Kandi Technologies Group (NASDAQ:KNDI) shareholders got a break on Monday, announcing a formal SEC investigation that began 15 months ago was now fading in the rearview mirror. The SEC's Enforcement Division -- after reviewing all of the information that it collected -- is recommending that the SEC take no action against the Chinese maker of electric vehicles.
"We are extremely pleased that the SEC has concluded its investigation, particularly since its existence was the subject of much misleading and harmful press by those holding short positions in the Company's securities," CEO Hu Xiaoming said in Tuesday morning's press release. "We respect the SEC and its mandate to protect investors, and cooperated in its investigation."
"We will continue to pursue those goals with transparency and in compliance with all applicable laws and regulations," he added.
The stock raced 14% higher on Tuesday's news, but this doesn't mean that it's the ultimate "drop mic" moment to silence all of the naysayers. It may be one massive dark cloud moving on, but short-sellers still have stormy questions about Kandi's business.
Kandi's in a great place, in theory. It started out making go-karts and ATVs, but its emphasis has shifted in recent years to electric cars. Kandi teamed up with Geely Automotive to roll out compact vehicles that are being primarily used for hourly rentals.
It's the right product at the right time. China's notorious air pollution finds the country providing rich subsidies to the distributors of vehicles powered by clean energy. China's also a market where auto ownership penetration remains low, opening up demand for its growing auto-share business by pedestrians, bicyclists, and those who rely on mass transit who could use a set of wheels to do everything from going shopping to running errands or dating.
The popularity of Kandi's auto-sharing program where it mans multilevel garages stocked with freshly charged vehicles has opened opportunities in new regions throughout China. The end result is explosive and accelerating growth.
Revving into a new day
Revenue climbed 47% in 2013, but it has skyrocketed 167% through the first nine months of 2014. Kandi is expected to announce its fourth-quarter results next month. This isn't just a top-line growth story. It struggled with quarterly deficits through 2013 as it ramped up its electric car business, but it's coming off back-to-back quarters of strong profitability.
There's no shortage of doubters. There were 7.3 million shares sold short as of the end of January, substantially higher than the 4.3 million bearish wagers betting against the company a year earlier.
One of Kandi's biggest critics has been the Mark Cuban-backed Sharesleuth.com. The site has been accusing Kandi of overstating the number of electric cars and go-karts that it's been reporting as sold. It remains to be seen if the formal SEC investigation coming to a close will soften the accusations. The incidents aren't necessarily related. However, it's a lot easier to distrust a company's financials when it's under the bubble of a formal SEC investigation. Kandi is free of that now, and the challenge here -- with the stock still trading well below last summer's peak of $22.49 -- is to win back investors. A blowout fourth quarter in a few weeks can only help.