2nd Place. FactSet Best Short

8/11/2019 2nd Place. FactSet Best Short

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https://www.sumzero.com/https://www.sumzero.com/


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September 12, 2014

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Market cap: $725mLiquidity: 3m shares per day average and liquid optionsPrice Target: $2 with a range of $0 to $7 per share

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Kandi Technologies Inc. (KNDI) is a China-based US equity issuer which manufactureselectric vehicles (EVs), parts, go-karts, utility vehicles, all-terrain vehicles and isdeveloping car share operations in Hangzhou, Shanghai and other cities.

While KNDI is touted as the Tesla of China and reports revenue growth of 171% y/ywhile claiming 30% market share of EVs in China, we believe this company is anexaggeration and may be a fraud.

KNDI equity may be a zero if our hunches prove correct and shares have downside to$5-7 range even if the company is not the deception we suspect.

From primary research and basic due diligence, we have developed a number ofserious questions about the legitimacy of Kandi deriving from:

misrepresentations of the Geely JV, related-party sales, continued engagement of a suspect audit firm, unusual reporting, financing and investor relations practices, association with stock promoters who have had trouble with securities regulators, inconsistent representations of the scope of the companys products and

manufacturing capacity, and modest ownership in the affiliated car share service companies which are the

only EV customers to date.

To be clear our bearish view on KNDI is not based on blanket skepticism aboutelectric cars. We love driving Tesla's remarkable vehicles and applaud their success todate. We view Nissans Leaf and BMWs i3 as among the more credible EV approachesfrom incumbent auto manufacturers. Teslas Model S has gained mind-share andmarket-share in the US luxury/performance segments with a differentiated and superiorproduct and crisp execution on a vision that is thrilling consumers. However, TSLA isonly worthy of mention alongside KNDI because of the opportunity their success hasset-up to short KNDI.
https://www.sumzero.com/


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Geely had acquired in 2008. Shanghai Maple had manufactured several conventionalcar models in that factory for export to Egypt, Chile and Russia from 2003 until ceasingproduction in 2010. Shanghai Maples cars were remarkably similar to certain Citroenmodels, so much so that Puegeots Chinese subsidiary Dongfeng Peugeot Citreon

Automobile Co Ltd. filed a number of lawsuits against Shanghai Maple for patentinfringement.

According to Geelys 2013 year-end financial statement, they contributed assets theyvalued at 640,000,000 RMB to the JV Company late last year. As of June 2014, Geelywas valuing their interest in the JV Company at 419,000,000 RMB, according to their2014 interim report.

A representative of Geely tells us that it is inappropriate for me to answer questionsabout Kandi Electric and we are not involved with day-to-day management andfurther that Geelys new energy product and technology plan is independent from theJV and involves quite a lot of other technology partners, technologies and products.This does not sound to us like Kandi benefits from a relationship with Volvo or any

meaningful EV technology from Geely or Volvo as many of the promoters haveasserted. If there is a close collaboration, why are representations so divergent betweenthe Geely side and the Kandi side?

We are also concerned about related-party sales relationshipsbetween Kandientities and Kandi USA Inc., an importer and distributor that the companys filingsdisclose is wholly owned by Hu Wangyuan, the adult son of Kandi Chairman HuXiaoming. Related party sales are always a concern because of the opportunity forfraud and possibility to move funds outside of the company. Kandi USA also creates theopportunity to get funds outside of China. An auditor may follow a trail of invoices andpayments, but are the goods and services transferred consistent with the value of those

transactions?

Chris Carey of Shareslueth has documented questions arising from analysis of UScustoms data relative to Kandis representations in SEC filings here:

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When we ask the company about its US business today, they tell us they no longer sellto the US. Thats quite a sudden pivot relative to meaningful US sales over prior years.The company has disclosed sales to Kandi USA of $6.9m in 2013 and $5.3m in 2012.

This is also a surprising statement given that the companys Q2:2014 10-Q disclosessales to Kandi USA of $2.2 million in the first half of 2014. Well be interested to seehow US sales develop in upcoming filings. Why wouldnt management want to improvegovernance and controls around distributors?


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While KNDIs auditor Albert Wong & Co appears to check the boxes with the SECand exchanges, this auditor choice and continued engagement raises manyquestions.Albert Wong & Co is a Hong Kong-based auditor associated with AlbertWong & Co LLP, a New York-based operation that employs two US CPAs who havebeen licensed in New York since the mid 1990s. PCAOB has found deficiencies oninspections of both Albert Wong entities.

Among our concerns about this auditor are that Albert Wong does not have any otherpublicly-traded clients (besides KNDI) with a market capitalization over $30m and onlytwo clients with market capitalization over $10m. A couple of Albert Wongs past clientshave been de-listed (examples: ARMX, CECX) and all others besides KNDI are recentlyilliquid, penny stocks (examples: QKLS, VALV, BHNN, CEAI, XCLL, YSYB). AlbertWong appears to only work with US equity issuers and does not seem to have anyclients that are publicly traded in Hong Kong. Why no clients locally in Hong Kong? AreUS investors more gullible?

Why wouldnt a legitimate company expecting to raise more money in US capital

markets upgrade its auditor? A recognized auditor would raise fewer questions withinstitutional investors and should lower the companys cost of capital for futurefinancings. Perhaps Big 4 is not appropriate or economical, but some audit team from ashop like Grant Thornton, BDO or Marcum should be interested in the work if they viewKandi as a potential client with bright prospects for growth. Have such firms consideredan engagement and passed?

