Think Tesla Motors Inc. Is Too Risky? Take a Look at Kandi Technologies, Inc.

There has been a buzz around Kandi Technologies lately, but is the EV maker worth your precious portfolio space?

May 16, 2014 at 4:01PM

Kandi Technologies (NASDAQ:KNDI) is a recreational vehicle company that began to make EVs in 2008. It has recently implemented a car-share program in traffic laden, air polluted China. Its growth potential is huge, but its dealings are murky. Getting a taste of Kandi broke my sweet tooth and reminded me just how refreshing Tesla Motors (NASDAQ:TSLA) is to have in my portfolio.

The sweet
Back in 2008 Kandi introduced its first electric car, the Coco. Prior to that, it focused primarily on atvs, go-carts, and recreational vehicles. Last year, Kandi's EV segment increased substantially due, in large part, to the company's growing car-share programs.

From traffic congestion to air pollution, China is struggling to handle how to address its growth. One solution, as Kandi sees it, is to offer cheap public transportation that gets residents from point A to point B as quickly as possible. Kandi sees its rent-by-the-hour, car-share program as an emission-free answer to China's growth problems.

Kandi is aiming to provide what Tesla does for small businesses, but to the average Chinese customer. But filling that niche doesn't provide enough growth potential to overcome Kandi's glaring risks.

The sweeter
In March of last year, Kandi entered into a joint venture with Geely, one of the largest vehicle manufacturers in China. Due in part to this partnership, Kandi's EV product segment revenue increased by about 145%, its EV unit sales increased by about 20% and its average EV unit price went up by about 104%. EV sales made up about half of Kandi's revenue in 2013, mostly due to it adding two new EV models the SMA7000BEV and the SMA7001BEV (catchy names, huh?). More on Kandi's accounting below.

Screen Shot

Kandi's fleet Source: Kandi's website

The small recreational vehicle company may be able to ride the Tesla wave, what with the boutique brand making such a splash in China recently, but that wave may not last too long. Since, unlike Tesla, Kandi doesn't seem to have transparency and accountability on its mind. Therein lies the problem, Kandi's downside is too apparent to ignore, and presents too much risk for long game investors.

The sour
Sure, Kandi's growth potential is huge, thanks to its car-share programs and its partnership with Geely, but its risks are ever present and too troubling for many buy and hold investors to buy into.

Screen Shot

Filling a niche does not a stable company make. Kandi's car share charging and vending machine. Source: Kandi's website.

To start, Sharesleuth.com has alleged that Kandi manipulated its sales numbers in order to misrepresent its revenue. Remember those stellar numbers earlier in the article?

Well, according to Sharesluth, from 2009 until 2011 Kandi reported through SEC filings that it sold more than 3,700 of its Coco EVs in the U.S., the company's main market from 2008 until 2011 , when, in fact, as Sharesleuth alleges, Kandi actually sold less than 1,000 vehicles during that time. The numbers it may have fudged amounted to about 20% of the company's revenue for both 2009 and 2010.

If the company manipulated this data then, what's to stop it from using the same shady accounting tactics now?

It gets worse: Kandi has been shady since the beginning.

S Sun

Tesla is a guiding light in an otherwise murky Chinese EV landscape. Source: Tesla Motors

The cavity
Kandi went public through what's called a reverse merger. While working with the Kelley Group, made up of Toronto-based consultant S. Paul Kelley and his three associates, Kandi acquired a majority stake in Stone Mountain Resources, a public Nevada mining company. Once Kandi got its sticky fingers into Stone Mountain, it essentially gutted it and started doing its own business under Stone Mountain's public status. This allowed Kandi to be traded in the U.S. while sidestepping the grueling process (and all the regulation therein) of going through the IPO process.

The reverse merger also positioned the Kelley Group to profit, as it owned shares in Kandi, served as liaison for the company to be listed on the U.S. exchange, and then promoted and inflated the stock.

The SEC Kandi krush
Earlier this month the SEC charged the Kelley Group with conducting these reverse merger schemes in order to manipulate trading and gain millions in profit.

The SEC alleges that during Kelly's involvement with Kandi, two of the Kelley Group consultants, George Tazbaz and Roger D. Lockhart, reached verbal agreement with Kandi's CEO, in which the parties agreed upon the following: Kandi would give Tazbaz and Lockhart 350,000 additional shares of the company. The consultants would then pay U.S. stock promoters to tout Kandi, and would orchestrate said promoters to manipulate and increase the stock price to $3 a share, minimum, within three months.

Around the time this agreement was made back in September 2009, Kandi was trading around $1.55 a share. A little over those promised three very profitable months, and Kandi was trading around $6.51, just about a 320% increase.

This manipulation was just the tip of the iceberg; the Kelley Group was giving Kandi stock away to a number of stock promoters. It then used various fraudulent schemes in order to increase share prices.

Once they inflated the market to their liking they dumped their shares and sought a nice profit.

And it appears Kandi's CEO knew about it all along.

In Store

Tesla showroom. Source: Tesla Motors.

In times like these
While I am very long on Tesla, I recognize that it fills a boutique luxury niche, and that its product line isn't one that many Chinese folks can afford. I was poking around and hoping to find a company on the other end of the spectrum, one that could provide cheap EVs to the Chinese market, which is looking to add 500,000 EVs and plug-ins to its roads by 2015. Kandi seemed, at face value, to fit the bill.

Boy, was I wrong. Kandi's risks are seemingly endless and for many long game investors it isn't worth it, no matter the growth potential. 

Not looking for a toohache?
Tesla may be out of reach, and Kandi may be too risky, perhaps you'd like to get in on the next disruptive industry before it hits big. The Economist compares this disruptive invention to the steam engine and the printing press. Business Insider says it's "the next trillion dollar industry." And everyone from BMW, to Nike, to the U.S. Air Force is already using it every day. Watch The Motley Fool's shocking video presentation today to discover the garage gadget that's putting an end to the Made In China era... and learn the investing strategy we've used to double our money on these 3 stocks. Click here to watch now!

Leah Niu owns shares of Tesla Motors. The Motley Fool recommends Tesla Motors. The Motley Fool owns shares of Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers