Niu - Earnings Call - Q4 2019

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by and welcome to the New Technologies Fourth Quarter twenty nineteen Earnings Release Conference Call. At this time, all participants are in a listen only mode. There will be a presentation followed by a question and answer session. I must advise you that this conference is being recorded. I would now like to hand the conference over to your first speaker today, Mr.

Jason Yang, Investor Relations Manager. Thank you. Please go ahead.

Speaker 1

Thank you, operator. Hello, everyone. Welcome to today's conference call to discuss New Technologies results for the fourth quarter and full year 2019. The call is being webcast from the company's IR website. An investor presentation and a replay of the call will be available soon at ir.niu.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 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. The press release contains 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, Doctor. Yan Li and the CFO, Mr. Hardy Zhang.

Now let me turn the call over to Yan.

Speaker 2

Alright. Thanks, Jason, and thanks everyone for joining us on the call today. So on the performance, our sales volume has increased by 14% in Q4 twenty nineteen and by 24% for the full year of 2019. Our revenue has also increased by 25% in q four and by 41% full year 2019. We have also enhanced our gross margin, achieving a historically high gross margin at 26.1% and net profit margin at 11.3% in q four twenty nineteen.

All financial data were beyond our expectation. Now we continue to build our leadership in urban mobility via product and technology development, event and user based activity we launched our UGT in late December. UGT is an upgraded high end version of U series targeting primarily Europe and The US market. U GT inherited a simplistic design style and lightweight body of our award winning U Series while increased wheel size and performance with the retail price started at a $16.99 euros in Europe. Second, we have launched our first Straddle electric motorcycle product r and our first three wheel electric motorcycle t at CES in January.

Both are revolutionary products to redefine urban mobility. R is our power performance product. It has a top speed of 160 kilometer per hour and a maximum drive range of 130 kilometers. It comes with a maximum 30 kilowatt mid mounted motor and a seven kilowatt hour portable dual battery. Our primarily targets Europe and The US market as well as high end motorcycle market in China.

As a high end strata motorcycle, it listed our new brand in urban mobility. Our video of art on Douyin has received more than 25,000,000 views as well as the top viewed videos on our Douyin platform. So this is just another testimonial on the popularity of this product. We expect r will be in the market in late twenty twenty. While r focuses on performance, T focuses on comfort and smart commute in urban mobility.

A self balancing three wheeler with a roof cover, T is the urban all weather commuter with a top speed of 80 kilometer per hour and a maximum dry range of 200 kilometers. It's spacious to take additional passenger and with extra cargo space. In addition, T is a level two autonomous driving capable, including adapt adaptive cruise control, self parking, and collision detection system. It is the perfect urban mobility vehicle for individuals and couple commuters, easy to use, robust to all weather conditions, and smart for safe driving. Now besides the new products, we continue to enhance our brand awareness through product launches, viral marketing, and the targeted marketing.

First, we attended for the first time CES in The United States in January. At CES, we successfully launched the two revolutionary products, R and T, as mentioned before, and continue to strengthen our brand of style, technology, and freedom in urban mobility. We received more than 200 media coverage with more than 2,000 articles published. We also broadcasted the launch on social media platforms, achieved around 120,000,000 views on Weibo and 34,000,000 views on Douyin. Second, we continue to create a viral marketing on social media platform.

Our quarterly Douyin views increased from increased to 20,000,000 in 02/2004 from just a few millions in the first three quarters in 2019. And due to the popularity of short video platforms, we plan to invest more resources on Douyin, Kuaishou, and Bilibili as well. Internationally, our 30 plus KOLs across Europe has also created more than a thousand pieces of new branded content, display them on Instagram and YouTube. The highlights of those came from key strategic cities such as Hamburg, Paris, Frankfurt, and Milan. And lastly, a Chinese TV series called was aired in February and has become one of the most popular shows in China recently.

Our scooters were used numerous times as a commuting vehicle in this TV series selected by the cast due to our fashionable design. This has achieved more than 2,600,000,000 views, and the show is still running. Now supported by the new products that enhance customer engage engagement and the brand awareness, we continue to expand our footprint. By end of q four two thousand nineteen, the number of franchise stores in China has reached to a 50 as we added total of 290 stores in the entire year of 2019. We further expanded our international footprint to 38 countries with 26 flagship and premium stores overseas and thousand plus dealers.

