小牛電動 (NIU) 2018 Q3 法說會逐字稿

Welcome to the Niu Technologies Third Quarter 2018 Earnings Conference Call.

(Operator Instructions)

As a reminder we are recording today's call.

(Operator Instructions)

Now I will turn the call over to Mr. Jason Yang, Investor Relations Manager of Niu Technologies. Mr. Yang please go ahead.

Hello everyone. Thank you for joining us on today's conference call to discuss the Company's Financial Results for the Third Quarter of 2018.

We released the third quarter results after the US market close yesterday. The press release is available on the Company's Web Site as well as from Newswire Services.

On the call with me today are Dr. Yan Li, Chief Executive Officer; and Mr. Hardy Zhang, Chief Financial Officer.

Before we continue please note that today's discussion will contain forward-looking statements made under the Safe Harbor provision of the United States Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties as such the Company's actual results may be materially different from the expectations expressed today. Further information regarding these and other risks and uncertainties are included in the Company's public filing with the SEC. The Company does not assume any obligation to update any forward-looking statements except as required under applicable law.

Our earnings press release and this call includes the discussions of certain unaudited non-GAAP financial measures. Our press release contains our [reconciliation] of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures and it's available on our Web Site.

Please note that unless otherwise stated all figures mentioned during the conference call are in Chinese renminbi.

With that let me now turn the call over to our CEO, Yan Li.

Thanks Jason.

And thanks everyone for joining us on the call today.

So we're very true to be hosting this call today, our first as a public-traded Company.

Clearly the IPO itself was a milestone accomplishment for NIU. [With its] capital for growth and we significantly raised our visibility. So being traded in the US on NASDAQ solidified our position as [a] global life-style brand that is transforming urban mobility here.

So we're also thrilled to report a significant milestone, our first quarter of profitability after adjusting for share-based compensation.

So we have worked very hard to create a business model that [can fund] rapid growth, [systemically] and operate at profit. We are excited that the financial results this quarter indicate we are pursuing an effective strategy.

We grew our e-scooter sales volume by 76%; our net revenue by 86%; and [we generated] RMB, 5 million of net income after adjusting for share-based compensation.

So we reached a position of leadership through a strategy focused on three elements: first, compelling products that offers the premium experience; second, sophisticated and efficient marketing strategy then effectively communicated the value proposition to our target audience; and third, a rapid expanding yet cost-effective sales network to fulfill the demands [after we] created it. So in the third quarter we have made progress in each of those three elements and let me reveal that now starting with the products.

So our e-scooter [line] is designed to serve customer needs from the low-cost entry-level to the high-end premium experience. Now most of you know, in August we have launched our new model, the entry-level UM, priced between RMB, RMB 2,999 and RMB 6,599 at retail so this UM e-scooter is designed to attract customers away from cheap-commodity scooters and introduce them to [what awaits] in our premium category.

Now with that our product line now spans six models, from UM up to the high-end N-GT which sells for RMB 19,999 retail in China. And we introduced N-GT in late June and we expect initial deliveries in the coming months.

We also launched our Niu Care services offering an attractive price point. The Niu Care is one of the first [brand of] smart maintenance services for electric scooters. The Niu Care services actually use the rich data-set that we collect from each scooter to personalize the service recommendations. It optimizes the customer experience by indicating the most relevant service actions at the proper time.

Now Niu Care also attracts our existing customers back to our retail stores and this increase of customer stickiness and obviously create the opportunity for cross-sell accessories during their visits.

Now the second element of our strategy is our marketing program so in the third quarter we increased our brand awareness through marketing promotions that leveraged a combination of three things, which are: one, the new product-launch event; second, the user activity-based [buyer] marketing; and third, the user location-based off-line marketing.

So for the first one we had a great product-launch event in Shanghai, [to glue in] our UM and also the McLaren GT Customer Racing co-branded scooters. Around 400 customers, partners, and the media attended that event and we received the country-wide coverage of over 200 articles.