Albert Wong is probably doing a fine job from the companys perspective. Theyve neverheld up KNDI in filing a 10-Q or 10-K form. Weve seen instances in other China-basedUS issuers where branded auditors with a broader set of clients and greater reputationrisk have delayed approving financials when questions have been raised. Given Kandi

is Albert Wongs most (or only) meaningful client, it seems the auditor has incentive toassist the company and maintain an on-going relationship with the fee-paying client.Does KNDI remain a timely filer with the SEC precisely because they engage AlbertWong?

We are concerned that Kandi management is deliberately avoiding scrutiny fromresearch analysts and mainstream investment bankers. KNDI curiously has noresearch analyst coverage, which is unusual given its recent market capitalization in the$700-900m range, trading volume of $50-100m many days and recent equity issuance.Kandi employs a captive investor relations officer in New York to answer the phone andfield questions. Yet KNDI has no analyst coverage, not even from banking-oriented

firms with practices focusing on China, clean tech and PIPE transactions. We havespoken with four analysts who publish research on other Chinese companies of similar(and smaller) market capitalizations and around the clean tech, battery and EV spaces.None have been approached by the company about coverage.

Instead, Kandi picks FT Global to manage its recent capital raises. FT Global is the one-man global investment bank of Patrick Ko, who pockets a $3.5m fee from KNDIs recent$70m capital raise in August 2014. Established analysts and bankers would at leastperform superficial due diligence, initiate with buy ratings while offering on-going


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Arthur Porcari also has a history of trouble with US securities regulators. He settledadministrative proceedings with the SEC in 1994 in matters relating to predictions,without a reasonable basis and stock price manipulation schemes.

http://www.sec.gov/news/digest/1994/dig060794.pdf

The National Association of Securities Dealers (NASD), a predecessor to FINRA, finedMr. Porcari and revoked his registration in 1989:

http://finra.complinet.com/en/display/viewall_display.html?rbid=1189&element_id=1159003969

Perhaps Chairman Hu was nave early in KNDIs history. Perhaps he had poorjudgment to associate with promoters like Agriogianis and Porcari and to issue optionsand shares to promoters at a discount (see pages 42-45 of the SEC complaint). Butnow that KNDI has been trading on US markets for over seven years with apparentvalidation of a larger market capitalization, why is management not dissociating fromsuspect promoters and practices? Instead, Chairman Hu appears alongside Porcari inpromotional videos!

We are concerned that Kandis EV is a weak and undifferentiated product. TheKandi car is a glorified golf cart with a top-speed unsuitable for highway use. This is amarginal vehicle and certainly not comparable to a Tesla Model S or a Nissan Leaf. Allsales of Kandis recent EV sales are to the related Zhejiang ZouZhongYou ElectricVehicle Service Co, Ltd. (ZZY) car share service entity. If the product is a compellingand ground-breaking vehicle for Chinas unique urban use cases, why is the companyonly selling to ZZY? Why no sales to other customers?

Why is Kandi vertically integrated as a business model at all? We see a number of

precedent bicycle share and car share models in China and other global cities. But wedont know of any other car/bicycle share operator that is vertically integrated with thecar/bicycle product manufacturer. ZipCar grew to #1 in conventional car share in the USby sourcing its vehicles from established, proven automobile manufacturers. Innovatingaround that business and service model was challenge enough! They wouldnt think oftrying to manufacture their own cars as well. What are the chances that Kandi is thebest electric vehicle designer and manufacturer in China and simultaneously the winnerin implementing an EV share model across multiple cities?


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Given our questions above, we believe the equity may be a zero.

But even if were wrong on all of our hunches around fraud and deception, KNDI stilllooks like a significantly overvalued equity based on a sum-of-the parts analysis.

Lets assume complete legitimacy in a simple exercise to value Kandi based onmultiples of comparable publicly-traded firms: core vehicle/parts product business + carshare service business = total value of KNDI.

First, lets consider the car share service side of the operations and give KNDI thebenefit of the doubt by imagining the scenario where their car share develops andproliferates across every major city in China. We have seen a precedent model for asuccessful car share in ZipCar (ZIP) and also a precedent valuation when Avis BudgetGroup (CAR) acquired ZIP in 2012. In the 12 years from ZipCars inception until itsacquisition, ZipCar grew from a single location in Cambridge, Mass, to eventually serve

more than 750,000 members at hundreds of physical locations in over 20 majormetropolitan areas and many smaller regions. Avis paid $500m to acquire 100% of ZIP.That was approximately 2x sales and a 50% premium to where ZIP was trading at thetime. Kandis affiliated car share offering has started in Hangzhou and expanded toShanghai with more cities to come. Remember, KNDI owns only 9.5% of the ZhejiangZouZhongYou Electric Vehicle Service Co, Ltd. (ZZY) car share entity. So perhaps ifKNDI can achieve ZIPs scale and success, the value to KNDI from its modest share ofthe ZZY car share business could be on the order of $50m several years ahead,assuming they can monetize for the value Avis paid for ZipCar. Well keep this analysissimple and not discount back to a present value.

Second, lets consider the core vehicle/parts manufacturing side of the business. Wellassume $130m in sales (from an approx. run rate of 4 quarters of reported Q2:2014sales of $33m). Then the question is what multiple do we pay? Established Chineseauto manufacturers like Geely Automobile (175 HK) and Great Wall (2333 HK) aretrading at 0.8x and 1.3x sales respectively. BYD Co Ltd. (1211 HK) trades at 1.8x sales,a premium perhaps supported by Warren Buffet's investment in this company that alsomanufacturers electric cars and electric buses. We'll be generous and apply a BYDmultiple to arrive at a value of approximately $235m for Kandi's core vehicle/partsproduct business.

$235m for core car/parts + $50m for car share = $285m sum-of-parts value based on

optimistic outcomes and multiples. This is well below KNDIs recent marketcapitalization closer to $800m.


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2nd Place. FactSet Best Short

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