小牛電動 (NIU) 2020 Q2 法說會逐字稿

Good day, ladies and gentlemen.

Thank you for standing by, and welcome to the Niu Technologies Second Quarter 2020 Earnings Conference Call.

(Operator Instructions) As a reminder, we are recording today's call.

If you have any objections, 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, please go ahead.

Thank you, operator.

Hello, everyone.

Welcome to today's conference call to discuss Niu Technologies' results for the second quarter 2020.

The earnings press release, corporate presentation and financial [press release] have been posted on Niu's Investor Relations website.

This call is being webcast from the company's IR website, and a replay of the call will be available soon.

Please note, today's discussion will contain forward-looking statements made under the safe harbor provisions of the 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 definition of non-GAAP financial measures and the reconciliation of GAAP to non-GAAP financial results.

On the call with me today are our CEO, Dr. Yan Li; and CFO, Mr. Hardy Zhang.

Now let me turn the call over to Yan.

All right.

Thanks, Jason, and thanks, everyone, for joining us on the call today.

We have observed a recovery in the China market in Q2, while in overseas market, our sales performance was still affected by COVID-19.

Now on performance in Q2, our total sales volume reached 160,000 units, an increase of 61% year-over-year.

The sales volume in China market reached to 155,000 units, an increase of 81% year-over-year.

While the international market reached 5,000 units, decreased by 62% due to the impact of COVID-19.

Despite the decline in sales in the overseas market in Q2, we remain very, very positive about our performance in the second half as the market gradually recovers from the COVID-19 outbreak.

Now in Q2, we continue to build our leadership in urban mobility via new product rollout, branding and marketing activities and the retail expansions.

So first of all, Q2 has been a very busy quarter for us in launching new products.

As I mentioned in the previous earning call, we launched our MQi2 on May 7, our flagship electric bicycle product for the China market in 2020, as the upgrade of our 2016 signature N1 model with the up-to-date technology and complying with China's new regulation.

The product launch was held on [June 4] on online live streaming sales at Taobao platform and achieved a huge success with 3 million plus views and likes.

Since then, M2 has been a key selling product in our electric bicycle category, representing 50.5% of our sales in Q2 and is positioned as our high-end electric bicycle product.

We also introduced MQiS or MS model on July 16.

MS is slightly smaller compared with M2 but also inherited the family design style of M-Series using the same technology platform as in M2.

We also apply our innovation in lightweight materials in MS, reducing the way of MS chassis, which allowed us to expand the battery capacity to 48-volt 26 amp hours, while still complying with the new regulation.

Now with this new battery capacity, the MS has a longer drive range up to 100 kilometers and leads the drive range for entire electric bicycle industry.

Also the compact form factor of MS is also very friendly for people with all heights.

MS comes with 4 models with pricing ranging from RMB 3,899 to RMB 5,599, representing an entry level product for the M-Series, while M2 is with price range from RMB 4,599 to RMB 6,199.

Now besides expanding our M-Series with 2 new models, M2 and MS, we also expanded our Gova series with 3 new models G0, G2 and upgraded G3.

G0 is an electric bicycle designed as an entry-level product of the Gova series, targeting the mid-end market with 2 drive range options at 40 and 60 kilometers, priced at RMB 2,299 and RMB 2,799.

G0 inherited the design style of the Gova series but is more compact and more practical with building back seats and add-on baby seats.

G0 was launched at the JD June 18 campaign with the presale warm-up and online live stream event.

During the live stream event, we received close to 4 million views and 2 million likes on JD platform.

And the entire product launch campaign generated a total sales volume of close to 17,000 units, demonstrating our capability to penetrate the mid-end electric bicycle market.

We also launched G2 and upgraded G3 under the Gova series on June 12 and July 18, respectively.

G2 is an electric bicycle product, larger than G0 with 2 drive range options at 60 and 80 kilometers, priced at RMB 3,599 and RMB 3,999.

Now G3 is the upgraded electric motorcycle product from our last year's G3 announcement, targeting cities with no restriction on motorcycles.

It's bigger in size and with faster speed up to 60 kilometer per hour.

It is equipped with 3 battery options and with price range from RMB 4,299 to RMB 6,499.

Now with G0, G1, G2 and G3, our Gova series achieved a full spectrum coverage from an entry-level electric bicycle to electric motorcycle with price range from RMB 2,299 to RMB 6,499, meeting a wide range of consumers' demand.

The entire Gova series will help us to expand our market reach to lower-tier cities.

Now besides new products, we continue to enhance our brand awareness via user activity-based viral marketing and target marketing.

On user activity-based marketing, we had 2 very interesting events in Q2.

