Niu Technologies Form 20-F Summary
Business context and reporting period
Niu Technologies filed its annual report on Form 20-F for the fiscal year ended December 31, 2018. The source filing provides full-year results rather than a standalone 2018 fourth-quarter income statement. Niu designs, manufactures and sells smart electric scooters, accessories and related app and insurance services, primarily in China, with growing overseas sales. The consolidated financial statements are prepared under U.S. GAAP and include the company’s PRC variable interest entity through contractual arrangements.
- ADSs began trading on Nasdaq under the symbol NIU on October 19, 2018; each ADS represents two Class A ordinary shares.
- Sales channels included 233 China city partners, 760 franchised stores, 22 overseas distributors in 27 countries, and online channels at December 31, 2018.
- Smart e-scooter unit sales increased to 339,585, up 79.2% from 189,467 in 2017.
Financial performance and key metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net revenue | RMB1,477.8 million | RMB769.4 million | Up 92.1% |
| E-scooter revenue | RMB1,370.5 million | RMB709.6 million | Up 93.1% |
| Gross profit | RMB198.6 million | RMB54.7 million | Up from RMB54.7 million |
| Gross margin | 13.4% | 7.1% | Up 6.3 percentage points |
| Operating loss | RMB317.4 million | RMB144.3 million | Loss increased 120.0% |
| Net loss | RMB349.0 million | RMB184.7 million | Loss increased 89.0% |
| Net loss margin | 23.6% | 24.0% | Improved 0.4 percentage points |
| Operating cash flow | RMB7.8 million | RMB80.1 million | Declined 90.3% |
| Investing cash flow | Used RMB103.6 million | Used RMB55.9 million | Higher use |
| Financing cash flow | Provided RMB555.4 million | Provided RMB2.4 million | IPO and preferred-share proceeds |
Revenue consisted primarily of e-scooter sales, which represented 92.7% of total revenue. Accessories and spare parts contributed 6.2%, and services contributed 1.1%. China generated 89.2% of revenue, while Europe and other overseas markets generated 10.8%.
Revenue per scooter increased from RMB4,061 to RMB4,352, while cost per scooter declined slightly from RMB3,772 to RMB3,767. Selling and marketing expense rose to RMB150.2 million, research and development expense rose to RMB91.8 million, and general and administrative expense rose sharply to RMB274.1 million.
Share-based compensation increased to RMB265.9 million from RMB62.5 million and was a major contributor to operating expenses. The filing also records a RMB21.8 million loss related to an April 2018 warehouse fire, including damaged inventory and property repairs.
Balance sheet, debt and liquidity
| Metric at December 31 | 2018 | 2017 |
|---|---|---|
| Cash | RMB569.1 million | RMB112.0 million |
| Restricted cash | RMB179.3 million | RMB169.9 million |
| Short-term investments | RMB120.2 million | RMB85.2 million |
| Accounts receivable | RMB54.4 million | RMB10.4 million |
| Inventories | RMB142.4 million | RMB88.2 million |
| Total assets | RMB1,185.3 million | RMB503.6 million |
| Short-term bank borrowings | RMB180.0 million | RMB168.2 million |
| Total liabilities | RMB614.8 million | RMB591.0 million |
| Shareholders’ equity | RMB570.4 million | Deficit of RMB325.2 million |
Liquidity was strengthened by approximately US$55.2 million of net IPO proceeds. Management stated that cash on hand was sufficient for current and anticipated general corporate needs for at least the next 12 months. However, approximately RMB179.3 million of cash was restricted as collateral for bank borrowings.
Capital expenditures were RMB53.2 million in 2018. The company expected approximately RMB115.0 million of 2019 capital expenditures to support planned production-capacity expansion. Contractual operating lease commitments totaled RMB11.6 million as of year-end 2018.
Material changes versus the prior comparable period
- Revenue nearly doubled, driven by higher scooter volume, expanded distribution, higher pricing and increased overseas sales.
- Gross margin improved substantially because of higher retail prices, product mix and lower raw-material costs per scooter.
- Despite gross-margin improvement, the net loss increased because of higher operating expenses, substantial share-based compensation, IPO-related professional fees and the warehouse-fire loss.
- Operating cash flow fell close to breakeven as inventories and accounts receivable increased, partially offset by higher accounts payable and accrued liabilities.
- The convertible loan was converted into Series A-3 preferred shares in March 2018, and preferred shares were converted into ordinary shares before the IPO. Year-end capital structure comprised 128,032,038 Class A shares and 20,642,020 Class B shares.
- The IPO and preferred-share financing materially increased cash and equity, while the company continued to report accumulated losses.
Guidance, outlook, management commentary and risks
Management expected revenue to continue increasing through new scooter launches, distribution expansion, additional online and offline channels, accessory and service growth, and international expansion. The company planned to launch at least two new scooter series or models annually in the near and medium term and expected production capacity to expand by approximately 700,000 units in 2019 and 1,000,000 units in 2020. These are forward-looking plans, not guaranteed results.
- Regulatory transition to China’s new electric-bicycle safety standard created uncertainty for the N and M series. Certain models could require re-engineering, motorcycle classification or third-party licensed manufacturing; noncompliant models could be prohibited from sale.
- The company depends on a PRC VIE structure. Changes in PRC regulation or enforcement could impair control over the VIE, prevent consolidation or restrict the company’s ability to receive economic benefits.
- The company identified a material weakness in internal control over financial reporting relating to insufficient personnel with appropriate U.S. GAAP and SEC reporting expertise. Remediation was underway, but the company could not assure timely or complete remediation.
- The company relies on external suppliers for batteries, motors, tires, chargers and controllers. Supplier concentration, single-source components, price increases or supply disruptions could reduce production and margins.
- Competition, product-quality problems, recalls, warranty claims, cybersecurity incidents, privacy requirements, intellectual-property disputes and international expansion could adversely affect results.
- The business is seasonal, with stronger demand generally in the third quarter and weaker demand in the first quarter because of weather conditions.
- Substantially all revenue is generated in China or denominated in Renminbi, creating exposure to PRC economic conditions, foreign-exchange controls, currency fluctuations and limitations on dividend transfers.
- The filing reports no material legal or administrative proceedings and no material off-balance-sheet guarantees or unconsolidated financing arrangements.
Most important facts for investors to verify
- Whether gross-margin gains can persist after adjusting for product mix, pricing, raw-material costs and distributor rebates.
- Whether the company can convert rapid revenue growth into sustainable profitability and consistently positive operating cash flow.
- The recurring versus nonrecurring nature of the RMB265.9 million share-based compensation expense and the RMB21.8 million fire-related loss.
- Progress on remediation of the material internal-control weakness and the quality of future SEC reporting.
- Compliance of each scooter model with China’s new safety, registration and certification requirements.
- Availability of restricted cash and refinancing or repayment requirements for short-term borrowings.
- Exposure to the VIE structure, PRC regulatory changes, currency controls and the ability to transfer cash from PRC entities.
- Actual utilization and timing of planned manufacturing-capacity expansion, including the expected RMB115.0 million 2019 capital spending.