Niu - Earnings Call - Q3 2019

Transcript

Speaker 0

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the NIO Technologies Third Quarter twenty nineteen Earnings Conference Call. At this time, all participants are in a 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 questions, you may disconnect at this time. Now I will turn the call over to Mr. Jason Yang, Investor Relations Manager of Niu Technologies. Mr. Yang, go ahead, sir.

Speaker 1

Thank you, operator. Hello, Welcome to today's conference call to discuss Niu Technologies results for the third quarter twenty nineteen. The call is being webcast from company's IR website. An investor presentation and replay of the call will be available soon at ir.me.com. Please note today's discussion will contain forward looking statements made under the Safe Harbor provisions of The United States Private Securities Litigation Reform Act of 1995.

Forward looking statements involve certain 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 include discussions of certain non GAAP financial measures.

Press release contains a definition of non GAAP financial measures and reconciliation of GAAP to non GAAP financial results. On the call with me today are our CEO, Doctor. Yang Li and our CFO, Mr. Hardy Zhang. Now let me

Speaker 2

turn the call over to Yan. Thanks, Jason. Thanks everyone for joining us on the call today. We have observed a gradual market recovery in Q3 being the traditionally a peak season of the year. Our sales volume has increased by 24% and revenue by 33% in Q3.

We have also enhanced our gross margin to 22.2% and net profit margin at 10.1%. Both were beyond our expectation. We continue to build our leadership in urban mobility via products technology development, marketing events and user based activities and retail expansions. First, we launched our global product line with three products G1, G3 and G5 in late September. The goal of product line is beautifully designed, but it was a different design style to expand our style diversity.

With product specs biased towards functionality, the goal of product lines position as a value for money product with retail price started at 2,599 perfect for entry level users under the new China regulations. G1 was shipped in late September and the G3 and G5 were shipped in late October. Despite the market already headed to a low season in October, we have seen quite a bit demand on this new product line. Second, we have launched our first power assisted bicycle product, new Aero EB-one in West Summit in Lisbon in November. The new Aero EB-one is a hybrid model of electric scooter and bicycle combining best features from both sides such as high battery capacity and the pedal assistance for longer range, scooter level dual suspension with sports bike wheels for better riding experience and the intelligent lighting system for safety.

The EB-one is classified as the electric bicycle in Europe and in United States. And this is our first product to target the annual more than 4,000,000 units electric bicycle market in The Europe and The U. S. The EP01 will be manufactured in Europe and we plan to ship this product first half twenty twenty. Third, we have also launched our full GT series led by our newly designed MGT scooter together with upgraded NGT and the UGT.

Inheritance the design style of our award winning M Series and combined with the GT powertrain technology, MGT is a dual battery electric moped with top speed up to 70 kilometer per hour and a range of 110 kilometers. We target to ship this product in first half twenty twenty as well. Lastly, we will also attend the twenty twenty CES in Las Vegas with quite a few revolutionary products to be launched at the CES. Make sure you do visit our booth then. Besides our products, we have also enhanced our fleet management solution.

It is the hardware and software SaaS solution with our connected vehicles, the fleet management software and the adaptive APIs. It's a one stop solution for all the sharing operators and the fleet management businesses. We have supported 16 sharing operators across 14 countries year to date. Now as NIO is the leading lifestyle brand in urban mobility, we continue to enhance our brand awareness through both very marketing and targeted marketing. We understood that the most efficient approach to enhance the brand awareness is through better marketing or word-of-mouth of our existing customers.

Hence the continuous improvement of customer experience and engagement is essential. In July, we have rolled out our new point system on our app. Users can obtain new points via various activities and milestones and redeem points for new lifestyle accessories such as T shirt, mugs, key chains. Till then we have more than 86,000 users participating in the program with over 5,000,000 points distributed. In September, we also rolled out our new wash program.

