The following is the translation of the Q/A section of Kandi's CC last Monday. It was performed by Jade a Chinese translator who works for the KANDI Yahoo Group.
I just finished "auditing" and "proof-reading" the translated transcript.
Instead of only focusing on what Mr. Hu said, I went over the entire Q&A section, including how the English questions were conveyed to Mr. Hu, which might affect the answer he gave.
My impression is that Kewa actually captured most of Mr. Hu's answer in her interpretation.
(I believe it is quite challenging--Mr. Hu's answer is not always succinct and to the point. It is really hard to follow his thoughts, translate and re-present them in an organized manner in real time.)
Kewa only had difficulty with the carbon trade program; even Henry didn't know how to translate the credit points Mr. Hu mentioned. Anyway, the idea is EV industry will benefit from it!! (and they both got it right...)
There are certain questions that Mr. Hu didn't provide an answer, not Kewa's intentional omission or careless oversight.
Since I have really tight schedule for this project, I hope you don't mind instead of re-doing the whole translation, I just modify the existing transcript and make it more complete based on what I heard from the recording.
But if you prefer a word for word translation in its very original discourse, I might need a lot more time to work on that.
Please see attachment for the draft (?). Let me know how you want me to continue this assignment.
Thanks! Jade
My (Rich's) Comment: I highlighted (in yellow) where Mr. Hu's answers seemed to be different from how Kewa interpreted them ......
A Revised Documentation based on the Seeking Alpha Transcript
Q: I’ve got a two part question, so bear with me. The first part is, you reaffirmed your target for 20,000 to 25,000 sales target in 2015 for the JV from 10,000 kind of last year. Are you feeling that we’re looking at the high-end or low-end or possibly be in that range? And at that kind of range, what would the expected revenues be to the JV and to the Kandi for the part? And then I’ve got a follow-up. Thanks.
A:
First of all, we will definitely achieve our target sale (20,000 to 25,000). Well, I can confirm right now it’s not going to be on the lower end. Second, as the EV sale increases, the revenue will increase. And as far as the revenue breakdown, I cannot provide any detail on JV or Kandi’s contribution in the total revenue. However, with the growing demand and sale, our expenses were becoming lower. So right now I can assure you that the total revenue will be increasing.
Q: And then just a quick follow-up. How many of the sales are targeted to be the K17 and the K30 models and what would be the full sales price of each before and after the consumer subsidy benefits? And then finally with the volume currently picking up, will you guys be releasing monthly EV sales. Thanks.
A:
So K17 will start selling at the end of Q3. So for the second half of 2015, the majority of direct sales will be K17; K30 is at the trial stage and the sale will be minimum, not as many as K17. And K17 is priced at RMB 140,980 before subsidies.
The retail price for K17 is RMB 140,980. This car is going to be sold in Beijing, Shanghai, where it will receive RMB 40,000 and RMB 45,000 from the local and national subsidies, respectively. So, with both subsidies, the buyer only pays about RMB 59,000 for this K17 model. Starting tomorrow, there will be a lot of marketing promotion activities for K17 in Beijing and Shanghai.
Q: As you know, I’ve been a close follower of Kandi for eight years and meeting you several times, both in U.S. and China. I want to personally congratulate you and management for the almost seamless transition of Kandi from an always profitable off-road recreational vehicle exporter to now even a more profitable China’s number one pure EV provider. I have published many reports on Kandi in the U.S., but the most asked about area has to do with capacity growth and debt associated with this, in particular the 100,000 capacity Wanning, Hainan province facility under construction that’s discussed in the SEC filing of the direct responsibility of Kandi rather than that of the JV as was the case with new Rugao to just mention. For the sake of translation, I’d like to break my question into a main section as up to two follow-up parts. Kewa, could you give that to Mr. Hu right now?
Again probably two follow-ups here, can the company provide us with an update on the Wanning facility and its completion status? Is Wanning still expected to be put into the JV upon completion and if so, all the decisions about Wanning and expenditures being made jointly with our partner Geely?
