Niu - Earnings Call - Q2 2020

Transcript

Speaker 0

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the New Technologies Second Quarter twenty twenty Earnings Conference Call. At this time, all participants are in listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. As a reminder, we are recording today's call.

If you have any objections, you may disconnect at this time. Now I will turn the call over to Mr. Jason Young, Investor Relations Manager of NIO Technologies. Mr. Young, please go ahead.

Speaker 1

Thank you, operator. Hello, everyone. Welcome to today's conference call to discuss NIO Technologies results for the second quarter twenty twenty. The earnings press release, corporate presentation and financial press release have been posted on NIO's Investor Relations website. This call is being webcast from the company's IR website, and a replay of the call will be available soon.

Please note, today's discussion will contain forward looking statements made under the Safe Harbor provisions of the United Private Securities Litigation Reform Act of 1995. Forward looking statements involve risks, uncertainties, assumptions and other factors. The company's actual results may be materially different from those expressed today. Further information regarding the risk factors is included in the company's public filings with the Securities and Exchange Commission. The company does not assume any obligation to update any forward looking statements, except as required by law.

Our earnings press release and this call includes discussions of certain non GAAP financial measures. The press release contains definition of non GAAP financial measures and the reconciliation of GAAP to non GAAP financial results. On the call with me today are our CEO, Doctor. Yan Li and CFO, Mr. Hardy Zhang.

Now let me turn the call over to Yan.

Speaker 2

All right. Thanks, Jason, and thanks, everyone, for joining us on the call today. We have observed the recovery in the China market in Q2, while in the overseas market, our sales performance was still affected by COVID-nineteen. Now on performance in Q2, our total sales volume reached 160,000 units, an increase of 61% year over year. The sales volume in the China market reached 255,000 units, an increase of 81% year over year, while the international market reached 5,000 units decreased by 52% due to the impact of COVID-nineteen.

Despite the decline in sales in the overseas market in Q2, we remain very, very positive about our performance in the second half as the market gradually recovers from the COVID-nineteen outbreak. Now in Q2, we continue to build our leadership in urban mobility via new product rollout, branding and marketing activities, and the retail expansions. So first of all, Q2 has been a very busy quarter for us in launching new products. As I mentioned in the previous earning call, we launched our MQI2 on May 7, our flagship electric bicycle product for the China market in 2020, as the upgrade of our 2016 Signature M1 model. With the up to date technology and complying with China's new regulation.

The product launch was held on Zhihuo online live streaming sales at Taobao platform and achieved a huge success with 3,000,000 plus views and likes. Since then, M2 has been a key selling product in our electric bicycle category, representing 50.5% of our sales in Q2 and is positioned as our high end electric bicycle product. We also introduced the MQIS or MS model on July 16. MS is slightly smaller compared with M2, but also inherited the family design style of M series using the same technology platform as in M two. We also apply our innovation in lightweight materials in MS, reducing the weight of MS chassis, which allowed us to expand the battery capacity to 48 volt 26 amp hours while still complying with the new regulation.

Now with this new battery capacity, the MS has a longer drive range up to 100 kilometer and leads the drive range for the entire electric bicycle industry. Also, compact form factor of MS is also very friendly for people with old heights. MS comes with four models with pricing ranging from 38.99 to 55.99 RMB, representing an entry level product for the M series, while M2 is with price range from 45.99 to 61.99. Now besides expanding our M series with two new models, M2 and MS, we also expanded our GOA series with three new models, G0, G2, and upgraded G3. G0 is an electric bicycle designed as the entry level product of the Goldwatt series, targeting the mid end market with two driver age options at forty and sixty kilometers priced at $22.99 and $27.99 RMB.

GZERO inherited the design style of the Goba series, but is more compact and more practical with building back seats and add on baby seats. GZERO was launched as the JD June 18 campaign with a presale warm up and online live stream event. During the live stream event, we received close to 4,000,000 views and 2,000,000 likes on JD platform. And the entire product launch campaign generated a total sales volume of close to 17,000 units, demonstrating our capability to penetrate the mid line electric bicycle market. We also launched G2 and upgraded G3 and the Gova series on June 12 and July 18 respectively.

G2 is an electric bicycle product, larger than G0 with two drive range options at sixty and eighty kilometers priced at 35.99 and 39.99 RMB. Now G3 is the upgraded electric motorcycle product from our last year's G3 announcement, targeting cities with no restriction on motorcycles. It's bigger in size and with faster speed up to 60 kilometer per hour. It is equipped with three battery options and with price range from $42.99 to $64.99 RMB. Now with G0, G1, G2 and G3, our GOA series achieved a full spectrum coverage from entry level electric bicycle to electric motorcycle with price range from RMB2299 to RMB6499 meeting a wide range of consumers' demand.

