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

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.

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.

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.

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.

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. 

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Read/Post Comments (21) | Recommend This Article (15)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 16, 2014, at 4:23 PM, Rdavis2035 wrote:

    WHERE ARE YOUR 2012-2014 NUMBERS FOR KNDI? ARE YOU SHORTING KNDI? WHAT ARE WE TO THINK ABOUT YOU, IF CAUGHT SHORTING SHARES OF KNDI????????

  • Report this Comment On May 16, 2014, at 4:25 PM, demonroach wrote:

    Why are you sprinkling Tesla images throughout your article?

  • Report this Comment On May 16, 2014, at 4:26 PM, demonroach wrote:

    "Leah Niu

    newniuknew

    Leah is a freelance writer for The Motley Fool. She is interested in socially responsible investing, conscious capitalism, and Tesla."

    Uh ok.

  • Report this Comment On May 16, 2014, at 4:50 PM, TMFDanielSparks wrote:

    Leah,

    Thanks for the great article. The alleged manipulation is certainly a red flag worth understanding.

  • Report this Comment On May 16, 2014, at 5:20 PM, tome21 wrote:

    Tmf...ridiculous kndi is not a defendant.. it was purely based on those firms involved and kndi is cleared from the sec. Otherwise don't you think they would delist kndi.. Ceo hu needs to step up to these people trying to trash a once in a lifetime srock.. 2 earnings in a row were super positive. The next one.. hold onto your butt cheeks leah, we shall see which one doubles first. Tesla or kndi....

  • Report this Comment On May 16, 2014, at 5:22 PM, captainccs wrote:

    The Lady liked Candy just 11 days ago

    http://www.fool.com/investing/general/2014/05/05/cant-afford...

    Now she trusts a Sharesleuth hit piece at Seeking Alpha. Like the song, La Donna è Mobile.

    Hit pieces create volatility and fantastic trading opportunities but have no effect on the long term performance of the company and its stock.

  • Report this Comment On May 16, 2014, at 6:34 PM, mscommgroup wrote:

    Leah, I just wanted to comment on the sharesleuth portion of the article: The alleged "misreporting" of vehicles were in name only, not in quantity or revenues derived. In late 2008, KNDI first developed a gas powered micro-car equivalent to the CoCo EV. Over the following year they developed the Electric Version. Over the 2008 to 2010 period the company did sell a total of 5630 micro-cars split between gas and electric. So there was no mis-reporting of data. Also, in the SEC complaint, KNDI was not mentioned as a defendant. I have been a long shareholder of KNDI and I do not understand why people love to hate it. The items you mentioned happened years ago. At the worst case, it may result in a small fine to the CEO. I also cannot understand why you wrote more positively about it on May 5th and now this very old news.

  • Report this Comment On May 16, 2014, at 6:37 PM, mscommgroup wrote:

    BTW, My 2014 Revenue picture for KNDI shows them coming in at about $253 million USD with an assumption that local government subsidies will continually be delayed and will not begin until late autumn. I am still working on an EBITDA and NI number. However, KNDI is making a lot of investments into their EV business so I am not paying attention to their bottom line until the last half of 2015. If the above rings true, KNDI's CAGR will be 168%!

  • Report this Comment On May 16, 2014, at 8:40 PM, Maxgain0114 wrote:

    "Boy, was I wrong."

    Do you really do any research before you write an article? Should we expect another article to redo this article any time soon?

    Firstly, you need to take english writing 101 before you post something for thousands of people to read.

    Secondly, don't just copy paste from other websites without any additional information. You can't even do that properly.

    Motley Fool really needs to monitor what kinda of article they are publishing.

  • Report this Comment On May 16, 2014, at 9:38 PM, Lancedesign wrote:

    This is an irresponsible, derivative article that is a poor representation of the good RESEARCH Fools typically execute.

  • Report this Comment On May 17, 2014, at 12:11 PM, Tgar13 wrote:

    As someone who has read the entire SEC complaint against the Kelley Group I have to say that it is just that a complaint against the Kelley Group not Kandi or Chairman Hu. In addition, it does not state that paying people on stock to promote company is illegal it is how the Kelley Group used that stock which was worthy of SEC attention

    I certainly wish the author put more time into actual research than copy Mark Cuban hit articles

    While everyone needs to be wary of any company and invest accordingly I still think that a long term investment in KNDI with a small portion of my portfolio is a wise decision

    Personally I bought at $4 and sold 20% of position at $20 so I am dealing with the house's money that said I think $11 is attractively priced given revenue growth and target market and first mover status I would be entering here as it has sold off with other small caps and with the SEC scaremongering articles

