Niu Technologies - Q2 2024

Transcript

Operator (participant)

Good day, ladies and gentlemen. Thank you for standing by. Welcome to NIU Technologies' second quarter 2024 Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we'll 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'll turn the call over to Ms. Crystal Li, Investor Relations Manager of NIU Technologies. Ms. Li, please go ahead.

Kristal Li (Investor Relations Manager)

Thank you, operator. Hello, everyone. Welcome to today's conference call to discuss Niu Technologies' results for the second quarter 2024. The earnings press release, corporate presentation, and financial spreadsheets have been posted on our investor relations website. This call is being webcast from our company's IR site as well, and the 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 U.S. 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, does not assume any obligation to update any forward-looking statement, except as required by law.

Our earnings press release and this call included discussion of certain non-GAAP financial measures. The press release contained a definition of non-GAAP financial measures and a reconciliation of GAAP to non-GAAP financial results. On the call with me today are our CEO, Dr. Yan Li, and CFO, Ms. Fion Zhou. Now, let me turn the call over to CEO Yan.

Yan Li (CEO)

Thank you, Crystal, and hello, everyone. Thank you for joining us today. The second quarter of 2024 continued the growth trend from Q1, with the total sales volume of 256,000 units, reflecting a year-over-year increase of 21%. The China market saw a 16% year-over-year increase to 207,000 units, while the overseas market experienced a significant year-over-year growth of 45% to 48,600 units. Total revenue reached RMB 940.5 million, marking a 13.5% year-over-year increase. This performance underscores the effectiveness of a strategic focus on expanding product sales channel and market coverage. We have made substantial progress in both China and overseas market, reflected in the improved performance and increased recognition from our partners.

In China, we focus on enhancing our product portfolio with new offerings around the core series. The new product introduced received positive feedback from users. In Q1, we launched product strategy to focus on target groups, and in Q2, expand our product offerings to further meet the diversified needs from the core groups. In the overseas market, we have significantly expanded our sales network for micro-mobility product by partnering with the key retail channels. This expansion has greatly increased our market presence, expected to further drive long-term growth. In the electric two-wheeler segment, we are optimizing our business operations to focus on key markets. We have completed the initial phase of building a foundation of direct sales in key markets in Europe and United States for our key products.

Although the strategy to invest more heavily in local operations takes time to implement in the beginning, we're confident that direct-to-market approach allows us to adapt more to the local market, thus can bring substantial growth in the long term. Now, let me dive into the China market. Our growth is driven by strategic focus on product portfolio expansion, sales channel growth, and same-store sales improvement. This year, we emphasize on product development on targeting both the high-end premium segment to reinforce our brand premium image and specific consumer segment, like Gen Z and female users. We initiated effort to expand sales channel by increasing the number of stores, increase under-penetrated cities. Additionally, we strengthened our omni-channel approach, integrating online and offline strategies to boost same-store sales. In Q1, we introduced the NXT, our most premium electric bicycle, priced at RMB 12,099.

It quickly became the leading product in segments, equipped with advanced features like full function ABS, TCS, blind spot detection, a car-grade dashcam, and a millimeter wave radar. Riding on the success, we launched the NQi Play electric motorcycle and the UQi Max electric bicycle, designed to appeal to the young Gen Z riders. The NQi Play inherited the classic N design, and the UQi Max offer a larger form factor, inherited the classic U-Series design. Additionally, we focus on female demographic by launching the upgraded U1 in March, coincide with the International Women's Day, combining the classic design with user-friendly and safety-focused features. Those new products are well received, collectively accounting for more than 50% all units sold in Q2, underscoring our strategic focus on targeting product development.

In Q2, we continued the product development strategy to grow our key premium products and expand the product portfolio for Gen Z and female users. We prepared the launch of NX, our most premium electric motorcycles, which was recently released in the market in July. The NX offers a customizable, smart tire pressure monitoring system, high-quality dual disc brakes, and adjustable suspension for smooth ride. Equipped with the most up-to-date new smart functionalities, the NX is priced from CNY 6,500-CNY 20,900. We believe the product will not only contribute to the sales volume, but also reinforce NIU's leading position in the premium electric scooter market. Now, to continue to explore products targeting the Gen Z user group, we recently launched the NT electric bike scooter, inherited the classic design of the N1, and it combined the advanced motorcycle-grade handling electrified.