Now despite the significant progress that we made in Q4 twenty nineteen, our business operation has been disrupted by the outbreak of coronavirus in Q1 twenty twenty. First, our sales in China has been impacted significantly. Most of cities have shut down business apart for the entire February. So we started February with all of our stores closed, but ended with 65% of our stores opened at February for business. Furthermore, as people were recommended to stay home and work from home, there were little retail traffic or retail demand.

Now we started to observe recovery in March as businesses start to be back in operation. And up until now, 85% of our stores have opened for business. Now in addition, for the past month and a half, we also focused on store sales improvement, linking offline stores with online presence. In February, we trained all our store operators to set up online virtual stores via WeChat and provided online sales consultations to potential customers. We also marketed the online purchase, offline delivery campaign and received promising results.

Our online to offline orders have increased by 2.5 x over the same time last year. Second, our international sales have also been impacted due to the disruption in production and shipping. Our factory was shut down for the February. And after the factory reopened in mid February, we also experienced a shortage of frontline workers as many of them were still in quarantine in their hometown. Now our upstream suppliers also experienced similar situation.

Now this disruption has caused slight delay in our international order fulfillment. Amid the current outbreak globally, we also focus on expanding our international footprint, enter additional countries in South America, as well as establish a stronger footprint in Southeast Asia to diversify the international sales. Now despite the current setbacks, we remain very positive about our business performance after the coronavirus outbreak is over. First, the long term industry trend or the fundamental market demand remains unchanged. Urban mobility is the necessity, and there's always a strong demand for more convenient, more efficient, and cleaner urban commuting solutions.

Second, we observed that in many markets that the forced quarantine has further shifted the consumer focus from offline to online, which we will benefit from due to our strong presence in both online and offline for marketing and sales. Now in the meantime, we're managing our business in a very prudent manner and ready to accelerate as soon as the market starts to recover. Now I'll turn the call over to Hardy to discuss our financial results. Hardy?

Speaker 1

Thank you, Yan, and hello, everyone. Before I discuss the Q4 financials, I would like to first share with you our cash and liquidity status because I think some of you may have concerns. The short answer is we do not foresee cash and liquidity problems in the short term based on our current estimates. By the end of last year, we had cash, term deposit and short term investments of RMB765 million in total. In early February, when the Chinese government first announced the restrictive measures to combat the virus, we did stress testing and ran different scenarios to assess the impact.

Subsequently, we took proactive actions to manage our cash spending and the working capital. In the meantime, we have been monitoring cash sales on daily basis. We are glad to see cash sales coming in consistently during the past few weeks. In terms of debt, we have short term bank borrowings of RMB217 million as of December. Out of the total borrowings, only RMB20 million is credit loan.

The rest are cash pledged loans. We pledged our US dollar cash to banks and borrow RMB loan to achieve a reasonable cash balance in different currencies. Considering our cash balance and debt structure, we do not foresee short term liquidity problem. Of course, to ensure we always have a plan B, we keep active communications with our relationship banks. They are very supportive and stand aside with us to provide support when needed.

I hope I've all addressed your concerns, and let's turn back to discuss our Q4 financials. Our press release contains all the figures and 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 fourth quarter figures unless I say otherwise, and that all monetary figures are unless otherwise noted. Our Q4 sales volume reached 106,000 units, increased by 13.5% year over year, in line with our expectation.

Total revenues rose 25% to 36,000,000 above the guidance we provided earlier, mainly because of two reasons. First, the product mix for e scooter sales are more favorable. The higher priced N and M series continued to take a decent proportion of our total sales volume. In Q4, N and M series in total accounted for 40% of sales volume compared with 35% in Q3. Second, strong sales in accessories, spare parts and services.

In q four, for each e scooter sold, we also sold RMB 820 accessories, spare parts and services compared with RMB524 in Q3 and RMB327 in Q4 twenty eighteen. The strong sales came from the spare parts sold to our overseas sharing operator and to our after sales service providers. Our e commerce platforms also had a strong sales in accessory and services in the fourth quarter, benefiting from the larger user base, higher brand recognition and more effective marketing activities. Revenue per scooter was RMB546, up 10% year over year. That growth was mainly driven by strong sales of accessories, spare parts and services as I mentioned above.

