Kandi Technologies Group, Inc. (KNDI) Q3 2015 Earnings Report, Transcript and Summary

Greetings and welcome to the Kandi Technologies Third Quarter 2015 Financial Results Conference Call. At this time all participants are in a listen only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] I will now turn the conference over to Ms. Kewa Luo, Investor Relations for Kandi. Thank you Ms. Luo. You may begin.

Thank you, operator. Hello everyone and welcome to Kandi Technologies Group’s Third Quarter 2015 earnings conference call. The company distributed its earnings press release earlier today and you can find a copy on Kandi’s website at www.kandivehicle.com. With us today are Kandi’s Founder, Chairman and Chief Executive Officer Mr. Hu Xiaoming; and Chief Financial Officer Mr. Henry Wang, both will deliver prepared remarks followed by a question-and-answer session. Before we get started, I’m going to review the Safe Harbor Statement regarding today’s conference call. Please note that the discussions today 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 results may differ materially from the views expressed today. Further information regarding these and other risks and uncertainties are included in the company’s annual report on Form 10-K for the fiscal year ended 31st December 2014 and the other documents filed with the U.S. Securities and Exchange Commission. Kandi does not assume any obligation to update any forward-looking statement except as required under applicable law. As a reminder, this conference call is being recorded. In addition, an audio webcast of this conference will be available on Kandi’s Investor Relations website. I will now turn the call over to Kandi founder, Chairman and CEO Mr. Hu Xiaoming.

Ladies and gentlemen good morning to those in the U.S. and good evening to those participants in Asia. Thank you for joining our third quarter 2015 earnings conference call. Today we will discuss our financial results, recent developments and conclude with our outlook for the fourth quarter of 2015. In the third quarter, we achieved a sales record for EV parts and EV products. Our EV parts sales increased 35.7% year over year while at the same time we made significant progress by selling 3004 EV products through the distribution channel under our direct sales program, increased 367.2% compared to 643 EV of the second quarter of 2015. Together with 3000 EV products sold to the Micro Public Transportation program, we sold a total of 6004 EV products during the third quarter. In September we even became the top seller of EV products in China. In our previous earnings call, I mentioned that our new model K17, Kandi Cyclone, received regulatory approval from the Ministry of Industry and Information Technology, MIIT. In the third quarter, we obtained the approval for a vehicle purchase tax exemption for K17. We have successfully launched the promotion for the model both in Beijing and Shanghai. And the initial market response has been extremely positive. In addition, I would like to share more about the recent policy changes in China for the new energy vehicle, NEV industry. In summary, it is very encouraging during the third quarter the government released a number of requirements to support the development of China’s EV industry, including the moving traffic controls and purchase quotas pure electric vehicles, encouraging government purchases, and promoting EV car-share programs. Meanwhile the strategic advisory committee on the construction of the national manufacturing power has recently released a 10-year roadmap for the NEV development in China with the plan to promote NEV to reach 5% of the total RO [ph] market in China by the year of 2020 and 20% by the year of 2015. With this new support and policies from the central government, we see strong potential for the business. We are extremely confident in our ability to continue our rapid growth and expansion, improve profitability while achieving further success on both our Micro Public Transportation program and direct sales program through the distribution channel which are the two unique engines for driving our EV product sales. We remain highly confident in achieving the JV company’s 2015 sales goal for EV products given all these policies mentioned above which will be between 20,000 to 22,000 units. Now I would like to turn the call to our chief financial officer Mr. Henry Wang to give you more details on our financial highlights.

