Kandi Technologies Group, Inc. (KNDI) Q4 2015 Earnings Report, Transcript and Summary

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

Thank you, operator. Hello everyone and welcome to Kandi Technologies Group’s fourth quarter and full year 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 December 31, 2015 and the other documents filed with the U.S. Securities and Exchange Commission. Kandi does not assume any obligation to update any forward-looking statements 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's Founder, Chairman and CEO, Mr. Hu Xiaoming.

[Foreign Language] Good morning to those in the U.S. and good evening to those participants in Asia. Thank you for joining our fourth quarter and full year 2015 earnings conference call. Today, we'll discuss our financial results, recent developments and conclude with our outlook for the first quarter and full year 2016. [Foreign Language] In the fourth quarter we achieved another sales record for EV parts and EV products. Our Q4 EV parts sales increased 51.6% year-over-year. Meanwhile the JV company made significant progress by selling 5,626 EV products through the distribution channel under its direct sales program which is an increase of 87.4% compared with 3,004 EV products sold through the program during the third quarter. Together with 6,474 EV products sold to the Micro Public Transportation program, a total of 12,100 EV products was sold during the fourth quarter. For the full year 2015, a total of 24,220 EV products was sold, a 121.5% increase compared with 2014, including 14,947 EVs sold to the MPT program and 9,273 EVs sold through the direct distribution channel. As the JV company becomes the top seller for pure EV products in China, we are proud of our standing performance in 2015. [Foreign Language] K17 was named China 2015 Pure Electric Passenger Vehicle of the year at the 6th Global New Energy Vehicle Conference which is first stages recognition of Kandi's EV product and technology. In 2015 K17 was sold for 1,945 units. We are very confident in the continuation of this strong sales performance in 2016 for K17. [Foreign language] Currently China's government is conducting a industry wide investigation concerning the new energy vehicle subsidy. We welcome the investigation and attention from the government which we believe will help the healthy development of the EV industry, while benefiting scaled EV manufacturers like Kandi in the long run. Meanwhile China's central government has extended its continued support and confidence in developing the New Energy Vehicle or NEV industry by enacting additional policies including reducing traffic controls and purchase quotas on NEVs, encouraging government purchases and promoting EV car-share programs. We are confident that through the rapid expansion of our Micro Public Transportation program and the strong performance of the direct sales program through the distribution channel, both of which are our unique growth engines, Kandi will continue to lead the growth of China's EV industry in 2016 and beyond. [Foreign language] Starting from January 1, 2016 one criteria for NEV subsidy is that a higher speed must meet 100 kilometers per hour, and the Ministry of Industry and Information Technology of China or the MIIT announced new work of qualified EV models to receive the national subsidy. However the national tax payroll doesn't release the list of purchase tax exemption accordingly. As such tax for EV manufacturers including our JV company have been significantly delayed in the first quarter of 2016. That being said we believe this issue is temporary and will be resolved soon and it will not impact the JV company sales for the whole year. We expect the JV company to achieve 35,000 or more in EV product sales in 2016, which represents at least a 44.5% year-over-year growth from 2015. [Foreign language] In 2015, we continued our devotion in new technology development for EV products such as dual mode driving technology, speed upgrade driving range enhancement and cloud sharing technology on driving habit data. However, in 2016, I also point out the research topics to apply wireless charging technology on electric vehicle. We have teamed up with research experts from Tsinghua University and Zhejiang University and have made encouraging progress on this project. We believe this technology may contribute to a revolution in the future to development of the electric vehicles. We will continue to invest in research and development throughout 2016, which will enhance our industry leadership position into EV technology. [Foreign language] 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. Now I would like to provide a brief overview of our financial results for the fourth quarter and the full year 2015. Please note that all numbers I will discuss today are in U.S. dollars unless otherwise noted. First, let me walk you through fourth quarter financial results. Total net revenues for the fourth quarter were $58.8 million an increase of $11.2 million from $52.9 million for the same quarter of last year. The increase in revenues was mainly due to increase in EV parts sales with battery sales accounting for the majority of the EV parts sales. EV parts sales were approximately $57.5 million for the fourth quarter of 2015, or 97.7% of our total net revenues, an increase of $19.6 million or 51.6% compared with 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 $58.4 million during the fourth quarter, an increase of 7% from $47.1 million in the same quarter of 2014. This