Gross margin was 26.1%, 12.6 percentage points better than this time last year and 3.9 percentage points higher sequentially. Our full year gross margin was 23.4%, 10% better than full year 2018. Q4 margin expansion was helped by the similar factor as we discussed during last quarter, being the overall favorable revenue mix and cost cutting efforts. Operating expenses on a comparable basis increased in line with the growth of our business. Our total operating expenses, excluding share based compensation, was million, increased by 31% year over year.

Operating expenses as a percentage of revenue were 16.1%, 0.6 percentage points higher than the same time last year. The increase was mainly caused by the higher G and A expense because we made provisions for bad debt and had additional professional service fee related to our global trademark registration. When we look at the full year 2019 numbers, our total operating expenses, excluding share based compensation, were 14.9% of total revenue, reduced by 1.9 compared with 2018. We achieved the leverage in our operating expenses on full year basis. In the fourth quarter, we have 13,500,000.0 government grant mainly related to our new factory in Changzhou, which commenced operation in December.

For full year 2019, we had 29,800,000.0 government grants, 2,600,000.0 is related to the new factory expansion and the tax paid, remaining a one off grant. During 2020, we expect to continue to receive government grants, but it will be a much smaller amount. Our GAAP net income in Q4 was million with net income margin of 11.3%. Our GAAP net income for full year 2019 was CHF190 million with net income margin 9.2%. The margin is higher because of above mentioned improved gross margin, the operating leverage achieved, government grants and also because of limited income tax expense as the company benefited from the accumulated loss carryforward from earlier years.

In the coming 2020, when the company continues to generate profit, we expect to pay the regular income tax during the year. Turning to our balance sheet, we ended the quarter with CHF765 million cash term deposit and short term investment. Capital expenditure was CHF42 million in Q4, mainly for building the new manufacturing facility in Changzhou and for expanding our retail sales network. Short term bank loan was reduced by CHF51 million compared with Q3 as we repaid bank loan. For full year 2019, our operating cash flow was positive million.

Cash expenditure was million. Now let's turn to guidance. We expect first quarter revenue to be in the range of CHF195 million to CHF265 million, a decrease of 45% to 25% year over year. Please keep in mind that this forecast reflects our current and the preliminary expectation and could change in light of uncertainty related to the COVID-nineteen developments. As Yan already mentioned, our operations are affected by the outbreak in many aspects in the short term, but when taking a longer term view, we remain positive about our business perspective.

With that, let's now open the call for any questions you may have for us. Operator, please go ahead.

Speaker 0

If you wish to ask a question, please press one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the pound or hash key. Your first question comes from the line of Winnie Dong of Piper Sandler. Please ask your question.

Speaker 3

Hi. Good morning. Thank you so much, for taking my question in for Alex Potter. I'm wondering, so you have your guidance down for March, down 25% to count 45%. Can you elaborate on what kind of scenarios you're taking into that wide range?

What would get us to the higher end and what would get us to the lower end? And then just any sort of on the ground development that you're hearing in March as we stand now? Obviously, a lot of impact has spread to Europe and to the West. So anything that you're seeing in China that we if you can share that, that'd be great. Thank you.

Speaker 1

Yeah. For for the guidance, yes, we gave a wide range with 45% to 25% decrease compared with last year. And the basis for giving that is we first took a conservative estimates based on orders we more or less already have on our book, that's including both the orders from overseas distributors and also the estimated orders from domestic distributors. And because, as you may know, there's seasonality in the sales of e scooters in China, and the q one is the slowest season, and normally, the sales will get to pick up from March. Therefore, we expect we expect the March will be a quite key and two weeks for us to sell additional scooters.

Therefore, we are betting on additional 20% from the March mainly because if few things. First, if the government lifted some of the restrictive measures for store openings, then there's additional shop can open in the next two weeks. As Yan already mentioned, up to now, we have only 85% shops opened. But if the additional 15% shop can open, then we can generate additional revenue from our retail shops. It's the first reason.

Second reason, as as we have seen some of our distributors who have their shop open, they are increasing their retail sales. Therefore, we expect they will continue to order from us. However, as I said, there's a lot of uncertainties during during due to the current outbreak. Therefore, we have to take a conservative approach and also give a wider range due to the risk involved. May I have Lee begin to comment on the rest?