First, a Niu fan from Shanghai spent 261 days riding along the entire border of China with total distance of 30,000 kilometers on our original N scooter.

During his trip, the fan goes through the snow mountains, rode across the Gobi Desert data and challenged the extreme cold temperature of minus 41 degree Celsius in the Northeast China.

So this story was published on Weibo and Douyin, and then was picked up by all major medias across China.

It has achieved 35 million views on social media and 10 plus T media coverage with hundreds of article mentions.

Now second, to celebrate Niu's fifth anniversary, a new fan from Beijing actually sent a new miniature model up to 20,000 meters above the sea level in Inner Mongolia with the hot air balloon and made a vlog capturing the entire the event.

The vlog has also achieved 41 million views and received 9 million likes on Douyin.

Both of those activities demonstrate a strong loyalty of our users to our brands and helps us to further build our brand awareness and brand reputation across a mass consumer base.

Third, to promote safe riding, we also launched a no helmet, no ride campaign together with traffic administrative departments across 10 provinces and cities with Weibo articles and Douyin and Kuaishou videos.

This campaign generated 24 million views across those platforms.

Now with those efforts, we continue to build out our own site on short video platform like Douyin and Kuaishou with Douyin quarterly views increased to 47 million in Q2, a 23% growth over Q1 and Kuaishou to 4.5 million views in Q2 versus only 190,000 in Q1.

Now internationally, despite the impact of COVID-19 virus, we continue to add key opinion leaders to the new crew team operators.

While worth to mention is the Spanish key opinion leader post on YouTube, and his post achieved 1.7 million views, making Niu a hot topic in Spain.

And to further enhance the user experience and engage our new users, we launched a new social feature on our app called My Riding Journey, allowing users to quickly create a long format pictures with the riding geo path to be easily shared in WeChat and within the app.

More than 15,000 journeys have been created and published in our Niu app community.

We'll continue to add more functions to our app as the means to increase user engagement and build brand loyalty.

So lastly, a very popular hip-hop live competition show called Street Dance of China was launched on July 18 on Youku.

It was expected to be one of the hottest shows for this summer in China.

We will have 2 feature advertising in the semifinal and the final during the show as well as an off-line advertising campaign in September, when the show is at its final stage.

We estimate an overall exposure over 200 million online and 400 million views off-line.

Not only this will provide a brand awareness exposures, it will also help us to further enhance our brand image as a trending brand leading the urban lifestyle.

Supported by the new products, the enhanced customer engagement and brand awareness, we continue to expand our footprint through store expansions and new market entries.

Now in China, Niu added 51 stores to 1,084 stores in Q2, we expect to accelerate store opening pace in Q3 as the COVID-19 situation recovered in China.

For the international market, we have increased our market coverage to 45 countries with 3 more adds in South America, mainly the Dominican Republic, Peru and Brazil.

We added additional 48 flagship and premium stores with total accounts reaching 91 flagship and premium stores versus 43 in Q1 despite the COVID-19 situation.

Now I will turn to -- 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 the 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 second quarter figures, unless I say otherwise and that all monetary figures are RMB unless otherwise noted.

Our Q2 sales volume reached 160,000 units, increased by 61% year-over-year.

China sales volume increased by 81% as a result of demand recovery, retail sales network expansion and new product launch.

Our China online sales are particularly worth highlighting.

Online sales continues to grow and accounted for 14% of total Q2 sales volume compared with the 2% at the same period last year.

The key reason is that this year, we launched new products, such as M2 and G0 through online platforms.

This helped to mitigate the restriction from COVID-19 for any big off-line event and also offered a good alternative for customers who are reluctant to go to off-line stores.

International sales volume decreased by 82% due to the diverse impacts from COVID-19.

The lower international sales volume had a significant impact on our Q2 financials.

For example, in Q2, we had a lower ASP, lower gross margin and also lower revenues from accessories, spare parts, many of these lines are caused by the lower international sales.

We will discuss the impact in detail later.

We also encourage you to keep this in mind while analyzing our financials.

Regarding product mix, as we launched new products, M2, G0 and G2 models in the second quarter, the product mix changed accordingly.

N-Series accounted for around 20% of total volume.

M-Series accounted for around 20%.

U-Series accounted for 40% and the Gova series accounted for remaining 20%.

The changes in the product mix affected our Q2 revenues and ASP.

Total revenues increased by 21.6% to CNY 645 million, in line with the guidance we provided earlier.

Revenues from scooters increased by 28% in total, out of which China market increased by 59%, and international market decreased by 53%.

Our Q2 scooter revenue was, however, negatively affected by the price discount we offered during the new product launch through e-commerce platforms.

For example, we offered RMB 500 discount on new model G0.

