小牛電動 (NIU) 2019 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Niu Technologies First Quarter 2019 Earnings Release Conference Call.

(Operator Instructions) I must advise this conference is being recorded today the 13th of May 2019.

I would now like to hand the conference over to your speaker for today, Mr. Jason Yang.

Please go ahead, sir.

Hello, everyone.

Thank you for joining us on today's conference call to discuss the company's financial results for the first quarter of 2019.

We released the results earlier today.

The press release is available on the company's website 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 provisions 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 discussed today.

Further information regarding this and other risks and uncertainties is included in the company's public filings 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 include discussions of certain unaudited non-GAAP financial measures.

Our press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures and is available on our website.

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

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

Yan?

Thanks, Jason.

Thanks, everyone, for joining us on the call today.

First of all, we're very excited to report a great start in 2019 with a strong growth and positive net profit.

We grew scooter unit volume by 76% and the revenue more than doubled.

We also improved gross margin to over 21% and operating profitably with the net margins of 3.4%.

Gross margin and net margins are 8.6 and 39.2 percentage points higher than this time last year.

Niu is at the forefront of the revolution in urban mobility.

And our results this quarter demonstrate our leadership position.

We made advances in technology leadership and also leveraged our brand awareness into new adjacent categories.

Our brands and the product strengths really showed in our financial results.

Growth was outstanding despite winter being our seasonally slow period.

Let's first discuss our most exciting development, the 2 all-new scooters model for the U-Series, the U+ and the US that were launched on April 12.

Our U+ and the US models feature the attractive device style of the U-Series.

The U-Series just achieved the so-called grand slam, winning all 7 major international design awards.

Over the past 20 years, the U-Series is the only second product to achieve this grand slam in the mobility industry.

And as many of you already know, the first product was our own M-Series.

We're extremely proud of our design leadership and this grand slam demonstrate our expertise.

Our unique and attractive style is the important part of the premium value proposition of our brand.

So in addition to a great style, the new U model covers more consumer segments.

The U+ is bigger and offers more driving range after 160 kilometers per charge, which is more appealing to frequent users with longer daily commute.

The US is smaller and lighter thus more appealing to users that prefer agility.

All U models are compliant with the new regulation on safety technical specifications for electric bicycles in China, which went into effect on April 15.

The U+ and US models deliver outstanding value.

The price range for the U+ is between RMB 4,400 and RMB 6,000.

And for the US, that's between RMB 3,500 and the RMB 4,600.

Both products were well-received by consumers and the first deliveries were made in late April.

So Niu is unique in that we can deliver a stylish scooter that has great range yet it's compliant with the 55-kilo weight regulation.

This is due to our leading battery system technology.

At the launch events, we introduced our upgraded smart battery system, which is called NIU Energy.

NIU Energy encompasses the battery management system and the pack technology.

Our engineering team designed industry-leading power system by leveraging the 2.4 billion kilometer of riding data we have collected from our users.

That usage data gives us incredible insight into the performance of batteries under all sort of conditions.

So under the NIU Energy, our battery pack was to achieve 8% longer driving distance, 40% longer battery life cycles and a 6% power improvement.

Our brand is also incredibly strong in the urban mobility.

And we are now expanding the brand into adjacent categories.

The Niu brand is technology, style and freedom.

We deliver the brand promise for weekend commuting via the electric scooter category.

Now we're delivering our brand promise for the weekend pleasure via our new high-performance bicycles.

So at the April launch events, we launched our new sports performance by family, NIU AERO.

The NIU AERO family features 5 product lines, encompassing 8 models of high-performance mountain and road bicycles.

Those bikes have aerodynamic design speed and style, and the smart meter connectivity for performance track.

Those bicycles are super light, with the lightest weight at 7.6 kilograms.

The price range is from RMB 2,500 to RMB 62,000.

We performed extensive market research before entering this category.

We conducted a customer survey and learned that 30% of our customers love bicycles and 40% express interest in our potential bicycle offering.