Each user can obtain a free wash coupon via our app and redeem at any of the 1,000 stores in China. The program has been online for about sixty days and we have more than 240,000 coupons claimed. In September, we also launched a one month new user referral promotion sales where existing users can receive new points by referring a new customer. More than 30,000 users have participated in this promotion. So all those programs enable us to engage our users more frequently online and offline and all those programs rely on our direct interaction with our users on the new app enabled by our smart scooters.

With the largest connected user fleet globally with more than 960,000 units, we have a unmatched competitive advantage over any competitors in this market and we'll continue to add more user interaction features to increase user engagement. Second being a lifestyle brand and with the fashionable design scooters, we are very unique position to go viral on any social media channels. Besides the surprising celebrity spot on we mentioned last quarter, we continue to create content either internally or through our users to go viral on the main social media platforms such as Weibo, Douyin, WeChat in China and Instagram, Facebook and YouTube globally. Our quarterly Douyin views across multiple accounts has increased from three millions to 10 millions. For example, our long distance riding event of user riding to Tibet also received more than 8,000,000 views on Douyin.

Lastly, our 30 plus KOLs across Europe has also created more than 3,000 pieces of content and received more than 1,000,000 views. We continue to participate in major exhibitions globally to build our brand awareness. We have attended the IFA in Germany in September, Autonomy in France in October, Tokyo Auto Show in Japan in October and the Web Summit in Lisbon, Portugal and ECCMA in Milan, Italy in November. Collectively, we have received more than 100 media coverage. New is well positioned as a new variability for urban mobility in all those shows.

Now supported by the new products, the enhanced customer engagement and brand awareness, we continue to expand our footprint. By end of Q3, the number of franchise stores in China has reached to ten twenty covering 182 cities. Our flagship and premium stores overseas have also reached to 20 by Q3. We're also very happy that we had our first flagship store opened in London, UK and Milan, Italy in November, a great milestone for the future growth in those two countries. We're also signing up dealer showrooms across The United States expecting to have more than 12 dealer showrooms from East Coast to West Coast by end of this year.

Now on the operation side, we have finished the buildup of our Phase one of our new factory. The factory will be fully in operation in December and this will add additional 700,000 units capacity totaling our overall capacity to 1,080,000 units a year. Lastly, me give a brief update on the China market. As mentioned last time, the overall retail market has been uncharacteristically soft since the implementation of new regulation. We have observed a significant market contraction contraction in May and June in the market where the regulation were strictly enforced.

We have observed some bounce back in Q3 partially due to Q3 was traditionally a high season and partially due to the spillover of the Q2's demand. The retail market quickly declined in Q4 as Q4 was traditionally a low season and the true market demand has not really bounced back yet. The sluggishness will likely to extend to the Chinese New Year in 2020 and we do expect the market will start to bounce back post the Chinese New Year as consumers began to get used to the new regulations and the many administrative processes such as getting license plate are smoothed out. Currently we have four models, the U plus U1 U. S.

And the G1 complying with the new regulation for the electric bicycle category in China where our N and M Series are classified as electric motorcycles. We're accelerating our product development effort and expecting to launch several new product lines for the electric bicycle categories in first half twenty twenty. We believe those new products will put us in a right position when the market start to recover next year. Now I'll turn the call over to Hardy to discuss our financial results. Hardy?

Speaker 3

Thank you, Yan, and hello everyone. Our press release contains all the figures and the comparison you need. We have also uploaded Excel format figures to our IR website for each reference. As I review our financial performance, keep in mind that we are referring to the third quarter figures unless I say otherwise, and that all monetary figures are RMB unless otherwise noted. As Yan mentioned, the China e scooter market recovered gradually during the third quarter, even though at low pace.

Our Q3 sales volume reached 149,000 units, increased by 23.5% year over year compared with 13.8% in the second quarter. The new national standards continues to affect the China retail sales market and the competition become more serious with competitors lowering sales price to maintain their market share. We are pleased to be able to deliver double digit growth with improved margin. Our gross margin reached 22.2 and net margin 10.1%. Total revenues rose 33% to million in line with the guidance we provided earlier.