Speaker 2

Yeah. I think I think Hardik pretty much covered it. It's really you know, we're actually watching the situation on a daily basis at this point. We look at the retail sales in March, you know, basically, the first two weeks, you know, like, if I look at the second week versus the first week, the retail sales actually increased by almost 10 to 15%. So it's really about, you know, third week and the fourth week, how that picked up and how we fulfill the orders.

At this point, our factories has pretty much back online, so we have no issues of fulfilling the orders. It's really the market need to be picked up both from the China side as well as we're looking at the the Europe and the and The US as well.

Speaker 1

Yeah. I hope that answers your question.

Speaker 3

Yes. That's that's very helpful. Thank you very much.

Speaker 0

Your next question comes from the line of Vincent Yu of Needham and Company. Please ask your question.

Speaker 4

Hi, management. I have a few questions. First question is trying to understand what's our view in, international market in first half twenty twenty, especially, when, you know, the European are like, the outbreak continue to, to go on. The second question is, what's our view in gross margin in the short term to moderate term and especially how big headwind we should expect especially when overseas market is being impacted? Third question is what's our view on our 2020 OpEx and CapEx plan given the industry headwind?

Thanks a lot.

Speaker 2

I'll cover the the market and okay. Let me so this is Yanli. I'll I'll cover the international market. I'll have Hardy covered the gross margin, the CapEx, OpEx as well. So, I mean, to be frankly, I think, you know, we're actually watching the international market on a daily basis right now.

So with if you look at last year, the I think the European sales represent rough roughly about 70% or 70 60 to 70% of our sales internationally, plus The US market probably represent about 80% of our sales. So, you know, those we we have orders from Europeans, European distributors, and we have orders from US distributors as well as some of the the the sharing operators in Europe and The United States. And so those are orders actually in our backlog. At this point we're actually trying to fulfill. And, you know, they will actually serve as basis for the first half in 2020.

Then having said that, right, it's really depends on how, you know, you know, obviously, our sales operation has been impacted. Retail sales operation has been impacted. For example, Italy, where, you know, initially, we have about we plan actually to build out about 10 to 20 flagship stores in Italy. And right now, we only have a few. And then the entire country's practically got shut down, so that retails retail sales practically gone for the you know, for the few weeks.

So we're actually watching the situation on day on daily basis at this point. Yeah. And

Speaker 1

for the gross margin, for the full year 2019, our gross margin was around 23%. And for the q one this year, we do expect some of the decrease of gross margin mainly because our factory cannot work beyond the full capacity. However, for the full year 2020, we still have the plan to at least to keep the same gross margin as what we already achieved in 2019. There's a couple of initiatives we have already started since the end of last year. One of the things is we are trying to renegotiate some of the component costs with different suppliers, and we made progress with many of them.

Therefore, we do see continuous cost opportunities. Secondly, as you know, commercial operation in our new manufacturing facility in Changzhou, and that facility was designed by ourselves. Therefore, we do expect higher efficiency from this new facility. And very lastly, as we continue to improve our revenue mix, including both the accessories spare parts and also some of the international sales, we do expect some potential upside from the revenue mix. Overall speaking, we package to achieve at least the same gross margin as what we have in 2019.

So this is the gross margin. And to answer your last question on the OpEx and the CapEx. For the OpEx as a percentage of revenue in 2019, it's around 15% of our revenue. Given we expect to continue to grow in 2020, we think we could probably at least maintain the fifth this 15%, and maybe we can even achieve further synergy or leverage from opening expenses. In terms of CapEx, during 2020, there's two areas where we want to spend money.

One is to continue to expand our retail sales network. Because of the this coronavirus outbreak, we are reevaluating how many shops we need to open. But anyway, I think maybe 50,000,000 to $100,100,000,000 will be more than enough for us to open all the retail shops which we need. The second area we want to spend money is we reserved a piece of land next to our current facility, And we do have a plan to acquire at least the land use right of that facility, and therefore, we can ready to construct new factory whenever needed. In China, because of the new national standard implementation last year, Chinese government gave us three year transition period for the consumers to replace their Eastwood or bicycles.

Therefore, we do expect some of the increasing demand during 2021 and also 2022. Therefore, we do believe we need to get ready for some of the capacities. Therefore, this is the the the two areas that may may spend money, but there are more for that in our control, and we can base on how the things developed to decide how much and also how fast we spend money. I hope this answered your question. Is there anything to add?