    Morgan Stanley has increased its position to 400,000 shares a 100% increase and I am sure they are well aware of the risks with the SEC investigation into the Kelley Group (small risk for KNDI)

    http://www.nasdaq.com/symbol/kndi/institutional-holdings

    So believe this Motley Fool and Mark Cuban article if you choose but many savvy investors and institutions are taking advantage of the pull back to get positioned for some long term rocking profits

  • Report this Comment On May 17, 2014, at 8:53 PM, spfmf14 wrote:

    This article is very poorly written, seems to be just another "hit piece" to scare off uninformed investors from Kandi. I completely agree with comments from mscommgroup and Tqar13. BTW, mscommgroup and Tqar13, thanks for including some forward looking numbers and mentioning the MS investment, verses bringing up 5-6 year old stuff in which the SEC was after Kelly group activities and not Kandi.

  • Report this Comment On May 17, 2014, at 8:56 PM, spfmf14 wrote:

    Also, with the article featuring two large beautiful pictures of Teslas, seems to be more of an add for Tesla than anything.

  • Report this Comment On May 18, 2014, at 9:24 AM, corstrat wrote:

    Leah, Shame on you. Looks like you let ShareSleuth make a "Fool" out of you and not in a worthy Motely way. This should not have happened if you would have taken some time to first research what you blindly passed on from SS's obsession of ignorantly passing on old debunked mis-information through more than half a dozen of their past diatribes beginning in early 2011.

    http://sharesleuth.com/investigations/2011/05/kandi_technolo...

    When SS first made this accusation of KNDI overstating their numbers in early 2011, KNDI did take the time to publicly debunk SS's claim in May of 2011 in an SEC 8K Letter to Shareholders filing. Here is just the opening two paragraphs of that filing with a link to the whole filing:

    "

    DEAR FELLOW KANDI TECHNOLOGIES SHAREHOLDERS:

    Recently there was an online story about our company, which was followed by significant volatility in our stock. The author presented the information in such a way that the clear implication was that some of the company’s revenue must have been inaccurately reported. That is not the case. Nearly all of the misinformation in the article is the result either of the author’s misunderstanding or inaccurately construing Kandi’s business, and in particular, its sources of revenue.

    We take our fiduciary duty to shareholders and all stakeholders very seriously, and the inaccurate reporting by this website in no way reflects the current business of Kandi Technologies. In fact, Kandi has a strong U.S. presence in go-karts and specialized EV products, and we are making great strides in our EV business in China as we shift our focus toward this market. We stand by our business strategy and results. At the same time, we felt it was important to clarify several questions that were raised. The following are our responses on the topics raised in the inaccurate article..."

    http://www.sec.gov/Archives/edgar/data/1316517/0001144204110...

    If as you claim, you are "very long Tesla", then you should have known better than to take and pass on at "face value" third party attacks by those with an "agenda" against a Company with a large short position. Lord knows enough of those have been written against TSLA over the past few years.

    Just a few additional comments about the Kelly group and related accusations .

    As an long term follower of KNDI who has personally visited the Company in China twice since 2010, and have published almost two dozen articles on the Company over the past four years, irrespective of what may have transpired in the last decade; I personally am thankful that Kelly et. al. convinced KNDI to come to the US as a listed Company. Were it not for them, US investors would never have had the investment opportunity to take advantage of this truly "Disruptive" Innovator.

    In your article you stated: "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."

    During that time, KNDI had announced they were expanding their fledgling EVs from export only, into the China market. An announcement alone which should have engendered an upward movement in the stock price, However; if you did a little research on market conditions for China stocks from 2009 to 2010, you would have noticed that the US China Stock FXI index rose from below 17 to over 45. During this same period of time Warren Buffet announced he had made a 10% investment in China based BYD due to its entrance into EV's driving BYDDF from a $1 a share US to over $11 a share US.

    While a myopic viewer of KNDI's stock movement might credit Kelly's group with KNDI's stock price increase at that time, IMO, only a "fool" not worthy of being Motely should give the Kelly group credit for the KNDI stock move other than being at the right place at the right time.

  • Report this Comment On May 19, 2014, at 8:31 AM, antikoolaid wrote:

    All forensic accountants should look at the company's most recent 10 Q filing. Anyone who reads and properly understands these filings could write a book about its accounting shenanigans. The SEC is on the side of Leah, which is why they are currently investigating Kandi - this is separate to the investigation in to promoters who deliberately and falsely inflated its stock value in direct co-ordination with the company's CEO. It is not legal to give shares to promoters for the specific purpose of falsely inflating the stock price. If this type of share compensation was legal, these stock promoters would not have been prosecuted by the SEC in the first place. It is very apparent from most comments here that paid stock promoters are still active with Kandi, attempting to intimidate any author who freely expresses their concerns about the company.