Equipped with car features such as keyless ignition, TCS traction control, cruise control, and push during the rides. The NT is priced competitively at CNY 4,499. For the female consumer segment, in May, we released the O-Series to complete our product offerings, covering the premium female sector. The O-Series is designed for young female riders with focus on comfort and looks, and emphasize easy long-distance riding, safety, simple operations, and design excellence. Key design features include comfortable seating, ergonomic handles, stable riding triangle, in addition to the new smart features, to ensure delightful and a comfortable riding experience for urban commuters. The O-Series was launched in the market on June 1, through our live stream. Our product line strategy positions NIU's portfolio with premium product, while also focusing on diversify offering for unique user needs.

Each product maintain the consistent design elements and NIU signature halo light, to help strengthen our brand recognition in the market. Now, for our marketing campaigns this year, we have strategically focused on penetrating target user groups with our new product launches. Statistically, we have integrated marketing efforts aimed at the Gen Z and female demographics. To engage the Gen Z group, we expanded our partnership with JD Gaming, a popular online gaming team in China, through co-branded product launches, live stream sessions, and the gaming competition sponsorships. Additionally, we collaborate with Razer, including launching a NIU x Razer SQi Limited Edition, and participating in a game competition across 50 universities, generating over 50 million views online. Other initiatives, including sponsoring the No. 18 basketball team game and the Running University NIU KOL ambassador programs.

With the product focused on female user group, we launched a targeted sales and marketing initiatives. For the O-Series launch, we executed a comprehensive campaign on the Xiaohongshu, leveraging KOL content marketing and influencer event. This included widespread exposures, in-depth user experience, and media coverage. Across all platforms, we have our content around the product release this year, gaining 1.1 billion views. With those marketing efforts, new products, we observed a significant increase in interaction across all social media platforms. This quarter, the NIU brand received a total of 125 million interactions, representing a 22% increase year-over-year. The growth interactions on social media platform indicates that both our product and marketing campaigns are gaining significant traction and effectively resonate with our audience.

Now, regarding the sales network expansion, we made effort to enhance our sales networks through both channel expansions and same-store sales improvement. Driven by the new product introductions, we re-resumed the channel expansion this year, opening 400+ new stores in first half, resulting in close to 300 store adds, primarily in tier three and tier four cities. While this growth is modest compared with our total store counts, it signals the start of renewed momentum in our sales network expansion. We anticipate to continue this positive trend in Q3 and Q4. In addition to new store openings, our key focus this year has been on improving same-store sales through our omni-channel approach, driving online traffic to offline stores.

We significantly increased our effort on the traditional e-commerce platform, with online orders accounting for 48% of total orders in first half, versus last year at 26%. In addition to traditional e-commerce platform, we actively expand our online presence on Douyin, Xiaohongshu, and the Kuaishou. Leveraging a strong content from our influencer network, those platforms became a fastest growing channels. For example, on Douyin, we ramp up the in-store live stream sessions across fifteen major cities, conducting more than 500 sessions, and then nearly 2,000 hours of streaming this quarter. By end of Q2, over 22,000 orders were placed on Douyin, compared to a double digit from same period last year. Those efforts improved the same-store sales by close to 7% year-over-year in Q2, laying a strong foundation for future growth. Now, let me turn into the overseas market.

This quarter marks the period of growth and strategic execution. In the micromobility category, we achieved a 54% year-over-year growth in volume, and launched a key strategic partnership to expand our sales network. For electric two-wheeler segment, we focused on building direct sales operations to revive our market presence in key markets. Now, in micromobility, we leverage our established product portfolio to grow market presence by updating a well-received product with new versions and enhanced channel penetrations in key offline channels. In Q2, we introduced the KQi300 Series as a significant update to the popular KQi3 Series, offering a versatile and powerful options for urban commuting, including the KQi300P, KQi300X. Both features a advanced two-tube hydraulic suspension system for smooth ride over rough surfaces.