Such price did affected our revenue by approximately RMB 10 million in aggregate.

But since we offer the price discount, we are able to save on sales and marketing spends, which I will discuss later.

Revenues from accessories, spare parts and services decreased by 17% in total, out of which China market increased by 70%.

International market decreased by 70%.

The decline of international sales is mainly due to lower spare part sales to the sharing operators.

Here, again, we encourage you to look at China and the international market separately to get a better picture of our business for this quarter.

Revenues per scooter, or ASP, decreased by 25%.

There are a few key drivers for the decline.

First, the lower proportion of scooter sales from international market, the impact on ASP is estimated to be 8.5%.

Second, the lower spare part sales from international market, the impact on ASP is around 6.5%.

Thirdly, the launch of low price model G0 affected ASP by around 6%.

The remaining 4% is mainly due to change in product mix in other models.

In summary, out of the 25% ASP decline, 8.5% is due to the lower scooter sales from international market.

With the recovery of international market in the coming quarters, we expect this negative impact will be much less going forward.

Gross margin was 23%, 0.7 percentage points lower than this time last year.

The lower margin was mainly due to lower sales of scooter and spare parts from international market, which negatively affected our margin by around 5.5% in total.

However, we are able to offset majority of such negative impact by cost savings on battery packs, various components and warranties.

Our total operating expense, excluding share-based compensation were CNY 82 million, increased by CNY 4 million or 4.6% year-over-year.

The increase was mainly caused by higher G&A expense of CNY 2 million for tax and a surcharge and a higher R&D expense of CNY 5 million mainly for higher staff costs.

Sales and marketing expenses, however, decreased by CNY 3 million.

As a percentage of revenue, the sales and the marketing expense, excluding share-based compensation, was 6.6% compared with 8.7% in Q2 last year.

The decrease of 2.1% was mainly because we moved online -- our product launch from online -- from off-line to online, as I discussed earlier.

We offered direct products discounts to customers, which affected our revenues but we saved on sales and marketing expenses.

Going forward, we may have similar approach for sales and marketing activities, especially with more direct sales through online e-commerce platforms.

Our share-based compensation expense were RMB 11 million, an increase of 8 million compared with the same period last year due to the new [grants] to employees during Q3 last year and Q2 this year.

Our GAAP net income was CNY 57 million and adjusted net income was CNY 68 million, both are higher than Q2 last year.

The adjusted net income margin was 10.5%, higher than 10.2% in Q2 last year, mainly due to lower sales and marketing expenses.

We are pleased to return to profitability in this quarter despite continued impacts from COVID-19.

Turning to our balance sheet and cash flow.

We ended the quarter with RMB 1 billion in cash, term deposits and short-term investments.

Our operating cash flow was positive CNY 338 million because of improved profitability, reduced account receivable, reduced inventory and increased accounts payable.

Our capital expenditure was CNY 59 million, out of which CNY 39 million for land use right acquisition, CNY 20 million for new store openings in China and the international market as well as for additional machinery and R&D spending.

We had a very healthy balance sheet and a strong cash flow in the second quarter.

Now let's turn to guidance.

We expect third quarter revenue to be in the range of CNY 850 million to CNY 950 million, an increase of 30% to 45% year-over-year.

In earnings release, we also provided you with the update on our July sales order.

China sales volume grew by 64%, even though there were very bad weather conditions in China.

The massive flooding affected our logistics and retail sales in July.

International sales volume grew by 56% year-over-year.

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

Operator, please go ahead.

(Operator Instructions) We have the first question from the line of Vincent Yu.

Congrats on the robust performance.

I have 3 questions.

First question is about the expansion of product category and the related audience.

So in July, Niu sold close to 68,000 units in China.

Can you share with us which models, in particular, has driven the strong growth, which is about 54%?

Second question is about -- can you share -- have some comments on the cadence of the reopening of the international stores?

And how should we think about the international unit sales for second half 2020.

And third question is about how should we think about the China e-scooter ASP for second half 2020?

Will we see a meaningful recovery?

(foreign language)

Let me answer your -- the first question.

For -- Key drivers for the July sales volume growth, there's a few new products we launched July.

First is MS. And MS is an electric bicycle category, new product, it's very much welcomed by our customers.

In July, MS contributes to around 10% of our sales volume for -- in the China market.

And another key driver is Gova series.

We launched both G0 in the second quarter.

Also we launched G2, both of them are electric bicycle.

They are also the key drivers for the July sales volume growth.

So mainly these 3 key new products driving the growth.

So the second question, I would like Yan to comment on.

I think for the international market, basically, I think we do have pretty good expectation in term of Q3 and Q4, partially because, one, all the stores are -- all our stores are opened so far in all the countries.

