Is the Chinese Company a primer for a revolution in transport means?
(24 minute read)
Still bothering with public transport to move around your city? Think again! A transportation revolution is at the door and is searching for you to join! With this analysis, you’ll be able to spot why it is not only a good choice to get an electric scooter, but it also makes sense to invest in the company that produces it.
Niu Technologies (better known as NIU) is a Chinese electric scooter company. The company offers NQi, MQi, UQi, Gova series e-scooters; RQi and TQi series urban commuter electric motorcycles; and NIU Aero series professional mountain street bicycles under the NIU brand name.
NIU also offers accessories for cycles and lifestyle merchandising. The company sells and services its products through city partners and franchised stores, third-party e-commerce platforms, and the company’s online store. As of December 31 2019, it operated through 235 city partners and 1,616 franchised stores in approximately 190 cities in the People’s Republic of China; and 36 distributors in 46 countries internationally. Even if NIU is distributed internationally, as of December 2020 more than 80% of the sales were in China.
After being funded in 2014, NIU grew initially thanks to four Series A and B rounds of investment between 2015 and 2018. Then, on 19th October 2018, NIU went public on NASDAQ, where the stock opened at $9.00 per share. From this operation, another funding of $63M was provided to the company.
While in the first two years of listing on NASDAQ the stock price remained volatile between the lowest of $5.90/share and the highest of $9.41/share, it started skyrocketing at the beginning of March 2020, amidst mainland China’s Coronavirus pandemic “bettering”, to reach its (yet) all-time-high on February 16th, 2021: $53.38 per share.
Is the fact that the Chinese manufacturer sold more than a million products enough to consider it a transport revolution at a worldwide scale?
1. The Company
Brief Company History
- 2014.09: NIU was born, from the ideas of Joseph Nelson and Token Hu.
- 2015.06: The first series of scooters was launched (NQi). In the meanwhile, through an online crowdfunding campaign, the founders raised USD $11M in 15 days.
- 2016.04: Launch of a second series of scooters (MQi), which raises USD $13M in 15 days.
- 2016.08: NIU begins sales in Europe.
- 2017.04: Launch of another series of scooters, the UQi.
- 2017.10 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.
- 2018.08: Launch of UQim.
- 2018.10: NIU is listed on the NASDAQ.
- 2019.06: Launch of UQi+ and UQis.
- 2019.11: Launch of NQi GTS, MQi GT, UQi GT at EICMA in Milan, Italy.
- 2019.12: First year with a positive net income: the company is profitable.
- 2020.01: Launch of RQi and TQi at CES in Las Vegas, USA.
NIU’s mission is to redefine urban mobility and make life better. The vision is to become the number one brand for urban mobility that is powered by design and technology.
To achieve the mission, NIU is committed in continue to design, manufacturing, and selling high-performance electric bicycles, mopeds, and motorcycles. To achieve the vision, NIU offers different series of products that address the needs of different segments of modern urban residents and resolve demands of different scenarios of urban travel, while being united through a common design language that emphasizes style, freedom, and technology. NIU has adopted an omnichannel retail model, integrating the offline and online channels, to sell its products and provide services.
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 in 2001 and Ph.D. from Stanford University in 2005, both in Electrical Engineering.
TOKEN YILIN HU
• Roles: Director and VP of research and development, since the company was born.
• Previous experiences: Co-founder of UTLAB in Nov. 2011, Lead designer at Frog Design (March 2009-October 2011), Designer at Microsoft China (March 2008 to 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 (Jan. 2007-Mar. 2009). Moreover, Mr. Liu was a director with many corporations and design firms between 1996 and 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 in 2002 and MBA from INSEAD in 2012.
As it’s clearly visible, a relevant chunk 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 the “Glory Achievement Fund Limited”, with 39% of total ordinary shares, which surpasses the percentage held by the management, and 27.7% of the total voting rights, which gives the directors of the company relative control.
The electric scooter market size was estimated at USD $18.6B in 2019 and is expected to reach USD $21.4B in 2021. 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). Right now the market is dominated by the cheaper 36V counterparts, however, in the near future, we will experience a decrease in prices of Li-Ion batteries with 48V and the subsequent market dominance of companies, like NIU, which heavily invested in those new technologies development.
While NIU’s technologies are advanced and at the top end of the current engineering level, an abundant quantity of other players is 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 1616 franchise stores in mainland China, 36 distributors in international markets and 46 countries covered globally. In Q4 2020, NIU Technologies was able to add 350 franchise stores around Mainland China to its portfolio. Its reach is supported by a strong distribution network that makes sure that its products are available easily to many customers promptly.
- 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, which 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 they get a community feeling, despite having sold millions of scooters worldwide.
- Skilled labour force: NIU can count on highly specialized designers and engineers that help develop cutting-edge technologies that will lead the company to a future of success.
- Product portfolio: The large portfolio of products allows NIU to reach different customer segments and needs.
Weaknesses of NIU
- Dependent from policies: The revenues are highly dependent on “green bonuses” and incentives put in place by policy-makers. However, since the green economy is expected to grow in the following years anyway, we can consider it a mild weakness.
Opportunities for NIU
- Global markets penetration: NIU’s main market has been China for now, but 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 in the future will be even more desirable, like the ones with 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 cancelled. However, there’s always some kind of risk of collision between those two countries.
- Constant technological upgrade expenses: NIU has to keep up with the peer’s expense level in R&D. 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 represents still a huge threat to the growth of the company.
NIU’s Business model is fairly simple: the objective of the company is to cover, with their products, all the needs of transport of individuals worldwide.
