Why Kandi Technologies JV Captured Didi Chuxing, World’s Largest Ride-Hailing Program, Through A Strategic Partnership To Initially Provide Up To 300,000 Government Accredited EVs For Didi’s 31 Million Drivers.
Abstract: On April 11th, China-based, NASDAQ listed Kandi Technologies (KNDI) put out a stunning announcement that its Kandi-Geely Joint Venture executed a contract to form a “Strategic Partnership” with Didi Chuxing, by far the world’s largest Ride Hailing Provider whereby Didi would:
1. “provide existing leasing-related platform resources to the JV Company for the Online Ride-Sharing Service Alliance's 300,000 government-accredited EVs” to be in service by 2024
2. Didi will “showcase” Kandi JV Ride-share eligible EVs to its 31 Million Drivers (customers)
3. Set up an EV leasing partnership for Didi Drivers to have access to Kandi JV cars which are the first to meet the new China nationwide Government accredited Ride-Hailing requirements
4. Kandi JV Alliance will be in charge of supplying Government accredited EV to Didi.
5. Didi will dedicate its resources to include its corporate strategies to further promote the Kandi JV Ride-sharing alliance.
Now I don’t think anyone would argue; if it was Tesla that put out this announcement with their name replacing Kandi, its stock would likely be up 10% on the news. And maybe even KNDI would be up significantly if “minuscule” (see chart below) Uber was in place of Didi in this transaction. However, though only a $270 million market cap on KNDI, which traded as high as $9.21 six weeks ago; on this pre-market announcement on an up day in the market, saw KNDI’s stock down over 3% intraday before closing down $.01 at $5.68 and has since continued down to $5.42 on Tuesdays close. Why? Either ignorance of the magnitude of this deal, or a concerted effort by its trapped 7 million share short holder deflating enthusiasm by attacking the stock on the news; or more likely a combination of both . However, KNDI’s Founder Chairman did take advantage of it the drop by buying 136,000 open market shares at $5.52 ($760,000)bringing his total recent purchases to over 700,000 shares and $3.1 Million. ─Against his $29,000 a year salary, that’s about 110 years’ worth.
I can’t do anything about the short, but let me explain the background and major significance of this deal and its direct positive effect it will have on KNDI, the US traded JV partner.
To put the size of Didi in the proper perspective, check out these two stunning graphs with the information provided by Bloomberg, 2018.
Source: Bloomberg NEF
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On March 25th, KNDI made an announcement that it was restructuring its JV with China Deca-billionaire Li Shufu and his privately held Geely Holdings Company, from its four year 50-50 agreement to a now 78-22. To accomplish this, Li would invest an additional $124 Million into the JV bringing his total cash investment to some $317.6 Million. However, the last $76.9 was paid directly to KNDI for 21.6% of its interest leaving its current total investment reduced to $81 Million for its 22 %. However, the announcement that reported this event also included a covenant allowing KNDI to inflate its position under very favorable terms within the next two years . So, for the time being, KNDI, who already had positive net working capital and a $4.45 Book Value, now has an additional $77 million in the bank. And as evidence for further financial strength, KNDI holds an additional $71 million in an Account Receivable owed it by the JV. Since KNDI was obviously not in any type of hardship financially prior to doing this deal, a logical question would be why did they do it right now when the JV looks like it is getting ready to rocket up?
Several Reasons Li Shufu is now ready to fully support the Kandi Geely JV
Li Shufu, a man who only broke into the Billionaires club in 2016, is now being estimated with a net worth between $14-17 Billion, making him the second wealthiest member of the National People’s Congress (NPC)(China’s Parliament). Li has decided to end his passive investor status in the JV now that it is one of only 17 China EV companies (out of almost 500!) with it’s own Manufacturers License and also is now ready to use his high profile “muscle” in the auto industry world-wide to dramatically accelerate Kandi JV growth. Three recent events already reflect his new invigorated stance behind the JV.
a. Kandi Technologies Announces the Receipt of Extend Supply Chain Finance Program of RMB 1.6 Billion (USD 237.2 Million) Feb. 4, 2019. This is a Jiangsu Province Government guaranteed low-interest supply chain credit facility that started out in May 2017 at only $1.8 million and due to Li’s influence has now been increased to $237 million. A real positive for KNDI as it is the JVs principle parts supplier.
b. Kandi JV Company Signs Strategic Cooperative Agreement with China Resources (Zhejiang) Vehicle and Ship Natural Gas Co., Ltd Mar. 4, 2019. This is an alliance with China Recourses, a State Owned Enterprise ranked #86 in 2017 on the Fortune 500 largest Global Companies. CR will be responsible for funding, infrastructure, and setting up Kandi patented Quick Battery Exchange Stations at all their service locations. From the announcement, “The mission of the Accredited Vehicle Alliance is to provide 300,000 government-accredited vehicles for the ride-hailing service within five years. The JV Company will be the primary vehicle supplier in the Accredited Vehicle Alliance , responsible for delivering pure electric vehicles with quick battery exchange features. Going forward, China Resources Zhejiang will be in charge of investment and operations of Accredited Vehicle Alliance's vehicle battery exchange business .”
