Kandi Technologies: Split Focus More Likely To Destroy Than Build Shareholder Value

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The electric off-road vehicle business has delivered mixed results, with inconsistent sales growth and limited brand recognition and distribution in the U.S. market.Kandi Technologies' new strategic ...

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Arctic-Images/DigitalVision via Getty Images It’s hard enough for a company to truly excel in one line of business, but successfully operating multiple lines of business, particularly when there are limited synergies between them, is another order of magnitude in terms of difficulty. Given that Kandi Technologies (NASDAQ:KNDI) has long struggled to achieve real success in any line of business, the company’s recent strategic plan that anticipates meaningful financial investment into multiple lines of business raises a lot of yellow and red flags for me. In particular, it’s hard to claim that the company has an identifiable area of expertise or core competency that can really drive the company further in the years to come. Kandi shares are down more than 40% from the time of my last article. At that time, I noted that the company had a worthwhile addressable market opportunity in all-electric off-road vehicles, but that securing distribution and brand value/reputation would be a critical challenge. I can’t say that I really feel any better about the company’s prospects today, and the idea that management will be splitting its focus across multiple lines of business and investing substantial capital into those new ventures leaves me even less confident that there’s a core strategy here as opposed to “let’s throw everything at the wall and hope something sticks”. Some Progress With The Old Plan, Albeit With Some Ups And Downs At the time of that last writing, Kandi’s core focus had shifted to designing and manufacturing all-electric off-road vehicles like golf carts, utility vehicles, and ATVs for the leisure and light work markets primarily in North America. While I haven’t been able to really identify any core competency or technologies that would distinguish Kandi’s offerings from rivals like BRP (DOOO), Club Car, Honda (HMC), Polaris (PII), Textron (TXT), or Yamaha (OTCPK:YAMCY), the company did manage to get distribution set up through Lowe’s (LOW), as well as a branding/resale agreement with Coleman Powersports, and the company recently announced a distribution agreement with Academy Sports + Outdoors. Results since then have been mixed. The electric off-road vehicle business has been generating about 85% to 90% of sales per quarter, with overall sales rising 8% in the third quarter of 2023, falling 26% in the fourth quarter of 2023, falling 10% in the first quarter of 2024, and then rising 9% in the second quarter of 2024, with the off-road business up about 11%. Margins have likewise been wobbly, with the last quarter’s gross margin (30.3%) basically in line with the third quarter of 2023 (30%) and the company continues to generate operating losses. Given that BRP, Polaris, and others have been pointing to industry sales trends of low to high single-digit declines (in part, at least, due to deal inventory reductions), I’d say Kandi is doing at least respectably well. While I can’t say that Kandi is taking the market by storm or becoming a household name, reviews have generally been positive, though some customers have definitely had issues with customer service/warranty support. Looking at business developments, the company introduced a line of NFL-licensed golf carts through Lowe’s, and introduced a new line-up of electric go-karts earlier this year (though as an open-wheel racing fan, I’d call them “dune buggies” as opposed to what I’d typically think of a “go-kart”). The company also announced a partnership with Hartford Industrial to allow Hartford to manufacture Kandi’s fully electric UTVs in Taiwan for export and sale in the U.S. I find this latter move to be a curious one, particularly in view of other strategic plans I’ll discuss in a moment. There’s really nothing unique or proprietary about Kandi’s offerings from a technology perspective (though the battery technology could be considered somewhat proprietary, maybe), so I’m curious as to the decision to outsource manufacturing, as that would seem to be the one area where Kandi could achieve some competitive advantage over North American and Japanese rivals (as lower-cost Chinese manufacturing isn’t exactly a new or unproven concept). A New Strategic Plan Leads Me To Wonder About Core Competencies And Split Focus The biggest change in the Kandi story relative to my last update came a couple of weeks ago when the company announced its 2025-2029 strategic plan, the resignation of the prior Chairman (Xiaoming Ju) and the movement of the then-CEO (Dr. Xueqin Dong) to Chairman and the naming of Feng Chen as the new CEO. North America – Electric Off-Road Vehicles and Batteries The strategic plan that Kandi presented anticipates the company focusing on two main lines of business in North America – all-electric off-road vehicles and lithium battery production. In the off-road business, the company anticipates investing $30M in 2025 to establish U.S.