increase was mainly due to the increase in corresponding sales. Gross profit for the fourth quarter was $80.4 million, an increase of 45.2% from $5.8 million for the same quarter of last year. Gross margin increased to 14.4% in the fourth quarter, from 11% in the same period of last year. Margin improvement was mainly due to the effective cost control and the scalable product for EV products. Total operating expenses in the fourth quarter were $13.9 million compared with $2.8 million in the same quarter of 2015. The increase in total operating expenses was due to $7.8 million increase in the stock compensation expenses and a $1.3 million increase in the research and development expenses. Net income was $0.8 million in the fourth quarter, compared with $1.7 million in the same quarter of last year. The net income decrease was heavily impacted by higher stock compensation expenses under the change of the fair value of financial derivatives, which together were $10.8 million more in the fourth quarter of 2015. Now, in the fourth quarter of 2015 non-GAAP net income in the fourth quarter was $13.9 million, a 250.9% increase from $4 million in the same quarter of 2014. The increase was mainly due to the revenue gross margin improvement and increase in net income contribution from the JV company. Now let me talk about our full year 2015 financial results. Total net revenues in 2015 with $201.1 million, an increase of 18.1%, from $170.2 million in 2014. The increase in revenue was mainly due to increase in the EV parts sales during 2015 with the battery sales accounting for the majority of the EV parts sales. EV parts sales were about $196.1 million in 2015 or 97.5% of total net revenues, an increase of $79.6 million or 68.4% compared with 2014. For the similar year and described previously, we no longer report any EV product sales. Our cost of goods sold in 2015 was $172.6 million, an increase of 17.6 % from $146.8 million in 2014. This increase was mainly due to increase in the related sales. Gross profit in 2015 was $28.4 million, an increase of 21.4% from $23.4 million in 2014. Gross margin in 2015 increased to 14.1% from 13.7% in 2015. Margin improvement was mainly due to the effective cost control and the scaled production for EV parts. Total operating expenses in 2015 was $32.4 million, an increase of $14.2 million from $18.2 million during last year. Total operating expenses recorded $22.4 million in the expenses for common stock awards under stock option for employees compared with $18.5 million in 2014. Excluding stock awards cost or operating expenses in 2015 were $10 million compared with $9.7 million in 2014, which is only a 3.1% increase. Net income in 2015 was $14.7 million compared with $12.3 million in 2014. The increase in net income was mainly due to revenue growth and margin improvement, increased net income contribution from the JV company, and the gain from the financial derivatives, offset by the increase from stock compensation expense. Non-GAAP net income in 2015 was $28.5 million, a 100.9% increase from $14.2 million in 2014. The increase in non-GAAP net income was mainly due to the revenue growth and margin improvement, and increased net income contribution from the JV company. Let me touch on the JV financials now. For the full year 2015, the JV company's net sales were $362.7 million, gross profit was $59.6 million and net profit was $23.3 million. Gross margin in 2015 was 19.46% compared with 19.4% in 2014. The margin decrease in 2015 was mainly due to product price decline and the lower selling price to a strategic partner during the year. We accounted for our investments in the JV company under the equity method of accounting, as we held a 50% ownership interest in the JV company. As a result, we've recorded 50% of the JV company's profit for $11.7 million for the full year 2015. After eliminating intra-entity profits and losses, our share of the after tax profit of the JV company was $11.8 million for the full year of 2015. Next, I'll review the company's cash flow. In 2015, cash used in operating activities was $3.1 million compared with cash used by operating activities a line of $7.5 million in 2014. The major operating activities that provided cash for 2015 were net income of $14.7 million and an increase in accounts receivable for $31.8 million. The major operating activities that used the cash in 2015 were an increase in accounts receivable of $28.5 million from the JV company and $42.2 million from the service company. Cash used by investing activities in 2015 was $5.9 million as a result of the issuance of notes receivable of $131.9 million. The repayment of notes receivable of $127.2 million, the long term investment of $1.5 million into the service company and $1.7 million for the short term investment. Cash used by financing activities in 2015 was $2.6 million as a result of an increase in distributing cash of $4 million. Finally let's take a look at our guidance. For the first quarter of 2016 Kandi expects net revenues to be in the range of $46 million to $48 million with a gross margin in the range of 13.25% to 14.25%. For the full year 2016 Kandi expects the net revenue to be in the range of $270 million to $300 million. The company also expects the JV company to deliver a total of 35,000 or more EV products in the year of 2016. This outlook reflects Kandi's current view which is subject to change. This concludes my prepared remarks for the fourth quarter and full year 2015. Operator, now the management team is ready to take some questions please.

