Niu Technologies: Uncertainty Around Long-Term Prospects

Summary

• Niu's revenue has grown at a 36% CAGR over the last three years.
• Net margin stands at a decent, yet not impressive 10%.
• Expanding internationally is the biggest challenge for Niu, since almost 90% of sales originate in China.
• The stock appears to be priced relatively high given historical multiples.

Thesis

Niu technologies (NASDAQ:NIU) is an e-scooter manufacturer headquartered in China. The company is aggressively growing revenue, while the global demand for electric transportation is increasing. In this analysis, I take a deeper look into Niu's fundamentals and competitive environment, that indicate a promising, yet challenging future. A forward-looking valuation scenario-analysis reveals that the exceptional past stock performance - over the last three years - is unlikely to continue.

Fundamentals

Niu Technologies designs, manufactures and sells high-performance electric bicycles, mopeds and motorcycles. NIU has a product portfolio consisting of seven series, four e-moped series, including NQi, MQi and UQi with smart functions and Gova, two urban commuter electric motorcycle series RQi and TQi, and a performance bicycle series, NIU Aero. Different series of products address the needs of different segments of modern urban residents and resolve the 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.

Source: Investor Relations

The global electric scooters market size is expected to reach USD 41.98 billion by 2030, expanding at a CAGR of 7.7% over the forecast period, according to a study conducted by Grand View Research, Inc. Adoption of e-scooter commuting among young populations in urban centers and the rising purchasing power of the middle-class in developing nations are two of the main trends the study underlines. Developing markets like India, Vietnam and the Philippines, known for massive, growing populations, concentrated in large urban centers offer the perfect placement for Niu's products. Europe and North America are also seeing increased demand for electric vehicle transportation, while having populations with stronger purchasing power. The current political environment in the United States and around the world, which seems to encourage the use of electric vehicles, as well as continuous progress in better technology improvement, are also beneficial for electric vehicle manufacturers.

The primary focus when it comes to Niu's sales is the Chinese market. While demand for e-scooters is going to increase around the world, international expansion is a challenging task. As of the last reporting quarter (Q3 2020), Niu does not seem to have made a lot of progress in the effort to increase international sales and market share. So far in 2020, revenue outside China only accounts for 11% of Total Revenue.

Source: Investor Presentation

Revenue growth for Niu over the past few years has been impressive. Since 2017, the company has increased sales with a CAGR of 36% up until December 2019, when the company's last-reported, full fiscal year ended. In the recent Q3 2020 results, Niu reported a 15% YoY revenue growth in Q3 YTD numbers. While growth appears to be slowing down, the company has established profitability and is - as of the last quarter - reporting 12 million USD of quarterly Net Income. Quarterly data regarding revenue, gross profit and net income growth since 2017 are shown below (Amounts in millions USD).

Source: Tikr.com

Since 2019, when Niu established profitability, Net margins have stayed relatively low, around the 10% range. While current profitability levels could be sustainable for an e-scooter manufacturer, especially given the low amounts of leverage that Niu carries, ideally, we would like to see some expansion - for a growing tech company like Niu - in the next few years.

Source: Investor Presentation

Stock performance

Over the past 2.5 years, since the company's debut in the NASDAQ via an IPO on October 19, 2018, Niu has been no stranger to price appreciation. The company has seen a huge run-up since late-2018, with an overall total return of 332.1% over 2.36 years. In the last couple of months, Niu's stock price has pulled back from all-time high levels of around $50, now trading at $40.31, as of the time this article is written. The current stock price represents a 20% discount from the early-February levels.

Data by YCharts

Risk Factors

The electric vehicle market is growing and so is the number of competitors. Niu is facing competition on a global scale from existing motorcycle and scooter manufacturers that are expanding their product range to include electric solutions. Manufacturers like Aprilia, KTM, Harley Davidson, Sym motors and others, maintain global brand name recognition and reputation for making reliable, practical and attractive motorcycles. Capturing market share from this type of companies, especially in markets like Europe and North America requires multi million-dollar advertising that might affect Niu's profit-generating capability. Apart from established motorcycle manufacturers, many new companies that offer e-scooter and other electric vehicle solutions are making their presence known. Some of the companies that fall into this category include: Arcimoto (FUV), which offers a range of three-wheeled electric vehicles that they call Fun Utility Vehicles, Vmoto that offers electric scooters as well as motorcycles and many more.

Niu does not seem to possess any distinct competitive advantage, when it comes to design, battery technology, marketing or pricing and is therefore vulnerable to more intense competition. Reducing prices to expand market share could lead to shrinking profit margins, while Niu's technology could soon become outdated in a technology space where change and progress come in a rapid pace.

Another thing to consider is the fact that since Niu is a Chinese manufacturer, international sales could be subjected to tariffs and trade restrictions. Europe and the United States have already demonstrated a history of imposing tariffs on Chinese imports and both already have such tariffs in place.

Forward Valuation

Looking at the Prices/Sales ratio I will attempt to project potential upside for the stock in the next 3 years through a scenario-analysis, in an effort to embrace the uncertainty that surrounds the company. Niu currently trades at a 7.5x 2020 forward Price/Sales multiple, with a 2.79B Market Cap. Average P/S ratio over the last 3-year period sits just above 3x.

• Bullish Case: The company beats growth expectations and grows revenue at a 45% per annum rate. In the absolute best-case scenario that the P/S ratio remains just shy of today's levels, the company will be trading at a 7.33B market cap, representing a 3-year 163% upside. If the P/S multiple drops at a more reasonable 4.5x, Niu will maintain a 5.08B Market cap, still implying a 3-year 82% upside.

• Base Case: The company maintains current growth rates and grows revenue at a 30% per annum rate. With a market valuation that will range between 2.03 and 5.28B, Niu is still potentially attractive, if the company maintains high valuation multiples. Maximum upside, assuming an unchanged 6.5x multiple sits at 89%, while a lower forward multiple of 2.5x at the end of the 3-year period, does not offer any hope for price appreciation.

• Bearish Case: The company fails to meet growth expectations and grows revenue at a 15% per annum rate. In this case, at a 4.5x P/S multiple in 2023 the potential for price depreciation starts creeping in, while at a lower 2.5x, the downside potential is growing. A 6.5x P/S multiple is going to be basically impossible for Niu to maintain if Revenue growth fails to meet expectations.

Final Thoughts

While Niu demonstrates promising growth potential in an expanding EV market, the company has a strong set of challenges to face as well. From strong competition, limited profitability capabilities and a tough road ahead towards global expansion, skepticism about the optimism that surrounds the stock is appearing. Uncertainty around China policy in Europe and North America also implies greater risk surrounding the company. Given the current valuation, I would not be, personally, adding Niu into my growth stock portfolio. I rate the stock as a hold.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.