DOOO - Kandi Technologies Hoping For Sweeter Results From A Shift In Its EV Focus

2024-01-16 17:23:16 ET

Summary

• After failing to gain any real traction in passenger EVs, Kandi Technologies Group, Inc. has shifted its focus to smaller electric vehicles like golf carts and ATVs.
• Customer reviews seem generally positive and there's room for a low-price option, but the market includes formidable established competitors like BRP, Club Car, Polaris, and Textron.
• Kandi isn't the only EV-only entrant, and the market is likely to attract other all-electric players, as well as other low-cost offerings.
• Kandi has the liquidity to pursue this new strategy, but establishing a critical mass with distribution and dealer support will be critical.
• I can get to a mid-single-digit fair value today, but there's a long road to success here and this company's track record raises questions that, at a minimum, demand thorough due diligence from investors.

It's been quite a while since I've written about Kandi Technologies Group, Inc. ( KNDI ). A decade ago, I didn't think much of the company's prospects for making a splash in the Chinese or U.S. electric vehicle ("EV") markets, despite a much-hyped partnership with Geely Automobile Holdings Limited ( GELYY ). Indeed, the company gained virtually no traction with those EV efforts, as its tiny, underpowered cars and hourly rental models failed to resonate with buyers. With that, the shares are down close to 80% since that last article, while Geely shares are up close to 200% and BYD Company Limited ( BYDDY ) (another well-known Chinese EV player) has seen its shares rise close to 350%.

Kandi has largely tabled its automobile ambitions, pivoting instead to smaller electric vehicles like golf carts, crossover golf carts, ATVs, UTVs, and the like. Although I see this as a more promising opportunity, and indeed I've previously written that I think there is an underrated opportunity in areas like EV scooters and bikes, there's no lack of competition from companies like BRP Inc. ( DOOO ), Club Cart , Honda Motor Co., Ltd. ( HMC ), Polaris Inc. ( PII ), Textron Inc. ( TXT ), and Yamaha Corporation ( YAMCY ). It's incumbent upon management to prove they can build a business here that is based upon more than just offering lower-priced options to customers.

With net cash of around $228M ($166M excluding restricted cash used to secure letters of credit), Kandi certainly has the liquidity to give this a real shot. Still, there's no institutional support here, and the approximately $250M market cap (leading to a minimal enterprise value) tells you a lot about what the Street thinks of the company. There have been issues here in the past with misleading statements from management (including an SEC settlement and fine), and I see Kandi's competitors as formidable players with significantly better R&D, manufacturing, and distribution capabilities. I can appreciate the speculative appeal to some investors, but this isn't a name I'll be seriously considering.

A Major Shift In Strategy After Significant Failures

Kandi introduced its first electric car into the Chinese market in 2008 and subsequently formed a joint venture with Geely in an attempt to gain traction in the low end of the fast-growing Chinese electric car market. Despite trying to find sustainable niches (like focusing on the hourly rental market at one point and pushing its quick-change battery technology), the reality is that the company has never achieved any real presence in the Chinese EV market.

Likewise with the company's ambitions to become a player in the U.S. market. Not only has the company never really made a dent in the market, but the company agreed to a cease-and-desist and $710K civil penalty to the SEC in September 2023 related to misleading statements regarding its U.S. on-highway EVs (namely, overstating its compliance with U.S. safety requirements and never actually selling vehicles to consumers in the U.S.).

All told, Kandi's prior on-highway passenger EV efforts could never reach sustainability, and the company saw revenue slide from a little over $200M in 2015 to under $80M in 2020 before rebounding to almost $120M in 2022.

With the writing on the wall, Kandi exited its loss-making JV with Geely in 2021 and has subsequently shifted its strategy to focus primarily on smaller electric vehicles for the U.S. market, including golf carts, crossover golf carts, ATVs, and UTVs.

New Opportunities, But Formidable Competition

You can actually buy a Kandi 4 electric golf cart at Lowe's Companies, Inc. ( LOW ) today, and the company likewise sells vehicles to Coleman Powersports that are sold under the Coleman brand. The Kandi Cowboy e10K utility vehicle and Lucky T9 ATV are likewise available for sale, though it seems as though relatively few dealers offer these vehicles today.

