AYRO - AYRO: Transformation To Market Leader Gathers Pace

Summary

• A significant company change gives this stock a substantial and sustainable competitive advantage.
• Ayro is targeting the Low-Speed Vehicle market and is the only new EV company taking on this market.
• The old buy cheap from China strategy has been replaced with an all-American designed and built premium product.

Over the last 18 Months, Ayro (AYRO) has transformed its business. The new senior management team remains focused on the same market. However, it has re-designed the company to give it a chance to be the dominant EV manufacturer in its chosen niche, the Low-Speed Vehicle ((LSV)) segment. The old strategy of buying vehicle kits from China and paying someone else to assemble them has been ditched. The new plan is to design and manufacture its patent-protected vehicle in the US, sourcing 85% of its components from America and 15% from Europe. I think the all-new AYRO will be a big winner, and I have already invested.

In this article, I will look at the LSV industry and then consider the competitive situation before I focus on how AYRO has altered its business to allow them to be the leading manufacturer in this market.

Low-Speed Vehicles

The LSV market is a large, growing, ripe-for-disruption market segment. Three legacy manufacturers dominate the market, and most EV makers are targeting higher price, higher performance niches and do not have a Low-Speed offering.

The following definition is from the US government

An LSV is a 4-wheeled motor vehicle, other than a truck, whose speed attainable in 1.6km (1 mile) is more than 32 kilometers per hour (20 miles per hour) and not more than 40 kilometers per hour (25 miles per hour) on a paved level surface.

The market is predicted to grow with a CAGR of more than 8% and reach US$14 billion by 2027. LSVs are typically used as golf carts and on large educational campuses. Industrial areas, gated communities, and airports are significant users of these vehicles. The US is the primary jurisdiction where LSVs are street legal; however, many parts of Europe have similar rules. Over 60% of LSVs are electric, but the vast majority run on lead acid batteries, which are inferior to Lithium Ion in almost every respect and run into regulatory problems in all relevant jurisdictions. Gas-powered vehicles are standard in outside settings, and some petrol versions are still available.

Market sub-segments

Golf-cart-style vehicles are used to ferry people in stadiums, airports, and around many campuses (as well as on golf courses).

Utility vehicles (think mini pickup trucks) are used on farms and in many campuses as delivery and maintenance vehicles. Both types are available as street legal and non streel legal versions.

A new niche may well be evolving that offers significant potential.

We all know that reflexes and driving ability reduce with age, and it is logical to assume that many older people will move to safer, more accessible modes of transport. An aging population may drive the sale of LSVs; with 25% of the US population now over 60 years old, it represents a significant wealthy customer base for many products. LSVs may be attractive to the older generation; they run at a maximum of 25 mph and can be fitted with advanced driver-assist functions to enable parking and collision avoidance. LSVs are low maintenance, quiet, easy to charge at home, and safe.

Most over 60s will not be looking for a Tesla's performance but want ease of use, safety, reliability, and easy maintenance. Charging infrastructure is not essential as this group is in no rush; they can plug it in at home and let it trickle charge overnight.

The Legacy Manufacturers

The manufacturers currently dominating this industry are Club Car (private company), John Deere ( DE ), Textron ( TXT ), and Yamaha ( YAMHF ).

Club Car is perhaps the leading player in this market, the others have it as a sideline, but it is the main business of Club Car. They offer several golf carts and utility vehicles. They also provide their golf carts for personal use and have two street-legal versions.

They have a third street legal utility version.

They come as standard with a Lead Acid battery and have Li-ion as an upgrade. The quoted prices are for the standard version and represent a benchmark in performance, design, and price for Ayro.

New EV Entrants

My trading strategy is based on analyzing the competitive strategy of new companies and choosing the one I think will be the winner in each industry.

I have looked at three new entrants to this market: Kandi ( KNDI ), Cenntro ( CENN ), and Ayro. No other new EV company I am aware of is targeting this area.

When I started looking at this market in 2021, I thought Kandi would likely be the winner; they had what looked like great products.

The NEV K23 and NEV K27 are neighborhood vehicles (street-legal LSVs). The Kandi website in the US was accepting $100 deposits for these two vehicles in 2021. It became clear reading the annual report for 2021 and listening to the commentary that these two cars would not be the focus for Kandi as they were experiencing supply and development issues. Both cars have since disappeared from the Kandi website.