Thank you, Mr. Hu and hello to everyone on the call. I would now like to provide a brief overview of our financial results for the third quarter of 2015. Please note that all numbers I will discuss today are in U.S. dollars unless otherwise noted. First, let me talk about the company’s revenues. Total net revenues for the third quarter of 2015 were $50.2 million, an increase of 14.3% compared with $44.2 million for the third quarter of 2014. The increase in revenue was mainly due to the increase in EV parts sales during the quarter with the battery sales accounting for the majority of the EV parts sales. The EV parts sales were approximately $49 million, or 96.9% our total net revenues, an increase of $29 million or 35.7% compared to the same period of last quarter. Please note that under the JV agreement, our EV products manufacturing business was quarterly transferred to the JV company which was completed at the end of 2014. Kandi is now primarily responsible for supplying the JV company with the EV parts while the JV company is primarily responsible for the production of EV products. As such we no longer report any EV product sales. Our cost of goods sold was $43.4 million during the third quarter of 2015, an increase of 12.2% compared with $38.7 million in the third quarter of last year. This increase was mainly due to the increase in corresponding sales. Gross profit for the third quarter of 2015 was $7.1 million, an increase of 29.2% compared with $5.5 million for the same period last year. The overall margin increased from 12.5% in the third quarter of 2014 to 14.1% in the same quarter of 2015. Margin improvement was mainly due to the effective cost control and the scaled production for EV parts. General and administrative expenses in the third quarter of 2015 were $80.6 million, an increase of 60.5 million compared with $2.1 million for the same quarter of last year. General and administrative expenses included $7 million in expenses from common stock awards and stock option for employees compared with 2 million for the same period of 2014. Excluding stock award costs, our net general and administrative expense for the third quarter of 2015 were $1.6 million, an increase of $1.5 million from $0.1 million for the same quarter of 2014. The increase was primarily due to the $0.5 million increase in legal expenses in the third quarter of 2015 and also the expense adjustment of $1 million in the third quarter of last year. Now I would like to discuss with JV’s financials. For the third quarter of 2015, the JV company’s net sales were $98.4 million, gross profit was $13.3 million and the net profit was $1.6 million. During the third quarter of 2015, a total of 6,004 units of EV products were sold at JV company, an increase of 208% compared with 1,950 units sold in the same period of 2014. We accounted for our investments in the JV company under the equity method of accounting as we have a 50% ownership interest in the JV company. As a result, we recorded 50% of the JV company’s profit or $0.8 million for the third quarter of 2015. After eliminating intra-entity profits and the losses, our share of the after tax profit of the JV company was $1.2 million for the third quarter of 2015, a decrease of $0.8 million compared with the same period of 2014. The decrease in the JV company’s profits were primarily due to, first, significant interest expenses incurred for the increase bank loan for operating needs; second, the increased operating expenses incurred compared with the same period last year where you will see in JV company’s future business growth, and number three, the lower production margin due to the lower selling price to a strategic client in the third quarter of 2015. Let me finish with the discussion of the company’s net income. Kandi’s GAAP net income was $2.3 million for the third quarter of 2015, compared with the net income of 13.5 million for the third quarter of 2014. The decline in net income was primarily attributable to, first, the decrease of the fair value of financial derivatives by $7.1 million to $3 million for the third quarter of 2015 compared with $10.1 million for the same period of 2014. Second, the $5 million increase in stock award expenses to $7 million for the third quarter of 2015 compared with $2 million for the third quarter of 2014. Our non-GAAP net income was $6.3 million for the third quarter of 2015 as compared to a non-GAAP net income of $5.4 million for the same period of 2014, an increase of $0.9 million. This increase in non-GAAP net income was primarily attributable to the mixture for sales growth and margin improvement. Next, I will review the company’s cash flow. For the third quarter, cash generated in operating activities was $11.6 million compared with the cash used by operating activities of $9.2 million for the same period of last year. The major operating activities that provided cash for this quarter were net income of $2.3 million and a decrease in accounts receivable of $32.3 million from the JV company. The major operating activities that used cash for this quarter were an increase in accounts receivables of $5.2 million and also an increase in inventory of $5.2 million and a decrease in accounts payable of $10 million. Cash used by investing activities for this quarter of 2015 was $10.6 million. As a result, our issuance of notes receivables of $66.5 million, the repayment of the notes receivable of $57.6 million and also the long-term investment of $1.5 million into the service company. Cash provided by financing activities for the third quarter of 2015 was $18.2 million, as a result of proceeds from the short term loans of $11.5 million and a decrease of the distributable cash of 6.7 million. Cash used in financing activities for the third quarter of 2015 was $18.1 million, as a result of the repayments of the short term bank loan of $11.5 million and the repayments of the notes payable of $60.6 million. Finally, let’s take a look at our guidance. For the fourth quarter of 2015, Kandi expects net revenues to be in the range of $54 million to $56 million with a gross margin in the range of 13.5% to 14.5%. The company also expects the JV Company to deliver 8,000 to 10,000 EV products in the fourth quarter and a total of 20,000 to 22,000 EV products in the full year of 2015. This outlook reflects Kandi’s current view which is subject to change. This concludes our prepared remarks for the third quarter of 2015. Operator, now the company management are ready to take the questions please.

