision 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 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, Dr. Dong. Please go ahead.

[Interpreted] Hello, everyone. I'm Xueqin Dong, CEO of Kandi Technologies. Welcome to our conference call today. I'm pleased to present the key results of our second quarter. During this period, our sales revenue soared to USD 36 million, showcasing an impressive growth rate of over 70% compared to the same period last year. This remarkable achievement is a direct result of our quivering efforts and dedication we have put into product transformation over the past few years. Our exciting journey led us to develop a series of cutting-edge or electric off-road all-terrain vehicles while using auto technology, which played a pivotal role in driving continued sales growth.

In the second quarter, our net profit reached a significant USD 4.4 million turning losses into banks, demonstrating that we have achieved significant success in overcoming the challenges of the past few years. The achievement is a result of our commitment to optimizing our product mix and targeting higher profit and fast-growing categories while keeping a close eye on our customers' changing demand.

Furthermore, as of June 30, 2023, we had a robust cash balance of over USD 230 million, giving us the confidence to tackle challenges and seize the opportunity. Moving forward, we will continue to strive and innovate to meet customer demand steadily advancing on the path of sustained success. I want to express my gratitude to all of you for your unwavering support and dedication to our shared vision.

Thanks again. Now we will move on to the Q&A session. Chairman Hu, Xiaoming and I will answer your questions and Ms. Kewa and Mr. Alan will provide translation for English questions. Please go ahead and ask your questions. Operator, please go ahead.

(Operator Instructions) Our first question comes from Frank Blatterman.

I actually have 2 very short questions. The (inaudible) authorization to buy back shares expired at the end of December past as the company submitted the paperwork for another buyback? And if not, is it under active consideration. Go ahead, Kewa.

[Interpreted] Thank you for your questions. The company currently has no further plan for the buyback transactions. Our goal ultimately is to strengthen the fundamentals of the company and create the largest value for the shareholders. As for the stock price, we believe that once the company's performance improves financially, it will organically bring up the attention and attract investment from the market.

My second question and this is a little bit different than what I initially was going to submit. With Kandi's cash on hand, apparently above the company's present market capitalization and a half dozen new products, there have been only 2 press releases this year, one to announce the CEO transition on January 11 and one to announce the acquisition of Northern Group on June 26, with none at all announcing the new products. Go ahead.

What's your question?

I'm sorry, I thought I was on. With Kandi's cash, my question is a little bit different than what I was initially going…

I got you till that part. And what's the second part?

With Kandi's cash on hand, apparently above the company's market capitalization and a half dozen new products there have only been 2 press releases this year. Is the company planning on having additional press releases as we are now a very good profit-making company and is it time to start touting our newer products?

[Interpreted] So the company has been adjusting our product mix strategy in the last few years. Indeed, we encountered certain difficulties from time to time, and sometimes it may not go well as we expected. So we end up adopting the strategy of refining optimizing our products before we disclose too much. Unfortunately, the transfer made for our production has achieved successful results. And the company has turned losses into gains in the first half of this year. Ongoing, we will consider to refining our disclosure approach to the public.

Congratulations on excellent results, Kewa.

Thank you, Frank.

Our next question comes from Droel Kramer.

The very quick, extremely quick pace, Kandi is now growing. How long does Mr. Hu feel it will take before Kandi catches up or beat Polaris, at least in the EV sector of the off-road vehicle space? And then I have a question after that.

[Interpreted] We will strive to improve and strengthen our fundamentals in the foreseeable future, and we strive to build the company into one of the leading manufacturers in the pure electric ATVs field within the next 2 or 3 years.

What new off-road vehicles of all types of sizes do Kandi expect to release this year? And is there 1 or 2 that Mr. Hu favors as particularly winner? And secondly, also, what percent of sales in this year's first half were sold outside the U.S. and what were the top 3 markets outside the U.S.?

[Interpreted] To answer that question, we have recently launched the model called 10K. It's a pure electric dual motor forward drive UTV in the U.S. market. We believe this model will be favored by the customers in the U.S. market. In the second half of this year, we will also launch a pure electric mini golf cart. We hope that this will be another popular model as well. At present, our products are mainly sold in the U.S. market. And then we also have some sales in Europe and Mexico region through our channel distributors. Thank you.

