NIU Technologies: A primer for a revolution in transport?

Brief Company History

• 09.2014: NIU was born, from the ideas of Joseph Nelson and Token Hu.
• 06.2015: The first series of scooters was launched (NQi). In the meanwhile, through an online crowdfunding campaign, the founders raised USD $11M in 15 days.
• 04.2016: Launch of a second series of scooters (MQi), which raises USD $13M in 15 days.
• 08.2016: NIU begins sales in Europe.
• 04.2017: Launch of another series of scooters, the UQi.
• 10.2017 to 2018.03: NIU attract worldwide attention by showcasing in the most important fairs around the globe and winning important design prizes in Germany, US and Japan.
• 08.2018: Launch of UQim.
• 10.2018: NIU is listed on the NASDAQ.
• 06.2019: Launch of UQi+ and UQis.
• 11.2019: Launch of NQi GTS, MQi GT, UQi GT at EICMA in Milan, Italy.
• 12.2019: First year with a positive net income: the company is profitable.
• 01.2020: Launch of RQi and TQi at CES in Las Vegas, USA.

Mission

NIU’s mission is to redefine urban mobility and improve the quality of life. The vision is to become the number one, design and technology-powered, brand for urban mobility.

To achieve its vision, NIU offers a varied series of products that address the needs of different segments of modern urban residents and resolve demands of different scenarios of urban travel, whilst being united through a common design language that emphasizes style, freedom, and technology. NIU has adopted an omnichannel retail model, integrating offline and online channels, to sell its products and provide services.

Management

DR. YAN LI
• Roles: Chairman of the board of directors (since March 2018), CEO (since December 2017), COO (since January 2016).
• Previous experiences: Principal at KKR Capstone Limited (2009–2015), Consultant at McKinsey & Company (2008–2009), Senior Research Engineer at Qualcomm Inc. (2006–2008).
• Education: Bachelor’s degree from University of California at Berkeley (2001) and a Ph.D. from Stanford University (2005), both in Electrical Engineering.

TOKEN YILIN HU
• Roles: Director and VP of research and development, since inception.
• Previous experiences: Co-founder of UTLAB (November 2011), Lead designer at Frog Design (March 2009–October 2011), Designer at Microsoft China (March 2008–January 2009)

CARL CHUANKAI LIU
• Role: VP of Design (since 2016).
• Previous experiences: Design director at Designworks BMW (Dec. 2014–April 2016), General Manager of Idea Dao Design (July 2009–Oct. 2014), Creative Manager at The Walt Disney Company in China (January 2007–March 2009). Director of various corporations and design firms (1996–2006).

HARDY PENG ZHANG
• Role: CFO (since April 2018).
• Previous experiences: Executive VP of Bain Capital (2015–2018), CFO at HOAU Group (2013–2015), Consultant at BCG China (2012–2013), Finance Executive at A.P. Moller-Maersk Group (2002–2011).
• Education: Bachelor’s degree in Economics and Finance from Peking University (2002) and an MBA from INSEAD (2012).

Relevant Shareholders

As it is clearly visible, a relevant bulk of voting power is held by the directors of the company, with Token Yilin Hu and Yan Li being the major representatives. The company has gone under several rounds of financing, and for this reason, the remaining capital structure is populated by several different Venture Capitalist funds. The most representative of this segment is ‘Glory Achievement Fund Limited’, with 39% of total ordinary shares, which exceeds the equity held by management; and 27.7% of total voting rights, which subceeds that held by management, allowing management to maintain relative control.

Industry

The electric scooter market size was estimated at USD 18.6B in 2019 and is expected to reach USD 20.0B in 2020. Between 2018 and 2025, the market for electric scooters is expected to grow at a CAGR of 7.3%. In particular, the growth will be driven by the increase in popularity in Europe and the US, as long as the employment of Li-Ion batteries with voltages of 48+V (like the ones implied in NIU Technologies’ products) increases. Currently, the market is dominated by the cheaper 36V counterparts, however, in the near future, we will experience a decrease in the prices of 48+V Li-Ion batteries, shifting market dominance to companies, like NIU, which are heavily invested in the development of these new technologies.