The entire GOLBA series will help us to expand our market reach to lower tier cities. Now besides new products, we continue to enhance our brand awareness via user activity based viral marketing and targeted marketing. On user activity based marketing, we had two very interesting events in Q2. First, a new fan from Shanghai spent two sixty one days riding along the entire border of China with total distance of 30,000 kilometers on our original end scooter. During his trip, the fan goes through the snow mountains, go across the Gobi Desert, and the challenge, the extreme cold temperature of minus 41 degrees Celsius in the Northeast China.

So this story was published on Weibo and Douyin, and then was picked up by all major medias across China. It has achieved 35,000,000 views on social media and 10 plus T media coverage with hundreds of article mentions. Now second, to celebrate a new fifth anniversary, a new fan from Beijing actually sent a new miniature model up to 20,000 meters above the sea level in Inner Mongolia with the hot air balloon and made a V Log capturing the entire event. The VLOG has also achieved 41,000,000 views and received 9,000,000 likes on Douyin. Both of those activities demonstrate a strong loyalty of our users to our brand and help us to further build our brand awareness and the brand reputation across a mass consumer base.

Third, to promote safe riding, we also launched a no helmet, no ride campaign together with traffic administrative departments across 10 provinces and cities with Weibo articles and Douyin and the casual videos. This campaign generated 24,000,000 views across those platforms. Now with those efforts, we continue to build out our own site onshore video platforms like Douyin and Kuaishou, with Douyin quarterly views increased to 47,000,000 in Q2, a 23% growth over Q1 and Kuaishou to 4,500,000 views in Q2 versus only 190,000 in Q1. Now internationally, despite the impact of COVID-nineteen virus, we continue to add key opinion leaders to the new crew team of creators. One worth to mention is the Spanish key opinion leader post on YouTube and his post achieved 1,700,000 views, making new a hot topic in Spain.

And to further enhance the user experience and engage our new users, we launched a new social feature on our app called My Writing Journey, allowing users to quickly create a long format pictures with the writing geo path to be easily shared in WeChat and within the app. More than 15,000 journeys have been created and published in our new app community. We'll continue to add more functions to our app as a means to increase user engagement and view brand loyalty. So lastly, a very popular hip hop live competition show called three Dance of China was launched on July 18 on Yunku. It was expected to be one of the hottest shows for this summer in China.

We will have two feature advertising in the semi final and the final during the show, as well as the offline advertising campaign in September when the show is at its final stage. We estimate our overall exposure over 200,000,000 online and 400,000,000 views offline. Not only this will provide a brand awareness exposures, it will also help us to further enhance our brand image as a trending brand leading the urban lifestyle. Supported by the new products, the enhanced customer engagement and brand awareness, we continue to expand our footprint through store expansions and new market entries. Now in China, NIO added 51 stores to ten eighty four stores in Q2, which is expected to accelerate store opening pace in Q3 as the COVID-nineteen situation recovered in China.

For the international market, we have increased our market coverage to 45 countries with three more ads in South America, mainly The Dominican Republic, Peru and Brazil. We added additional 48 flagship and premium stores with total comps reaching 91 flagship and premium stores versus 43 in Q1 despite the COVID-nineteen situation. Now I will turn the call over to Hardy to discuss our financial results. Hardy?

Speaker 1

Thank you, Yan, and hello, everyone. Our press release contains all the figures and the comparisons you need. We have also uploaded Excel format figures to our IR website for your easy reference. As I review our financial performance, keep in mind that we are referring to the second quarter figures unless I say otherwise, and that all monetary figures are RMB unless otherwise noted. Our Q2 sales volume reached 160,000 units, increased by 61% year over year.

China sales volume increased by 81% as a result of demand recovery, retail sales network expansion and new product launch. Our China online sales are particularly worth highlighting. Online sales continues to grow and accounted for 14% of total Q2 sales volume compared with the 2% at the same period last year. The key reason is that this year, we launched new products such as M2 and G0 through online platforms. This helps to mitigate the restriction from COVID-nineteen for any big offline event and also offered a good alternative for customers reluctant to go to offline stores.

International sales volume decreased by 82% due to the adverse impact from COVID-nineteen. The lower international sales volume had a significant impact on our Q2 financials. For example, in Q2, we had a lower ASP, lower gross margin and also lower revenues from accessories spare parts. Many of these lines are caused by the lower international sales. We will discuss the impact in details later.

We also encourage you to keep this in mind while analyzing our financials. Regarding product mix, as we launched the new products, M2, G0 and G2 models in the second quarter, the product mix changed accordingly. N series accounted for around 20% of total volume, M series accounted for around 20%, U series accounted for 40% and the Goa series accounted for remaining 20%. The changes in the product mix affected our Q2 revenues in ASP. Total revenues increased by 21.6% to $645,000,000, in line with the guidance we provided earlier.