A:
First of all, Wanning production plant has seen some changes in its construction plan. The Wanning facility is originally set in Wanning city, Hainan province. Since our new Hainan governor has different strategic planning for the province and takes EV industry as the top provincial project, Wanning facility is now moved to Haikou National Hi-Tech Zone. The government promises to compensate the company for the loss resulting from the relocation. Since the new location and government support give Kandi an optimistic market outlook and promising local subsidy, now we are still in the middle of negotiation, which has been going pretty well. As soon as the details are finalized, we will share the decision with the public. And the second question in regards to the expenses that occurred for the Wanning facilities… as per the term for the joint venture, upon the completion of the facility, it will be merged into the JV. Kandi and Geely will then be evenly responsible for the expenses.
Q: That’s sounds like great news. We have a lot of excess capacity ready anyway right now. So, I guess the tail part of my follow-up question, my follow-up was pretty much the original cost was going to be about U.S. $160 million for the Wanning facility. And we reported last year that we’ve already spend $59 million on this facility. So since it’s going to be owned by the JV, I’m just kind of curious in the first place, why is it that Kandi independently is required to build this facility when the Rugao facility was built in the JV from the beginning?
A:
To answer your first part of the question, the reason Kandi build Wanning facility fairly independently because the agreement with Wanning was signed before the joint venture with Geely was established; after the joint venture, we like to keep the things separately so Kandi is going to build this independently until we complete the facility building, then we’ll put it into the joint venture. However, Rugao program happened after the establishment of the joint venture. The second question is, if the negotiation with Hainan government goes successfully, I believe we’re going to have a lot supporting policies from government, including subsidy and other favorable policies. So, I believe that’s going to be very helpful and very encouraging for us.
Q: On the $59 million that we’ve already spent, certainly portion of, I believe it was said that we’re going to -- the government is going to try to reimburse us or whatever we haven’t spent. I assume the balance is put in escrow right now? And I still have one more little follow-up after that.
A: Of course, the money will be paid to Kandi. The estimated compensation, covering the loss of time and over RMB 50 million, definitely will be paid to Kandi’s account.
Kewa Luo - Investor Relations Manager
Mr. Hu is saying that other losses in building successfully, the money will eventually come to Kandi’s account.
Q: Now one last, the JV company has increased its capacity after completion of Rugao and Wanning to about 400.000 EVs per year. That seems to equal the targeted sales projections mentioned in an answer to a question at the San Francisco Shareholders Day as being our goal for 2020. So, is 400,000 units by 2020 still a realistic target? And the last part of the question is even with unit sales more than doubling to 20,000 to 25,000, why was so much excess capacity built so early?
A:
In terms of capacity, an auto factory needs to be built to a certain scale to accommodate more comprehensive technologies. We either build a facility to that scale or not to build it at all. Additionally, all our facilities are located in the different provinces that are actively promoting EVs, some with certain target to achieve or some having strong incentives. It is known that if the facility were not in the local region, the company wouldn’t be able to receive local government’s subsidy or other benefits. In order to enjoy the local subsidies or the supportive policies as well as to capture as many market share as impossible, we have these facilities built in different areas.
In conclusion, we are doing all this work as to prepare for the high growth. And from the cost perspective, the effort and the cost to build a 10,000 capacity facility is pretty much the same to build a facility that has 100,000 capacities. So in order to have the capability to grow the market share, so we need to have the facility in scale to be ready for the market growth.
Q: This one last part of that that I didn’t hear an answer for, since the government is anticipating to have 5 million cars on road by 2020, again, I’d like to ask a question, is it feasible, is it possible to target of 400,000 by 2020; is that realistic?
A:
We are very confident to achieve that target and I like to specially thank for your long-term support and other shareholders with their support and especially market growth, we believe that we are going to achieve that target.
Q: Certainly congratulations in order for wonderful and beautiful second quarter in both sales and earnings. I was very pleased with you at this morning. My question is what competitive advantage do you see that Kandi has and the JV now over kind of EV manufacturers?
A:
First of all, it is hard say what exactly competitive advantages Kandi and JV have, I can tell you is that last year in 2014, the pure EV sales, Kandi ranked number one in China and I believe we’re going to remain that leadership in China this year as well. In regard to the advantages Kandi and joint venture have, I can say that our outstanding EV business model, technologies, even user experience are beyond expectation and have been well received so far. Especially Geely is the biggest automaker in China; their technology, their management talent, and R&D are definitely superior to other EV makers. These are our strength. And tomorrow, at our promotion of K17 in Shanghai and Beijing, you will see the difference between K17 and our older models. You will see the improvement in this particular new model in terms of cost value and smart technologies. And I believe that after K17 being released, we will a leading mid-to-high end EV provider in China.