-based production capacity equivalent to 50K units, while forecasting production rates of 36K in 2025 growing to almost 78K in 2029, with revenue growing from $185M to $526M (versus annualized second quarter revenue of $140M) and generating gross margins of 30% or more. While investing $30M to establish U.S. production may seem curious given the agreement with Hartford to manufacture UTVs for export in Taiwan, it could make sense from a few perspectives. Management hasn’t said a lot about the Hartford agreement (particularly with respect to minimums), but having the option to flex additional capacity isn’t a bad thing. At the same time, establishing production in the U.S. could be a reasonable response to growing risks of increased U.S. protectionism, depending upon the outcome of the upcoming U.S. Presidential election. The second part of the North American business plan is less encouraging to me. Management plans to spend $100M to build 1 GWh of lithium battery production capacity in the U.S. (with potential future expansion to 3 GWh) as part of a plan to grow its lithium battery business in the U.S., EU, and Southeast Asia. Management believes that this business could eventually generate $230M/year in revenue at 30%+ gross margin, but I’m skeptical. Not only is the North American electric vehicle market growing slower than previously forecast, there’s no shortage of lithium battery capacity expansion on the books today across the industry. The Tesla (TSLA) – Panasonic (OTCPK:PCRHY) Gigafactory has 37 GWh/year of capacity and a 17 GWh/yr expansion has been announced. Likewise, LG Energy has capacity of around 35 GWh/yr in Ohio and 85 GWh/yr more on the way, while SK On and Samsung SDI could both be at around 40 GWh/yr in a few years. More concerning, I don’t really see where Kandi’s edge would be in this business. A small sub-scale player with no notable proprietary technology or performance advantages competing against global behemoths with strong supply chains and major international customer partnerships. This suggests to me that Kandi will basically be chasing table scraps, particularly given that EV adoption in the U.S. has been slower than expected and may well continue to ramp at a slower-than-expected pace over the next few years. Importantly, the company also noted that it was pursuing a potential IPO of the Kandi America business. China – “Smart Mobility” And Battery Swapping I have concerns about Kandi’s plans for the North American market, but I have even more doubts about the plans that management announced for its operations in China. Management announced that they expect to generate $24M in revenue in 2025 from “smart mobility” businesses in China, with that business growing to $70M in 2029. Management has been relatively vague here, but as talked of ride hailing as a core business opportunity, and I’m skeptical this is a market where Kandi can generate any meaningful long-term profits. Kandi has ventured here before, including a JV with Geely (OTCPK:GELYY) that generated meaningful losses and no market traction, and I don’t see any reason to believe that another go-around will do any better. Kandi’s other focus in China centers on battery-swapping technologies, and this is at least an area where the company has shown some knowhow and innovation in the past. Even so, I think management’s projections of $100M in revenue in 2029 is too optimistic, as the company will need to forge partnerships to get anywhere close to that figure and I again question where there is a core competency or competitive differentiation that can drive that level of revenue – Kandi has tried competing here before, and while perhaps the market is better-developed today and more willing to embrace this offering, I see no reason to give them the benefit of the doubt. The Outlook Kandi underperformed my expectations for the second half of 2023, and I’m currently expecting around 10% growth in 2024 – a number that could prove too ambitious given pressures in the off-road recreation and work vehicle market. As I said above, at this point, Kandi really has no brand recognition or brand value in the U.S. and basically operates as a lower-cost “off-label” alternative. While I still believe there is room for an off-label offering in what is a roughly $10B total market opportunity, it’s a tough segment of the market. Operating efficiency will be paramount and given that many of these purchases are very much discretionary or luxury spends, a lack of brand value will likely always be a challenge for the company. I’d likely be more positive (at least incrementally) on Kandi, were it focusing solely on that all-electric off-road opportunity. I have real concerns about the investments in battery manufacturing capacity; establishing capacity for their own battery needs could make sense, but I think management is kidding themselves if they really think they’ll be a competitive player as a seller of batteries to other OEMs. Likewise, I have little-to-no confidence in their ability to execute on plans targeting markets like ride hailing or battery swapping in China. As it will likely come up in the comments, yes, the company has about $220M in cash (or around $2.54/share). Over $100M of that amount is restricted (generally to secure letters of credit), and management is looking to spend around $130M in capex in 2025. Likewise, while the company has been repurchasing shares, the magnitude of the repurchases (1.4M through the second quarter) is not significant next to new share issuances (diluted shares outstanding are up about 10M year-over-year through Q2’24). I do believe that Kandi could achieve around $225M in revenue in five years’ time, largely on the back of the electric off-road vehicle business, but I have real concerns that significant capital will be frittered away in other business ventures and that the company will struggle to achieve meaningful sustained profitability. The Bottom Line  Clearly, I’m no fan of these shares today. While I see potential upside in the electric off-road vehicle business, I don’t have that much confidence that it will ever generate especially attractive margins or cash flows, and I do see a real risk of management’s other ventures destroying more shareholder value. The low share price and lack of institutional sponsorship suggests to me that these shares could be volatile and generate meaningful gains for aggressive traders, but I have no interest in them as an investment.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2479125052"}