Revenues from scooters increased by 28% in total, out of which China market increased by 59% and the international market decreased by 53%. Our Q2 scooter revenue was, however, negatively affected by the price discount we offered during the new product launch through e commerce platforms. For example, we offered RMB500 discount on new model G0. Such price discount affected our revenue by approximately RMB10 million in aggregate. But since we offered a price discount, we are able to save on sales and marketing expense, which I will discuss later.

Revenues from accessories, spare parts and services decreased by 17% in total, out of which China market increased by 70. International market decreased by 70%. The decline of international sales is mainly due to lower spare parts sales to the sharing operators. Here again, we encourage you to look at China and international markets separately to get a better picture of our business for this quarter. Revenues per scooter, or ASP, decreased by 25%.

There are a few key drivers for the decline. First, the lower proportion of scooter sales from international market. The impact on ASP is estimated to be 8.5%. Second, the lower spare parts sales from international market, the impact on ASP is around 6.5%. Thirdly, the launch of low priced model G0 affected ASP by around 6%.

The remaining 4% is mainly due to change in product mix in other models. In summary, out of the 25% ASP decline, 8.5 is due to the lower scooter sales from international market. With the recovery of international market in the coming quarters, we expect this negative impact will be much less going forward. Gross margin was 23%, 0.7 percentage points lower than this time last year. The lower margin was mainly due to lower sales of scooter and spare parts from international market, which negatively affected our margin by around 5.5% in total.

However, we are able to offset majority of such negative impact by cost savings on battery packs, various components and warranties. Our total operating expense, excluding share based compensation, were 82,000,000, increased by CHF 4,000,000 or 4.6% year over year. The increase was mainly caused by higher G and A expense of CHF 2,000,000 for tax and surcharge and a higher R and D expense of 5,000,000, mainly for higher staff cost. Sales and marketing expenses, however, decreased by CHF 3,000,000. As a percentage of revenue, the sales and marketing expense, excluding share based compensation, was 6.6% compared with 8.7% in Q2 last year.

The decrease of 2.1% was mainly because we moved online our product launch from online from offline to online, as I discussed earlier. We offered direct product discounts to customers, which affected our revenues, but we save on sales and marketing expenses. Going forward, we may have similar approach for sales and marketing activities, especially with more direct sales through online e commerce platforms. Our share based compensation expense were RMB 11,000,000, an increase of EUR 8,000,000 compared with same period last year due to the new brands to employees during Q3 last year and Q2 this year. Our GAAP net income was 57,000,000 and adjusted net income was CHF 68,000,000, both are higher than Q2 last year.

The adjusted net income margin was 10.5%, higher than 10.2% in Q2 last year, mainly due to the lower sales and marketing expenses. We are pleased to return to profitability in this quarter despite continued impact from COVID-nineteen. Turning to our balance sheet and cash flow. We ended the quarter with RMB1 billion in cash, term deposits and short term investments. Our operating cash flow was positive million because of improved profitability, reduced accounts receivable, reduced inventory and increased accounts payable.

Our capital expenditure was EUR 59,000,000, out of which EUR 39,000,000 for land use right acquisition, 20,000,000 for new store openings in China and international markets as well as for additional machinery and R and D spending. We had a very healthy balance sheet and a strong cash flow in the second quarter. Now let's turn to guidance. We expect third quarter revenue to be in the range of $850,000,000 to $950,000,000, an increase of 30% to 45 year over year. The earnings release, we also provided you with the update on our July sales volume.

China sales volume grew by 64%, even though there were very bad weather conditions in China. The massive flooding affected our logistics and retail sales in July. International sales volume grew by 56% year over year. With that, let's now open the call for any questions that you may have for us. Operator, please go ahead.

Speaker 0

Certainly. Ladies and gentlemen, we will now begin the question and answer session. Thank you. We have the first question from the line of Vincent Yu. Please go ahead.

Speaker 3

Yes, Hardy and Jason, congrats on the robust performance and thanks for taking my question. I have three questions. First question is about the expansion of product category and the related audience. So in July, a new sales close to 68,000 units in China. Can you share with us which models in particular has driven the strong growth, which is about sixty four percent?

Second question is about, can you share some comments on the cadence of the reopening of the international stores? And how should we think about the international unit sales for second half twenty twenty? And third question is about how should we think about the China e scooter ASP for second half twenty twenty? Will we see a meaningful recovery?

Speaker 1

Thanks, Vincent. Let me answer you to the first question. For the key drivers for the July sales volume growth, there's a few new products we launched in July. First is MS. MS is electric bicycle category new product.

It's very much welcomed by our customer. In July, MS contributes to around 10% of our sales volume for in the China market. And another key driver is the Goa series. We launched both G0 in the second quarter. Also, launched the G2.