Furthermore, we note that the sales of premium performance bikes are growing a 10% a year in China, even as the whole bike industry is shrinking.

This data supported our thesis that Niu can effectively penetrate the performance bike category.

Early results are encouraging.

For instance, our first sales campaign on JD.com was sold out in 2 minutes.

So the April product launch not only successfully rolled out 2 electric scooters and a family of performance bicycles but was also a big success in terms of building brand awareness.

We counted over 400 media mentions and had audience of more than 400,000 people watching the product launch through live streaming.

To support a new product post launch, we are now running offline ads as well.

So in addition to the launch event and our offline ads, we continue to let social media to build brand awareness.

Our last Niu social media campaign in Q1, Not Only a Scooter and A New Way Forward, generated over 4 million views on TikTok and 1 million views and retweets on Weibo.

Let me also mention another interesting program we initiated in social media.

So in addition to the premium riding experience, Niu is also known as a socially responsible choice for transportation.

This is due to the cleanness of the electric power as well as the reduction of traffic congestion and emissions due to a small factor.

To further reinforce our image as a socially responsible brand, in March, we launched a new foreign campaign.

We asked our riders to post their mileage and their new stories on social media, such as Weibo and TikTok.

Selected users will get to claim 1 pine tree planted in inner Mongolia sponsored by Niu.

So on social media, the Niu Forest topic has received over 500,000 views.

Now with our brand strength and product leadership, our only real barrier for growth is the distribution.

Naturally, growing our distribution network is a top priority.

And again, in Q1, we expanded our reach around China and around the world.

In China, we opened 121 stores, giving a total of 881 retail outlets at the end of this quarter.

Our store network is managed now by 223 city partners across 180 cities.

We also expanded internationally, entering yet another new country, now selling in 28 countries through 23 international distributors.

Next major countries which we're expanding into are Korea and the U.S. On March 28, we attended the Seoul Motor Show, and I saw a potential for robust demand in that country.

And we are now working hard to build our exclusive channel in Korea.

Meanwhile, in the U.S., we have obtained the Federal government approval for selling our scooters nationwide.

We're now moving fast, we already received our first order with a 1,000 units from the U.S. scooter sharing operator.

Planned deployment is in New York City.

We shipped to the U.S. in April, and our customer anticipates that they will be put into services in June.

Lastly, let me touch upon the new regulation, specifically the so-called safety technical specifications for electric bicycles in China.

It went into effect on April 15.

This regulation prompts the industry to upgrade from traditional heavier lead acid battery scooter to lighter and more portable lithium-ion battery scooter.

It does this by putting a weight restriction of 55 kilos on the scooter.

This policy will accelerate adoption of the lithium-ion battery scooters in the Chinese electric scooter market while simultaneously improving the road safety of electric scooters.

We believe this regulation will encourage more people to adopt electric scooters for their daily commute.

So the policy is enforced at 3 levels.

First, the manufacturers are required to obtain specification at the China Quality Certification Center for all electric scooter models sold as electric bicycles.

Second, retailers cannot sell noncompliant electric scooters.

And then finally, consumers can only get a license plate for compliant electric scooters.

The entire industry, including us, experienced a noticeable spike in the demand in March before this regulation went into effect.

So clearly, some of Q2 demand was pulled into Q1.

Many consumers rushed to purchase the existing models before April 15.

And after April 15, we have observed a sharp drop in retail sales for a couple of weeks, confirming our thesis about demand pull-in.

We expect demand shifts to be a short-term, only affecting the first half of the year.

We still foresee a very strong demand growth in the second half of the year

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

Hardy?

Thank you, Yan, and hello, everyone.

Our press release contains all the figures and comparisons you need.

As I review our financial performance.

Keep in mind that we are referring to the first quarter figures, unless I say otherwise.

And that all money figures are RMB, unless otherwise noted.

As Yan mentioned, 2019 is off to a great start.

We again delivered a strong growth, and we operated profitably.