For the second market strategy, the user activity-based buyer marketing, we launched in multiple interest groups the [we share] platform. One example is the city-rider interest group covering 25 cities. We're also promoting customer riding-experience, [we have those] interesting groups.

Now for the third one, the user location-based off-line marketing, we launched [plus real] ads in our top 19 cities, over 250 bus routes. We selected them based on the rider-location profiles we collected which is highly effective.

So those plus ads garnered more than 1.3 billion views which significantly increased the brand awareness in those cities.

And the last element of our strategy is our sales network which continues to grow significantly in this quarter. We opened 71 stores in China and that gives us 642 stores in 164 cities around the country, so this is 80% growth compared with the store counts at the same time which is Q3 2017 last year. Our store network is managed by 215 city partners in China now, up from 205 partners at the start of the quarter.

And we also grow the distribution overseas too, we're now selling in 27 overseas markets around the world compared with only 17 countries at the same time last year.

So those three key elements of our strategy are driving exceptional growth. As a result, we are now planning to expand production capacity. We signed a contract to acquire land-use rights and are planning a new factory opening in Changzhou, China. So the [face mob] new factory will have a capacity of 700,000 units annually and expected to [ramp into] production in 2019.

Now is that I will turn the call over to Hardy to discuss our financial results.

Thank you, Yan.

And hello everyone.

Our press release contains all the figures and the comparisons you need. I'm not going to repeat all the numbers, instead we are going to focus on the drivers and the factors influencing the results. Keep in mind that we are referring to the third quarter figures unless I say otherwise, and that all figures are in RMB unless otherwise noted.

Revenue growth was driven by scooter volume of course as well -- as well as price increases. Q3 scooter volume gross was primarily driven by new store openings in China and the launch of new models. Specifically, we opened 71 new stores in China and we started the delivery of two new models, M+ and UM, which contributed a significant portion of Q3 volume.

As should mentioned that our scooter sales in China has somewhat [leveled off], financially (inaudible) in Q3 our peak season [where our winter sales] in Q1 are the slowest. Q1 is also impacted by the Chinese new-year holiday. Please keep that in mind as you observe our [sequential] revenue pattern over the coming quarters.

The increase in net revenue per scooter was mainly driven by our pricing actions. In January we increased the price for many models across the M- and U-Series. In August we raised the prices of certain models [in the group]. And on October 26th, we raised the prices of certain products within (inaudible). The price increases were introduced together with performance-upgrades of the scooters so that we maintain our competitive value-proposition.

[With that] our premium position will enable more pricing actions in the future as we ramp the production line with more value-added products and services. We believe the price increase in August and October will help to drive further market expansion in the near future.

Gross margin improved 3.6% over the same period last year mainly due to the price increases I just mentioned. In addition, gross margin was helped by a higher proportion of overseas sales which normally have higher price and higher gross margin. Compared to last year the proportion of overseas e-scooter sales nearly doubled to 5.1% of the total scooter revenue.

In Q3, to promote the two new models, M+ and UM, we set lower price initially and gave additional sales volume rebate to the city partners which affected our gross margin in the quarter.

On October 26th we increased the price of certain products under the new model, M+ [line] which will help to drive further market expansion in the near future.

Operating expenses increased in line with the growth of our business. We added employees, enhanced R&D capability, and address up (inaudible) in connection with the new product launch. However, as you can anticipate, we are also seeing meaningful operating leverage. As a percentage of net revenue, operating expenses excluding share-based compensation was 11.9% [but clearly] below the 13.7%, we saw in the third quarter last year.

Our GAAP net loss was RMB 2 million which include around RMB 7 million of share-based compensation. [Adjusting off] the share-based compensation, we had positive adjusted net income of RMB 12 million.

Our balance sheet ended the quarter in solid shape. As of September 30th, we had a cash, term deposit and a short-term investment of RMB 484 million. We generated a positive operating cash flow of RMB 96 million and incurred capital expenditure of RMB 23 million. [Let me remark that] our October IPO rated around $54 million so our balance sheet is now, is even stronger than it was at quarter end.