Both of them are electric bicycle. They are also the key drivers for the July sales volume growth. So it's mainly these three key new products driving the growth. For the second question, I would like Yan to comment on.

Speaker 2

I think for the international market, basically, I think we do have a pretty good expectation into Q3 and Q4, partially because one, all the stores are all our stores are opened so far in all the countries. So it looks like it's back to the business. And the second, we do observe that because of COVID-nineteen situation that actually across the globe, people start to prefer what you call individual urban mobility commuting device, which is our basically our product, the electric moped and electric scooters, so in tender. So that was actually a good sign to actually to drive sales. And lastly, I think we are also planning to roll out in the second half of this year, roll out our EUV, our first electric, well, let's call it power assisted electric bicycle or the e bike and there's sort of the European category as the e bike.

So that product will be rolled out most likely in Q4 this year and that will also help us help us to drive a little bit sales in Q4 and actually also roll over to the 2021. So net to net, I think right now it's very positive. And then we're also start to seeing orders from sharing operators as well. As we just recently actually got an opportunity of few orders from sharing operators really to expand their sharing operations in Europe. I think due to a similar basic phenomenon that we observe, they observe very similar phenomenon as due to the COVID-nineteen situation, people start to using this individual community device, whether it's owned or shared.

And last, and one more thing we draw as we mentioned in the previous call actually, we draw out a new rental program in July in Europe. And this program is actually through an app that user can actually rent new scooter from a participated dealers on weekly basis, daily basis. And so far we've had more than hundreds of dealers participate in this new rental program. And we think this actually will also help to sort out to lower the, what they call the entry barriers and give people even a, what they call a cheaper way to try out a new scooter first before making a purchase decision. So those are all the few things that we're really working hard to get the international market back on track.

Yes, so that's my question. For question three on the ASP, I'll let Hardy to answer that.

Speaker 1

Sure. For the scooter ASP, let's first talk about the second quarter ASP. So overall, ASP declined by 25%. And as I mentioned, the 8.5% is because lower international sales. And since July, you see we have already seen a recovery of the international market sales.

In July, our international market sales grew by 6556%. China market goes around 64%. So they are growing at a similar speed. Therefore, in Q3, also in the remaining of the year, we believe this 8.5% will not be there anymore. So if you take this 8.5% out of this, the 25% has given you remaining 17% that may have a may last for the remaining of the year.

But when we look at the ASP, we need to separate them into three categories. One is the China scooter ASP, second is overseas scooter ASP and thirdly is accessories spare parts ASP. For the overseas ASP, we believe it will continue to be strong. In the second quarter, our overseas scooter ASP increased by more than 20%. It's a very strong growth.

And for the remaining of the year, because of the order book, we believe our ASP will be at least the same as last year or even have a slightly growth. The China ASP, however, will decline because of the launch of GOVA series. The G0 and the G2, their prices lower than the new series. Also the MS newly launched the product in July also has a lower ASP compared with the M2 we launched in the second quarter. So for China scooter, we are thinking anywhere between 15% to 1818% ASP decrease in the third quarter.

For the accessories spare parts, this is the this part, we have some uncertainty mainly because of the overseas sharing operator, how much spare parts they order from us. Currently, for our Q3 forecast, we have been quite conservative in this part. But in short, I think the ASP for the overall products will decline for the second half of this year mainly because of the change in product mix. This is my answer to your third question.

Speaker 0

Can we move to the next question, sir? Thank you. Hello, Chris. Yes. The next question comes from the line of Bing Wang.

Please go ahead.

Speaker 4

Question number one is that about the gross margin. I actually found the gross margin quite stable. If possible, can you provide a detail about the vehicle or scooter gross margin? And is that increase or decline? And second is about the service.

And second is any one off issue in the gross margin we can explain in the second quarter. That is the second one is that you mentioned that the raw material and the parts decline, how battery declines the key driver for the margin stabilization. Can you quantify how much from the normal parts, how much from the battery, etcetera? That's number one question. Number two is about share based compensation.

I actually found that this one is pretty big in the first half. You just mentioned that you actually offer more or one more in the second quarter this year. Can I assume this number will be similar in the future compared to 2019? How

Speaker 2

should

Speaker 4

we think about the share based compensation? That's the second question. And third one is about the volume. You actually provide very good number. Can you provide guidance in the first two weeks after August?

What's the driver for this high growth? Somebody said that in China, because COVID-nineteen concern, a lot of people actually try to buy the scooters to avoid the poverty transportation. And do you see this as a key driver? This driver will continue to be strong because the Chinese COVID-nineteen seems at good control. So which means the growth may be lower.

Is there a reason why you have second half, oh sorry, third quarter only 30% to 45% growth, which is below the 64% in the July? So do you expect the growth to decelerate because the guidance is lower than the June number? Thank you.

