The Other Electric Car Company

by Debra Fiakas CFA
 
If you are putting together a list of 2013 phenomena, you can put Tesla Motors (TSLA:  Nasdaq) and its Model S electric car near the top.  The stock bounced off a low of $32.11 in early January last year and nearly went into orbit.  TSLA share closed the year 2013 at $150.43, representing a return of 368% from the 52-week low.  Impressive! 

The market pundits cannot seem to get enough of Tesla and its founder/CEO Elon Musk.  Yet Tesla is not the only electric car producer that has met with some success with consumers. 

China’s Kandi Technologies Group, Inc. (KNDI:  Nasdaq) produces small, low-speed electric vehicles for off-road and campus use as well as all-electric and gas-electric hybrids for street transportation.  Kandi’s best selling product, the Go-Kart, accounts for about one-third of unit sales, but contributes close to 60% of total revenue.  All together Kandi sold just over 137,000 units in the last twelve months.  About 85% of Kandi’s vehicles are sold at home in China, but even so some of those domestic sales are to distributors which end up bringing the vehicles to the U.S. market.
 
Anyone who reads this column more than just a few times, knows I put a high priority on cash flow performance.  Measuring how much of sales is converted to cash helps separate companies with real financial strength from those that rely on financial fluff in the media to drive shareholder value.

In the most recently reported twelve months Kandi converted 34% of sales to operating cash flow.  Granted much of that cash flow was contributed by a short-term loan from a joint venture partner.  That said, Kandi’s three-year average cash flow generation was 14% as a percentage of sales.  If the loan from the joint venture partner is excluded, then the cash conversion ratio was 5%.

Tesla on the other hand is a significantly larger company, earning $1.7 billion in total sales in the most recently reported twelve months.  During this period the company reported positive cash flow for the first time in its history, managing a cash conversion ratio of 5%.

Kandi may be a more consistent producer of operating cash flow, but size and proximity to investors in the U.S. market has helped give TSLA a far higher valuation.  TSLA trades at 10.8 times sales while KNDI commands a multiple of 7.2 times sales.  In terms of cash flow, investors are paying 20.5 times CFO for KNDI, but are willing to advance a whopping 200 times Tesla’s cash flow to get a stake in the Model S producer.

As a China-based operation Kandi Technologies may have a credibility problem with investors.  Too many of the China companies that have registered as public companies in the U.S. have turned out misleading or even false financial reports.  However, there is much to be said about having access to Chinese consumers who are increasingly affluent and keenly interested in novel transportation options.  What is more Kandi is a very innovative car manufacturer.

Consumers in Hangzhou, China – a cozy little city of 8.7 million people  –  will soon be able to step up to a Kandi automated garage, insert a card, and drive away in a Kandi electric car.  The driver will get up to 75 miles for the equivalent of $3.25 an hour.  The car can be dropped up at another Kandi rental site, much like the bicycle-sharing program that has become popular in the U.S.  This is different that the car sharing scheme of Zipcar that works more like a car rental.

Kandi has also come up with a solution for the problem of recharging batteries with a battery ‘swapping’ option.  Consumers who opt for a long-term lease instead of car-sharing can drive up for a convenient battery swap.  This is particularly important for Chinese drivers who might not have the ability to plug in an electric car at home or work.  Tesla may have the caught the attention of U.S. investors with its sleek electric sports cars and sophisticated publicity campaign.  However, Kandi Technologies is a contender in its own market with rental options that make sense for its customers.

Just like shares of Tesla, KNDI followed a pretty steep trajectory in 2013. By the end of 2013, the stock had delivered 250% growth from its 52-week low in late January 2013.  With the Hangzhou project coming on line in the coming months, it seems the company should be able to deliver earnings in a similar trajectory.
 
Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.