Both models include a smart connectivity to the NIU App, enhancing the overall riding experience with customizable settings and safety... The KQi300 sold over 10,000 units in the first few months during its launch, and it quickly attracts attention from influencers, media, and industry. In the first half of 2024, we also expand our micro-mobility offline retail channels in key countries in the U.S., Germany, and Australia, achieving notable growth in the key market. In the U.S. in July, we announced our strategic partnership entering all 800+ Best Buy stores. This milestone allows us to reach a wide market across the United States. Build on this momentum, also collaborating with Walmart, Kohl's, Target, and Home Depot to diversify our product offerings across various channels. Similar expansion effort were carried out in Europe and Australia.

In Germany, our product are now over 400 MediaMarktSaturn stores, and with successful pilot programs. Australia saw a considerable progress, with JB Hi-Fi stores increasing to 230, and hundreds of The Good Guys and Harvey Norman stores also displaying our products. Now moving forward, our focus on for the rest of the year is to leverage our well-rounded product portfolio and establish a sales network to drive growth in both sales volume and profitability. In response to change the import tariffs to the United States, we have initiated effort to relocating part of our manufacturing outside China. Now shifting to the electric two-wheeler segment, the business decreased by 69% year-over-year in first half 2024, driven by both external and internal factors.

Externally, key markets in Europe, like Germany, France, and Dutch regions, saw a significant drop in the total market volume after withdrawal of government subsidies for clean energy product, leading over a 50% decrease in total market size. Internally, we transitioned to a direct sales model in core market. While this shift will drive substantial long-term growth, it require time to be fully implemented and realized. By Q2, we have added 100 plus dealers on board in those key countries, and those build a good foundation for future growth when the market starts to turn around. Now, looking ahead, we're optimistic about the coming quarters for both China and overseas operations.

In China, we'll continue our strategy on optimizing product portfolio with premium products and Gen Z mass premium products we announced in this market in July and August, improving same-store sales with omni-channel approach and building our market effort around the specific consumer segments. Those adjustments have shown very positive results in Q1 and Q2, and we're confident that it's bring faster growth in Q3 and Q4. Overseas market, we expect sustained growth in the micro-mobility segment, supported by the comprehensive product portfolio and solid channel presence in the key market like Germany, US, and Australia, Australia. We have observed a strong 32% year-over-year growth in the product activation in July, and those growths are sustainable throughout the year.

In the electric two-wheeler market, while we're updating our product offerings, our focus remain on expanding the dealer network throughout the rest of the year to regain the dealer network footprint. Now with that, let me turn the call to Fion.

Fion Zhou (CFO)

Thank you, Yan, and hello, everyone. Please note that our press release contains all the figures and comparisons you need, and we have also uploaded Excel format figures to our IR site for your easier reference. As I review our financial results, I'm referring to the second quarter figures, unless I say otherwise, and all monetary figures are in RMB, if not specified. As Yan just mentioned, our total sales volume for the second quarter was 256,000 units, up 21% compared to the same period of last year. 208,000 units were sold in China, while the remaining 48,000 units were sold overseas. Nearly 60% of our sales volume in China was contributed by the new products launched this year.

The total revenue for the second quarter amounted to CNY 940 million, up CNY 12 million, or 13.5%, compared to the same period of last year. China revenue was 802 million, accounting for 85% of the total revenues, and of this, the scooter revenue was 727 million, up 14% year-over-year. This increase was mainly due to the higher sales volume and partially offset by a decrease in the revenue for scooters. China scooter ASP was CNY 3,503, down 2% year-over-year and 2% quarter-over-quarter. The year-over-year decline in ASP was mainly due to a change in product mix within the premium series.