Although NIU’s technology is advanced and at the pinnacle of the current engineering level, there is an abundance of other players present. However, the strong focus on design and international coverage gives NIU the ability to have an edge and continue growing.

Strengths of NIU

• Distribution and reach: NIU Technologies reached 1,033 franchise stores in mainland China and 33 distributors in international markets, which covered 42 countries. Its reach is supported by a strong distribution network that ensures that its products are easily available to a large number of customers in a timely manner.
• Cost structure: Selling scooters at an accessible price (compared to gasoline scooters) guarantees NIU a large customer base.
• Dealer community: NIU has a strong relationship with its franchisees, to which it not only provides supplies, but also focuses on promoting the company’s products and training.
• Community of customers: Clients feel part of a revolution in transport and experience a sense of community, despite having sold millions of scooters worldwide.
• Skilled labor force: NIU can count on highly specialized designers and engineers that help develop cutting-edge technology that will lead the company to a future of continued success.
• Product portfolio: The large portfolio of products allows NIU to reach different customer segments and needs.

Weaknesses of NIU

• Net income: The EPS/Price ratio is a weak 0.367%. This could dissappont the investors that anticipated NIU would already be mature enough to cash large profits.
• Dependent from policies: The revenues are highly dependent on ‘green bonuses’ and incentives that are put in place by policy-makers. However, since the green economy is expected to grow in the following years, we can consider it a mild weakness.

Opportunities for NIU

• Global markets penetration: NIU’s main market has been China, nonetheless it is slowly gaining grip in European and American markets.
• Bigger factories and scalable plants: NIU is planning on upgrading their manufacturing sites in order to begin a mass production that could lead to even more affordable prices.
• Expertise in 48+V batteries and performance electric engines: due to the company’s heavy investments in R&D, NIU could become a leader in the production of scooters that will be more desirable in the future, such as those containing the high-voltage batteries.

Threats for NIU

• Technological developments by competitors: while NIU could hold a competitive advantage in high-voltage powered electric scooters, it could suffer from technological developments by competitors, both Chinese and International.
• Trade wars: with Biden’s election, the threat of an increasingly stressful trade war between the US and China seems obsolete. However, there’s always some kind of risk of collision between those two countries.
• Constant technological upgrade expenses: NIU must sustain levels of R&D expenditure, in line with its peers. However, it could reach levels that do not justify the existence of the business itself.
• Growth in Global Markets stopped by COVID-19: while the pandemic seems under control in China and other eastern countries, in the rest of the world, it still represents a huge threat to the growth of the company.

Business Model

NIU’s Business model is fairly simple: the objective of the company is to cover, with their products, all the transport needs of individuals worldwide.

To do that they offer e-scooters of any kind and shape, for all transportation purposes. This main business accounts for 87.2% of its revenue generated. However, there is another 12.8% of revenue derived from other types of sales, such as merchandise and lifestyle accessories. The potential for growth of those parallel sources of income is huge as NIU’s customers are very design and style-conscious.

Revenues generated from the sale of e-scooters are mainly traced to mainland China, which accounts in 2020 to 94.5% of sales, while the rest of the world accounts for a minuscule 5.5% of the total sales.

In the evaluation of those figures it has to be taken into account the fact that while in China every scooter sold brings on average a revenue of USD 530, in the international markets, this figure is almost triple.

The current line-up of products sees seven different designs of scooters taking the stand. However, they are divided into three major model categories: NQi, MQi and UQi.

NQi series was the first to be developed and proposed to the market. It equips a Li-Ion battery that allows having a battery capacity of 29 Ah, a weight of 10 kg and a recharging time of 7 hours. The range is said to be in the order of 80 km.

MQi is about design. Moreover, it equips a battery that is even lighter than the one of NQi with only 8.3 Kg, a range of 65 km and a charging time of 6 hours.