[Operator Instructions] The first question is from Peter Dalrymple of LPD Investments.

Is the company still confident that they’re going to reach their sales target in 2020 and reach 400,000 units?

Peter, please repeat one more time please?

Yes. Is the company still confident they’re going to reach their 2020 goal of 400,000 units? 400,000 EV units?

[Interpreted] I’d like to close by what I mentioned in the previous conference call, where I said the Chinese government goal of EVs by 2020 the number of the vehicle is representing a cumulative of vehicles throughout the years to 2020, is the total sales of 5 million, and Kandi is projecting the total unit sales of 400,000 also during the same time period throughout 2020. And for that number we have mentioned that we are very confident to achieve 400,000 through 2020.

The next question is from Carl Sherr, a private investor.

And I’d like to ask the re-branding of the joint venture, to produce EVs through the Global Hawk brand would imply that all joint venture EVs will be sold throughout the world to give exposure [ph] both in China and internationally?

[Interpreted] First of all, the rebranding is that strong indication of our process and similar cooperation between Kandi and Geely. Secondly, because Global Hawk, this trademark and Geely brand are very well known and highly recognized among Chinese consumers. So having more brands will help the EV’s marketing and sales going forward. And so for the new trademark we are going to be using for our all future EV’s batches we are going to manufacture.

I have one more question. Kandi’s share price performance has not been in keeping with the phenomenal success of the company in reality. Are you planning a share buyback program or even going private again?

[Interpreted] First of all, the company has never considered about going private, and in regarding to your buyback shares, the board hasn’t really discussed this option at this moment. And for the recent price that is not reflecting the company’s value. I believe that this is temporary and while some markets very truly understand the business model, the price will be adjusting and reflecting the value of inventory.

I would have one more, typically this question being that Kandi has been reported on several national newspapers to be in collaboration with the Technical University of Zürich in re-launching the iconic BMW Isetta brand, also known as the bubble car in the US. Are you aware of that?

[Interpreted] We are not aware of this news if we have any cooperation with any organization or any company who will be releasing the news throughout news channel and we are not responsible for any third party publication.

[Operator Instructions] The next question is from Arthur Porcari of Corporate Strategies.

Actually I have two follow ups, please. My questions actually involve strategic partners. On the last conference call reference was likely made to Kandi strategic partnership for production. It sounded that announcement, the China media mentioned that the partnership was in addition to working together on wireless charging, also going to be working on developing an autonomous EV for the future. Can you give us an update on either of these two areas, wireless and/or autonomous or self-driving cars?

[Interpreted] Both wireless charging and autonomous EV technologies are still in progress of R&D and this is going to take some time in my opinion. So please stay tuned for our upcoming announcement that company’s going to release.

My follow up – first follow up is, how is the agreement with Alibaba incorporating their Yun OS system as Kandi’s branded EV operating system working out? Do you envision Alibaba working with Kandi or the JV in other areas in the near future?

[Interpreted] In regarding to the incorporation with Alibaba as [indiscernible] customers’ preference, for example, all these are behaviour builder, are being stored in the Yun OS system but right now at this moment nothing is finalized. Once we have any firm results, we will be releasing to the market. And going forward I believe there will be a more area that company or JV can together working with Alibaba brand and at this moment we don’t have any more to announce. Please stay tuned for our upcoming news.