This quarter, the sales volume of our high-end lead-acid motorcycles grew favorably in the premium market, accounting for one-third of the sales in our premium series. These models are typically offered a competitive price, which explains the slight decline in ASP and margins as well. The overseas revenue were CNY 138 million, accounting for 15% of the total revenue. The scooters revenue, including the motorcycles, the mopeds, kick scooters, and e-bikes, amounted to CNY 130 million, compared to CNY 115 million in the same period of last year. This growth was mainly due to the increased sales of kick scooters, and partially offset by the decline in the sales of electric motorcycles and mopeds. The micro-mobility revenue was around CNY 119 million.

up 32% year-over-year, and the overseas scooter ASP decreased from RMB 3,430 to RMB 2,682 year-over-year, as the increased proportion in the sales volume of kick scooters. However, compared to the first quarter 2024, the ASP increased 4% quarter-over-quarter. The revenue from accessories, spare parts, and services amounted to RMB 83 million, a 10% increase compared to the same period of last year, due to the increase of sales spare parts in China market. The gross margin for the second quarter was 17%, 6.1 PPT lower than the same period of last year, and 1.9 PPT lower than the previous quarter. This decline was mainly due to the lower margins of China scooters and the increased proportion of the overseas kick scooters with a lower margin.

In China, as we mentioned previously, our high-end lead-acid motorcycles offered a lower margin compared to our classic premium lithium-ion ones. Meanwhile, we continue to allocate part of the margins to our domestic distribution partners to reward their loyalty to the company. Talking about operating expenses, the second quarter OpEx was CNY 192 million, representing a 3.5% decrease compared to the same period of last year, and the total OpEx ratio decreased from 24% to 20%. Selling and marketing expenses were CNY 120 million, up CNY 11 million year-over-year, primarily due to the new product promotion in online shopping festivals like June 18, May 20, and other advertisements in China. Selling and marketing expenses as percentage of revenue went down from 13.2% to 12.8%.

R&D expenses amounted to CNY 32 million, down CNY 9 million year-over-year, and mainly due to a decrease of CNY 9 million in share-based compensation and staff costs. R&D expenses as percentage of revenue went down from 5% to 3.4%. G&A expenses were CNY 39 million, down CNY 9 million year-over-year, mainly due to the decrease in allowance for doubtful accounts. G&A expenses as percentage of revenue went down from 5.8% to 4.2%. In the second quarter, we had a net loss of CNY 25 million, with a net loss margin of 2.6% under the GAAP accounting, compared to a net loss of CNY 2 million for the same period of last year. The adjusted net loss was CNY 20 million, with a adjusted net loss margin of 2.1%.

Turning to our balance sheet and cash flow, we ended the quarter with CNY 1.3 billion in cash, restricted cash, term deposits, and short-term investments. Last quarter, this amount was CNY 1.2 billion, and last year end, it was CNY 1.1 billion. Our operating cash inflow amounted to CNY 174 million, and we expected the operating cash flow to remain healthy going forward. The CapEx for this quarter was the outflow of CNY 20 million, reflecting an increase of CNY 5 million compared to the same period of last year. This can be attributed primarily to an increase in the opening of new stores in China. Now, let's turn to the guidance.

We expected the third quarter revenue to be in the range of CNY 1,298 million to CNY 1,483 million, an increase of 40%-60% year-over-year. Please be aware that this outlook is based on the information available as of the date and reflects the company's current and preliminary expectations, which is subject to change due to the uncertainties relating to various factors. With that, we're now open for the call for any questions that you may have for us. Operator, please go ahead.

Operator (participant)

Thank you. We will now begin the question and answer session. To ask a question, please press star one one on your telephone and wait for your name to be announced. If you'd like to cancel your request, please press star one one again. One moment for the first question. Our first question comes from Kai Kang from CITIC. Please go ahead.

Kai Kang (Analyst)

Okay, thank you for the opportunity, and thank you, Mr. Yan Li, and thank you, CFO Fion. And I'm Kai Kang from the CITIC Securities and also from CLSA, and I have two questions. And the first question, that as we have mentioned, we will have a strong growth on the next third quarter of 2024. So what kind of GPM do we think we can achieve, and in the third quarter as our volume will be much better with scale effect? And what's the, maybe both in the long term or the midterm GPM, do we think we can achieve or can get? And that's the first question.