(Operator Instructions) Our next question comes from Mark Cano.

I have a question about Kandi's recently announced acquisition of the 20-year marketing and analytics company, Northern Group. Looking at the Northern upside, it is easy to see why Kandi would embrace this company based on its blue-chip existing clientele in business that have obviously connections to Kandi manufacturing expertise. Lowe's and Fleet Farm already carried Kandi golf carts, Home Depot managed tractors supply and mid-state, while similar demographic of Lowe's. And now with this acquisition, have a straight-line relationship to Walmart, Target and Best Buy carried Hover-1 board and the scooter line. Even Sharper Image and Hammacher Schlemmer carried hoverboard, e-bikes and scooters.

However, Hover-1 connects to Kandi its (inaudible) division, which has provided over 100 million in batteries in electric motors in recent years. I can see all of the above using various products or having Kandi design custom or private label vehicles from Kandi conglomerate of various divisions that already manufacture parts in-house for 95% of its complex golf carts and UTV. However Northern also has existing clients such as Walgreens, Ulta Beauty and other nation brand in unrelated industries. My questions are Kewa, would you go ahead with the introduction or should I…

So my questions are, could this deal have been done for [$30 million] cash? Or was it required to be done for stock by the seller? Do Northern Kandi division keep all the above out of the industry clients like Ultra, Walgreens, even in the revenues, even if the revenues are derived from totally unrelated business. Also will its marketing team continue to solicit this unrelated business?

[Interpreted] So first of all, the acquisition transaction of Northern Group will be closed with Kandi's resulted shares with certain escrow restrictions. For specific agreement terms, please refer to the equity transfer agreement attached to this quarterly report on 10-Q. As for the business and the goal of the company, of course, the main goal of the Northern Group is to promote and operate the company's products. That's our main focus. But definitely, they will keep those profitable operations and businesses. Thank you.

Okay. I understand. And just a couple of more questions. The acquisition terms filed with the SEC seems unique, if not confusing. Please explain the earn-out terms for the 3.9 million shares. And under what circumstances the deal could be unwind? And second, for only less than 5% of Kandi, this deal looks excellent. Where does management see this taking Kandi in the future?

[Interpreted] So as for the questions about the agreement terms, kindly refer to the equity transfer agreement attached to the 10-Q for this period. And in the future, of course, we would like to utilize the sales resources to expand our sales channel and subsequently boost up the company's sales revenue. Thank you.

Our next question comes from Michael Pfeffer with Oppenheimer.

I have 2 related questions requiring some context. The first concern is a Kandi long promise guidance trend. While not yet included in the company earnings press release, I'm happy to see the almost mandatory requirement to ever get Wall Street analyst coverage, guidance or forecast has now started to partially appear in each of the last 2 Kandi conference calls in response to investor questions.

In the year-end 2022 conference call, Mr. Hu forecasted 20,000 to 25,000 units for '23. On the Q1 '23 conference call management reconfirmed the 25,000 full year unit sales and added 3 more forecasts, including 6,000 to 7,000 unit sales forecast in Q2, up from 3,000 in Q1, full year revenues and gross margin forecast. The revenues forecast came as an affirmative response to a question of whether $150 million to $200 million was realistic for 23 full year and was guided to the high end of $200 million by this quote.

So far, our forecast, we believe that there now will be roughly $150 million, even more the top line with the $200 million of the USD sales for this year. I think we can achieve that goal. Maybe you can translate that, and then I'll get to the question, please.

If achieved, this would be an impressive 80% year-over-year increase from '22. Also, from a management response to gross margin question for the entire year, the response was equal to excellent 35% achieved in Q1 for 16.6% in 2022. If achieved, by putting those 2 together, we could see a gross profit of some $70 million or more than $0.90 a share for '23. My first questions are, do you stand by these full year numbers higher or lower? And how about expectations for Q3 at the current pace, is it doubling to $400-plus million in 24 realistic? And if so, does Kandi have the current capacity to deliver?

[Interpreted] So in the first half of this year, we sold more than 7,000 pieces of the pure electric golf carts in the U.S. market, excluding the 6,000-plus in the whole year of 2022. And of course, it comes with a higher and significant increase in the gross margin. For the details of our financial figures, please refer to the quarterly report. In the second half of this year, we believe that the sales revenue will increase to a certain extent.