The UQi is a smart naked that has a tiny battery that weights only 5.2 Kg, while still allowing a range of 30-40 Km and a capacity of 21Ah.

Key Performance Indicators (KPI’s)

Revenues of NIU Technologies have kept growing between 2016 and 2019. With the number of produced units going up, NIU has been able to reduce the cost per scooter and grow the gross profit figure.

While revenues have been skyrocketing, EBITDA and EBIT figures have been negative for years, until the 2019. The reduction of the costs associated to the production of the scooters and the increased popularity in mainland China and the international network of distributors allowed NIU to spread the fixed costs over an increasing number of scooters, bringing the company to profitability.

After an incredible growth in 2017 and 2018, driven by mass sales in China, the YoY Revenues have seen a natural dampening. Still, in 2019 NIU has managed to increase revenues from the previous year of almost a 40%.

NIU Technologies just got profitable through its mass production efforts. Balance sheet financials appear really healthy, given the low indebtment of the company.

Follows NIU’s balance sheet, with figures in United States Dollars and harmonized account descriptions over the years 2017, 2018, 2019 and over the first half of 2020.

Follows a revised income statement, with figures in United States Dollars and harmonized accounts over the years 2017, 2018, 2019 and over the first half of 2020.

The Income Statement indicates a steady growth in revenues and a non-linear, growth of Operating Expenses, demonstrating good scaling possibilities.

Year 2019 marked an important achievement for NIU: it became for the first time a profitable business, with over-the-industry margins. 

Revenues are composed for the majority by scooter sales, of which 94.5% in mainland China, and for almost 13% by merchandise and other accessories’ sales. 

To be considered is also the impact of COVID-19 on domestic revenues, which were sensibly affected in Q1 2020 and as a result make H1 2020’s figures not entirely appealable.

While the indebtment, especially in light of the recent profitability, is stable and low, the main concerns for investors could be a low Gross profit margin (if compared with peers) which could be a weakness in a long term consideration of stock health.

However, as seen in the table below, several peers have an over-budgeted cost structure that allows NIU to have some of the best EBIT and EBITDA figures.

Peter Lynch Stock Category

Legendary investor Peter Lynch used to categorize stocks based on 6 different types:

• Asset plays (also known as “Net nets”), which represent stocks which have some valuable asset and that have been overlooked by the general investors. Investors need working knowledge of the processes of the company and have patience to let it “yield value”.
• Turn Around are all about big risk but big rewards. Those companies are focused on debt load, because they could have depressed names and they need to recoup lost ground quickly.
• Cyclicals: the timing of investing is critical. In fact, those stocks follow cycles, during which their revenues and their profits are volatile, and decrease and increase depending on the current moment of the pattern.
• Slow growers: companies that have seen serious growth in the good old days, but continue to grow at a rate that is slightly higher than the GDP. These companies usually pay regular and fat dividends.
• Stalwarts: they grow faster than slow-growers. At the same time, they are rather good, but not “star” performers. Those companies usually offer protection during hard times of the economy as its whole.
• Fast growers: small aggressive and (usually) new companies. Their growth is 20% or more year on year. They could easily be companies to keep in portfolio for years, to see gains in the four-digit scale. This has obviously the downside that fast growers could also become broke really fast. Peter Lynch used to see the trick about investing in these companies as exiting when growth slows down.

It’s easy to categorize NIU Technology as a fast grower, due to its outstanding EPS and revenue growth. Moreover, Price to Earnings Ratio has skyrocketed from March 2020, when the company first saw a positive operative margin as a result of an outstanding 2019. The growth is then obtained from usual income sources, like the sales of scooters, and not from the disposal of assets or other extraordinary operations.

Discounted Cashflow Model (DCF)

For the Valuation of NIU Technologies we first used a Discounted Cash Flow model. Using 2020 as year 0 for making predictions about the figures of the EBIT, we decided to assume a 40% growth YoY. This might seem high, but the economy of scales and the conquering of Western markets could lead NIU to efficiently increase its EBIT. In fact, international sales have almost a triple value then the domestic ones and selling globally could lead to a greater mass production.