c. And of course the subject of this report, Kandi's JV Company Signs Major Customer Cooperative Framework Contract with Didi Chuxing . This deal clearly happened due to Li Shufu’s increase in JV ownership. And of course, it doesn’t hurt that China Resources has already joined with the Kandi JV program. But additionally, it is my belief that “politics” has also come into play because of Li’s high position in the China NPC. Note from this article; “ Geely Chairman Li Shufu suggests purification of car-hailing development space to 13th NPC ”, Gasgoo| March 02, 2018, ─This was published in the China media in March of 2018 at last year’s NPC meetings, where Li pushed through legislation to revamp the whole Ride-hailing registration process and the way the players needed to start doing business. As it turns out, the Government was listening to Li and most of his changes are now being implemented. Without a doubt, these new changes are having a major problematic effect on Didi as China’s largest Ride-hailer, so it should be of no wonder that they now want to get “close” to Li Shufu.
2. KNDI has its own operating business outside of its participation in the JV. In fact, since KNDI has never owned more than 50% of the JV, it has not been able to consolidate any of the JV revenues into its own audited financial statements, only the bottom line profit and loss. In fact, in 2018, were it not for having to take half of the JV’s $35 million loss, KNDI would have had a pretax profit of over $19 million. Instead, it could only report a pre-tax profit of around $2 million.
However, KNDI is the principle OEM battery and auto parts supplier to the JV. If just this one agreement for 300,000 units over five years is achieved, the JV will generate over $7 Billion in sales, and KNDI will likely independently generate over $3 Billion in battery and parts sales from the JV alone.
With the recently announced full government approval of the new Kandi K23’ “ Kandi Pure EV Model K23 Receives MIIT Approvals ” which was specifically built to meet all of the new Ride-hailing requirements, the first few hundred K23’s as part of the 300,000 will begin shipping in April with a fast ramp-up following. Producing the batteries, Management Systems, EV Motors, EV AC and other parts to include some body parts, will require KNDI to have significant up-front liquidity to make and deliver these parts. For this reason alone, KNDI welcomed the cash directly from Geely . Management feels its own cash flow will have grown sufficiently by the end of two years to handle all future requirements. If correct, it will at that time decide whether to exercise its option to exchange KNDI’s own shares at the same registered capital level it sold the JV shares to Geely. However, should they elect to do so, I cannot think of any investor other than Li Shufu that KNDI shareholders would be more welcomed to come aboard by KNDI holders.
One might ask, why would Li Shufu be so accommodating to KNDI and its success ? Exclusive of his 2010 $1.5 Billion paid for Volvo, he has put more direct cash into the KNDI JV than the total of all cash invested in all of the rest of his direct auto company acquisitions and Joint Ventures combined by over $100 million; and as you can see from the table below, even Geely Auto predecessor is included.
Looking at the table, you will note Zhidou is in red and Geely Holdings ownership has declined to around 27%. This is because Zhidou, which also makes small EVs, while starting the same size as Kandi JV, has had several additional rounds of financing that Geely did not participate in, but now looks like it may have to enter court protection as can be seen by this recent article. Over the years as a JV, one may have noticed that Zhidou sold twice as many cars as KNDI, yet Li has seemingly abandoned the Zhidou JV and blessed Kandi JV. On the other hand, KNDI shareholders have continuously complained that KNDI should try harder at selling EVs to consumers. The last time I visited the Company in China Dec. 2013, I asked KNDI Chairman Hu, who was in the middle of selling a lot of EVs to both leasing and hourly carshare sales (Over 50,000), what his plan was to enter the retail consumer market. He told me his model was for inner-city use only and due to restricted parking and charging access, it made little sense to him to address that market; instead, he was going to stick to leasing and fleet sales in the thousands at a time while capitalizing on KNDI’s Quick Battery Exchange.
Two years later, in a Li Shufu interview as to what he expected of both Kandi JV and Zhidou JV, here was his response:
So, it seems while some KNDI shareholders and detractors have been predicting “KNDI is on a slow boat to oblivion because they can’t seem to sell EVs to consumers”, Hu has stuck to the business model Li Shufu wanted of him, a commercial model that is much less reliant on subsidies, and now KNDI is being rewarded by Li.
It is my intention in the next week or so to put out a more detailed article on Li Shufu and his Global Auto Dynasty to include why he is so excited again about KNDI and its unique Quick Battery Exchange with 3-minute mobile capability and what it can do to revolutionize the Ride-hailing business.
Writers Disclosure. I hold KNDI shares.
Originally Published at: Why Kandi Technologies JV Captured Didi Chuxing, World’s Largest Ride-Hailing Program, Through A Strategic Partnership To Initially Provide Up To 300,000 Government Accredited EVs For Didi’s 31 Million Drivers.