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Summary

I can't think of a more hated asset class right now than Chinese stocks. Probably a good time to look for high-quality Chinese compounders. I believe that electric scooter producer Niu Technologies is a great candidate for a long-term hold. Niu company has been suffering from China's ill-fated zero-COVID policy, which led to Niu's offline retail stores being shut down and low demand for transport vehicles. Now that the country has opened up again, customers are starting to return to stores. Niu's products are excellent: well-designed, full of smart tech solutions and well-built, too. It already dominates China's tier 1 cities, and now it's turning its sight to lower-tier cities and overseas markets. The company also benefits from the ongoing shift towards electric vehicles. And within that segment, a shift from lead-acid battery scooters to lithium-ion battery scooters. At 0.43x EV/Sales and long-term operating margins of around 7-8%, Niu is priced as if it's going bankrupt. But management guidance suggests that company will return to growth by the end of the year, thanks to the end of China's zero-COVID policy and lower lithium prices. 

Introduction

Niu Technologies is one of China’s leading EV scooter manufacturers, focusing on lithium-ion battery scooters with modern designs. 

Most of Niu's vehicles are simple 2-wheelers costing around CNY 4,000 with a maximum speed of 25km/hour, the highest speed at which vehicles can drive without license plate registration in China. 88% of Niu’s revenues come from electric scooters and 11% from accessories and spare parts.

Niu does production in-house, while distribution takes place through so-called “city partners” that act as showrooms and service centres. The company has had a dominating 26% lithium-ion battery scooter market share in tier 1 cities but limited presence in China’s smaller cities.

While Niu has started to export its scooters to overseas countries, the company is still early on in that process. And the popularisation of electric scooters is likely to benefit the company as the overall market grows. 

The origin story

Niu was founded as “Beijing Niudian” by a group of Chinese entrepreneurs in 2014. They raised their first seed money of CNY 72 million through JD’s crowdfunding platform in 2015. It later raised capital from high-profile VC funds GGV Capital and IDG Capital.

Niu's CEO is Dr Li Yan, who prior to starting the company was a principal at KKR Capstone from 2009 to 2015, overseeing their investments in China. Earlier in his career, he was a consultant at McKinsey and a research engineer at Qualcomm. He has a PhD from Stanford in electronics and electrical engineering. He attends the earnings calls personally and comes off as an intelligent individual. 

The first scooter N1 was launched in 2015, followed up by the M-series in 2016, which won 7 international design awards including the Red Dot award. This success helped the company list on NASDAQ in 2018. 

A new regulation introduced in China in 2019 set the maximum speed and weight for electric scooters with no license registration at 25km/h and 55kg. This regulation helped Niu immensely, given that lithium-ion battery scooters are much lighter than their dirtier and heavier lead-acid battery predecessors.

In 2021, Niu set up a new manufacturing facility in Changzhou in Jiangsu province, after previously leasing factory buildings from third parties. The new factory has capacity of 111,000sqm and has a capacity of 2 million vehicles per year. 

During the pandemic, Niu introduced lower-end models under the GOVA brand name, which did not perform as well and brought down overall company margins.
China’s zero-COVID policy during 2022 was another headwind as many of Niu’s stores had to close, and the remainder suffered from weak foot traffic. Finally, high lithium carbonate prices caused prices for lithium-ion batteries to go up from early 2022 onwards, creating yet another headwind for growth.