Speaker 2

Vincent, just actually just thought that one thing I thought I mentioned on your first question is actually besides your it's one thing we're trying well, we have done, and, actually, we believe it actually will will help the international market this year as we're diversify our our revenue streams, not from you know, it used to be Europe and The United States represent 80% of market. But, you know, literally starting at the second half last year as we actually expanded to more countries. For example, we're successfully entered Japan. We're well in Korea. We're actually start to develop more businesses in Southeast Asia.

And just recently, we actually signed a bunch of you know, quite a few distributor agreement in South America. So, obviously, some of the sales actually you know, whether it will show up in q two or second half of q two, it depends. It also depends on how, you know, situation in those countries actually turned out to. But I think as a if I look at, you know, in in the long run, not for the entire year, it actually opened up more market for us, which actually help us to basically diverse you know, to reduce the risk.

Speaker 4

Got it. Thank you very much, Fernandez.

Speaker 0

Your next question comes from the line of Bin Wang of Credit Suisse. Please ask your question.

Speaker 5

Thank you. I actually have three questions. Number one is about volume growth in the past three months. If you see your guide 25% to 45% revenue decline, how long it decline? And because the AC increased by 5% last year, so the volume guidance is likely to be 20% to 40% decline.

So if it is that case, can you provide by month, say, what's the number in January, what's number in February and what's that in the March? Can I assume the March will be much higher growth compared to the February? So we see a sequential improving chain. That's the number one about volume growth. And number two is about new products.

We actually, expecting you relaunch now M series called MQI because that currently is still a motorcycle. It didn't return to the e scooter category. So when the new design M plus, we are back to the E scooter category, that's actually what key driver for the volume growth this year. That's the second question. And third one is about the cost reduction.

We actually observed the battery price has been declined around 28% year over year in the first quarter this year. And if you see sequential also increased decline by around 20% Q on Q. So this actually is the LED battery. Can I assume a similar pricing decline for the E scooter battery as well? So if the case, can I assume 20% cost reduction in the battery price?

Thank you.

Speaker 1

So let me address your first question about the volume for the first three months. Normally, look we combine January and February together because different year, the Chinese New Year are on different months. So if you combine January and February, our volume was down around 60% compared with last year. But in March, at least in the first two weeks, have seen volume down only 20% to 30%. So we do see an improvement in the first two weeks of March, and we continue to see improvement during the past few days.

So this is the answer to your first question on the on the volume. For the second, for the new product, I will

Speaker 2

leave to Yan to comment. So on the on the product part, so we do have a plan to not just have one series, also have two products that comply with the the Chinese new regulations on electric bicycles. Those products were scheduled to be launched in April. But now, actually, due to the the coronavirus outbreak, we had to push it. It basically created a delay roughly about a month or so.

So we're actually trying to you know, the entire team tried to work really hard to actually try to accelerate that schedule such that, you know, we can actually see the product either by April or early May. The delay is mainly, you know, needless to say, entirely basically, entire country got shut down for a month or a month or more. So it's actually very difficult to accelerate the product development, so we're trying hard on that one. So and, also, we do have high hope on those two products, especially the one first on the one thing you mentioned, the new M Series. That will be actually a a full covered electric bicycle products.

It have will have the, you know, inherited the design style of our M Series, but at the same time complying with the China news regulations. I think people will be expecting that product since last year. And, you know, finally, we should be able to keep what people want in q two this year.

Speaker 1

And just to add to Yan's point on the second your second question about the new M, we have successfully got the certification for that product. So I think that's one of the key milestones we already achieved. And to answer your third question about cost reduction, I think during 2019, we have seen the whole battery, including battery cell, also battery pack, the cost has reduced around 9% during 2019. And for 2020, based on the current estimate, we see at least a 5% to 10% reduction. This is before the coronavirus outbreak, but this outbreak may give us additional leverage to continue to negotiate the the price down.

That's our current expectation, probably 5% to 10% cost reduction for the battery cell.

Speaker 5

Thank you.

Speaker 0

There are no further questions at this time. I would now like to hand the conference back to today's presenter. Please continue.

Speaker 2

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

Speaker 0

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