Speaker 1

Sure. Let me first answer your question on the gross margin. Definitely, our gross margin is relatively stable compared with Q1 also last year. The key driver is cost savings. I can probably can provide you further breakdown for the margin on different components.

For our scooters, if you take out the logistic cost warranty, it's in the second quarter, the gross margin is around 20.7% compared with last quarter, it increased by 2%. And if you compare with last year, it has increased by around 3%. So this is a scooter gross margin. For the accessories and spare parts gross margin, it's around 48%, very similar to what we had in Q1, also in Q2 last year, so relatively stable. For the service gross margin this quarter is a low relatively low, only around 30% compared with the 70%, 80% in the previous quarters, mainly because in this quarter, we have service revenue coming from Volkswagen project.

You may recall, we provide R and D service to Volkswagen for new products that they plan to launch next year. But because of the COVID-nineteen, the project has to be suspended. Therefore, even though we have the same revenue, we have to incur additional costs, mainly for staff costs that we need to save the team for their project. That's why it drags down our service revenue gross margin. So this is the margin by product lines.

And specifically on the raw material, how much we save on that. So if we compare with our Q2 raw material procurement cost with Q2 last year, our battery cell cost actually declined by around 10%. And the battery pack and BMS also have a few percentage decline. Overall, the battery pack the overall battery pack, including both battery cell, BMS and the pack, has a decline of 8% compared with same period same time last year. The other components on the scooter also have around 4% cost up.

Overall, if you calculate by the weighted average, it contributes to around 5.6% cost up. So this is really the key driver to help us to make sure our gross margin is relatively stable. And so this is the answer to your first question. Your second question is the share based compensation. The share based compensation is mainly because last year in the second in the third quarter, in August, we've the Board approved additional share based compensation for the management team, also for the some of the key employees.

So that strike up our SBC cost by around $4,000,000 You May Q2 last year, the SBC is around $4,000,000 per quarter. So because of the SBC we gave in August, that's drive after SBC spend by around $4,000,000 And in April, because some of the employees there share based compensation, pre IPO share based compensation already fully lasted, so the company decides to grant them additional share based compensation, continue to last for additional four years. That also drive up the cost by around 13,000,000. So this is the majority of the FCC we granted. And for the remaining of the year, we do not expect any significant further share based compensation to increase.

So that's the answer for your second question. The third question is I'll leave it to Yen to comment.

Speaker 2

I'll get to it. Yes. I think for the August sales volume growth, we're looking at multiple factors here. The first factor will, you know, which actually the plus side is actually the back to school, right? So kids back to school, think that will actually provide a positive, know, basically a catalyst to the market where we think we can actually will drive the volume growth.

I think the second is actually, I think Bing just mentioned, you look at basically our guidance, which is actually the year over year growth in terms of the I think you mentioned we it wasn't really slower than the second quarter, no? The guidance on third quarter.

Speaker 1

Higher, 30% to 45%?

Speaker 2

Yes, it's actually higher than the second quarter. So I think that when we think the back to school will help us. Second is actually a lot of our new product, we look at the as I mentioned, the G2, the G0, the G2, the G3, the MS, all those products, basically with first the G0 and the G2 announced in mid June, the rest is actually in July. So if you think about those products, we'll kick in the effect of this new product, we'll kick in practically in Q3 this year. So typical, when we first announce the new product, usually, we have our own ramp up period and also it takes, you know, roughly about a month or so for the market to fully start to assess the product and really ramp up the sales.

So I think this those new products will help us in terms of drive up the August sales. And lastly, think with a phenomenon we observe, as I mentioned in the call, where with the G0, now we start seeing early sign of G2, where with G0 and G2, it actually also helps us to penetrate what we call the lower tier cities in the market where used to be we don't have a perfect product for those markets. And that actually helped us, I think with our store expansions in Q3, those also will contribute in term of the Q3 growth.

Speaker 1

Just to add to Yan's comments on August sales trends, in the August, our sales volume growth maintained at least the same speed as what we delivered in July. In the August, we expect the volume growth will accelerate mainly because we started new school opening promotion activities from Monday from today. Normally, will drive the volume for Yes. The So that's the answer to your question on August, the sales volume growth.

Speaker 4

But also, in the third quarter guidance, already 30 to 45, which is well below the 54 in July August.

Speaker 1

It's mainly because of the ASP. I mean, as I said, because we launched G0, G2, also MS, their ASP is lower than the average ASP. So this will drag down the ASP. But the volume will still be quite strong.

Speaker 4

Okay. Lastly, about the COVID-nineteen impact, because I know the second quarter, whole China actually only goes by 45% because of COVID-nineteen. So did you see the COVID-nineteen impact or help will be less going forward because COVID-nineteen seems to be better controlled in Mainland China? Thank you.