Thank you, at this time we'll be conducting a question and answer session. [Operator Instructions] Thank you, our first question comes from the line of Mark Kano with TANT. Please proceed with your question.

Hello and good evening everybody. On March 8 -- first congratulation on this terrific quarter to Kandi management and the whole time, it's been astonishing how you're working. On March 8 one of China's largest auto maker state owned BAIC announced that it was planning to bring RMB3 billion on Shanghai's public exchange IPO for its EV subsidiary. Media reported they will be offering around 25% stake on to the public which if successful would create an immediate 1.8 billion market cap on a company that is -- that has produced less than half the number of total EVs since 2013 that Kandi JV has. Since Kandi has already given notice of its intention to bring the JV public, through its own IPO with this recent 2015 annual financial filing it would appear that the two year audit requirement for the JV Shanghai SV IPO has been met. Now my question is while it is well known that mainline IPOs take a considerable time to filter through in the registration process. Do you expect recently announced fast track program for IPOs could still allow an IPO this year? Also for the SEC filing it appears that ZZY may also be preparing an IPO, any comment on this?

[Foreign language] First of all thank you for your question. In fact the Chinese Asia market has not been transformed into our registration system yet and there is no detailed timeframe for the process. At this stage we are not sure whether the JV company can complete the proper listing this year. But the current focus of the JV company is stated to achieve growing production in itself this year. With regard to ZZY as far as I know they are in the process of a IPO. We wish them a successful listing so that ZZY have a stronger capital capabilities to implement the MTT program.

Well okay thanks a lot. And again great results and just go on this way, it would be a pleasure. Thank you.

Thank you. Our next question comes from the line of Frank Laderman, a private investor. Please proceed with your question.

I have two major questions regarding the new K17 Cyclone and K12 Urban Beauty. First of all congratulations on having a new high tech CNG K17 Cyclone receiving the 2015 award for the new player Green Car of the Year. But I am sure was it made your frustration, the government to certainly raise the top speed requirement for subsidies from 80 kilometers per hour to 100 kilometers per hour in 2016 and forward. So my first question is the K17 top speed has been 86 kilometers per hour, is this a relatively easy upgrade of the motor batteries and controller or due to space consideration require a more expensive design? How long do you expect it will take for the upgrade to begin as we make the roll out of the speed version to start? And lastly can you give us your expectation of K17 sales to this year?

[Foreign language] Of course, the upgrade requires more advanced technology and more investment which isn't very easy but we have completed the speed upgrade for K17 in 2015 and we already received approval from MIIT by which you can find our car model in such way. We expect to sell approximately 20,000 K17s in 2016.

Well, thank you and the second part of my question, while the company has not yet announced the official opening of its new 100,000 capacity easy assembly facility in [indiscernible], the China media has had several articles with pictures and videos of this new robotic facility and test production for the new K12 Urban Duty. While the full specs have not been released on the K12 due to its small size and planned urban use, I've got to make the assumption that it was not originally designed for the new requirements of 100 kilometer per hour top speed. If this assumption is true as this is the case of the K17, how long do you expect it to be before it will be ready for full production and sales?

[Foreign Language] The model K12 was originally developed based on the speed requirement of exceeding 100 kilometers per hour and this car has already received approval from MIIT and this car will be ready for sales starting in the second quarter.

Okay. Thank you very much and congratulations on an excellent year.

Thank you. [Operator Instructions] Our next question comes from the line of Tony Gibbons, private investor. Please proceed with you question.

Good morning and my question is as follows. Last year it was announced by the national government that a new round of limited EV only licenses would be awarded to qualified people to make and sell EVs directly. At the last conference call it was reported that Kandi had applied for one of these licenses. Can you give us an update on what Kandi's thoughts are on getting this new license.

[Foreign language] On the application is in approval process, we're having [indiscernible], we will apprise the market when there's any progress. But know also that so far there hasn't been any new manufacturers receiving the license. So it's hard to say but we will apprise the market as soon as we will have any progress being made.

Okay. Thank you very much.

Thank you, our next question comes from the line of Harold Gapry, private investor. Please proceed with your question.

Hello, currently the company and the JV have three assembly production facilities each with a 100,000 EV capacity. Recently it was announced that a fourth similar sized facility in Haiku has broken ground with completion expected next year. Can you tell us, the company view as to how long this 400,000 capacity should be sufficient before further capacity expansion will be needed? Thank you.