So it looks like it's back to the business.

And the second, we do observe that because of COVID-19 situation that actually across the globe people start to prefer, what we call, individual urban mobility commuting device, which is our -- basically our product -- products, the electric moped and electric scooters (inaudible).

So that was actually a good sign to actually to drive sales.

And then lastly, I think we are also planning to roll out in the second half of this year our EUB our first electric -- power efficient electric bicycles, or the e-bike and they're sort of the European categories as a e-bike.

So that product will be rolled out most likely in Q4 this year, and that will also help us to drive a little bit sales in Q4 and actually also roll over to the 2021.

So net to net, I think, right now, it's very positive.

And then we also start to seeing orders from sharing operators as well.

As we just recently actually got opportunity to fill orders from share operators really to expand their sharing operations in Europe.

I think due to a similar basic phenomenon that we observed, they are very similar phenomenon as -- due to the COVID-19 situation, people start using this individual commuting device, whether it's owned or shared.

And last -- and one more thing with July, we mentioned in the previous call, actually, we grew out a new rental program in July in Europe.

And this program is actually through an app, the user can actually rent new scooter from participated dealers on a weekly basis, daily basis.

And so far, we've had more than hundreds of dealers participate in this new rental program.

And we think this actually will also help to sort of -- to lower the, what they call, the entry barriers and give people an even, what they call, a cheaper way to try out a new scooter first before making a purchase decision.

So those are all the few things that we're really working hard to get the international market back on track.

Yes.

So that's for my questions.

For question 3 on the ASP, I'll let Hardy to answer that.

Sure.

For the scooter ASP, let's first talk about the second quarter ASP.

So overall, ASP declined by 25%.

And as I mentioned, the 8.5% is because lower international sales.

And since July, you see, we have already seen a recovery of international market sales.

In July, our international market sales grew by 65 -- 66%, China market grew around 64%.

So they are growing at a similar speed.

Therefore, in Q3, also in the remaining of the year, we believe this 8.5% will not be there anymore.

So if you take this 8.5% off of this 25% has given you remaining 17% that may have a -- may last for the remaining of the year.

But when we look at the ASP, we need to separate them into 3 categories: one is the China scooter ASP; second is overseas scooter ASP; and thirdly, it's accessories, spare parts ASP.

For the overseas ASP, we believe it will continue to be strong.

In the second quarter, our overseas scooter ASP increased by more than 20%.

It's a very strong growth.

For the remainder of the year, because of the order book, we believe our ASP will be at least the same as last year or even a slightly growth.

The China ASP, however, will decline because of the launch of Gova series.

The G0 and the G2, their price is lower than the M and U-Series.

Also the MS, newly launched the product in July, also had a lower ASP compared with M2 relaunched in the second quarter.

So for China scooter, we are thinking anywhere between 15% to 18% ASP decrease in the third quarter.

For the accessories, spare parts this is part we have some uncertainty, mainly because of the overseas sharing operator how much spare parts they order from us.

Currently, for our Q3 forecast, we have been quite conservative in this part.

In short, I think the ASP for the overall products will decline for the second half of this year, mainly because of the change in product mix.

This might answer to your third question.

The next question comes from the line of Bin Wang.

Question number one is about the gross margin.

I actually found the gross margin quite stable.

If possible, can you provide a detail about the vehicle or scooter gross margin?

And is that increase or decline?

And second is about the service.

And second is any one-off issue in the gross margin we can explain in the second quarter.

That's the -- second one is that you mentioned that the raw material and the parts decline -- or battery declines is the key driver for the margin stabilization.

Can you quantify how much from the normal parts?

How much from the battery, et cetera?

That's number one question.

Number 2 is about the share-based compensation.

(inaudible) one is pretty big in the first half.

You have mentioned that in -- you actually offer more (inaudible) in the second quarter this year.

Can I assume this number will be similar in the future compared to 2019?

How should we think about the share-based compensation?

That's the second question.

And third one is about the volume.

You actually provide a very good July number.

Can you provide a guidance in the first 2 weeks of August?

What's the driver for this high growth?

(inaudible) in China because COVID-19 concern, a lot of people actually try to buy the scooters to avoid public transportation.

And do you see this as the key driver?

Or is travel will continue to be strong because the China's COVID-19 seems at full control.

So which means growth may be lower.

Is that the reason why you have in the second half -- sorry third quarter only 30% to 45% growth, which is below the 64% in July.

So do you expect growth to decelerate because the guidance is lower than that June number?

Sure.

Let me first answer your question on the gross margin.

Certainly, our gross margin is relatively stable compared with Q1 also last year.

The key driver is the cost savings.

I can definitely can provide you further breakdown for the market on different components.

