Kandi Technologies Group, Inc. (“Kandi”) (NASDAQ: KNDI), the manufacturer and marketer of electric vehicles (“EVs”) and EV parts, is in trouble. On March 13, 2017, the company announced that it would have to restate previously issued financial statements for the years ended December 31, 2015 and 2014 and the Q1, Q2, and Q3 of 2016. This all happened after the CFO resigned suddenly a year before.
What do we think in Insider Financial? We believe that we found an opportunity. Most institutional traders are selling the company right now, as they don’t believe that the company may regain the faith shareholders previously placed in the company. We agree, but we believe that at the current price levels, it does not matter; it is close to liquidation value. It represents an opportunity. Have a look at the chart:
Business, strategy and products
Kandi is manufacturer of vehicles based in Jinhua, China. It focuses on the production of EVs and quads. The company was incorporated in Delaware on March 31, 2004, changed the name of the company from Mountain Resources, Inc. to Kandi Technologies, Corp. in 2017, and on December 21, 2012, it was finally called Kandi Technologies Group, Inc.
The Chinese EV sector could not be anymore sexy at the moment. The Chinese government is helping the development of these technologies in several ways. Look at the new subsides from these authorities that we found hidden in the annual report of the company:
- (1) generous cash subsidies: In 2016, China’s central government subsidized pure electric vehicles by up to RMB 55,000 per unit.
- (2) charging facility construction support: In September 2015, the State Council revealed “2015-20 charging facility development guidance” to help accelerate new energy vehicle development.
- (3) free vehicle licenses in quota control cities
- (4) exemptions from acquisition taxes and excise taxes, which are normally based on engine displacement and price, as well as exemptions from circulation/ownership taxes. Source
The company is developing vehicles to target these new policies, that is small EVs to drive in the city or fuel efficient vehicles:
To cut a long story short, these are only a little part of the law firms that filed a class action against the company:
Why? Mainly because shareholders lost approximately 10.26% on November 14, 2016 when the CFO, Wang Chen, resigned. Additionally, because the company’s share price lost another 7% following a press release, wherein Kandi’s management communicated that some of its previous financial statements will have to be restated.
The law firms all agreed to commence a class action against the firm, alleging that the company failed to disclose that:
“(1) certain areas in Kandi’s previously issued financial statements for the years ended December 31, 2015 and 2014, and the first three quarters for the year ended December 31, 2016 required adjustment;
(2) as a result, Kandi lacked effective controls over financial reporting;
(3) consequently, defendants’ statements about Kandi’s business, operations, and prospects, were materially false and misleading and/or lacked a reasonable basis at all relevant times.” Source
In total, we believe that the company lost much more value than what the law firms are claiming. In our opinion, the market reaction to this announcement is most of the times excessive. We have seen other opportunities such as this one. Check, for example, Marvell Technology Group, Ltd. (MRVL), which was targeted by law firms and its shares were traded at half the amount of cash per share holding in the balance sheet. In less than a year, the share price went from trading at $9 to $16. Something similar could happen here.
The company keeps working
On April 24, 2017, the company announced the receipt of payments from the Chinese Government; in total approximately US$87.6 million for the manufacturing of its EVs. Investors can find more information in this press release. The Chairman and CEO, Mr. Hu Xiaoming, said the following about the news:
“the JV Company was top ranked in EV sales during 2015. Once the third central government subsidy payment for 2015 is received, there will be an annual settlement of all subsidy payments for 2015, and a further central government subsidy payment of RMB (1) 400 million (approximately US$58.1 million) is expected to arrive.” Source
(1) 1RMB = 0.1452 USD
Balance Sheet per share numbers
As said previously, the balance sheet per share numbers shows that the share price is very undervalued. The book value per share is $4.87; using the most recent numbers that may be restated. Hence, the company’s share price is trading at 0.84x its book value per share. Why? The most important part of the balance sheet is the net receivables, which is $218 million divided by 47 million shares for $4.6 per share. This is the money that the company will receive from the Chinese Government. We have seen that the company is receiving that cash. Yes, it comes late, but if finally comes. Hence, we don’t see any problem.
Insiders are buying
Insiders in the company know that the company will be able to restate the financial state, thus they are buying at this moment. Have a look:
|Purchase at $3.64 per share.||Indirect||134,680||Mar 22, 2017||37,000|
|Purchase at $3.70 per share.||Direct||39,471||Mar 22, 2017||10,668|
|Purchase at $3.71 per share.||Indirect||150,255||Mar 21, 2017||40,500|
|Acquisition (Non Open Market) at $0 per share.||Direct||Feb 24, 2017||2,500|
|Purchase at $5.15 per share.||Indirect||293,859||Dec 27, 2016||57,060|
|Purchase at $4.93 per share.||Indirect||176,962||Dec 20, 2016||35,895|
|Purchase at $4.67 per share.||Indirect||131,932||Dec 2, 2016||28,251|
|Purchase at $4.75 per share.||Indirect||161,500||Dec 1, 2016||34,000|
The company had a problem last year, and will have to restate some of its previous financial reports. Fair enough, but, in our opinion, the market reaction was excessive and the amount of shorts in the name is too large (16.32% of the float). Hence, the share price is vastly undervalued. The shares are trading close to liquidation value, and the only ones who could see it are the insiders, who are buying shares.
We believe that the company may restate its financial statements soon. This process may surprise short sellers, who may close their positions fast, creating a squeeze that may correct the share price undervaluation. To sum up, stay alert and follow this stock as news could break anytime soon. We will be updating our subscribers as soon as we know more. For the latest updates on KNDI, sign up below!
Disclosure: We have no position in KNDI and have not been compensated for this article.