The revenue growth was mainly driven by volume growth of 23.5% as a result of the recovery in China market and continued strong performance in the international market. I want to highlight that our revenue growth in this quarter had high quality. First, our accounts receivables reduced from million in the second quarter to RMB62 million in the third quarter. And the customer receipt in advance or in other words, the prepayment from our distributors was RMB44 million. Second, we maintained high gross margin at 22.2%, which is 9.8% higher than Q3 last year.

We managed to grow our top line with higher profitability. All of this translated to our strong cash flow and increased the cash balance. By the end of Q3, we had cash, term deposits and short term investments of million in aggregate compared with the RMB667 million in the second quarter, an increase of RMB252 million to our cash balance. All of them demonstrated the high quality of our revenue growth. Revenue per scooter was RMB438, up 7.4% year over year.

Net growth was driven by both higher average sales price per scooter and a strong sales of accessories, spare parts and services. The average scooter sales price grew 1.5% driven by three key factors. First and more important, the higher proportion of scooter sales from international markets where our sales price are much higher than China sales price. In the third quarter, our international scooter sales accounted for 7.6% of the total scooter revenue compared with the 5.1 in the same period of last year. Secondly, in April, we increased China retail sales price by 1% to 5% for selective models.

Third, the unfavorable change of product mix in China market and this partially offset the two positive factors mentioned above. The proportion of sales volume from the N and M series was around 35% in the third quarter compared with the 65% in the same period last year. Zen and M Series in general has higher sales price and therefore the lower proportion of sales from the two series negatively affected our average sales price per scooter. Our sales of accessories, spare parts and services continues to be very strong in this quarter. On average for each scooter sold, we also sold RMB524 for accessories, spare parts and services, increased significantly from RMB278 per scooter last year.

The increase was mainly driven by strong accessory and spare parts sales in both China and international markets and also by the R and D service revenue from the development collaboration agreement we signed with VW Group earlier this year. Gross margin was 22.2%, 9.8 percentage points better than this time last year and 1.5% lower sequentially mainly due to seasonality. Over the longer term, we expect our gross margin to be in the range of 20% to 25%, so we are happy to be moving close to our long term goal. Margin expansion was helped by three key factors. First, the favorable revenue mix.

Ancillary revenue from sales of accessories, spare parts and services was 12% of total revenue compared with 6.8% last year. International scooter sales was 7.6% of total scooter revenue compared with 5.1% last year. Both ancillary revenue and international scooter sales have higher gross margin and hence helped our margin expansion. I however want to caution you that our sales have a seasonality and the above mentioned revenue mix will fluctuate from quarter to quarter. Second, the margin expansion was helped by the price increase.

As mentioned earlier, we increased retail sales price in April and adjusted the wholesale price to our distributors accordingly. Such price increase contributed to the improved gross margin. Third, our continued efforts to optimize cost helped margin expansion. The cost of revenue on comparable basis further declined. We secured cost savings on raw materials and benefited from the economy of scale in our production.

We were able to negotiate lower procurement price because of our larger scale and in-depth knowledge of the supply chain. We believe such cost reductions are sustainable and will continue to benefit our gross margin for the coming quarters. In summary, out of the total 9.8% margin expansion in the third quarter, we estimate roughly two percentage points came from revenue mix, another 2% came from price increase and the remaining six percentage points came from cost reduction. Operating expenses on comparable basis increased in line with the growth of our business. Our total operating expense excluding share based compensation was million increased by 46% year over year.

Operating expense as a percentage of revenue was 13.1%, 1.2 percentage points higher than the same period last year. The increase was mainly due to our marketing and promotion activities in the third quarter and also higher depreciation and amortization expense as a result of expanded retail sales network. As you may recall that during our second quarter earnings release, we advised you that we intentionally postponed some of our sales and marketing expenditures from the second quarter to the third quarter due to the implementation of the new national standard. Therefore, the 1.2 percentage higher sales in the marketing this quarter was mainly driven by the timing of the spending. When we look at the first three quarter numbers, our sales and marketing expenses excluding share based compensation was 8.5% of total revenue, reduced by 1.7% compared with 10.2% in the third quarter last year.