And for our scooters, if you take out the logistic cost, warranty, in the second quarter, the gross margin is around 7 -- 20.7% compare with last quarter, it's an increase by 2%.

And if you compare with last year, it has increased by around 3%.

So this is the scooter gross margins.

For the accessories and spare parts gross margin, it's around 48%.

This is very similar to what we have in Q1, also in Q2 last year.

So relatively stable.

So the service gross margin this quarter is relatively low, only around 30% compared with the 70%, 80% in the previous quarters mainly because in this quarter, we have a service revenue coming from Volkswagen projects.

You may recall, we provide R&D service to Volkswagen for new products that they plan to launch next year.

But because of the COVID-19, the project has to be suspended.

Therefore, even though we have the same revenue, we have to incur additional costs, mainly for staff cost, we need to save the team for their projects.

That's what dragged down our service revenue gross margin.

So this is market by product line.

And specifically on the raw material, how much we save on that.

So if we compare with our Q2 raw material procurement costs with Q2 last year, our battery sales costs actually declined by around 10%.

And the battery pack and BMS also have a few percentage decline.

Overall, the battery pack -- the overall battery pack, including both battery cell, BMS and the pack, has a decline of 8% compared with same period same time last year.

The other components on the scooter also have around 4% cost up.

Overall, if you calculate by the weighted average, it contributes to around 5.6% cost up.

So this is really the key driver to help us to make sure our gross margin is relatively stable.

And so this is the answer to your first question.

And your second question is the share-based compensation.

The share-based compensation is mainly because last year in the second -- in the third quarter, in August, we -- the Board approved additional share-based compensation for the management team also for the -- some of the key employees.

So that's dragged out -- dragged up our SBC cost by around CNY 4 million.

You may -- Q2 last year, the SBC is around CNY 4 million per quarter.

So because of the SBC we gave in August last year, that's drove up SBC spend around CNY 4 million.

And in April this year, because some of the employees their share-based compensation -- pre-IPO share-based compensation already fully lifted.

So the company decides to grant them additional share-based compensation continue to last for additional 4 years.

That's also drive up the cost by around CNY 3 million.

So this is the majority of the SBC we granted.

And for the remaining of the year, we do not expect any significant further share-based compensation to increase.

So that's the answer for your second question.

The third question is -- I'll leave to Yan to comment on talk of the sales volume.

Yes.

I think for the August sales volume growth, we're looking at multiple factors here.

The first factor, which is actually the plus side, is actually the back-to-school, right?

So with kids back to school, I think that will actually provide a positive basically catalyst to the market where we think we can actually drive the volume growth.

I think the second is actually, I think Peng just mentioned, if you look at basically our guidance, which is actually the year-over-year growth in terms of the -- I think you mentioned we -- it (inaudible) for the second quarter, no?

The guidance on the third quarter.

Higher 30% to 45%...

Yes, it's actually higher than the second quarter.

So I think that -- well, we think the back to school will help us.

Second is actually a lot of our new products, we look at the -- as I mentioned, the G2 -- the G0, the G2, the G3, the MS, all those products, basically with first the G0 and the G2 announced in mid-June, the rest is actually in July.

So if you think about those products, will kick in -- the effect of this new product will kick in practically in Q3 this year.

So typically, when we first announced the new products, they usually -- we have our own ramp-up period and also it takes roughly about a month or so for the market to fully start to assess the product and really ramp-up the sales.

So I think this -- those new products will help us in terms of drive up August sales.

And lastly, I think with a phenomenon we observed, as I mentioned in the call, where with the G0, now we start seeing the early sign of G2, where with G0 and G2, it actually also helped us to penetrate what we call the lower-tier cities, in the market where it used to be, we don't have a perfect product for those markets.

And that actually helps us, I think, with our store expansions in Q3, those also will contribute in term of the Q3 growth.

Just to add to Yan's comments on August sales trend.

In the first half of August, our sales volume growth maintain at, I believe, the same speed as what we delivered in July.

In the second half of August, we expect the volume growth will accelerate mainly because we started new school opening promotion activity from Monday, from today.

Normally, that will drive the volume for the August.

Yes.

Yes.

So that's the answer to your question on August, the sales volume growth.

But it was said in the third quarter guidance [of] 30% to 45%, which is well below the 64% in July and August, but...

It's mainly because of the ASP.

I mean as I said, because we launched the G0, G2, also MS, the ASP is lower than the average ASP.

So this will drag down the ASP.

But the volume will still be quite strong.

Okay.

Lastly on -- about the COVID-19 impact.

Because I know the second quarter, whole China actually [volume increased] by 45% because of COVID-19.