Revenue more than doubled, gross margin increased significantly to 21% and the net margin was positive at 3.4%.

Revenue rose 106% to CNY 355 million driven by increased scooter unit volume and higher revenue per e-scooter.

Volume grew by 76% driven primarily by 2 factors: first, our expanded sales network in both China and internationally; and then second, incremental demand for certain N and M models in front of the new national standards deadline, which was April 15.

We accommodated the extra demand for this model because they will no longer be licensed and registered as electric bicycles after the deadline.

This was the main reason for the surge in revenue, which was significantly above the guidance we provided earlier.

Revenue per scooter was RMB 5,359, up 17% year-over-year.

That growth was driven both by scooter pricing and sales of accessories, spare parts and the services.

The average scooter sales price grew 14%.

This was due mainly to the higher retail price for the U-Series as well as favorable change in product mix.

Specifically, we started delivering NGT models in China, where NGT retail price of RMB 20,000 has more than doubled our other models.

Sales of NGT contributed 2.3% of the total unit volume.

In addition, sales of the M+, which is the upgraded version of the M1, generated around 30% of total unit volume.

The higher average sales price of scooters was also helped by a higher proportion of sales from our premium versions of each model, specifically within the M and N series.

We have multiple versions of scooters within each model series.

These are the Pro, Sport, Citi and Lite.

Pro and the Sport versions have a higher retail sales price than the Citi and the Lite.

For instance, the Pro is nearly 35% higher than the Sport, which in turn at 15% higher than the Citi.

We also have strong sales of accessories, spare parts and the services.

On average, for each scooter sold, we also sold RMB 670 of accessories, spare parts and services.

The ancillary revenue per scooter is up 47% from RMB 457 last year.

The increase was mainly driven by the spare parts sales from international markets.

Gross margin was 21.3%, 8.6 percentage points better than this time last year and 7.8 points better sequentially.

Over the longer term, we expect our gross margin to be in the range of 20% to 25%.

So we are very happy to be moving into that targeted long-term model.

Margin expansion was helped by sales of accessories, spare parts and the services, which are high margin.

A higher proportion of international scooter sales also impacted the gross margin positively.

Ancillary revenue and the international sales were 12.5% and 18.8% of revenue, respectively.

Altogether, these 2 factors contributed 2% to 3 percentage points of the high growth gross margin.

I want to caution you that we do not expect this gross margin beat to be sustained as we move through the year.

These 2 factors are usually seasonally high in Q1, then normalized during the rest of the year.

Cost of goods also declined as planned, as we secured the cost savings of 3% to 5% for various raw materials and components.

We were able to negotiate lower procurement costs as our larger scale led to better bargaining power.

We believe this cost reduction are sustainable and will continue to benefit our gross margin for the foreseeable future.

Operating expenses increased in line with the growth of our business, excluding share-based compensation, G&A increased by 153%, representing 5.4% of revenue versus 4.4% last year.

The increase in G&A expense was due to audit and legal fees for the annual audits and producing the [20F] filing.

Obviously, those are the new costs now since we are publicly traded.

R&D expense grow as we invested in new product development and design.

Sales and the marketing expense grow in line with our expanded sales network in both China and the international market.

Despite higher expenses, we're still seeing meaningful operating leverage.

as a percentage of revenue, operating expense excluding share base compensation, was 17.5%, below the 19.2% we saw last year.

Our GAAP net income was $12 million with net margin of 3.4%.

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 $694 million in cash and the equivalent.

Operating cash flow was positive $16 million.

Capital expenditure was $29 million, primarily driven by building out the new manufacturing facility in Changzhou and by the new stores opened in China.

Now let's turn to guidance.

We expect second quarter revenue to be in a range of $580 million to $660 million, this represents year-over-year growth of 51% to 72%.

We expect to operate profitably.

The revenue range is relatively wide due to the regulatory demand pull-in we discussed earlier.

Although the new regulation shifted some demand between quarters, the underlying trend in our industry is still quite strong, as you can tell by the growth rate that we expect.