We continue to see the leverage of opening spend. In the third quarter, we have 12,600,000.0 government grant, out of which 5,000,000 is a one off reward and the remaining is related to our new factory expansion in Changzhou. Our GAAP net income was 66,400,000.0 with net income margin of 10.1%. We are pleased to operate profitably even as we invest heavily in growth, which demonstrates the strength of our business model. Turning to our balance sheet, we ended the quarter with million cash term deposits and short term investments RMB152 million higher than last quarter.

Operating cash flow was positive million. Capital expenditure was RMB39 million, mainly for building the new factory in Changzhou and expanding our retail sales network. Now let's turn to guidance. We expect fourth quarter revenue to be in the range of RMB450 million to RMB515 million. This represents year over year growth of 5% to 20%.

We recognize the challenging market environment and we are working hard to accelerate the growth next year with increased product portfolio in both China and international markets. Please keep in mind that this forecast reflects our current expectation and could change. With that, let's now open the call for any questions that you may have for us. Operator, please go ahead.

Speaker 0

Thank you, sir. Ladies and gentlemen, we will now begin We have the first question from the line of Alex Potter. Please ask your question.

Speaker 4

Hi, guys. Thanks for taking my question. Very nice quarter. I wanted to ask first of all about the competitive environment given the new regulations. You mentioned a lot of the lower end competitors are cutting price in order to try to maintain market share.

Yet you are increasing price or you did in April and it seems like your market share is increasing. So it sounds like the pressure on the low end competitors must be rising pretty substantially. If you could comment on your ability to continue consolidating the market that would be helpful. Thanks.

Speaker 2

Thanks, Alex. I think that's a great question. So what we have observed basically in the when the new regulation was in place in the China market, due to actually due to the sluggish of the retail market, we do see traditional players really slashing prices try to maintain the volume. We have seen fierce competition on product which used to sold at RMB2000 ish now being sold at almost 1,500 RMB or 1,200 RMB. Most of those products are still lead acid based because there's at this point, there's still one version of lead acid based electric scooter that meet the the new regulation requirement.

It's a it's a basically it's a 60 oh, sorry. It's a 48 volt and 12 amp hour lead acid lead acid battery based scooters. It's very very much look like a bicycle type. And most of the pricing competition is that on that particular product line where people competing really, you know, 1,500 RMB, less than 1,500 RMB. So if you look at that particular product and then market segment that product is addressing to, it's actually very different with our product lines.

Most of our right now with the exception of Gova before with the NIU even our cheapest one in US is RMB3500 and Gova is at RMB3000. So we're actually addressing sort of at least the mid to high end of the entire market, where that market to our extent really there hasn't really been any sort of price competition there and we're sort of enjoying a more or less unique leadership there.

Speaker 4

Okay. Very good. Also you mentioned obviously the gross margin holding up very nicely. You mentioned the raw material pricing. Obviously, you're getting some procurement benefits as your scale rises.

Is this specifically related to battery procurement? Or is it across the board? What raw materials in particular are you benefiting from?

Speaker 3

Yes. This is Hardy. I think across the board, we do see the cost decline and normally we see the body parts of the scooter has declined anywhere between 3% to 5% depending on different components and for the entire battery cells, also the battery pack we see close to 10% decline. This is compared to the cost base last year. And in the third quarter, we see slightly decline compared with the second quarter.

And so far based on the current trend of this market the supply in the market, we do believe there is potential for us to further negotiate for this cost so that we can benefit further in the future. Hope this answers your question.

Speaker 4

Okay. That's great. And then last question, obviously you're generating cash. What are your plans for deploying this cash that you're raising? I mean, is that primarily into more sales and marketing, new product development, breaking into overseas markets?