So do you think the COVID-19 impact will help -- will be less going forward because COVID-19 seems to be better controlled in Mainland China?

Yes.

I hope -- I didn't capture the full question, but hopefully, I can answer it.

I think basically, now with the COVID-19 impact, we saw a full impact in Q1, a little bit in Q2.

But as of now, I think for China, we're back -- effectively, I think we're safe to say we're back to, what we call, the pre-COVID-19 market condition or even better because the COVID-19 actually drives quite a lot of people to choose not to take public transportation and really start to move to electric bicycle product in China.

So I think in China market, we're actually in a better position, even in a better position than the pre-COVID-19 situation.

I think that was one of the reasons we keep -- we're rolling out multiple new products like this in the last quarter and also in July and really try to take advantage of this and capture this market growth.

I think similarly, I think in Q3, we expect to add more stores, where -- because of COVID-19, our Q1 store adds, or store expansion, it fell apart because the many construction site -- construction was shut down, so we were not able to open a lot of stores.

But now we have quite a bit stores ready to be open in the backlog, which will happen in Q3.

So that will help on the China situation.

Now on the international situation, I think it's actually back to normal.

But the only thing with the international situation is Q3 has traditionally has been a slow quarter for international, especially in Europe, where people take vacations.

Still, we expect to actually to getting a faster growth in Europe in Q3 to really make up the gap for Q2.

But having said that, keep in mind, Q3, typically, there are people taking vacations in Europe.

So they're a little bit sluggish in term of retail.

We have our next question from line of Lei Wang.

This is Wang Lei speaking from CICC.

So first of all, congratulations on the strong sales despite of the impact from coronavirus.

That's very inspiring for sure.

I -- so basically, I have 3 questions on financials and some other factors.

The first question is about the ASP of the spare parts.

It was around like RMB 800 in the second quarter of 2019 and then dropped to like RMB 500 in the third quarter and then increased to RMB 1,200 in the first quarter of 2020, even with the COVID-19 impact in China.

So what could be the driver that makes the key differences that spare parts' ASP?

That's the first question.

And then the second question is about the new regulations that we believe will redefine the 2-wheeler industry in China.

So it seems individual cities are having different lower enforcement strengths.

For instance, in Beijing, it seems we have a more restrict environment where Shanghai is not taking that regulation seriously for now.

How do you view the enforcement in the following quarters?

That's the second question.

And then the last question and the third question is about the impact from the sharing economy.

So looking forward, do we think the rising of the sharing economy will lead to a negative impact to our sales in the future?

Or will Niu become a key vehicle suppliers for this industry?

That's all my questions.

Sure.

Lei, let me answer your first question about the spare parts ASP.

And I think we need to first talk about the total revenue for accessories, spare parts and services.

I think the revenue comes from 2 source: one is the sales from the China market; secondly is the revenue coming from overseas markets.

So even though in the second quarter, our total revenue from this category reduced by 17% but if you see that in the international market and also the China market, China market actually grew by 70%, 7-0, 70%.

Overseas market declined by 70%, also 7-0 percent.

So in China, if you calculate the average ASP per scooter, the price is actually quite stable.

So the decline or the fluctuations mainly coming from overseas markets.

So for overseas market is the key driver for our revenue in this category is the actual battery and some spare parts we sold to sharing operators in overseas markets, in both Europe, also in the U.S. This year, because of COVID-19, it continues to affect the U.S., it continue to affect Europe, therefore, we have much less spare parts sold to the overseas market.

So that's really the driver to contribute to the fluctuation of the ASP.

We think this will continue for probably in the next 1 or 2 quarters.

We hope next year it become more or less stable.

So that's my point -- answer to your first question.

I would like Yan to comment on the remaining 2 questions.

I think Lei, I think on the regulation enforcement, I actually agree with you.

We do observe different cities actually apply a different -- what you call -- enforce it differently.

Top cities, what do we observe, basically like top 20 -- top 10 to 20 cities, actually top 20 cities, we're talking about Beijing, Shanghai, Hangzhou, Nanjing, even Guangzhou those cities and Hangzhou those ones and Fuzhou and Guangzhou, Shenzhen.

Those ones, actually, they enforce very strictly.

And so in those cities, actually, only the electric bicycle products are being sold.

And after the top -- and those cities roughly represent about -- traditionally into our market size, they're roughly about 6 million units a year in terms of market size, out of that 30 million unit total market size annually.

And then after that 20 cities, I think we're still seeing a hand of cities still enforce the electric bicycle rules.

And obviously, there are also cities that actually -- that allow electric motorcycles or actually allow motorcycles.

So that the product that didn't fall under the, what they call the electric bicycles, are being sold as electric motorcycles.

And a little bit caveat on this is actually [more] enforcement.