Cenntro offers the Metro. After discounting Kandi, I thought Cenntro would likely be a leader in this market and wrote an article about them. You can read Cenntro Electric Group: History, Facts, And Fiction . Here, Cenntro is the Chinese supplier that Ayro has ditched; if you read that article, you will find the reasons I have entirely discounted Cenntro as a competitive threat.

Ayro: The Competitive Situation

So we have a growing market for LSVs with one dominant manufacturer and two potential disruptors no longer targeting this market segment. Almost by default, we are left only with Ayro, but that is no guarantee they will be successful.

When I began following this opportunity in 2021, Ayro was selling the Club Car Current, a rebadged version of the Cenntro metro. Ayro had the exclusive rights to sell the car in the united states. They bought it as a vehicle kit from Cenntro in China and shipped it to the US, where Karma Automotive assembled it in California . Ayro sold all its products through its exclusive dealer Club Car. The Club Car website says it is no longer available .

This entire business model was dropped in 2022.

The Business Transformation

In Sept 2021, Rob Keller resigned as CEO of Ayro, receiving a $650K payoff. Later in the same month, Thomas Wittenschlaeger was appointed as his replacement . Two months later, in the Q3 earnings call, Ayro announced a 44% growth in revenue and a 374% growth in operating expenses. Wittenschlaeger said:

now is the time for us to evaluate our strategy and operations to ensure we are headed down the path within the electric vehicle market that provides the most shareholder value.

In the Earnings call in March 2022 , Thomas began to explain the new strategy. The first step was to focus exclusively on the LSV market and end the development of the 311X, which the previous management had intended to use as the first high-speed Ayro EV.

Thomas discussed plans to develop a US supply chain. He revealed the intention to design a replacement for the Club Car Current, codenamed the Ayro Z. Further plans involved reducing expenses and headcount.

In the May 2022 earnings call , significant progress was announced, and headcount reduced by removing consultant rolls resulting in a 62% decline in net loss. Work had begun altering the Round Rock facility to become the production hub for the Ayro Z.

In the August 2022 call , the ambitious timeline for the Ayro Z was laid out. Thomas said he hoped to unveil a prototype by year-end and be approved for the Federal Government's General Services Administration Schedule ((GSA)). Thomas said:

we also expect to be able to build a platform of fundamentally higher quality that should lead to substantially lower warranty and substantially lower support costs.

The reason for this remark became apparent when they announced that they had a 100% defect rate in the motor controllers and batteries supplied by Cenntro and had to write off $1.32 million due to these defective components. Ayro pushed into a significant loss for the period ended the agreement with Cenntro.

By the November call , the pace of change was becoming apparent. The Ayro Z had its official name, "The Ayro Vanish," and its specification was released. The Vanish will be both a light- and a heavy-duty LSEV; it will have a payload configured as either a flatbed, utility bed, or van box. It is only 58 inches wide, meaning it can fit through standard double doors, and it will be street-legal. The vanish platform will allow for golf carts and people-moving applications; however, it will initially target light-duty utility and last-mile delivery markets. In an answer to analyst questions, he gave the Vanish a price tag of $24,000 that makes it very competitive with the Club Car products discussed earlier and this price includes the Li-Ion battery.

The sales channel strategy took on some color with the announcement that Gallery Carts and Element would become distributors. The supply chain was in place, and the build-out of the manufacturing facility was on schedule. First shipments to customers are expected late in the first quarter of 2023.

The Flawless Balance Sheet

Ayro has Zero debt. In Sep 2022, the quarterly cash burn was $5.7 million, implying a cash runway approaching 1.8 years.

Conclusion

The Ayro business transition is almost complete; before the end of the next quarter, they will be manufacturing and selling an American designed and Made LSEV with 85% of components sourced in the US. They have created a premium product that will arrive as a platform to address each niche of the low-speed electric vehicle industry. They will have an excellent channel strategy and limited competition in a growing market.

The product will have a superior battery and will be price competitive with the main competition.

Ayro has the money on hand to make this all work. The new management has proven it can make a decisive change and move quickly to get a product to market.

If the Vanish sells, we can expect to see Ayro shares surge higher, and if they remain on target, we are only three months away from finding out if it sells.

I am already long Ayro and will add to the position if and when we get more positive news, the biggest of which will be confirmed sales.

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