As for next year 2024, we are confident we can continue to grow based on the momentum of this year. Of course, it depends on the stability of the international market and then the user acceptance of our new products. As for production capacity, we have been adjusting in the last few years. As long as there's a need and demand from the market, we believe that our production capacity to survive to meet the needs. Thank you.

Okay. On to my second related part. In hindsight, on May 10, right after the excellent last Q1 conference call, the stock price had been going up the prior week, but closed that day down around 3% to $3.08. The next day, it started moving up. And over the following 25 trading days reached a 52-week high of $4.28. Noteworthy, during this period, the overall market and China stocks were generally weak. Also, there was no published news from Kandi to account for the rise. The only logical reason for the move up was the publication and circulation of the conference call transcript led by its 4 excellent guidance comments.

My point is that guidance does make a huge difference. At the time of the conference call, there was no guidance in the actual earnings press release only some mediocre numbers. The live conference call likely had a small audience of long-time investors and due to only 5% fund ownership and no analysts, little if any Wall Street professionals attending. These likely the reason it initially dropped. However, once the third-party transcript started circulating the next day, the move up started. Maybe you can translate that and then I have one question and then I'm done.

In my opinion, if the company would follow typical successful public company trends, which incorporate forecast in the actual earnings release, which carries a much more extensive distribution profile and stickiness than a transcript, this Kandi best-kept secret will finally have a chance to be discovered by Wall Street, particularly now in light of Kandi, having a few quarters track record with its new predictable market of products. So my last question is, in the future, will management assure shareholders that will seriously consider making this necessary step to significantly increase investor awareness.

[Interpreted] First of all, thank you for your great opinion. The company has been adjusting our product structures in recent years and indeed encounter some difficulties and sometimes it may not go at what we expected. So, we end up adopting the strategy of few words and many bids. We try to strengthen our fundamentals. Fortunately, the strategic product transformation leads to turnaround in profitability. And that's why we have more income generated and net income generated in the first half of this year. Upcoming will definitely take your opinion into consideration and try to explore and optimize our strategy of communication to the public. Thank you.

Our next question comes from Arthur Porcari with Corporate Strategies.

Well, it was a very good quarter, an excellent quarter no matter how you cut it but let me cover this area. I won't take near as much time as I have in the past because everybody is appreciating me, I think did an excellent job. And my question is a bit bizarre maybe but the subject of my question is who is (inaudible) Sports Technology Company Limited and how does it relate to Kandi? But let me give you some background for these questions first.

I was browsing in the Kandi products in Alibaba. I discovered a very impressive marketing sub website on Alibaba for a company founded in 2001 colleagues (inaudible) Sports Technology Company. At first glance, it looks like an international wholesaling site, specializing in a lot of off-road vehicles and several different variations. It has some mail shown some 246 different off-road vehicles, both electric and ICE that can be bought in bulk at wholesale prices.

This impressive homepage features some very familiar looking vehicles, 6 to be sure. If you look closely, you see at the front plate which is Kandi on about 3 of those vehicles. But the rest of them all have letters that start with KD, which we all know that's been around for a while, KD is Kandi's designator. So interesting that this shows up almost as if we're a Kandi site. Go ahead and tell that to them first, then a little bit more than I'll ask some questions.

And at the bottom of this first page is the pictures of the vast beautiful new manufacturing facility looked exactly like Kandi's new Haiku (inaudible) 100,000-vehicle facility but was missing just a few things. At the center guard gate, which will normally would have a large ground sign and on that side it would show Kandi's name with the shield logo on it. Instead, it had a brown redaction patch over those pictures. And the upper levels, as I know that facility has also the Kandi name and this shield type of logo that we have is normally up there on the real website. Well, and there was also a redaction patch on the picture there. So got a little confusing. Go ahead and tell them that much right now.

Moving on to the company's profile page under company's certification to my surprise, they had a single document for download for the CE mark, which we all know is the authorization to do business in Europe, which I have no idea they can't even have the CE mark. Anyway, it went on to say the actual document the Zhejiang Kandi Technologies was listed as the manufacturer on this certificate.