China’s risk-free rate is 3.28%, the equity risk premium is 6.26% (source: Damodoran). The levered beta used is 0.78. This means that the cost of equity for NIU Technologies is 8.16%.

At the same time, NIU has an impressive cost of debt of 2.08%, which equals to 1.56% if considered the tax effects. This gives the total value of the WACC, given the capital structure (50% debt, 50% equity), a rate of 4.86%. Hence, the average cost of capital for NIU Technologies is 4.86%.

I used, to determine the terminal value, two different methods. One relies on a really common multiple, EV/EBITDA, which shows how much times the Enterprise is valued, in relation to the Earning Before Interest, Taxes, Deductions and Amortizations. Moreover, the method of perpetual growth assumes the value of the company increase year to year of a fixed amount, forever. I chose the figure of 3% because of the country and stock characteristics.

After having conducted an analysis using a DCF model, I saw that the company is currently undervalued, with its future growth as a really relevant factor. My analysis saw the intrinsic value of the stock to be more than double the current price.

I made the assumptions above because I believe that the company has still a lot of market to conquer outside mainland China and moreover, with higher-revenues-generating customers it will be enhancing its EBIT year on year.

Comparable Analysis

Peers of NIU are difficult to identify. The electric scooter market, especially the high-end one, is populated by hundreds of small and micro companies dispersed all over the world. For this reason, we decided to restrict the number of peers selected to three significant ones: Tesla, Piaggio and NIO. The American company conducted by Elon Musk has been selected because of its connection with the NIU regarding the research for cutting-edge electric motion technologies. However, Tesla isn’t having a profitable business structure, while the Chinese manufacturer has healthy profit margins.

Piaggio was selected because of its strong bet towards electric scooters made with the electric Vespa, an iconic scooter that could be a best-seller in Europe and possibly in the US. Piaggio and NIU shared, interestingly, similar multiples figures.

The last one considered was NIO, another car manufacturer that invests heavily in research in electric transportation. Apart from its research and development, we included NIO also because of the fact that it is a Chinese company: this could give our Comparable Analysis some sort of “country adjustment” to the other average figures.

The tables below show the results of the comparable analysis conducted:

From the analysis, NIU Technologies resulted often overperforming the average multiples of the other companies. To determine the target price of the stock is interesting to consider the P/E ratio, as well as the EV/EBITDA and EV/EBIT ratios.

NIU is in fact positioned in the middle of the ratio figures, between the historical scooter manufacturer Piaggio, which has industry-typical ratios and margins, and the overhyped tech startup group composed by NIO and Tesla. This shows that the valuation is based on rational figures and is not overly inflated.

The path for NIU’s target price seems clear enough to compare the different analyses conducted.

Is NIU undervalued or overvalued?

Since the characteristics of the stock of NIU Technologies require a deeper research on the correct market price, we decided to pursue analysis through Comparable, Multiples, and ultimately using a perpetual growth model.

The peers chosen for this analyses are not that many and of different dimensions: that is because of the immense fragmentation of electric scooter’s market.

In fact, NIU is one of the few manufacturers of e-scooters that are listed on the markets and hence make their financial statements available to the wide public.

For this reason, we selected Piaggio, an Italian manufacturing group of two-wheeled vehicles (one of its lines is converting entirely to electric-powered scooters), Tesla, the notorious car manufacturer which is similar to NIU because of its pioneering presence in the market and NIO, another EV manufacturer, similar for reasons regarding the country of incorporation and business model.

The table above is the output generated from the throughout different analyses conducted. The DCF, depending on the case scenario, gives us a range of price between 41.82 and 71.09 USD per share, with the sweet spot, based on our analysis and forecasts, at about 57.59 USD per share.

The comparable analysis gives us a wider range of prices, but the interesting fact is that all the analysis, when averaged together, converge to the same target area.