What are your priorities? Because obviously, a positive cash position and positive operating cash flow is a nice position to be in. Just wondering how you're going to spend it. Thank you.

Speaker 2

I think that's a great question. So we're looking at actually any sort of cash we're generating eventually it has to translate or transform to translate to profit. So we're looking at the profit are coming really through three parts. One is actually continue to really accelerate the growth from this revenue from sales volume perspective. That means some part of cash will be invested in building out the retail expansions.

You look at this year, actually have significantly accelerated our effort in the first half this year to build up stores. We also start to build up retail stores globally. And that each of the store require a minimum anywhere between in China it will be somewhere around US100 sorry US10000 versus globally it's about like EUR20000 ish of CapEx investment per store. But having the retail footprint is actually essential for us to build up the brand and also support the sales growth. So I think that's one part of cash we got invested.

I think second, yes, we do have put a cash into building up the capacity to support the growth. This year, you see we actually built up the new factory this year to add another 700,000 units of annual capacity and really to support the future growth. And the third part is actually I think there obviously there will be so the first two I mainly talk about the CapEx part of it. I think the last part is actually it's a cash or you can think of a portion of profit will be reinvested into the R and D such that we can continue to come up with new product lines as well as the marketing and branding expenses. I'll turn to Hardy for additional add.

Speaker 4

Okay. Very good. Thanks a lot guys. Nice quarter.

Speaker 0

We have the next question from the line of Pin Wang. Please ask your question.

Speaker 5

Hi. I'm Bin Wang. Actually I have few questions. Number one, about the competition because we see the news flow on this month, Yardi are the number one producer has been announced to build a 1,500,000 plant in Chongqing actually mainly focused on the high end. So naturally, our provider number target will be around RMB6 billion.

So implying ASP is around RMB4000. So if they can deliver actually head to high competitor RMB1.5 billion. So I just want to seek your view about this high end production base from the Yardi, the competitors? That's number one question. And number two is about the data expansion.

Actually, because in this quarter, only 50 one-five deals established compared to a few 100 in the past several quarters. So I just want to know the reason why the expansion has been slowing down because this used to be the key driver for future growth? And you just mentioned you have so many cash you should able to support the deal expansion, but why is that just 15? And what's the guidance for the year end? That's the second question about the data expansion.

Speaker 3

And third one is about new products.

Speaker 5

You just mentioned in the CES, we have some new products. But at the same time, you also mentioned the revised version for M Series will also be debuted. I also just want to check whether this is the same products, I mean, new M will be in the CES or is totally different to two different products? These are pretty much my questions. Thank you.

Speaker 2

Think, Bin, great questions. So let me try to address one by one. Hopefully, don't miss any. I think first of all, on the think the market is there, so there's nothing we can prevent other players enter the market and try to sell or try to attack or address our market there. But if we look at the idea and the other competitors in this market, I think they obviously we have seen those competitors actually announce or actually commercialized high end products.

And I don't think actually by simply building up a 1,500,000 high end capacity will allow them to actually obtain that market share. I think it's combination of branding, having the right product and also having the right retail to actually to address that high end market. I mean so far we're still very confident. I don't have the exact data, but you look at any some on a city by city basis, we'll look at some of the cities. Basically, let's look at the price range anywhere between RMB4000 and up.

In some of the key cities, we're almost holding more than 50% of market share. So as really a demonstration that de facto, we are the high you know, the dominant force in the sort of the mid to high end market. So and with the competition coming, obviously, we're going to continue to also to ramp up our games as well with new product rolling out. So let me address on the new product part and I'll talk about the rate expansion. So if you look at, observe how we build up this business and build up this team in 2015, 2016, 2017 that three years, each year we only announced one new product line.

2018 we did about three. And so far this year we already announced actually I'm not counting myself right, but almost five to six or seven, right? So it's a we had a U plus U. S, that's two, and then we had the Gobot G1, G3, G5. So those are commercialized and also the bicycle.