I also want to explain something, you noticed in our earnings release. We did not discuss earnings-per-share or earnings per [EDS]; the share [comp] as of September 30th is somewhat (inaudible) in light of our October IPO; that event converted the preferred shares into ordinary and added significantly to the shares (inaudible). Of course, the offer per share [may alter] going forward.

Now turning to fourth-quarter guidance. We expect net revenue to be in the range of RMB 370 to RMB 390 million representing growth of 69% to 78%. While you make [a sequential] comparison, please keep in mind my earlier comments about the seasonality. Third-quarter sales are always our strongest of the year, while Q1, we're always in the (inaudible).

Also keep in mind that this forecast reflects our current expectations and is subject to change.

With that let's now open the call for any questions that you may have for us.

Thank you.

Yes. Ladies and gentlemen, we will now begin the question-and-answer session.

(Operator Instructions)

Brad Erickson of Needham & Company.

Hi, thanks for taking my questions. I just had a few. First can you just sort of help us sort of net out all the puts and takes with respect to product mix in the quarter. So revenues obviously grow a bit faster than (inaudible) but you introduced an entry-level model and then raise prices a bit during the latter part of the quarter. Can you just give us a bit more color on what drove the higher ASP, year-over-year and was geographic mix also a driver there?

Yes. I think for the driver of the higher ASP for this quarter is really caused by a few factors. The first factor the product mix, especially in the -- in the third quarter, we began to deliver model plus and model M+ has higher ASP than other products; and this is the first driver.

Secondly, our overseas sales account for 5.1% of this quarter's revenue compared with 2.7% last year; overseas ASP is much higher than domestic ASP -- or domestic sales ASP, that also had a factor causing the increase of the -- this part of the ASP.

And lastly, the most important one, is actually the retail price increase. We increased price in January this year across different products, different products in the series. And in August again we raise the price for U-Series. Net, in average, we increased around 6% year-over-year; this helped a lot our Q3 net AS -- net price.

And then second, just now that you've increased prices on the M+, maybe just talk about what you've seen demand-wise since making that move and your confidence level there?

Brad, talking about the pricing, the confidence on the price increase -- sorry, I didn't--

Yes.

-- [get the]--

So you said--

-- question [at first].

-- I think you said you increased price at the end of October. I'm just curious to see sort of any early views of demand that you've seen associated with that?

No, I -- so that was associated with the M+. We increased price on M+, on two models, on M+, by two (inaudible) [ANR and B] and after the price increases, we actually -- we observed no impact on the demand and actually the demand is still very strong so this is actually an indication that we continue -- the customers -- the consumers continue to accept the premium brand.

And you know, to be honest right, the M+, when you look at the base price of you know, the [ones], the 46 -- RMB 46,999, we've increased by RMB [3,000] to you know, RMB 49,999 which actually makes zero difference to the consumer-buying behaviors.

Yes. And adding to that, when we increased retail sales price, so adding to that, when we -- when we increased the retail price, we also added additional features to the product; we upgraded some of the functions of the models.

Historically also when we increase retail price, we also provide additional features or [cable bunker], we try to [reduce this] so that's why the customers take price increase as a -- as a positive [as such] has little -- limited impact on our sales.

And then just broadly, can you just give us a sense of channel inventory levels and how and if they change at all through the quarter given what sounded like some strong [shipping] of these new models?

Yes. I think the -- you know, the channel inventory levels do remain roughly around one -- so you know, in -- to the extent that we are -- we are not -- you know, we -- you know, our -- actually our city partners pay us in advance so they also carefully manage their channel inventories. It's not like you know, they have a you know, they basically give them credit lines. To that point they're -- actually want to keep their inventory within the one-month timing to make sure that does not disrupt their sales but at the same time, not holding too much in their inventory.

And then one last one if I could squeeze it on; just relative to the guidance can you remind us of just anything you might be lapping from last year, new product introductions, et cetera? That'd be great, thanks.

Sorry, [you need] to clarify what your question is?