Speaker 2

I I didn't capture the full question, but hopefully I can answer it. I think basically now with the COVID-nineteen impact, we saw a full impact in Q1, a little bit in Q2, but as of now, I think for China, we're back, you know, I think we're safe to say we're back to what we call the pre COVID-nineteen market condition or even better, because the COVID-nineteen actually drives quite a lot of people to choose not to take public transportation that really start to move to electric bicycle product in China. So, I think in China market, we're actually in a better position, even in a better position than the pre COVID-nineteen situation. I think that was one of the reasons we keep, we're rolling out multiple new products line this in the last quarter and also in July and really try to take advantage of this and capture this market growth. I think similarly, I think in Q3, we expect to add more stores where because of COVID-nineteen, our Q1 store adds or store expansion, it was subpar because the money construction site was construction was shut down, so we were not able to open a lot of stores.

But now we have quite a bit stores ready to be opened in the backlog, which will happen in Q3. So that will help on the China situation. Now, on the international situation, I think it's actually back to normal, but the only thing with the international situation is Q3 has traditionally has been a slow quarter for international, especially in Europe where people take vacations. Still we expect to actually to getting a faster growth in Europe in Q3 to really make up a gap for Q2. But having said that, keep in mind, Q3 typically, there are people taking vacations in Europe, so they're a little bit sluggish into more retail.

Speaker 4

Okay. Thank you so much.

Speaker 0

Thank you. We have our next question from the line of Lee Wong. Please go ahead.

Speaker 5

Doctor. Lee and Hardy. This is Wong Lei speaking from CICC. So first of all, congratulations on the strong sales despite of the impact from coronavirus. That's very inspiring for sure.

So basically, I have three questions on financials and some other factors. The first question is about the ASP of the spare parts. This was around RMB800 in the 2019 and then dropped to like RMB500 in the third quarter and then increased to RMB1200 in the first quarter of twenty twenty, even with the COVID-nineteen impact in China. So what could be the driver that makes the key differences that's spare parts ASP? That's first question.

And then the second question is about the new regulations that we believe will redefine the two wheeler industry in China. It seems individual cities are having different law enforcement strengths. For instance, in Beijing, it seems we have a more restrict environment, while Shanghai is not taking that regulation seriously for now. How do you view the enforcement in the following quarters? That's the second question.

And then the last question and the third question is about the impact from the sharing economy. So looking forward, do we think the rising of the sharing economy will lead to a negative impact to our sales in the future? Or will NIO become a key vehicle suppliers for this industry? That's all my questions. Thanks.

Speaker 1

Sure, sure. Thanks, Lee. Let me answer your first question about the spare parts ASP. I think we need to first talk about the total revenue for accessories, spare parts and services. I think the revenue comes from two thoughts, one, the sales from China market.

Secondly, it's the revenue coming from overseas market. So even though in the second quarter, our total revenue from this category reduced by 17%, but if you see that into international market and also China market, China market actually grew by 70%, overseas market declined by 70%, also 70%. So in China, if you calculate average ASP per scooter, the price is actually quite stable. So the decline or the fluctuation is mainly coming from overseas market. So for overseas market, the key driver for our revenue in this category is the actual battery and some spare parts we sold to sharing operators in overseas markets in both Europe and also in The U.

S. This year, because of COVID-nineteen, it continues to affect U. S, continues to affect Europe. Therefore, we have much less spare parts to the overseas market. So that's the really driver who contributes to the fluctuation of the ASP.

We think this will continue for probably in the next one or two quarters. We hope next year it's become more or less stable. That's my follow-up question to your first question. I would like to get comments on the remaining two questions.

Speaker 2

Think, Lei, I think on the regulations enforcement, I actually agree with you, we do observe different cities actually apply a different, what do you call it, enforce it differently, top cities, what do we observe basically like top 20, top 10 to 20 cities, actually top 20 cities, we're talking about Beijing, Shanghai, Hangzhou, Nanjing, even Guangzhou,

Speaker 6

those cities

Speaker 2

and Hangzhou, those ones and Fuzhou and Guangzhou, Shenzhen, those ones actually they enforce very strictly. And so, in those cities actually only the electric bicycle products are being sold. And after the top and those fees roughly represent about traditionally into our market size, they're roughly about 6,000,000 units a year into our market size, out of that 30,000,000 units total market size annually. And then after that 20 cities, I think we're still seeing a handle, cities still enforce the electric bicycle rules. And obviously, there are also cities actually that allow electric motorcycles, actually allow motorcycles.

So that the product that didn't fall under the, what they call the electric bicycles are being sold electric motorcycles. A little bit of caveat on this is actually it's more enforcement. First of all, regardless which CD, this enforcement is actually very strictly on manufacturers. Basically, for the product that manufacturer provide, the product has to be either compliant with the electric bicycle or electric motorcycle. There couldn't be a different, you know, third category product, which is not compliant with either regulations.