First of all, regardless which cities this enforcement is actually very strictly on manufacturers.

Basically, for the product that manufacturer provides, the product has to be either compliant with the electric bicycle or electric motorcycle.

There couldn't be a different -- a third category product which is not compliant with either regulations.

So from manufacturing perspective, as Niu -- as any other manufacturers, the product will shift are -- in either electric bicycle or electric motorcycle.

And they are being sold as electric bicycles or electric motorcycles.

I think only the city that's a little bit loose on this are cities doesn't require people to get license plate on their electric bicycles or electric motorcycles.

That's where the enforcement is a little bit loose.

But I think I gave a really long answer for short question here.

But I think as the time passes, you're going to going to see more and more cities going to enforce the rules.

For example, last year, we didn't see Suzhou, basically a third-tier city, (inaudible) really enforce this.

But this year, Suzhou -- this -- the -- Suzhou actually start offering -- require people to get license plate on electric bicycles, practically, basically April, May this year.

So you're going to see more and more cities, actually, will apply the policy.

I think the reason it's slower, because it requires quite a bit administrative effort to establish, what we call, the license plate for protocol, getting the local traffic management to set up post, to get bicycles, to get license plate registration for that.

It takes time, but I think within a couple of years or so, you're going to see that sort of really get -- be enforced strictly.

Okay.

So it seems not only to lobby the central government, but also we need to take some time to lobby the local governments, asking them to manage the implementation, right.

Actually, it doesn't require lobbying.

It's really that the local administrative government, actually, what we call, have the task force.

Yes, so it's basically, where they turn around and say, "Well, we need to do this.

Now do we have the task force ready?" Suzhou didn't do it last year because they have the task force ready to get all the -- to come up with, what we call, the implementation of it, and then sit here.

And this year, Suzhou is ready to join the club.

So you're going to see more cities.

Lastly on the shared operations.

Yes, we also observed quite some sharing out -- mostly still on Tier 3 or Tier 4, Tier 5 cities.

For example, I visited a city called (inaudible) so I see a lot of share with electric bicycle shares, there are ones deployed by Halo, there's one deployed by Meituan, electric bicycle sharing operators.

We think that's actually complement as part of solution for urban mobility, and it has a little impact to our business because all our products are the mid-end to high-end products.

If you actually look at the bikes that sharing operators deploy, it's very simple, it doesn't even have a, what we call, a display.

Minimum plastics, it's simply to just let you get by.

So we think if there's a massive of those being deployed in those cities, actually, the market segment got hurt the most, probably on the low-end side.

I see.

So basically, they won't have impact to your future sales in those lower-tier cities because we're not having the more advanced products.

All right.

Yes.

Right.

During the -- in 2016 and '17 when the -- we got those question in 2016, '17, when the -- when sharing bicycles hit its prime.

Currently, the sharing electric bicycles sort of the operation to me, basically allow you to rent at a longer distance.

But other than that, it serve the same market, right?

We have the next question from the line of Alex Potter.

I guess a question -- 2 questions maybe on margins.

The first one, going back to gross margin.

Obviously, the cost control that you mentioned was really strong.

I was wondering if you could elaborate specifically on why battery costs and why these components costs are coming down.

Is this a function of just cost cuts from your suppliers?

Is it because you now have more scale and you're able to negotiate better pricing?

Like what specifically is driving the cost declines?

And is it sustainable?

So that's question number one.

Question number two is on the mix of e-commerce.

I know that, theoretically, at least, your e-commerce sales should be higher margin than your sort of traditional in-store retail sales.

Was this a driver of the gross margin outperformance in the quarter as well?

Or how would you quantify the impact there on margins?

Sure.

Thanks, Alex.

For the -- for your first question on the gross margin, the way how we negotiated with our suppliers is that in the beginning of the year, we agree on volume and we also agree on the price.

And also, we agree on our volume-based discounts.

So the more we purchase from them, the lower discount we can get from them.

Of course, this is one of the key drivers why you see the large volume gave us a lot of benefit for cost savings.

Then go back to the negotiation at the beginning of the year.

In the beginning of the year, definitely, we need to have an expectation about the raw material for manufacturing battery cells, et cetera, et cetera.

Based on that expectation, we negotiated with our suppliers.

In China, because of the mass capacity buildup for the EV segment also because declining of some of the raw material costs, therefore, when we negotiated with our supplier in the very beginning of the year, we also negotiated quite aggressive targeted price for the various part of the components.

So in short, there's 2 key drivers.

One key driver is the overall market, how we see the capacity in different components or how we see the cost of raw material develop for the year.

Secondly, it really depends on volume.

