Posted: 21 Jul 2012 10:52 AM PDT
Tom Konrad CFA
The city of Hangzhou just signed a strategic cooperation agreement with Kandi Technologies (NASD:KNDI) and nine other companies to supply 20,000 electric vehicles (EVs) for the city’s “pilot” EV leasing program. Kandi is the only EV supplier to take part; other companies involved will supply the batteries (Air Lithium (Lyoyang) Co. Ltd.) and charging by the local utility. The utility will fund construction of a charging and battery swap station network as well as paying for the batteries.
The batteries will serve a dual use for grid stabilization, or Vehicle to Grid (V2G) technology. The batteries will be financed by charges to electricity customers because of this dual use. So, in addition to this being the largest EV sale ever announced, the project is also effectively the largest scale trial of the use of EV batteries for V2G. V2G is a concept much talked about in academic circles, but so far if has only seen small scale pilot projects in the West. Part of the problem with implementing V2G is typically the split incentives between battery owners and the utility. Battery owners naturally worry about reduced performance of their very expensive battery packs if they are used for V2G. The Hangzhou project neatly avoids this conflict of interest because the utility owns the batteries, and the EVs are only available for lease.
Financial Impact for Kandi
The program will begin in August, and is scheduled to be completed by the end of 2013. We can expect Kandi to sell EVs at a rate of over 1000 per month during implementation. Kandi?s revenues for each vehicle will be around $6800 per EV. Kandi’s gross margins are about 25% on its existing off-road vehicle business, and observers of the company tell me Kandi would be unlikely to undertake a project if it earned substantially less than that. We can expect an increase in gross profit of about $1300 to $1700 per vehicle, or about $0.70 per share annual gross profit, most of which will flow through to earnings.
Kandi is already profitable, with trailing earnings of $0.20 per share (EPS), so we can expect total EPS for 2012 is likely to be around $0.40 per share, and EPS for 2013 is likely to be around $0.80 per share based just on this deal and zero growth in the company?s existing business. The existing off road vehicle business has been growing rapidly, and additional EV orders seem likely, so $0.40 and $0.80 EPS in 2012 and 2013 should be considered a lower bound on earnings, which will most likely be higher.
China’s Aggressive EV Goals
Kandi’s rapid earnings growth could continue if Kandi manages to grab a decent share of the 500,000 EVs by 2015 and 5,000,000 EVs by 2020 goals set by the central government.
China is currently behind in implementing these EV adoption goals, largely because of the high cost of EVs from Kandi rivals such as BYD (OTC:BYDDY), and lack of charging stations. The Hangzhou pilot project, with its rapid, utility-financed build-out of charging stations and inexpensive mini-EVs from Kandi seems designed to address both these problems.
Kandi’s mini-EVs may be just what the Chinese government ordered.
Disclosure: Long KNDI
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