    I will just address some of the "diatribes" mentioned in the comments section. It is suggested that investors's should be thankful to fellow pumper buddies Kelly et al for bringing Kandi to the US, but there is no mention that Kelly et al also brought to the US Telestone Technologies Corp. (delisted from Nasdq); New Oriental Energy & Chemical Corp. (delisted from the Nasdaq) Orsus Xelent Technologies Corp. (delisted from the American Stock Exchange). I don't think investors in these companies feel very thankful about that. As for bringing Kandi to market, the company only sold 620 EVs for the first three months of this year. At the operating level, before the interest charge and extra losses from financial derivatives, the company lost $2,853,871 (reference line 6 of the income statement, Page 3, 2014 Q1 filing). For those that are not delusional, this is not very deserving of praise.

    EV sales are barely happening. None of the stock promoters mentioned that this supposed "disruptive innovator" (LOL!!) only sold 620 EV's during the first three months of this year. That equates to about 3.4 cars sold per day (in the whole of China!). Not exactly "disruptive". Along with the company's operating loss, this hardly justifies the company's current share valuation. The bottom line is that despite repeated initiatives by the PRC government to boost EV sales, the Chinese market does not want Kandi's EVs en masse, and the EV supportive infrastructure still does not exist for sales at such wishful thinking levels.

    In fact, Kandi DID admit that it had overstated EV sales, by mis-classifying sales of gas powered vehicles as EV sales. The point here is that investors bought in to Kandi on the basis of its EV sales, and not tiny little gas powered cars. Good work by Sharesleuth for uncovering this deception. Here is the company's obfuscated admission of it:

    "the (Sharesleuth) article does point out an error in the description of the revenue build for 2009 as presented in our 10-K for 2010. This same error had been brought to our attention earlier by investors in the Company, and the Company was in the process of analyzing the discrepancy in order to provide an explanation and correction. To be clear, the discrepancy is only in the tabular description of the composition of 2009 revenue in our 2010 10-K. The 2009 10-K is correct. The 2009 total revenue as reflected in the 2010 10-K is correct. It is the allocation of 2009 revenue to the 2009 segment revenue as reflected in the 2010 10-K that is incorrect. The mistake is the result of new accounting employees having applied for a second time a standard correction for invoices issued during the period for product delivered in a prior period to a number to which that same correction had already been applied and having allocated some vehicles to the wrong segment categories."

    The short version of the above quote is "we mis-classified gas powered vehicle sales as EV sales". The company's reporting was so bad that it could not even get its numbers right for EV sales, but apparently this was going to be corrected anyway before Sharesleuth pointed it out. Oh yeah? Sure you were Kandi....

  • Report this Comment On May 19, 2014, at 4:02 PM, Maxgain0114 wrote:

    antikoolaid,

    I am sure you lost a boat load of money shorting Tesla.

    Pick your poison wisely next time else you are not going to survive. You are shorting a stock that has gone from a low 0.44 (2009) to now trading at 11-12. We all know, who is winning this battle.

    Keep spreading fear, short term you might get the volatility but long term you can't beat 40 million revenue vs 14 million revenue. Good luck.

  • Report this Comment On May 19, 2014, at 4:09 PM, pickinupsteam wrote:

    Antikoolaid new sign in name, most likely another alias. Asserts that investors bought this stock because of a miscount of EV's in 2009. That seems kind of a stretch. Again, talks about 1st quarter slow sales, but ignores 4th quarter, high sales of EV's. Not a very thorough look at he facts. Why not just let the author respond for herself?

  • Report this Comment On May 19, 2014, at 9:39 PM, spfmf14 wrote:

    Let the upcoming 2nd and 3rd numbers do the talking. Leah Niu and antikoolaid, care to put up your own money against Kandi share price being higher or lower on August 18 verses today?

  • Report this Comment On May 20, 2014, at 2:08 PM, mscommgroup wrote:

    Who would you believe? Morgan Stanley, JP Morgan, the NASDAQ Global Select Committee and the 1400 shareholders who did massive due diligence into all of these KNDI matters? OR should we believe Leah, Shareslueth and all of the short selling retards??? Case closed... KNDI will sky rocket this year. Just buckle your seatbelts.

  • Report this Comment On May 21, 2014, at 6:16 PM, captainccs wrote:

    The 10 Most Recent Messages By antikoolaid

    That User has never posted a message.

  • Report this Comment On June 19, 2014, at 7:28 PM, Tgar13 wrote:

    Airpocalypse makes this a buy

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