Sure. Just relative to your -- to the guidance for the fourth quarter, just wondering if you could provide any color on you know, things about the last-year quarter that you might be lapping, anniversaring here, new product introductions would be the most -- the most likely ones, any detail you can give would be great?

No. I think on the -- so typically, the [fourth] quarter -- I believe the fourth quarter last year we didn't [draw] any new products so you know, same with this year fourth quarter we are not planning to draw any products and so the year-over-year growth in terms of the guidance we gave is based on -- all based on existing products.

Wei Fang of Credit Suisse.

Hello. I just have a few questions regarding the GP margin and first can you -- can you give us some guidance on your GP margin in the fourth quarter and also what would the trend to be in 2019? Because in the third quarter I saw that your GP margin seems to be lower than the previous two quarters in 2018 and does that mean that this is sort of the level that your GP margin will be sustainable or are they going to be like be even higher in 2019?

Yes. I think it's a very, very good question. Our Q3 gross margin is 12.4% and if you compare that with the first-half gross margin, 14.3%, you'll see a 2% drop and this is because of a few reasons.

The first is the mix in the sales; in the first half our revenue coming from overseas market, the first half is [covered], overseas market sales. In the first half of this year our overseas revenue contributes to around 13% of total revenue and in the third quarter the overseas sales contribute to around 5% of the total revenue, so there's an 8% difference.

And overseas sales have a much higher gross margin, around 20% higher than the domestic sales so if you have 8% with 20% higher gross margin, that gives you around 1.5 to 1.6% difference. But this percentage change we believe is seasonal so each year you'll see our Q3 in terms of overseas sales is a slow season.

Last year the overseas sales contribute 2.7%, this year it contributed 5.1% [due to] (inaudible) contracts and improvements.

On the Q4, we believe the overseas sales will come to a normal level, contributes to around 9 to -- 8 to 10% of total revenue. So in other words, in Q4 you are not going to see these kinds of factors influence our gross margin. But this is the first effect of overseas sales in [part].

Secondly, what affects Q3 margin is the promotion we gave our new products including M+ and UM. We gave additional -- we gave lower retail price and also additional sales rebates to our distributors than -- based on their preorders and also "early-bird" so this influencer gross margin between 1% to 1.5% but as I mentioned we increased retail price for M+ on October 26th so from October -- from November, December, we will see improvements in our margins.

So these two factors are actually the key drivers for the lower gross margin in Q3 and for that we believe most of the impact will be mitigated or even eliminated in Q4 so Q4 will impact the margin, we'll go back to the year-to-date level -- similar level to the year-to-date, 13.4%.

Next year we do believe the margin will continue to expand. First of all, I think if we launched the new product, N-GT, that one we will start delivering the coming month; N-GT has a much higher price point also, very (inaudible) gross margin so when we start to deliver N-GT, that new model next year, we'll see the margin expansion from that new product. It's the first thing.

Secondly, our overseas revenue, this year will contribute to around 8% to 9% of total revenue. For the old -- for the overseas revenue we believe that it will continue to grow next year, that will also help us on the gross margin next year.

Thirdly and whilst it's a very important revenue line in our income statement, is the revenues from accessories, spare parts, and the services, that's why we have launched a new product, [substantially] for example we began to sell batteries as accessories to our customers. We also launched a new service called "Niu Care," both new products and accessories, will help us to further increase the proportion of the revenues from other revenue streams. That part of the revenue stream has higher -- a much higher margin, around 60% so this -- it's the third driver.

And the last driver is maybe we are also thinking about increased (inaudible) sometimes next year [together with] performance upgrades, that's -- also happens with the -- (inaudible) extension.

And very lastly, as we mentioned during the Road Show and also communication earlier, we do see the cost of battery has been -- continue to decline. We do observe the trend, we believe that's one will continue next year; will also help us with other margins.

So overall speaking, we believe in terms of margin next year, we will see further margin expansion compared with [previous] levels.

Hope that answers your question.

(Operator Instructions)

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

(Inaudible)

And I'd like to hand the call back to our presenters. Please go ahead.

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

This concludes the call. You may now disconnect.