Yan Li (CEO)

I can, so let me repeat the question. So basically, you're asking us about the third quarter strong growth, and, you're asking about the GPM or?

Kai Kang (Analyst)

Uh, the-

Yan Li (CEO)

I think I have-

Kai Kang (Analyst)

Yes. Yes.

Yan Li (CEO)

... What do you mean by GTM? The go-to-market plan?

Kai Kang (Analyst)

The gross profit margin.

Yan Li (CEO)

Oh, okay.

Fion Zhou (CFO)

So you're asking about the reason why the gross margin dropped, right? This is Fion.

Kai Kang (Analyst)

Yes, and the trend of the gross profit margin in the next few quarters.

Fion Zhou (CFO)

Okay, all right. So, regarding the gross margin, actually, this quarter and last quarter, the reason is the reason is mainly count on the domestic gross margin drop. As I just explained, starting from this year, we plan to launch the high-end lead-acid motorcycles in our premium series. Normally, in domestic market, we set a bar that the MSRP above 4,500 is our premium series, and below that is our mass premium series. And this year, our high-end lead-acid motorcycles, the cheapest model of our high-end lead-acid one is around 4,800 RMB.

and we also launched the other, you know, lead-acid high-end motorcycles set the price around 6,000-8,000 CNY MSRP, which is also the leader in the premium markets in our premium series and also, you know, in the China market. But those lead-acid ones, gross margin is around 5-7% gross margin, less than our premium models. Normally, our premium lithium-ion ones got the gross margin around 22%-28% gross margin. And the lead-acid one is around, you know, 5 to 7 PP lower than the our traditional premium lithium-ion one.

This main factor drives our gross margin in China market and also, you know, in blended in total to around 3%. And the rest 3%, as I just explained last quarter, that this year, since we launched the different new products fitting to different consumers, like Yan just mentioned, the Generation Z, the female ones, the lead-acid products, which are new to the market. So, we offered several points of the channel profits to our distributors to thank for their loyalty to our brands, you know, during last year and the year before last, when we're facing the difficulties in the domestic market.

And also, you know, to boost their confidence and help us to build in the more healthier sales channel in the domestic market. And that's why, you know, we are able to open the new stores in the first half, in the first half of this year, more than 400 new stores in China market. And those are the two major points, which, you know, drag down our gross margin in China market. And in the meanwhile, our overseas markets, the kick scooters revenue contributes around 14% of our total revenues, compared to only 10% last year. And those increased proportion of the overseas kick scooters also, you know, drag down our blended gross margin in total. And those are the, you know, main reason why the gross margin dropped compared to last year.

But, you know, for the following quarters, and when we see the overall this year's guidance, we won't expect our year-end or the average annual gross margin go back to around, you know, 22%-23% as we previously, you know, did in 2021 or 2022. But, you know, we expected the gross margin this year would be lower than, than, you know, the year before last and last year. But still, you know, we'll remain at the higher level when we compare to our competitors in the China scooters market. I hope this will answer your question.

Kai Kang (Analyst)

Thanks a lot. I see the trend on this margin. And also, you also mentioned about the new shops and new dealer networks that we are expanding in China. So, do we now have a higher target on the dealer network volume or shop volume in China at the end of this year? Or, what's the target on the dealer network?

Yan Li (CEO)

I think the goal is actually to at least add another roughly another 1,000 stores this year, you know, in addition to the existing ones we have. I think the first half, I mean, we opened up, you know, 400+ stores, but also I think we shut down about 100 something. So basically that resulted in net add of close to 300 stores. I think the rest that we're looking at is, you know, basically what we need to do for Q3 and Q4.

Kai Kang (Analyst)

Well, thank you. It's very clear, and thank you.

Operator (participant)

Thank you for the questions. Our next question comes from the line of James Zhou from UBS. Please go ahead.