Q: Yes, my question is [indiscernible] can you update the progress to provide any specific detail of significance from the JV with regard to your focus on new cities like Wanning and Rugao, also how many total cities have been [ph] with regard to the program and then do you have any cities to receive program [indiscernible] and I have a follow-up.
A:
We have about nine cities that have MPT program so far and I expect to have 15 cities in total running the business model by the year-end. So I think we of course already reach the target while the delivery volume is larger as compared to last year. Last year some of the cities started MPT with the number of EVs in 100s; by this year, the demand will be at least 1,500 EVs in any of these cities, and one of them I think will be 5,000.
Q: Do you have any idea what the typical mix of the K10 and K11 will be in the program and have you done any thinking or figuring of the expected number cities [ph] in the program for 1 million population going forward?
A:
Going forward, K10 and K11 production will decrease and we are going to add K12 and K17 to the program, as they are more high-tech, more advanced and more appealing on the design. But I cannot provide you with more detailed breakdown of the number right now, because it really depends on city’s preference. And to answer your second question, what is the expected number of EVs in the program per 1 million populations. To be honest with you, we have never had that kind of estimation. But I can provide you that by 2020, we expect that we are going to produce 2.5% to 3% of the total NEV used in China. So, our target is in line with national government target of 5 million NEVs, accounting for 2.5% to 3% of the total vehicles on the road by 2020. That’s our goal.
Q: Congratulations on a good quarter, showing sequential unit sales growth though the market seeing the 20,000 to 25,000 annual number being realistic. My question is, can you give some additional color on the direct sales from brand that we have and specifically what kind of feedback are we receiving from the store dealerships and how many dealerships have now been so far and how many do we expect to have year-end? And I do have a follow-up question as well.
A:
So far, we have 30 stores that are selling our cars. But now the business focus has been adjusted. For the next 2 quarters, K17 will be our major selling model. I believe the K17 will be very popular and well received in two cities, Shanghai and Beijing. The reason is that EVs are exempt from limited driving in Beijing, and from license plate restriction in Shanghai. EV also gets free the license plate in Shanghai. So, these are the benefits to have EVs in Beijing and Shanghai. And starting tomorrow, we’re going to have a very aggressive marketing in these two cities. And so I wouldn’t want to give out the expectation of how many dealerships will be by the year-end, as I believe the sales will be growing given the demand in these two cities Beijing and Shanghai.
Q: A follow-up question, to my understanding, the PRC has the mandate out there for 30% percent of all new government auto purchases being EVs by 2016. Is that still in effect and if so, is Kandi aggressively going after that business?
A:
That 30% of the government vehicles will be NEVs is still the plan for many local governments. However, it’s not been effectively executed at this moment. We have our K30 specifically designed and ready for government car use. Next year G-20 conference will be held Hangzhou, and I believe one of our car models will be employed for the event.
Q: The last question, several months back we announced a sale of I believe it was 60 units for police use. So, was that well received; do we anticipate further sales with other police departments and such?
A:
It is still going pretty well, but Kandi did not sell the EVs directly to the police department. So, we are not really involved in the operation. However, ZZY is on top of that and it’s going well; more police departments or other patrol department is interested in leasing the cars.
Q: My question is, do you sell EV parts to any other car manufacturers and if not now, would you expect to sell some in the future?
A:
Since it is still at the early stage of EV industry, there is no big demand. However, as an EV part manufacturer, we have been preparing to grow and to provide our products to other carmakers.
Q: My question is with the possibility that the PRC may seemly open the issuance of new auto manufacturing licenses, this can be intent to apply for its own license and how long would that take; and once received, how would you anticipate Kandi would use its own license?
A:
Right now, China has new policy regarding license issuance to the new energy vehicle manufacturer. But so far, as far as, I know no one has received a license yet. Kandi is in the process of the application. But how soon we will receive the license depends on the government, and how quickly the application is handled. Right now we are using Geely license to manufacturing Kandi brand vehicle. Once Kandi receives its own license, there is no doubt that Kandi is going to use this license to manufacture Kandi’s own brand vehicle.