So from manufacturing perspective, as new as any other manufacturers, this product we ship are in either electric bicycle, electric motorcycle. And they are being sold as electric bicycle or electric motorcycles. I think only the city is a little bit loose on this, our cities doesn't require people to get license plate on their electric bicycles or electric That's where the enforcement is a little bit loose. But, you know, I think you gave a really long answer for a short question here, but I think as time passes, you're going to see more and more cities going to enforce the rules. You know, for example, last year, we didn't see Suzhou, basically third tier city in Yangzhou really enforce this, but this year Suzhou basic, you know, this that, you know, the Suzhou actually start offering, you know, require people to get license plates on electric bicycles, you know, practically, you know, basically April, May this year.

So you're going to see more and more cities actually will apply the policy. Think the reason is slower because it requires quite a bit of administrative effort to establish what we call the license plate protocol, getting the local traffic management to set up posts, to get bicycles, to get license plate registration, so that it takes time, but I think within a couple of years or so, you're going to see, know, one and half city getting, you know, being enforced strictly. Okay.

Speaker 5

So it seems not only to lobby the central government, but also we need to take some time to lobby the local governments asking them to implement the implementations.

Speaker 2

Actually, it doesn't require the lobbying. It's really that the local administrative government actually, what do call it, have the task force.

Speaker 5

Yes, okay. Correct.

Speaker 2

Yes, so basically where they turn around and see, well, we need to do this now. Do we have the task force ready? Qutong didn't do it last year because they didn't feel like they have the task force ready to get over, to come with what we call the implementation of it. And then this year, Qutong is ready to join the club. They're going to see more cities.

Thing on the sharing operation, yes, we also offer quite some sharing, still on Tier three or Tier four, Tier five cities. For example, I visit a city called Changzhou, so I see a lot of sharing with electric bicycle sharing, they're once deployed by Hello, there's one deployed by Meituan, and then electric bicycle sharing operators. We think that's actually complements as part of solution for urban mobility. It has little impact to our business because all our products are on the mid end to high end products. You actually look at the bikes that sharing operator deployed, it's very simple.

It doesn't even have a, what we call, a display, minimum plastics, it simply just lets you get by. We think, you know, if there's a massive of those deployed in those cities, actually the market segment got hurt the most probably on the low end side.

Speaker 5

I see. So basically, won't have impact to our future sales in those lower tier cities. I think we're having more advanced products. All right. Yes.

Speaker 2

Right. Experienced that in 2016 or 2017 when the we got those questions in 2016, 2017 when the sharing bicycles hit its prime. Currently, the sharing electric bicycles, sort of the operation to me basically allows us to ride a little bit longer distance. Other than that, it's it serves the same market, right?

Speaker 5

All right. Okay. All right. That answers all my questions. Thanks, Doctor.

Li, and thanks, Charlie.

Speaker 2

All right. Thank you. Thank you.

Speaker 0

Thank you. We have the next question from the line of Alex Potter. Please go ahead.

Speaker 7

I guess a question two questions maybe on margins. The first one, going back to gross margin, obviously, the cost control that you mentioned was really strong. I was wondering if you could elaborate specifically on why battery costs and why these components costs are coming down? Is this a function of just cost cuts from your suppliers? Is it because you now have more scale and you're able to negotiate better pricing?

Like what specifically is driving the cost declines and is it sustainable? So that's question number one. Question number two is on the mix of e commerce. I know that theoretically at least your e commerce sales should be higher margin than your sort of traditional in store retail sales. Was this a driver of the gross margin outperformance in the quarter as well?

Or how would you quantify the impact there on margins? Thanks.

Speaker 1

Sure. Thanks, Alex. For your first question on the gross margin, the way how we negotiate with our suppliers that in the beginning of the year, we agree on our volume and we also agree on the price. And also, we agree on our volume based discount. So the more we purchase from them, the lower discount we can get from them.

Of course, so this is one of the key drivers why you see the large volume give us a lot of benefit for cost savings. Then go back to the negotiation early at the beginning of the year. In the beginning of the year, definitely, we need to have an expectation about the raw material for manufacture, battery cells, etcetera, etcetera. Based on that expectation, we negotiated with our suppliers. In China, because of the mass capacity buildup for the EV segment, also because declining of some of the raw material costs.

Therefore, when we negotiated with our supplier in the very beginning of the year, we also negotiated quite aggressive targeted price for the various part of the component. So in short, there's two key drivers. One key driver is the overall market, how we see the capacity in different components or how we see the cost of raw material capacity for the year. Secondly, it really depends on the volume. Normally, more volume we have, the lower discount the more discount we can receive from our suppliers.

