Niu Technologies: Weak Sales Trends And Unclear Future (NASDAQ:NIU)

Introduction

Shares of Niu Technologies (NASDAQ:NIU) have dropped 6% YTD. Despite the fact that the company operates in a booming e-mobility market, COVID restrictions in China and weak sales in Europe have led to a continued decline in sales in Europe, which, in my personal opinion, may have a negative effect on financial performance due to for reducing economies of scale. In addition, the rise in prices for commodities (lithium) has an additional negative impact. In my personal opinion, the current fundamental upside does not match the risks that come with buying stocks, so I don’t think now is the best time to go long.

4Q22 volume update

In 4Q22, the company continues to face selling pressure. Thus, total sales decreased by 42% YoY to 138,279. The largest decline occurs in the Chinese market, where sales decreased by 42% YoY to 118,065. Sales in China are negatively affected by COVID, which causes severe restrictions and a decrease in traffic in stores. According to management comments, the company is looking forward to a recovery in sales in top-tier cities as COVID restrictions ease in 2023. Overseas sales decreased by 39% YoY to 20,214. The decrease in sales is due to the fact that the company’s main partner in Europe is in the process of business restructuring, which caused delays in sales. You can see the details in the chart below.

Projections & Valuation

To forecast the future results of the company, I tried to make my own forecasts of operating and financial results. I based my forecasts on historical business results, management forecasts, and my own expectations.

Volume & revenue model

I believe that in 2023 you will see a recovery in sales in China and Europe due to the easing of COVID restrictions in China and the normalization of orders in Europe. As such, I forecast sales growth in China in quantitative terms of 40% in 2023 and a gradual decline to 10% in 2026 on the back of a strong historical base. In overseas sales, I predict a 30% recovery in 2023 and a gradual decline in growth to 10% by 2026. You can see the results of my predictions in the chart below.

In addition, I expect revenue per model to continue to grow by 5% in 2023 and 2024 across all markets and decline to 3% in 2025 and 2026. The outstripping growth in 2023 and 2024 is due to the need to shift higher costs and increase the share of premium brands.

Costs

In terms of forecasting production and operating costs, my forecasts are based on the following assumptions:

Gross margin: I believe that you will see a gradual improvement in gross margin until 2026, because business growth and increasing economies of scale will contribute to lower COGS per 1 unit in the coming periods. Thus, I predict that in 2023 we will see a decrease in COGS per unit by 5% due to an increase in the share of the premium brand and a recovery in sales volumes. You can see the details of my predictions in the chart below.

Selling and marketing expenses: I predict stable expenses at 14% (of revenue) until 2026. I think that it will be difficult for the company to show significant improvements in this line of expenditure, since the increase in sales in offline channels is achieved by increasing the network of stores.

General and administrative expenses: I predict a slight improvement from 4.3% (of revenue) in 2023 to 4% (of revenue) by 2026 due to increased economies of scale and more efficient administrative spending.

4Q estimates (projections)

Yearly projections

Thus, I do not see the potential for significant improvement in operating margin at the moment. In my personal opinion, the increase in the share of premium brands is a key driver for the company, which can support the gross margin, which will help achieve the operating profitability of the business.

Valuation

For business valuation, I prefer to use the DCF method. On the one hand, DCF is not the most preferred way to value such a company, as the model is too sensitive, on the other hand, DCF allows you to make realistic assumptions about sales growth, price growth and increasing margins due to increasing economies of scale. Also, based on my forecasts, I calculate multiples for the company.

The main inputs in my model are:

WACC: 8.8%

Terminal growth rate: 3%

Also, in the chart below, you can see the calculated multiples based on my sales & net income projections in future periods.

Drivers

COVID: the lifting of COVID restrictions will help restore demand for the company’s products in the Chinese market. Recovering traffic in the company’s stores, picking up business activity and recovering consumer confidence in China could help boost sales in the coming quarters.

Margin: increasing economies of scale, increasing the share of premium models (product mix) and effective cost control can lead to an increase in the operating margin of the business, which can support the company’s shares.

New model launches: successful market launches of new models in the premium segment can boost sales and profit margins by improving the product mix. So, according to management comments, the company plans to officially launch the first e-bike product in Q1 2023.

Macro: the normalization of macro conditions and the restoration of business confidence could boost demand for the company’s products from sharing operators, which could provide strong support to revenue going forward.

Risks

COVID: continued COVID restrictions in China could lead to a decrease in the company’s store traffic, which has a negative impact on sales dynamics in the Chinese market, which accounts for the majority of the company’s revenue.

Margin: rising costs for materials (lithium) and reduced business scale could lead to higher production and operating costs, which is negative for the level of profitability.

Macro: high inflation, declining real disposable income and declining consumer confidence could lead to lower consumer spending in the discretionary segment, which could put pressure on the company’s top line.

New model launches: cancellations or delays in new model launches could dampen investor expectations for revenue growth and margins as the company plans to launch premium models that help support the gross margin amid stagnating sales in China.

Conclusion

In my personal opinion, now is not the best time to buy stock in a company. Based on fairly optimistic inputs in my model, such as continued sales growth in key markets, successful price increases for key products, effective control of production and operating costs, and the realization of economies of scale, I do not see the potential for a significant improvement in the financial performance and operating profitability of the business. In addition, the company continues to experience pressure from rising prices for commodities and macro headwinds. So now my Hold recommendation is based on the fact that low sales in Q4 2022 are already factored into the current share price. I will continue to closely monitor the company’s earnings in the coming quarters, especially e-bike sales performance throughout 2023, which could change my outlook and my view of the company’s stock.