Also on that page are some video and virtual reality clips of the same facility as the home page, except this time, the redactions were not there. And now the page clearly shows the Kandi and the Kandi logo in those 2 locations, actually. So after further Internet search of their name, I found a second (inaudible) website with a beautiful aerial portrait of Kandi's (inaudible) facility on the banner. On that side, it broke down its international sales statistics with 70% to North America and the rest of detail out to some 15 additional countries.

The pages actually had the feature to retranslate each page into some 80 different languages. This company, at least currently appears to be an independent global wholesaler with long-term very close ties to Kandi. Finding that CE mark which is mandatory for Eurozone was also encouraging. So I'm going to have a few questions to follow.

First question, what is Kandi's current relationship with this company (inaudible)? Or was it perhaps something like the Northern Group as a company that maybe Kandi is wanting to buy because they seem to be very proud of the Kandi name.

[Interpreted] (inaudible) is a long-term customer of the company and now they would still purchase certain kinds of the ATV products from us according to the demand from the market. We have no plans to acquire (inaudible)

Well, does Kandi have any other international wholesale relationships. And what percent of Kandi's business you expect will be done outside the U.S.? And also a question for a friend, does Kandi have any dealerships in Canada?

[Interpreted] Currently, we did not have other wholesalers, although sometimes there are some small-scale customers who will come to us directly and purchase certain items. As for the wholesale plant in Canada, we are currently working on it to set up the wholesale channel. Thank you.

Just a little follow-up there if I want to notice. This particular company again, seems to have changed from just over within the past year or so to really put a lot of stress on Kandi, almost 240-odd various products, which, by the way, also includes lithium batteries, which could be bought there in bulk. So I guess my question is are the lithium batteries Kandi batteries? And on the other hand why are they seem to be stressing the whole front page is Kandi. I mean I'm very happy to see that but are they just focusing a lot more on Kandi name than they have in the past, I guess, is my question.

Our next question comes from Francis Forte.

In May, the company entered into a consulting agreement on business growth and Financial Advisory Services, a $1.1 million contract. Is that a follow-up on the arrangement they had with CITIC before COVID for a possible spin-off or listing on the Chinese exchange?

Operator and Francis, can you hold on for second. Management says they (inaudible) time to answer the previous question, then we'll come back to you, okay? Please just hold on and wait on line. So right now, we're answering the last question was the previous caller then we'll go back to the question.

[Interpreted] Sorry, there was some interruption for our answer for the previous question. As for the questions, so first of all, (inaudible) is one of our long-term customers, and they also would like to promote our products. That's why we will see such information on their website. Currently, we do not supply any lithium and sales to (inaudible). Thank you. So Kewa, we can resume the question from the last.

Francis, you can proceed with your question one more time.

Agreement on business growth and financial advisory services for $1.1 million. Is this a follow-up with CITIC on the agreement they had before COVID to possibly do a spin-off or list part of the company on the STAR Exchange in China?

[Interpreted] So as for the consulting agreement if you noticed, it's not related to our potential listing in China market with the CITIC. Indeed, it's for our separate plan to our U.S. subsidiary (inaudible) to explore the possibility to be separately listed in the U.S. mainboard. Thank you for your observation.

And another question for you, Mr. Lim. When Kandi sold its (inaudible) facilities a couple of years ago. As I recall, a large part of the compensation for that, over $70 million I think, was a tax benefit, a potential tax benefit on our profits. And I think it was for 8 years. Have we ever been able to take advantage of that until now? And now that we are profitable could that tax benefit really come into play? And could we recoup a large part of that in the future?

[Interpreted] So thank you for your question. As for the tax benefit utilization, we believe we can utilize in the upcoming future. First of all, the golf carts are currently manufactured from our Hainan facilities. Ongoing, we will try to expand our production in Jinhua as well. But since we have those net loss carryforward that we can able to utilize. So yes, as for your questions, we can utilize those tax benefits in the upcoming future.

Congratulations.

I would now like to turn the floor back over to Kewa Luo for closing comments.

Thank you again for attending today's conference call. If you have any more questions, feel free to contact us or contact our IR agency Blueshirt. We look forward to updating you on our next earnings call. This concludes our call for today. You may now all disconnect. Goodbye.

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