Electric golf carts are nothing new, and it's a market that is already well in hand for established players like Club Car and Textron's E-Z-GO, but electric off-road vehicles are more of an emerging opportunity. Polaris is already on the market with offerings like the popular (if expensive) Ranger XP Kinetic, and Textron offers its Tracker line, and Eco Charger has garnered good reviews with its Lithium Prestige line.

More competition is coming - Bombardier is looking to introduce models over the next couple of years, and both Honda and Yamaha are looking to introduce electric offerings, albeit with much murkier timelines to market.

Although ATVs, UTVs, and the like aren't major sources of pollution/emissions and are not likely to get a lot of attention from governments, I do see electrification as making some sense here given the usage patterns for these vehicles. Range anxiety isn't as much of an issue, and although battery costs and maintenance/repair are issues today, the longer-term cost competitiveness of electric drivetrains looks fairly attractive.

I've seen a relatively wide spread of third-party estimates for the size of the global ATV/UTV market (around $8B to $9.5B), with the U.S. making up about half of the market, but there seems to be a greater consensus that the market is likely to grow at a mid-to-high single-digit rate over the next decade (around 6% to 7% a year), with electric vehicles outgrowing that rate as they gain share from conventional gasoline powertrain vehicles. Golf carts are another $1.5B or so opportunity on top of that, growing at a slightly slower rate.

There's a solid revenue opportunity here, but I have unanswered questions as to Kandi's ability to achieve a real presence in the market. Looking at the company's current offerings and considering third-party reviews, it seems like the primary selling point for Kandi's offerings is their price.

Most markets can support low-price offerings, and I don't see why golf carts, ATVs, and UTVs would be an exception, but it's tough to build an enduring business as a low-price provider. I see little to prevent another Chinese-based manufacturer from likewise entering the market with a price-focused model, and Kandi will need to actively build its dealer network and/or seek out more opportunities like the Coleman Powersports (putting other companies' badges on their vehicles) to achieve a sustainable critical mass. I'd also note that these products are broadly speaking a luxury/splurge items, and it's tougher to make a go of it as a price-based competitor in markets where customers are more focused on performance (whether that's for work uses or leisure).

The Outlook

Although revenue growth of 8% in the third quarter may not seem all that spectacular, Polaris did report a 4% revenue decline and BRP reported a 9% decline, with both companies noting weakening consumer demand in the face of higher rates and increased economic uncertainty. I'd also note that gross margin improved 11 points to 30% (better than the 25.4% at BRP and 22.6% at Polaris) while operating loss expanded about $1.4M to $3.6M.

With well over $200M in available net cash, I would like to see Kandi invest in marketing and distribution to establish its presence in North America. Building a dealer network takes time (and money), and as I said before, I don't really have an issue with the company seeking more "re-badging" deals to offer its products under other brands that already have established distribution and support in the U.S. Given that even low-cost ATVs and UTVs aren't exactly cheap ($10K and up), knowing that parts and service will be readily available is an important selling point. If Kandi is serious about being a player in this market, they should invest accordingly.

Just a couple of percentage points of global ATV/UTV/golf cart market share can be meaningful to Kandi from a financial perspective, and likewise achieving just a mid-single-digit share in the U.S. market would likely be enough to support a profitable, cash-generating business with staying power.

The question, though, is whether they can achieve this, and the jury is very much out. These are early days, so the lack of meaningful market presence and dealer support isn't disqualifying, but there's a lot of work left to be done if this new model is going to work out and generate gains for shareholders. I can get to a roughly $4 fair value on the basis of double-digit revenue growth and long-term free cash flow margins in the mid-single-digits (not out of line with the industry), but Kandi's ability to execute is very much a real question - in addition to the SEC settlement, there have been pointed questions and accusations about management's accounting and representations to shareholders (accusations the company has denied), and I strongly encourage readers to do their own due diligence.

The Bottom Line

With a relatively new CEO on board, it's fair to ask how much Kandi's past failures reflect on the current business plan and the company's ability to execute. At a minimum, I think this new plan to target the off-highway market is far more realistic and viable than the earlier strategy to become a player in the passenger EV market.

All of that said, this is still a highly speculative idea. Until I see a more established operating track record (and ideally some progress on dealerships/distribution), Kandi Technologies Group, Inc. is not a name I can recommend even though I fully acknowledge that success from here could drive outsized gains.

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