Q: When I was in San Francisco at the investors conference earlier this year, shareholders conference, you mentioned about you were developing and testing a new lower price extended range battery. What is the status of that and what makes this battery different than conventional lithium batteries.
A:
Yes. The cooperation with Tianneng Power is still going well, but it’s still a long way for the new battery to be ready and to be used in EVs. Additionally, we also are applying for the national government subsidy. For now, national government only subsidizes the lithium battery. We don’t have any subsidy policy for this new type of battery yet. And without national government’s approval and subsidy, we won’t be able to install or use the new battery. And we are working hard and hopefully we’re going to have some update soon. In regards to what makes such a battery different is safety and competitive pricing.
Q: Is it going to affect -- I assume the range of the car is going to be increased dramatically or what is the status of that? Will the battery increase the range of the car?
A:
The driving range will be about the same compared to lithium battery, but the safety and the price are better compared to those of the lithium battery.
Q: My first question relates to margin. My understanding is the operating margin as a part supplier to the JV is somewhat less than the margin of the completed vehicles and the JV. If the company proceeds with the sales expected to be in the 100,000 plus range, can you give us some guidance on how those margins will look going forward?
A: (Henry)
Okay, let me explain the margin. Actually compared to same period last year, the margin, the overall margin decreased which mainly due to we have the EV products sold in the last -- essentially last year and EV products which a little bit higher margin in the last year. So, basically we sold EV parts in this year and the EV parts margin will be maintained -- they still enable us as our guidance that is about 13.5% to 14.5% in the year. What I want to explain more is because we the JV agreement that we already transferred EV product producing in the JV company, so while we consider the margin, actually we need to maybe -- if we put some JV company’s margin which was shared to the Kandi, the overall margin for Kandi should be like 25% to 30% something like that.
Q: A quick follow-up question, yes, understand that the PRC is instigating or pollution tax for polluting companies. Can you give us some color on how this might affect Kandi as the part manufacturer and also as the JV sales?
A:
Next year, China will commence carbon-trade program, in which each EV will receives green credits 5 times higher than a regular car. This definitely will benefit the entire green industrial chain, from EV parts or whole vehicle production even to the actual driving.
Kewa Luo - Investor Relations Manager
This is definitely going to be benefit for us…
Henry Wang - Chief Financial Officer
Okay, let me explain a little bit about this. Actually we will have the carbon trading arrangement, maybe starting from the next year. And for Kandi, we are under production chain, I think from Mr. Hu’s point of view; we can get the benefits or advantages on this.
Q: What is the status of the Hangzhou local government subsidies and how much is estimated that they still owe ZZY? And will Kandi make any kind of an announcement when ZZY does get the local subsidies and I have one little follow-up.
A:
First of all, the Hangzhou local government subsidy is already available; because our MPT program is treated as a special case that calls for a specific policy, which is not just about how much each car get subsidized but also about the grant for infrastructure, the local subsidy is still under discussions. Since the policy is for the time period from 2013 to 2015, we’re hoping by the year-end we are going to have answers from the government. By then, each payment we receive will be announced. And additionally, I’d like to mention that yesterday we received the advance payment from the national government about approximately RMB360 million and the announcement will soon be out very soon.
Q: As the follow-up, do they expect, when it goes into these cities that they will get the subsidies, the local subsidies on a more timely basis than they had with Hangzhou with all the delay?
A:
The 2013- 2015 subsidy should be gradually issued by the year-end.
Q: And other cities, do you expect that the pace will be on a more timely basis?
A:
As mentioned, the subsidies have been gradually released, so it’s hard to say whether they are being on time. But hopefully by the year-end, the 2013-2015 subsidies can all be received.
Q: Two part question, with China’s macro economy slowing down, how does that impact Kandi sale?
A:
This is only going to benefit the new energy vehicles; it won’t have negative impact on EV industry.
Q: And my second question was will other cities adopt the same rules as Beijing as far as allowing only electric vehicles in the city every day, if I heard that correctly? I think I heard that correctly.
A:
Beijing is the capital of China with a lot of people, and not every city in China has the restriction on the car driving. So for those regions already have restrictions on the driving, I believe they are going to follow Beijing and adopt such policy. But as for those regions without restricted driving, then this policy wouldn’t be relevant.
EOM.