Again my apologies for a second one here, but having to do strategic agreement, last June, it was the strategic agreement signed with Forte Fosun, the real estate division of China’s largest private conglomerate Fosun to expand the micro bus throughout China by adding locations on site to their vast portfolio of condominiums and shopping centers nationwide. Though Mr. Hu personally participated in the signing, no news on this was released to shareholders in the United States. However in just two weeks ago, it was announced by the China media the first such location has been opened in Forte Fosun’s Greentown high end township community. With urban real estate availability, one of the major obstacles to micro bus growth, why have we not seen any company announcement on this strategic agreement with Forte Fosun?

Yes, please, please summarize your question.

Okay, let me try one more time. In June it was reported by the China Media we signed a deal with Forte Fosun strategic agreement, the large conglomerate in China, real estate – Forte was going to expand the micro bus throughout China by adding locations on site to most of their condominiums and shopping centers. And then October it was announced that the first such location has now been opened by Forte Fosun’s Greentown high end township community. With real estate being so valuable right now in the urban area, big locations, why haven’t we seen any announcements by the company on this strategic agreement with this major corporation?

[Foreign Language]

Mr. Hu’s answer is he is not aware of any incorporation or intend to cooperation with Fosun. And so going forward if we have any cooperation with any organization we are going to announce the news but if it’s not significant order, that we’re probably not going to announce every deals that we have cooperate with other company.

Well I only asked that question because there were pictures of Mr. Hu at the signing ceremony back in June.

[Foreign Language]

All right. Mr. Hu just corrected, we actually work with Forte which is subsidiary of Fosun. So that’s why he was confused earlier. So we don’t have any cooperation with Fosun but however, we do have some cooperation with Forte, and the cooperation has been going well.

The next question is from Robert Langberg, a private investor.

On the last conference call you reported that we were in nine cities with the MPT car share and then you said that six more was expected to be started by the end of the year. We have not seen any press releases but do you expect that we can meet that goal of reaching 15 cities by the end of this fourth quarter?

[Foreign Language] Yes, we are still very confident that we are going to achieve this goal by the end of Q4. But I’d like to mention that we are going to have some cities with trial launch of our MPT program such as Jinhua and Wuhan [ph], they are going to be – not having a significant EV deliveries, so we are not going to announce every single one. But however right now we are planning on -- launch the MPT program in high core cities and once we have items finalized, we will be announcing this to the market.

The next question is from Ted Schwartz of TAS Associates.

At the last conference call, we were told that you’re going to start a promotion the next day on the K17. It was also reported that sales were expected to begin in late quarters – from Chinese New Year [indiscernible] the promotion was very successful and that numerous media outlets have written favorable reviews of the K17, and we know that a significant number of pre-sale deposits were collected. It doesn’t look like you made any deliveries on the K17 in the third quarter. Could you give us an update on that and an update on the new K30 where it’s been?

[Interpreted] For the K17, this is a pretty new model and we have seen quite strong interest from the consumers. Therefore we want to focus the market in Beijing and Shanghai instead of the entire China. And because Shanghai and Beijing, they have been providing very good support without any restriction on the play or driving, so right now we are applying for the government required EV sales catalog and right now we are in the process of applying that, hopefully by the end of this year we are going to complete all this process. As far as K30, because this is exact cars [ph] so the sales price is kind of high, is around $50,000. So we are not planning on targeting this car into the mass market but however they are going to be at G20 Summit in our home city Hondru [ph] next year and K30 has been chosen to be the official EV during this event. So we are only going to produce limited K30 in the future.

Has there been any update on the subsidies from the city of Hangzhou which seems to be delayed a few times?

[Interpreted] the Hangzhou government local subsidy has been delayed as everyone is aware but we are hoping that by the year end they are going to give us a final answer.

The next question is from Frank Laderman, a private investor.