James Zhou (Analyst)

Dear management, thanks for taking my questions. I have one question. And so we all know that the new national standard is about to roll out in a few months. So, there is any comments on the potential policy and maybe its impact on the high-end commuter markets we are in?

Yan Li (CEO)

Well, I think we're still very closely, you know, monitor and actually looking study this new national standard. I think it has a, you know, basically, the standard has some key things around battery safeties, which actually, you know, may actually, I think will be actually positive news for us. And also, you know, the standard also have some requirement on sort of, you know, the design form factors. So our design team is actually really looking into the standard and actually basically are developing products that are meeting new standards. So, you know, in terms of the impact, you know, I guess we had to just watch and see.

James Zhou (Analyst)

Okay, thank you.

Operator (participant)

Thank you for the questions. Once again, to ask question, please press star one, one. One moment for the next questions. Our next question comes from the line, Yaqing Chen from CICC. Please go ahead. Yaqing, your line is open, you may unmute locally.

Speaker 6

Oh, hello. Good evening. I'm Yaqing from CICC, and my first question is, what is your expected gross margin of kick scooters in the mid to long term? Because, we can see that the growth margin of kick scooters may be lower than than scooters in domestic markets. So, how can we improve the gross margin of kick scooters, and what is your expectation of it?

Fion Zhou (CFO)

Well, this is Fion. I'll answer this question. Actually, you know, our kick scooters gross margin remain almost stable for the past three quarters, when our sales volume ramped up to around 40,000 units per quarter. And in the meanwhile, the other, you know, reason why the gross margin remains stable is that we set up a stable partnership with our overseas sales partners, like Yan just mentioned, in the U.S., Best Buy, Walmart, and also, you know, in the EU, the major electronics marts, like MediaMarkt, those big partners. But this is but our kick scooters business is still at the very beginning stage.

Even this year, we don't expect a huge increase compared to last year, or we made a market somebody in the, in those countries. We still expect that, you know, once when our sales volume reach around 0.5 million sales volume in total in the overseas markets, we are able to see the, the scale of economy benefits from the production cost, and also, you know, the, the buying power in the shipping and logistic cost. But, you know, below those sales volumes, since we sell it, you know, across the US and the, EU, there is no strong benefit from the cost reduction way for us. And in the meantime, we didn't expect the kick scooter as the, profits, as a, as a profit stream to our company.

We still see the kick scooter as the strategic footprint for our, you know, micro mobility and our mobility business in the developed countries, to reinforce our brand and to help us build up the brand image compared with our motorcycles. That's why, you know, we didn't put, you know, a harsh pressure on the kick scooters profitability. Hope this will answer your question.

Speaker 6

Thank you. It's very clear. My second question is about expense ratio, because we have seen a downward trend in operating expense ratio in quarter two. Will it continue to decline in the second half of the year, quarter to quarter?

Fion Zhou (CFO)

Yes, for sure. You know, once when our revenue increased, and we, you know, get back to the right track in the growth of our business, those expenses as percentage of revenue will drop dramatically. Since, you know, last year, we already done the cost reduction and improved our operating efficiency at the second half of last year. Normally, you know, the expenses as kind of the fixed cost or fixed expenses are at the lowest level to our production and our business scale. This year, the only thing is will be changed, or the only expenses will be changed, aligned with our revenue, is the selling and marketing expenses.

For the R&D and G&A, since the revenue increased, those expenses of, of, as percentage of revenue will drop. And this year, we expect even the annual OpEx as percentage of revenue will drop dramatically compared to last year. Well, we'll be back to the same level as the year before last, which is around, you know, annually, around 16%-20% is our, you know, normal level for, for the annual OpEx as percentage of revenue.

Speaker 6

Awesome. Thank you very much. That's all my questions, and we are looking forward to the earnings in next year quarters. Thank you very much.

Operator (participant)

Thank you for the questions. Once again, to ask question, please press star one, one. Thank you. Seeing no more questions in the question queue, let me turn the call back to Mr. Li for closing remarks.

Yan Li (CEO)

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

Operator (participant)

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect your lines.