In fact, to get a better picture of underlying demand without the quarterly fluctuation, we are comparing the first half of 2019 to the first half of 2018.

Combined revenue for first quarter 1 and quarter 2 is expected to be in a range of $935 million to $1 billion, representing year-over-year growth of 68% to 82%.

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.

(Operator Instructions) We have the first question from the line of Brad Erickson.

Just had a few.

First, you mentioned the falloff in demand you saw for a couple of weeks, I believe you said, due to the regulatory deadline.

Is the takeaway to be made there that you've seen things sort of stabilize.

Maybe just a bit of color about how run rates have been trending now over the past months as you gotten past that sort of pull forward and falling demand?

Yes, I think that's good question.

So given we're only 4 weeks since they just implement the regulation, so first couple of weeks that there was really a sharp drop on in terms of retail sales.

Basically we'll recover (inaudible).

So we start seeing that the sales -- the retail sales start to recover.

But obviously, this -- it recovers -- I don't think it have been recovered back to -- entire industry haven't really recovered back to the normal sales level yet.

But keep in mind, this is only 4 weeks after they implemented the new regulation.

Yes.

Got it.

Okay.

And then just within gross margin.

Hardy, I think you mentioned you got benefits from the ancillary channels as well as international revenues.

But if we looked at it based on a product mix, how much benefit did you get from the pull forward in demand?

Any color there would be great.

I think it's from the gross margin contribution.

We don't think there's been any benefit on the gross margin from the 2 over demand.

I think the higher gross margin is mainly because we have much higher ancillary revenues, especially the spare parts we sold in the international market.

Those spare parts normally have around 40% to 50% gross margin.

So that part have really helped us with that.

I think, second, what has helped us is the price increase on the U-Series, we see the sell out the year.

The U-Series has had a significant growth in first quarter.

Therefore, we do see the contribution from that on our gross margin.

I think, very lastly, I think the most significant contribution to the gross margin is from the COGS.

We did manage to get a lot of cost reduction on different type of raw materials and components, and that has translated into part of the improvement in the first quarter gross margin.

And in the quarters ahead, we believe there's still room for us to improve.

Perfect.

Thanks.

And then maybe one last one if I could.

I guess, one of the important levers it would seem like for demand here going forward is how tightly the new national standard will we policed and some of the smaller outer line cities.

What are you seeing there thus far from a regulatory standpoint?

And maybe just a bit of color in terms of what's baked into your guidance around your expectations for how shrewdly the new national standard will we policed?

I think, first of all, the -- we have a view that -- actually from the fact also that this new national standard will be very actually strictly enforced.

But having said that, it basically trickles down, I mean it takes times to actually get to what you call a Tier 4, Tier 5, Tier 6 cities.

If you look at top tier cities like Tier 1, Tier 2, basically Beijing, Shanghai, Guangzhou, Shenzhen and also the provincial capitals, almost on day 1, April 15, right, on day 1, that's already in place.

Now -- I mean, just to -- as I mentioned in the call, it basically enforce them on manufacture level.

Basically, from our levels, any scooters we ship out has been what you call a 3C -- basically get a 3C certificate from the China security center.

They are -- people checking the local enforcement are checking on the retailers on a weekly basis to make sure the retailers doesn't sell anything that is non-complaint.

And then, lastly, I want to make example, like city of Beijing, right, what you see is actually there are policemen on the street are checking people who don't have a license place for their scooters.

And if you don't have a license place for scooters, at this point, it's only a RMB 20 fine, but I think there's also announcement within a few months or so that, that fine will actually get to above RMB 1,000.

So we do see the -- it is as we expected that this regulation is being strictly enforced.

I think, I believe more color on that, there are also some other initiative burdened on some of the cities.

On the country level, we have this new national standard, which all the manufacturer needs to get this [CQC] certificate.

However, some of the cities also have their own requirements to put the product into the product catalog only after the manufacturer register their scooter within their city catalog, they can be sold in the retail network.