I have a question involving the national subsidy. How does the national government determine the amount of money to be advance -- for the quarterly advance subsidy payment?

[Interpreted] For the national subsidy payment, in the past usually it’s one to two quarters delay but they will pay you after up to two quarters. But right now they have updated the payment schedule, usually government will prepay in the first quarter of every year so upon the request from the manufacturers that expectations of how many cars you are going to sell, so this year we have received $370 million, so by the year end we are going to tell the government how many more or how many less EV we have sold, then we are going to have a final payment calculation with government to get a final payment.

One quick question follow-up, obviously delayed national subsidies, do you have a figure of how much money is [indiscernible]

[Interpreted] I am sorry I don’t have these figures because right now the question is Hangzhou government hasn’t decided how many they are going to subsidize per vehicle for our MPT program. So till that plan is finalized, then we will find out how much in total that it has occurred, so we are hoping by this year end we are going to have the plan finalized that we will find out the more information. Mr. Frank, Mr. Hu likes to clarify what he just mention regarding to the Hangzhou’s subsidy and this subsidy is paid to the service company ZZY, so for the money that is owned to the ZZY from the government is not going to Kandi directly. So for all the money will be considered as the AR in our financial book, it’s not going to affect our net income, just want to clarify that.

The next question is from Walter Hill of Carty and Company.

Hi, what is the status of a possible IPO, the joint venture that was announced earlier this year? And if there was a IPO, would it be listed on Hong Kong Stock Exchange or Mainland Exchange? And last one here is, would the JV consider inviting a private equity firm to or firms to invest pre-IPO such as the case of Uber China?

[Interpreted] First of all, we have been working on the IPO plans and second of all, as you know the JV company has less than two years historical financial record, and minimum two years financial requirements. So right now we are still pretty early for that. And so we are still integrating all the resources to look for the best options for the company and for now we are probably more leaning towards listing in China but however noting is finalized as of this point. And our ultimate goal is to maximize our shareholder value, so all the options are going to work around that focus to work on and once we have any update we will update the market.

The next question is from Steve Miller, a private investor.

Hi, this question is really to try to get a clarification. In the past SEC financial filings, the JV financials show up in very abbreviated way with minimum footnotes. It’s also noticeable that the JV shows no long term debt yet it appears to own manufacturing facilities outright that lease in US dollars is worth well over 500 million. Can detractors seem to point to kind of liabilities on the quarter two report of over $332 million as evidence that the JV is in poor financial condition? Is it clear to assume that a large portion of the current liabilities is just proxy for long term mortgages on the facilities and well collateralized? If so, what would that percentage be?

[Foreign Language]

Okay, let me take this question and thank you for your questions, Steve. First, actually the JV company debt ratio was almost 63%, as of end of this quarter. I think it wasn’t an average labor in the EV manufacturing industry. Second, in China actually the short term was well come out for long term use. The bank, generally the bank will renew the short term loans, while it isn’t matured in the next year, and in China the government provides the greater support to the EV industry and I am very confident that for the launch in Europe in the next year. The number three, I want to highlight, that is the JV company now is making the money and they also have money in capital expenditure in the year, and it can generate a free cash flow while the subsidy reaches the accounts family. So all in, one word, JV’s financial condition seems stable, that’s our expectation. End of Q&A

Thank you ladies and gentlemen, that is all the time we have for questions. If you have any additional questions, please feel free to contact our investor relations department or the Piacente Group. With that, I’d like to turn the conference back over to management for any additional comments.

Thank you, ladies and gentlemen for attending Kandi’s third quarter earnings call. In closing, allow me to represent the Board of Directors and the management team at Kandi Technologies Group to reaffirm our commitment that we will continue to work diligently to maximize shareholders’ value by focusing on growing our EV business strategically while delivering strong operational results. Thank you very much for your support for Kandi over the years. We look forward to talking with you next quarter. If you have any additional questions, please don’t hesitate to contact our investor relations department. Thank you. Good bye.

Thank you, ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. And thank you for your participation.