Niu Technologies: Weak Sales Trends and Uncertain Future… – Seeking Alpha

Introduction

Niu Technologies Shares (NASDAQ: NIU) have fallen 6% since the start of the year. Despite the company operating in a booming e-mobility market, COVID restrictions in China and weak sales in Europe have resulted in a continued decline in sales in Europe, which in my view, personal opinion, may have a negative effect on financial performance due to reduced economies of scale. In addition, the rise in raw material prices (lithium) has an additional negative impact. In my view, the current fundamental upside does not match the risks of buying stocks, so I don’t think this is the best time to go long.

4Q22 volume update

In 4Q22, the company continues to face selling pressure. Thus, total sales fell 42% year-on-year to 138,279. The biggest decline is in the Chinese market, where sales fell 42% year-on-year to 118,065. Sales in China are negatively affected by COVID, which is causing severe restrictions and a drop in traffic in stores. Based on management comments, the company expects sales to pick up in tier-one cities as COVID restrictions ease in 2023. Overseas sales were down 39% year-on-year to 20 214. The drop in sales is due to the fact that the company’s main partner in Europe is undergoing restructuring, which has caused delays in sales. You can see the details in the table below.

Projections and evaluation

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

Volume and revenue model

I think 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 expect sales growth in China in quantitative terms of 40% in 2023 and a gradual decline to 10% in 2026 based on a solid historical basis. In overseas sales, I expect a 30% recovery in 2023 and a gradual decline in growth to 10% by 2026. You can see the results of my forecast in the table below.

Additionally, I expect revenue per model to continue to grow 5% in 2023 and 2024 in all markets and decline to 3% in 2025 and 2026. The higher growth in 2023 and 2024 is due to the need to displace 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 think you will see a gradual improvement in gross margin through 2026 as business growth and increased economies of scale will help reduce COGS per unit in future periods. Thus, I predict that in 2023 we will see a decrease in COGS per unit of 5% due to an increase in premium brand share and a recovery in sales volumes. You can see the details of my predictions in the table below.

Sales and marketing expenses: I foresee stable expenses at 14% (of turnover) until 2026. I think it will be difficult for the company to show significant improvements in this line of expenses, because the increase in sales in the offline channels is achieved by increasing the store network.

General and administrative expenses: I expect 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 expenses.

4T estimates (projections)

Annual projections

So, I don’t see the potential for significant improvement in operating margin at this time. In my opinion, increasing the share of premium brands is a key driver for the company, which can support the gross margin, which will help achieve the operational profitability of the company.

Assessment

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 business, because the model is too sensitive, on the other hand, DCF allows you to make realistic assumptions about sales growth, growth prices and increased margins due to increased savings. of scale. Also, based on my forecast, I calculate multiples for the business.

The main inputs of my model are:

WACC: 8.8%

Terminal growth rate: 3%

Additionally, in the table below, you can see the multiples calculated based on my sales and net revenue projections for future periods.

Drivers

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

Margin: increased economies of scale, increased share of high-end models (product mix) and effective cost control can lead to increased company operating margin, which can support stocks of the company.

Launch of new models: 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 feedback, the company plans to officially launch the first e-bike product in the first quarter of 2023.

Macros: Normalizing macroeconomic conditions and restoring business confidence could drive demand for the company’s products from sharing operators, which could provide strong revenue support going forward.

Risks

COVID: Continued COVID restrictions in China could lead to less traffic at the company’s stores, negatively impacting sales momentum in the Chinese market, which accounts for the majority of the company’s revenue.

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

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

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

Conclusion

In my opinion, now is not the best time to buy shares in a company. Based on fairly optimistic elements of my model, such as continued sales growth in key markets, successful price increases for key products, effective control of production and operating costs, and achievement of ‘economies of scale, I do not see the potential for improving the financial performance and operational profitability of the company. Additionally, the company continues to be pressured by rising commodity prices and macro headwinds. So now my Hold recommendation is based on the fact that weak sales in the fourth quarter of 2022 are already factored into the current stock price. I will continue to closely monitor the company’s earnings over the coming quarters, particularly the performance of e-bike sales throughout 2023, which could change my outlook and view of the company’s stock.