Now we also have the product that ready to be commercialized next year, which is the new Aero EB as well as NGT and the UGT. Right? So we really, really up our games in terms of getting new product development. Now for the CES, the the two revolution well, the couple revolutionary products to be announced at CES are very different with the with the with the new m series. The we will have a new series announced in the first half next year, but the the product that we're gonna show in the CS are actually different.

So and actually next year, we're we're not just talking about three products. I think, you know, you look at we have what we have look at how, I guess, the number of product we developed in 02/2019, right, I think, you know, we're going to try to rule out basically, I don't have the exact number in count, but we're going try to roll out as many products as possible as well in 2020 the basically with the ramp up R and D team. And lastly on the retail expansions, yes, we have slowed down our retail expansion in Q3. Even you look at our historically, we look at 2018 and 2017, Q3 has always been a very low season to open retail stores because the Q3 has been traditionally a very hot season for selling scooters. So it's actually very difficult to turn over the stores.

So typically, what the the hot season to open stores are q one and the q four. So we're actually trying to accelerate our store opening in Q4 as well as Q1 twenty twenty.

Speaker 5

Thank you. I actually have a last question about outlook, if not guidance outlook. For next year, what's the operating volume number we should be expecting? If you're possible, can you break down about the overseas and China? Or especially in the China, can you break down about the NIU brand and mobile brand?

Speaker 2

This is the

Speaker 3

You're asking for the outlook for next year or the Yes. First

Speaker 5

Next year, for sure. Full year next year, 2020.

Speaker 3

We have to update our numbers. I think we'll probably provide an update when we do the release in next quarter.

Speaker 5

Okay. Thank you.

Speaker 0

We have the next question from the line of Tan Ho. Please ask your question.

Speaker 6

Yes. Good evening, management. Couple of detailed question. One is for the bike you sold 149,000. And so could you please give us the breakdown for the NMU series?

And also how much did you sell for GOVA this series? That is number one. Number two, the ASP in 3Q was down to RMB3856 and compared with 2Q at RMB4543. So I wonder what are the reason behind that? That's number two.

Number three, Q4, what's the plan for the store opens in Q4? Thank you. That's all my questions.

Speaker 3

It's Hardy. Let me first answer your first two questions. For the mix between our product line, as I mentioned, the N and M, the top end two series, they account to around 35 of the total sales volume in third quarter and Gova accounted to around 5% of the total volume, remaining 60% came from our U series. So this is a mix of the products in the second in the third quarter. In terms of ASP, normally we encourage you to look at the year over year comparison instead of quarter to quarter comparison mainly because of the seasonality.

If you look at the ASP from last year, you'll see the similar trend. Normally, the third quarter has the lowest average ASP throughout the year. And the reason behind is because the third quarter is the peak season for China sales, but the slowest season for overseas sales. Normally, the sales price of overseas products is more than double of the China sales price. So because of this mix of products, you see there is a change in the ASP.

So this is first reason, part of the seasonality. Second is linked to your first question because of the change of the product mix. In last year, our top models, N and M, they accounted for around 65% of the total sales volume in that quarter. But this year, that percentage has reduced to around 35%. That also has an impact on our average sales price.

So that's the two key contributors for the lower ASP compared with the second quarter. For the last question on the retail expansion for the fourth quarter, I would like Yan to comment on that.

Speaker 2

So obviously, the Q4 hasn't really ended yet. So we still have you know, number of stores actually in construction. And, you know, so I I don't I wouldn't be able to give an exact number on by end of q four, what number store we're gonna have to open. And I think there will be a combination of either some of the stores will get to open in December or some of the store will get open actually January next year. So basically, we're always looking at the q four this year and the q one next year are sort of the season we need to open stores.

So obviously some store got shifted in Q4, some store maybe got shifted in Q1.

Speaker 6

Okay. Thank you.

Speaker 0

At this time, there are no further questions. I'd like to hand the call back to your speakers for any closing remarks.

Speaker 2

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

Speaker 0

Thank you, sir. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.