[Foreign language] It depends on the market growth. We believe once that construction of the Haiku facility is completed our total capacity can satisfy the market demand through 2020 and there is also two main reasons for us to be prepared. One is that for the future sales in EV we expect that there will be enormous growth in the EV products that will have both prepared for the sales. The second reason is [indiscernible] is probably the first product that will be [banned], the non EV vehicle so we believe there will be a potential for us to have the facility in a location.

Thank you.

Thank you. Our next question comes from Walter Hill, Carty and Company. Please proceed with your question.

Last August, federal subsidy check was received by the JV for approximately $60 million for about 6,000 EV sold in the first half of 2015, which probably include the small advance. I assume the next check for the EV sold in the second half for 2015 maybe some additional small advance. It appears the JV sold triple the amount of EVs in the second half over the first. Could the subsidy check for the second half be as much as $150 million and when would you expect that this would be paid? A - Unidentified Company Representative [Foreign language] The subsidy payment we received in August last year was the payment in agreement. And the rest of the subsidy for 2015 will be paid after the government when it shifts the profits of the diversification and allocation. The payment is -- schedule is depending on the process on time. Typically this should around the March or April but due to the reclassification the government is conducting regarding to the improper behavior by some EV manufacturers. So we think it going to cause some delay. But we still anticipate the payment to be delivered by the end of the first half this year.

But, do they think that can be as much as $150 million?

[Foreign language] So the point is to paying advance of RMB360 -- RMB360 million and per vehicle the subsidy payment is RMB45,000. It should be around that number.

Thank you.

Thank you. [Operator Instruction] Our next question comes from the line of Ted Schwartz with TAS Associates. Please proceed with your question.

My quick question is a year ago it was mentioned on a conference call that Kandi was working with Tianning Power to co-develop a new generation battery, can you tell us the starters -- the status of the new battery?

[Foreign Language] What Kandi and Tianning Power have been co-developing is the primary lithium battery which has already being utilized in the electric vehicles. This new generation battery will have advancing the speed, driving range, powertrain for our electric vehicle mode and out of the 20,000 EVs last year we have sold, approximately or half of those are using this new generation battery.

Very good, thank you very much.

Thank you. Our next question comes from the line of Arthur Porcari with Corporate Strategies Inc. Please proceed with your question.

Thank you. Great job. Particularly, sincerely given the battery unit sales and guidance both quarterly and for the year. I've got a couple of questions. In 2015, on Q1 EV sales in China started very slow with some 7,600 EV to include hybrids sold from all manufactures. While Kandi sold only 200 in these two months, it ended the first quarter with 20% share, I think with 1,600 EV. For full year 2015, all China EV sales grew to number one in the world with some 250,000 sold units including the hybrid with Kandi taking the top spot in pure EV with the reported 24,000 and change we've reported. And number two only to be with BYD which was mainly hybrid, this is an amazing performance by the JV for a two year startup, particularly considering all the rest of the manufacturers or all line auto makers. From reports out of China though total EV sales in January and February '16 were down over 75% from December. With effectively no production report about the China media for Kandi or other micro, mini EV makers due to that, I assume upgrading to the 100 kilometers to get the new subsidies. So my question, industry overall, is this industry wide slowdown start at the year pattern for two years in a row to be expected in future here? Additionally has the JV now completed all upgrades necessary on all the current models and of all the cities that Kandi is currently operating and put the new subsidy programs in place. I'll repeat that if I need to.

[Foreign Language] This pattern will most likely be expected in future years because there are special situations in the first quarter in China due to our Lunar New Year. But the weakness in January and February of this year are mainly related to the newer of qualified EV models issued by the Ministry of Industry and Information Technology of China on the first day of this year. Other EV models need to meet the required top speed of 100 kilometers per hour in order to receive the national subsidy, this new list overrules the right to receive the national subsidy for all the EV models that were included in the previously announced list. Meanwhile our updated list of qualified EV models to receive purchase tax exemption in 2016 is still forthcoming from the state and institutional taxation. That's why the sales for EV manufacturers including our JV company have been significantly delayed in the first quarter of 2016. Additionally again China's Lunar New Year is in the first quarter and will typically impact at least a two week long period. The first quarter is also the planning period when the government and related departments work on the EV development plan and details for this year. As a result EV sales in the first half are usually slower than the second half of the year when the execution of the plans is usually pushed harder.

Okay. Thank you. Just another couple of quickies here. I just happened to hear you say you expected to do 20,000 K17s in 2016 but you have only given guidance of well 35,000 or more for the full year. Will the K17 become an integral part of the MPT program or do you expect the slowdown in overall MPT expansion? And what is the sales price for the new K17?