So this administrative have those additional burden to some of the distributors.

But we believe this is temporary.

And once we get everything registered, then the retail will recover.

We have the next question from the line of Bin Wang.

I actually have 3 I want to ask.

First one is I noticed in the April this year, it seems like you raised the price for some of your products by around 2% to 5% because -- due to new decoration.

So your guidance, because of a couple of pricing hike, do you see any margin improvement or how much margin, because as mentioned, 2% to 5% pricing price, maybe some cost increase, so what will the margin increase because of this?

That's number 1. And number 2 is that recently, China-U.

S. trade have some dispute and do this impact your penetration to the U.S. market?

Also will this impact your first batch order as mentioned in the call to the U.S. client in New York City?

That's the second question?

And the last one, actually want to answer about margin Because the margin is really a surprise.

They're moving to one-off factors, for example, NGT sales, for example, a couple of potential issues.

Only moving everything won't be normalizing margin in the first quarter.

And especially, can you quantify on nonmaterial pricing decline because there's no material -- you didn't breakdown how much motor, how much battery and how much steel, how much tire.

Can you give me more detail?

Yes.

I think let me answer your first question about the price increase in April.

In April, we increased the retail sales price for certain models and U-Series.

For the price increase for N and M series is really to cover our cost.

There was no impact on the gross margin.

We just want to maintain our gross margin, that's why we increased price for N and M models.

For the U-Series, we increased the price, that will help us with the margin going forward.

I think another reason we increased the sales price for the year 1 models is because we launched the 2 new models, new class and U.S., so we need to make sure that different type of products are in the different category of price range.

So that's to your first question.

Second, let me hand to answer.

So Peng, just also let me answer the first question on the -- the price increase sometimes something because, for example, on the U-Series, with the new regulation, what's required is actually we had to include pedals change on the scooters.

So there's also a fairly cost increase, but obviously, our price increases has higher percentage in cost increase help the margin bit.

Now on the second, on the U.S. dispute, so because our product category is already at a 25% tariff, so the current dispute makes no difference, unless the current dispute results that they reduce the tariff from 25% to 10%, it will help us.

But right now, we're actually doing -- conducting business in the U.S., assuming, which is that 25% tariff.

And also, let me pass to Hardy to talk about the gross margin part.

Yes.

So the gross margin, we had 21% in the first quarter.

I think that breakdown is 21% improvements to 3 different segments.

The first segment as the so-called one-off, this one-off is not linked to NGT.

Now we see the development of NGT in the first quarter, but this NGT is a preorder from last year.

And last year, we gave lots of promotion events to the consumers.

Therefore, the entity margin was not as good as the normal models because there's actual promotion.

But there is 1 one-off event, that change of product mix, especially in the N and M series.

As I mentioned in the -- earlier, in this model, we have different specs, we have pro, sport, city and light.

In the first quarter, our sales in the top models, premium models, pro and sport, has taken a larger proportion.

Normally, these top 2 models account for 40% of the total series.

However, in the first quarter, these 2 models contributes to around 60%.

And this impact contributes to around 1%.

This is -- I can it one-off, I don't think this is going to repeat in next quarter.

But this one-off, the 1% is one-off.

Second category is more seasonal impact is mainly from the international sales and also the accessory sales.

International sales account for around 19% and the accessory sales account for around 13%.

This is much higher than the normal average we have for the whole year.

These 2 parts contributes to around 2% to 3%.

For the full year basis, we don't think this 2% to 3% will be fully translated into the full year margin.

The very last point is contribution from cost reductions that give us around 2% to 5%.

That part is going to be sustainable.

So if we make the normalized adjustment, we believe, if we take out these one-off items, also we normalize for seasonal impact, our gross margin for the first quarter will be around 18%.

(Operator Instructions) As there are no questions, I'd like to hand the call back to your speakers.

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.

Operator?

Thank you, sir.

Ladies and gentleman, that does conclude our conference for today.

Thank you for participating.

You may all disconnect.