To do that they offer e-scooters of any kind and shape, for all transportation purposes. This main business accounts for 87.7% of its revenue generated. However, there is another 12.3% of revenues that are derived from other kinds of sales, such as merchandise and lifestyle accessories. The potential for growth of those parallel sources of income is big since people that buy NIU products are really design and style-conscious.
Revenues generated from the sale of e-scooters are mainly traced in mainland China, which accounts for 2020 to 86.7% of sales, while the rest of the world accounts for a tiny 13.3% 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 $495 USD, in the international markets, this figure is triple.
The current line-up of products sees seven different designs of scooters taking the stand. However, they are divided into three big 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 Kgs, 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.
A new entry in NIU Technologies’ lineup is the “NIU Kick Scooter”, a stylish and compact e-scooter with a top speed of 25 km/h and a range of 50 km, powered by a 48V Lithium battery.
This scooter starts at $599 in the US. For now, it’s not clear the price that it will have in Europe.
2. Quantitative Analysis
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 2019. The reduction of the costs associated with 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.
The firm managed to keep the same profitability metrics between 2019 and 2020, even with the COVID-19 pandemic affecting the international markets.
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 highlights, with figures in United States Dollars (USD/CNY=6.5401) over the years 2018, 2019, and 2020.
Follows the income statement, with figures in United States Dollars over the years 2018, 2019 and 2020.
The Income Statement indicates a steady growth in revenues and a non-linear, growth of Operating Expenses, demonstrating good scaling possibilities.
The 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 86.7% in mainland China (last year they accounted for 94.5%), and 13.3% internationally.
Besides scooters, NIU Technologies sells also merchandise and other accessories, which in 2020 accounted for 12.3% of the total revenues.
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 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, 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, the 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.
3. Valuation of NIU Technologies’ shares
Discounted Cashflow Model (DCF)
For the Valuation of NIU Technologies, we first used a Discounted Cash Flow model.
Before performing the analysis, it’s crucial to try and forecast the possible number of deliveries for the coming years, as well as the revenue for each e-scooter sold.
NIU Technologies is a company in a strong growth phase and is about to benefit from the economies of scale given by the mass production of its scooters.
The hypothesis is that the firm will have a stable revenue per e-scooter of $545 and will see the number of vehicles growing at a really conservative rate of 5% YoY.
Below is the table that sums up the assumptions made and the consequent effects on profitability.
As said, the above hypothesis is rather conservative, because the economy of scales and the conquering of Western markets could lead NIU to increase its EBIT figure even more. In fact, international sales have almost triple the value of domestic ones, and selling globally could lead to greater mass production. This has already happened during 2020 when NIU has seen its deliveries grow by more than 40%.
After this forecast, Unlevered Free Cash Flow figures for next years were projected, as per the graph below.
China’s risk-free rate is 3.24% (10 years government bond), the equity risk premium is 5.4% (source: Damodaran). The beta used is 0.74 and the country risk premium is 0.68%. This means that the cost of equity for NIU Technologies is 7.91%.
At the same time, NIU has an impressive cost of debt of 2.08%, which equals 1.93% if considered the tax effects. This gives the total value of the WACC, given the current capital structure (46.21% debt, 53.79% equity), a rate of 5.15%. Hence, the weighted average cost of capital for NIU Technologies is 5.15%.
Below is a quick summary of the components used to calculate the WACC.
To determine the terminal value, two different methods can be used. One relies on a really common multiple, EV/EBITDA, which shows how many 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. The perpetual growth assumed is 2%, to give a conservative response also in case of a future stagnation of the revenues.
The DCF Analysis gave as a result an enterprise value of USD$6.88B and an equity value of USD$7.02B. The number of diluted ADS shares outstanding is currently (as of the 31st of December 2020) 78,917,934.
This gives us an equity value per share of almost USD$89. The value can seem rather optimistic, and it is under some criteria. The market, however, is currently pricing the Enterprise Value of NIU Technologies at 82.9 times the EBITDA figure.
It’s not realistic to be selling the stock again in 2025 at this kind of multiple, however, a more realistic figure can be found around the 30x-40x range. This would still place the stock in an undervalued area, with a target price between $53 and $60 per share.
Is NIU undervalued or overvalued?
NIU is one of the few manufacturers of e-scooters that are listed on the markets and hence makes their financial statements available to the wide public.
The company 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 the 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 $48-53. At the same time, investors will benefit in the middle-long term from the larger margins gained with international sales, which 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 slightly undervalued if looking at the current financials and especially at the perspective of growth that appears solid. The future of NIU is bright, with more and more customers worldwide looking at Chinese vehicles to possibly fulfill their transportation needs.
Given the current share price, NIU is slightly undervalued, and with a strong potential for 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 positions 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 years, 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, it can be supposed that, due to its cutting edge technologies and generous continuous investments in R&D, NIU will be on the market with a 95% of probability.
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 continually 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 significantly 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.
5. Conclusion & Investment Strategies
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 short-middle term speculation. Higher price regions are advised only for longer investment timespans because volatility could 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 the portfolio for the long term, benefitting in the future for the current high investments in R&D and new plants. New production sites will have the ability to raise profitability, especially with the progressive international expansion, where NIU sells its scooters at almost triple the price it does nationally.
So, are you embracing the NIU revolution?
Disclaimer: Our content is intended to be used solely for informational and educational purposes, and not as investment advice. Always do your research and consider your personal circumstances before making investment decisions. ChineseAlpha is not liable for any losses that may arise from relying on information provided.