2023-06-05 06:41:47 ET
Summary
- NIU's top line growth is projected to slow in FY 2023 considering the company's unfavorable sales exposure.
- Niu Technologies' net profit margin for this year is less likely to be as high as pre-COVID levels, taking into account competition and expansion plans.
- In my view, NIU's FY 2023 outlook is lackluster, which means that there is a lack of earnings catalysts to drive its share price up.
Elevator Pitch
I continue to award a Hold rating to Niu Technologies' ( NIU ) stock.
With my earlier initiation article for NIU published on September 27, 2022, I discussed about Niu Technologies' sales recovery and its valuations. My attention turns to NIU's revenue outlook and profitability expectations. Considering that NIU's top line growth and net margin are unlikely to revert to pre-COVID levels in the near term, I don't see any visible re-rating catalysts in place for Niu Technologies. Therefore, I have chosen to retain a Hold rating for NIU.
Niu Technologies' Top Line Growth Prospects
NIU is guiding for a +7.5% YoY increase in its revenue from RMB827.6 million in the second quarter of 2022 to RMB890.0 million for Q2 2023 based on the mid-point of its guidance outlined in its Q1 2023 results release . As a comparison, Niu Technologies used to achieve much higher YoY top line expansion rates of +135.0%, +46.5%, +37.1%, +46.7% for the first, second, third, and fourth quarters of 2021, respectively. Mainland China, NIU's home market, experienced the worst of the COVID-19 pandemic in 2022, so the company isn't expected to return to pre-COVID sales growth levels in Q2 2023.
For the full year, Niu Technologies hasn't provided guidance. But the sell-side analysts' consensus FY 2023 top line estimate for NIU is RMB3,816.9 million, which translates into a sales growth of +20.5%. Although Niu Technologies' expected revenue expansion for this year seems decent in absolute terms, this is a far cry from what NIU previously reported before the pandemic. NIU's top line CAGR for the FY 2018-2021 time period was higher at +35.8%.
I think that NIU's management guidance and the market's consensus financial projections are realistic. Niu Technologies' revenue mix with a tilt towards vehicles powered with lithium-ion batteries and a focus on the premium segment is unfavorable, and this will be a drag on NIU's revenue growth prospects this year.
A May 22, 2023 Seeking Alpha News article cited research from Citi ( C ) which highlighted that NIU is less competitive than "peers that mainly used lead acid batteries", as a result of "the escalated lithium battery cost." In my prior late-September 2022 initiation article, I had noted that "price-sensitive consumers might opt for the less expensive scooters fueled by lead-acid batteries" and give Niu Technologies' relatively more pricey "lithium-ion battery-powered electric two-wheeled vehicles" a miss.
Separately, NIU stressed at the company's Q1 2023 earnings call that it positions itself in the "premium" (greater than RMB5,000) and "high quality mid-end" (between RMB3,500 and RMB5,000) segments of China's two-wheelers market. The official PMI for China fell to a new five-month trough in May 2023, and it is likely that a significant proportion of Chinese consumers will consider down-trading in a weak economic environment i.e. purchase two-wheelers in the mass-market category.
To sum up things, Niu Technologies' sales are concentrated in lithium-ion battery-powered two-wheelers and the premium segment, and this is negative for NIU's revenue outlook in the near term.
Profitability Expectations For Niu Technologies
Based on the analysts' consensus financial forecasts sourced from S&P Capital IQ , the sell-side sees NIU's normalized net profit margin improving from 0.3% for FY 2022 to 3.6% in FY 2023. But Niu Technologies' expected profitability is still less than half of what the company used to achieve in the pre-pandemic years. As a basis for comparison, NIU registered normalized net profit margins of 10.1%, 8.5%, and 7.4% for FY 2019, FY 2020, and FY 2021, respectively.
In my opinion, price competition and investment needed to support geographical diversification are the key factors that are hurting Niu Technologies' profitability.
NIU stressed at the company's Q1 2023 results briefing that "there are less price war involved" in the premium and mid-end segments where it operates in. But Niu Technologies' management comments also imply that they acknowledge the presence of price competition in China's two-wheeler market, although the company disagrees with the intensity of the price competition that it faces in its market segments. Price competition will naturally limit NIU's ability to raise prices, and also compel the company to spend more on advertising and promotions. As such, it is no surprise that Niu Technologies' profit margins aren't expected to revert to pre-COVID levels this year.
On the other hand, NIU has plans in place to expand outside of its home market. As a reference, Niu Technologies generated 82% of the company's fiscal 2022 revenue from China. At its first quarter earnings briefing, the company disclosed that it is engaged in "sales channel expansion" and "product marketing campaigns" as part of plans to "establish our presence in" international markets such as Europe and the US. While I have a favorable view of NIU's intention to reduce geographical concentration risks, it is unavoidable that the company will need to spend a meaningful amount of money to support its geographical expansion plans.
In summary, Niu Technologies' net margin will not get back to historical levels in the very near term, as a result of competition and its overseas expansion initiatives.
Concluding Thoughts
My analysis of NIU's financial prospects leads me to the conclusion that 2023 won't be an exciting year for the company in terms of top line growth or profit margin expansion. In the absence of potential results-related catalysts (e.g. positive surprises or earnings beats) for the stock, I decide to leave my existing Hold rating for NIU unchanged.
For further details see:
Niu Technologies: Lackluster Outlook Keeps Me On The Sidelines