So this is answer for you, first question. For your second question, you are definitely right. The e commerce gross margin normally should be higher than the sales through offline, if we are talking about the same product, same model. But in the second quarter, unfortunately, the e commerce channel is not the key driver for the stable gross margin, mainly because while we launched new products online, we also gave discounts on the new products. Therefore, in the second quarter, actually, our e commerce gross margin was lower than last year, mainly because of the discount we provided to end consumers.

But in other side, we are able to save on the sales and the marketing expenses. But going forward, if we can continue the faster growth on the e commerce platform with stable price, no discount, then definitely e commerce platform will be one of the key contributor for the margin growth going forward. So this is my answer to your second question.

Speaker 6

Yes, I'll just add

Speaker 2

on the margin part on the cost cut. So besides the scale, you know, the annual negotiations, I think there's one more thing within the electric bicycle category that we actually observed very interesting, because there was a, what do call a 55 kilogram of weight limitation. So there's quite a bit innovation in terms of lightweight materials. For example, you will reduce the chassis weight by half a kilo, but at the same time we're able to, you know, add that half kilo weight to the battery pack. It will allow us to use a lower density batteries, but achieve the same battery capacity.

And by doing so, you know, we have observed in cases that we're actually able to save 100 or 200 RMB per scooter basis. If you look at this on a scooter of 4,000 or 5,000 RMB, this is basically 5% savings. So this is actually due to, you know, to figure out where, it's simply a math question, what do call it, it's a math question where the total weight is restricted by kilo, so where should I reduce the weight, and where should I increase the weight, and such that give me a lower cost product at the same performance. So there are a few tricks or innovations we're also doing on that domain, which actually helps quite a bit as well.

Speaker 7

Great. Very good. Thanks. That's very helpful.

Speaker 0

Thank you. We have our next question from the line of Jun Xian. Please go ahead.

Speaker 6

Thanks for taking my question. This is Jun Xian from Citi Securities. So I have a couple of questions about the new products. So we just noticed that Yaibi is also releasing new products, the pedal assist electric pack. What's your I was wondering what's your point of view about this niche market?

And when exactly will your new product launch? And in your opinion, what size of this market will be in the future? And I have another question about the new brand Gova. Can you tell us what's the approximate gross profit margins of Gova? Thanks.

Speaker 2

So, let me actually talk quickly talk about the first, I assume you mentioned this is power assisted bicycle, or what we call the Pedalike or e bike basically this product category. So our product, we actually announced at CES this year in January, it's EUB-one and this product is targeted European and The United States market. The reason we targeted Europe and United States market because market size is huge, basically it's a 5,000,000 units a year market with average retail ASP of thousand $500 and that market has been doubled in the last three years and expected to be doubled again in the next three or four years. So, I think it's actually and for us to get into that market is actually also very simple, it uses motor, the only thing it has required is the power sensors, but into our design frame, we have all that capability internally. The only caveat with that product for Europe is the power assisted bicycle in Europe, there's anti dumping policy from Europe against China, so that our product has to be manufactured in Europe. China,

So, actually able to secure a local manufacturer partner in Europe and will help us to produce that product in Europe. This product got a little bit delayed this year because of COVID-nineteen situation. Our team couldn't get to Europe. There has been a lot of on-site negotiation, checking the site, all that stuff. So it got a little bit delayed.

But hopefully, we should be able to get this product out the door in the second half and it will drive a huge future growth for the Europe and United States market. This particular product doesn't we don't think this product actually has a market in China, particularly because China people actually the power system bicycle is not as friendly as our electric bicycle product. So, consumers will actually prefer electric bicycle first over the power assisted ones, where you actually require to pedal a bit before you actually have the power output. So hopefully that will answer the e bike market, the power system bike market. On the Goa brand, before I hand to Marty on the gross margin, so we don't view Goa as a second brand.

We still view Goa as the Goa series and our NIU brand that will help to leverage our existing sales channel and also leverage our brand awareness. But on the gross margin, I'll let Hardy to answer your question there.

Speaker 1

Yes. For Goa, we have a quite wide range of models from G0 to G2 with different specs. So let's give you a range, the gross margin for different products and the Goa series anywhere between 13% to 22%, depending on which model, which specs we're talking about. So this is the answer to your second question.

Speaker 6

Okay. Thanks, Hardy. Thanks, Yan. Thank you for your time.

Speaker 0

Thank you. Thank you. Seeing no more questions in the queue, let me turn the call back to Mr. Li for closing remarks.

Speaker 2

All right. Thank you, operator, and thank you all for participating on today's call and for your support. So we really appreciate your interest, and we look forward to reporting to you again next quarter on our progress. Thank you. Operator?

Speaker 0

Thank you. Thank you all again. That concludes the call. You may disconnect now. Thank you.

Good day.