[Foreign language] The K17 is the new car with more advanced technology and K12 also is the new car that we are going to launch. So these two cars going to be the main product we are going to marketing for. As a result, K10 and K11 will be less -- will be increasingly less compared to K17 and K12. And in terms of the price K17 will be approximately RMB10,000 more compared to K11 and K12 will be just above a couple thousand RMB more compared to K10.

Okay, good. So effectively then that 35,000 that is estimated for the year, revenue wise will be almost the equivalent of 50,000 or 60,000 of the prices what you are getting from the K10 and K11, I would then assume. Is that correct?

50,000?

Let me try that one more time. If you are getting 10,000 more for the K17, then that’s almost equivalent to 50% of what we were getting for a K10 or K11. So the equivalent of 35,000 assuming that the low end of the guidance, say 35,000 would still probably represent a doubling of revenues for the JV. Is that correct? That’s compared to 24,000 cars last year.

24,000. Are you asking since the selling price of K17 is 10,000 more than K11?

Right.

So for the 35,000 EV that forecasting 2015 that will be?

Hypothetically if you are getting 20,000 for, let's say a K10 or a K11 and now you are going to get 30,000 for a K17 and that’s going to be the main stay for the future of the company here for this year. Since the number of cars have increased from 24,000 to at least 35,000 it's in a much higher price. So therefore what I am asking is, is it fair to assume the JV's numbers should double on a revenue basis for the year?

Okay, okay.

I think that’s the basic math, anyway.

[Foreign Language] Okay. Mr. Hu is saying that the total won't be double of last year's revenue, so that to be very conservatively saying, it will be 50% more in the dollar amount.

Okay. Thanks very much and again great year and looking forward to even a greater year this year. Thank you.

Thank you. Our next question is comes from the line of Carl Sherr, a private investor. Please proceed with your question.

Good day and congratulations first of all for an outstanding performance, executing and surpassing your business plan. My question is adding on to the recent question of Mark Kano in your recent interview you mentioned that Mr. Hu and Mr. Shufu has bought 13% of the shares of ZZY each which were valued at $100 million each thus giving ZZY an approximate evaluation of about $1 billion. As Kandi's 9% interest in ZZY that should be valued at about $90 million, how's this accounted for?

[Foreign Language] Carl, are you asking 13% equals $100 million, right?

Yes, that's what I read in the interview.

[Foreign Language] And that gives round a $1 billion valuation of that total company correct?

Yes, exactly.

Mr. Hu is saying that calculation is not correct. [Foreign Language] Due to the fact that ZZY is still in the planning phase of doing an IPO, so I cannot comment on the valuation, how it's being calculated. But what I can disclose is , I personally own 13% and the company, Kandi owns 9.5%, so as for now I cannot comment on others and we have to wait until the ZZY to become listed to have more information on the valuation.

Okay, thank you. Could I add on another question?

Sure.

Mr. Hu mentioned earlier that your actively looking for solutions for wireless charging and I remember that he addressed it in his keynote speech which was the opening address at the recent Electric Vehicle Conference in China. How far along is this and what's -- do you have a projection into the future when this technology will be ready to be implemented?

What kind of technology in Kandi or?

The wireless charging for batteries of electric vehicles.

[Foreign language] During my speech what I really stated is actually a friendly reminder to the government and industry experts that there might be a potential risk in that big parking garage or parking lot that if only electric vehicle parking then there would chance to get on fire then it will cause a big disaster there. But this is just my reminder to the industry. It's not really a difficult technology that right now we are going through with the electric vehicle industry. But I believe that if this being brought up and the attention from the government in the industry this will be -- the risk will be avoided in the future.

Excellent. And do you envision that wireless charging of better SVI induction feels is the approach to go for this solution?

[Foreign language] I believe we'll be much, much better and efficient.

Thank you so much.

Thank you, ladies and gentlemen thank you for your questions, this does mark the end of our time allowed for questions. I'll turn the floor back to management for any final concluding remarks.

[Foreign language] Now I'd like to thank you for all your time to participate and especially those who asked questions. I have tried my best to answer all your questions, but if there is anything that I haven't answered or not accurate, I’ll welcome you to contact us in the future. And thank you ladies and gentlemen for attending our 2015 full year earnings call. In closing allow me to represent the Board of Directors and the management team of Kandi Technologies Group to reaffirm our commitment. 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 in Kandi in 2015. We look forward to talking with you next quarter. If you have any additional questions or any concerns, please don’t hesitate to contact our Investor Relations department. Good bye.

Thank you, this concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.