NIU is the leader of a rather fragmented market that is going to further consolidate in the next years: given its position, we expect NIU to remain on top of the market share in China and to conquer the international markets with an interesting price proposition.

Coming to the main question: Is NIU undervalued or overvalued?

The answer, in this case, is rather simple. Given the characteristics of the stock object of analysis, we can conclude that NIU is a stock to buy and hold in portfolio, to benefit from the growth and its newly found economies of scale, which will boost cash production in upcoming years. The purchase of this stock can be profitable in the short-medium term if bought at prices that go from the current market prices up and until the “safe maximum” price of $46-48. At the same time, investors will benefit in the middle-long term from the larger margins gained with international sales, that could lead in the next two years the price of NIU’s stock to spike well over $65/share.

Hence, at the moment NIU is overvalued, if looking at the current financials, but not if looking at future prospects of growth. The future of NIU is bright, with In fact, the overvaluation, using the DCF model Is only of some dollars per share, which make NIU currently a great pick.

Given the current share price, NIU Is slightly overvalued, but with a strong potential of growth In the middle-long term.

Other Manufacturers’ Competition – Eternity factor

China has seen several electric scooter manufacturers born in the last five to ten years. What is also true is that NIU position itself as an already strong player in the Chinese market and a star for the European and American markets, that have still to catch up with the new trends about electric motorbikes.

The overall market is growing and NIU offers a product that, due to its production scale, can be delivered at a reasonably low price.

Moreover, NIU is specialized in the production of scooters that will especially be popular in the following year, when everybody would start wanting for more performances and longer ranges of operation.

While it’s not easily predictable if a certain company will be able ten years from now to still be around, I would say that, due to its cutting edge technologies and generous continuous investments in R&D, NIU will be on the market with 90% of probability.

Valuation Risk

When addressing growth stocks, the risk of overvaluing a company is always present and frequent. This could also be due to the assumption that the firm will continue to perform following high-quality standards and will be able to attack the European and American market shares effectively and in a timely manner.

However, through the analyses conducted, it can be observed that by continuing investing in the consolidation and upgrade of manufacturing plants the cost of the product will lower down to levels that will allow the company also to cash-in liquid profits and to retain them for the investors.

The probability of the above valuation happening is currently 80%, with the factor of risk being the presence of entering competitors or wrong strategies in addressing non-Chinese markets that could impact significatively the profitability of the company.

Worldwide Policies Risk

The policies implemented by the final markets influence heavily the ability of the company to enter the market or continue selling at the best level.

While China, for example, is recurringly non respecting environmental objectives, other macro continents are implementing drastic measurements to prevent global warming and in general pollution.

This risk is mainly due to the reuse or recycling of the batteries that could lead policy-makers to restrict the access to electric-powered means of transport.

However, it must be said that as a matter of fact those policies are hard to be seen, since the estimated line of thought of worldwide policy-makers is the empower of electric vehicles and not the dismission.

Another face of the policy risk could be a trade war and in general an imposition of taxes for Chinese products entering US and EU markets. However, also in this case, the probability of this happening is rather low for the above products. In particular, this has changed drastically with the election of Joe Biden as President of the United States of America, who replaced the declared “anti-China” ex-President Trump.

Yes, and not only for long term investment. Considering the current perspective of growth we believe NIU Technologies’ stock to be a BUY until the $42/share area for a short-middle term speculation. Higher price regions are not advised, because volatility endanger the short term placement of the stock back in the market with a profit.

As Peter Lynch’s definition of fast growers, NIU Technologies has the potential to be a growth stock to be kept in portfolio for a long term, benefitting in future for the current high investments in R&D and new plants. This second ones will have the ability to raise the profitability, especially with the progressive international expansion, where NIU sells its scooters at almost triple the price it does nationally.

A good buy in the middle-long term then, for a great appreciation In the next 2-4 years. It could also represent a good buy in the short term, but with prices that shouldn’t surpass the $42/share threshold.

So, are you embracing the NIU revolution?