2023-08-17 14:30:45 ET
Summary
- Niu Technologies' revenue in the second quarter of 2023 increased by 0.1% YoY, while operating loss (% of revenue) increased to 0.8%.
- Chinese e-scooters sales down 17% YoY, while international sales down 1% YoY.
- I do not expect the company to be able to show a significant improvement in operating margin in the second half of 2023, so my recommendation is HOLD.
Introduction
Shares of Niu Technologies ( NIU ) have fallen 41% YTD. Since my last post , where I talked about the uncertain future of the company, the company's stock has declined 33%, while the S&P 500 index has risen 8%. In my article, I would like to update my view on the company's shares.
Investment thesis
Despite the fact that the company's shares have fallen heavily, I believe that it is still not the best time to go long. Despite the fact that sales of e-scooters in quantitative terms have almost recovered to the level of last year, I do not expect that the company will be able to demonstrate a significant improvement in operating margin in the second half of the year, while reaching the break-even point, in my personal opinion, is one of the main potential drivers of stock prices.
Company overview
Niu Technologies is a manufacturer and distributor of electric scooters, bicycles and e-bikes. The main market for the company is China, where the company sells about 84% of its total sales, while the international market (Europe, USA) accounts for about 16% of its total sales. The company was registered in 2014 and is headquartered in Beijing, China.
2Q 2023 Earnings Review
Sales of e-scooters increased by 1.5% YoY, the largest contribution was made by the growth in sales in overseas markets, where sales increased by 17.1% YoY, while sales in China decreased by 1% YoY. The average selling price of e-scooter ((ASP)) in China increased by 8.1% YoY due to an increase in the share of premium brands, while ASP in the international market decreased by 33% YoY due to lower sales of electric motorcycles. Thus, the company's revenue decreased by 0.1% YoY in Q2 2023 .
E-scooter sales volume and volume by geography (%) (Company's information)
Gross margin increased from 20.3% in Q2 2022 to 23.1% in Q2 2023 due to an increase in the share of premium products, the sales of which are more profitable (Rqi model in the Chinese market. Earlier in my article , I already wrote about that I consider the increase in the share of premium brands to be one of the main drivers of profitability for the company.
Gross profit margin (Company's information)
Operating expenses (% of revenue) increased from 20.9% in Q2 2022 to 24.0% in Q2 2023, due to an increase in sales and marketing expenses (% of revenue) from 11.2% to 13, 2% and spending on general % administrative (% of revenue) from 4.4% to 5.8%.
Thus, operating loss (% of revenue) increased from 0.6% in Q2 2022 to 0.8% in Q2 2023.
Operating loss (% of revenue) (Company's information)
My expectations
I believe that a solid increase in sales in quantitative terms and achieving economies of scale are key issues in the company's investment case. On the one hand, I see that the company is moving in this direction, however, on the other hand, I think that the company will not be able to show significant improvements in the second half of 2023.
First, based on management's forecasts during the Earnings Call following the publication of Q2 results, we can conclude that the increase in the share of premium brands and the recovery in sales in quantitative terms will not provide serious support to the gross profit margin. Thus, management admits that the gross profit margin in Q3 may be at the level of 20% - 23%, which is lower than in Q2 2023.
So, in quarter three, we only expect the blended gross margin for our group will be around 20% to 23%, which may -- the most possible way that our gross -- blended gross margin will fall into the range of 22.5% or something around this gross margin range. We won't expect the quarter three's gross margin reach 23%, those high.
In addition, based on historical data on the impact of volume sales growth on operating cost reductions (% of revenue), I believe that the company will not be able to demonstrate a significant improvement in operating efficiency due to increased economies of scale. Thus, the company's management expects that revenue in the 3rd quarter of 2023 may grow by 15%, of which 10% is accounted for by an increase in sales volumes, and about 5% is an increase in the average selling price.
Risks
Margin: rising costs for raw materials and reduced economies of scale due to slower sales may have a negative impact on the operating profitability of the business, which is especially relevant for the company, as the company's profitability is still in the negative zone.
Macro: a decline in real income in China, Europe and the US may lead to a decrease in consumer spending in the discretionary segment, which may also put pressure on the company's revenue growth rates in the next periods.
Regulation: imposition of government restrictions on the use of vehicles in the micro mobility segment (restrictions on the use of electric bicycles in Guangzhou) may lead to a decrease in sales in existing markets and, consequently, a decrease in the company's revenue
Drivers
Margin: an increase in the share of premium brands in the company's total sales, as well as an increase in economies of scale, can have a positive impact on the operating margin of the business.
Revenue: launching sales in new geography (Thailand, Indonesia), expanding sales offices, launching new models on the market, rising prices for the company's products and effective marketing can contribute to the growth of the company's revenue in the following periods.
Valuation
Valuation Grade is A+. On P/E ((FWD)) and EV/EBITDA ((FWD)) multiples, the company trades at 14.6x and 3.9x, which are 7% and 61% lower than the sector median, respectively. On the one hand, I like that the company is trading at a discount, but on the other hand, I think that the company's shares deserve a discount due to the size of the business and relatively low growth rates. In addition, I would like to point out that it is not worth making a purchase decision based only on a relatively low valuation, as the discount can persist for a long time if the company does not show improvement in fundamentals.
Conclusion
Despite the fact that I like the company and the market in which it operates, I believe that investors should wait for the results in the next quarters before making a purchase decision. I avoid a sell recommendation as the company's shares are valued at low multiples, but I don't see any additional upside catalysts, so my recommendation is hold.
For further details see:
Niu Technologies: Still Not The Best Time To Buy The Dip