Normally, the more volume we have, the lower discount -- the more discount we can receive from our suppliers.

So this is answer for your first question.

For your second question, you are definitely right.

The e-commerce gross margin normally should be higher than the sales through off-line if we are talking about same product, sale model.

But in the second quarter, unfortunately, the e-commerce channel is not the key driver for the stable gross margin, mainly because when we launch new products online, we also gave discount on the new products.

Therefore, in the second quarter, actually, our e-commerce gross margin was lower than last year, mainly because of the discounts we provided to end consumers.

But in the -- but on the other side, we are able to save on the sales and the marketing expenses.

But going forward, if we can continue the faster growth on the e-commerce platform with a stable price, normal discount, then definitely, e-commerce platform will be one of the key contributor for the margin growth going forward.

So this is my answer to your second question.

Yes.

I'll little bit add on the margin part on the cost cut.

So besides the scale, the annual negotiations, I think there's one more thing within the electric bicycle category that we actually observe -- very, very interesting.

Because there was, what we call, a 55-kilogram of weight limitation.

So there's quite a bit of innovation in terms of lightweight materials.

For example, if we reduce the chassis' weight by 0.5 kilo, but at the same time, we're able to add that 0.5 kilo weight to the battery pack, it will allow us to use a lower density batteries, but achieve the same battery capacity.

And by doing so, we have observed in cases that we're actually able to save RMB 100 to RMB 200 on per scooter basis.

If you look at this on the scooter of RMB 4,000 or RMB 5,000, this is basically 5% savings.

So this is actually due to -- to figure out where -- it's a -- simply, it's a math question -- what we call, it's a math question where the total weight is restricted at 55 kilo.

So where should I reduce the weight?

And where should I increase the weight and such that give me a lower-cost product at the same performance?

So there are a few tricks or innovations we're also doing on that domain, which actually helped quite a bit as well.

We have our next question from the line of Xinchi Yin.

This is Xinchi Yin from Citic Securities . So I have a couple of questions about the new products.

So we just noted that YADEA is also releasing new products, the pedal-assisted electric [bike].

What's your -- I was wondering what's your point of view about this niche market?

And when exactly will your new products launch?

And in your opinion, what size of this market will be in the future?

And I have another question about the new brand, Gova.

Can you tell us what the approximate gross profit margins of Gova?

All right.

So Xinchi Yin, I actually talk -- quickly talk about the first.

I assume you mentioned this power-assisted bicycle, what we call the pedal-light or e-bike, basically truly (foreign language) this product category.

So our product, we actually announced at CES this year in January, it's EUB-01.

And this product has targeted European and the United States market.

The reason we target it in Europe and the United States market because market size is huge.

It basically is a 5 million units a year market with average retail ASP of USD 2,500.

And that market has been doubled in the last 3 years and expected to be double again in the next 3 or 4 years.

So I think it's actually -- and for us to get into that market, it's actually also very simple.

It uses motor.

The only thing it has -- it requires the power-assist sensors.

But in terms of design frame, we have all that capability internally.

The only caveat with that product for Europe is the power-assisted bicycle in Europe, there's anti-dumping policy from Europe against China so that our product has to be locally manufactured in Europe.

So we're actually able to secure a local manufacturer partner in Europe and will help us to produce that product in Europe.

The -- this product got a little bit delayed this year because the COVID-19 situation, our team couldn't get to Europe, there has been a lot of on-site negotiation, checking the site, all that stuff.

So it got a little bit delayed.

But hopefully, we should be able to get this product out the door in the second half, and it will drive a huge future growth for the Europe and United States market.

This particular product -- we don't think this product actually has a market in China, particularly because China people actually -- the power-assisted bicycle is not as friendly as our electric bicycle product.

So consumers who actually prefer electric bicycle first over the power-assisted ones where you actually require to pedal a bit before you actually have the power output.

So hopefully, that will answer the e-bike market, power-assisted bike market.

On the Gova brand, before I hand to Hardy on the gross margin, so we don't view Gova as a second brand.

We still view Gova as this Gova series under of Niu brand that will help to leverage our existing sales channel and also leverage our brand awareness.

But on the gross margin, I will let Hardy to answer your question there.

Yes.

For Gova, we have a quite wide range of models from G0 to G2 with different specs.

But I just give you a range, the gross margin for different products and the Gova series anywhere between 13% to 22%, depending on which model, which specs we're talking about.

So this is answer to your second question.

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

All right.

Thank you, operator, and thank you all for participating on today's call and for your support.

So we really appreciate your interest, and we look forward to reporting to you again next quarter on our progress.

Thank you.

Operator?

Thank you.

Thank you all again.

That concludes the call.

You may disconnect now.

Thank you.

Good day.