NIU (NIU) appears to be valued at 3.1x forward sales and 20x EBITDA, which does not seem cheap. However, investors need to take into account the company’s usage of its own data. In my opinion, if the market starts seeing the company as a tech company, 6x forward sales could make sense. Taking into account this fact, I will be buying shares of the company.
Business Model, Big Data, And Recent Agreement With Aurora Mobile
NIU commenced operations in September 2014, and launched its first NQi-series smart e-scooters in June 2015. According to the annual report, the company’s mission is to redefine urban mobility. NIU offers e-scooters and a mobile app, which connects you in real time to the vehicle.
I believe that most investors are interested in knowing whether the company’s e-scooter will be sold in 2021. I do believe that the market has to assess this question. With that, I need to mention that the company’s e-scooter may be worth millions thanks to the data obtained by NIU.
According to the company, NIU’s vehicles offer 462 different data points, including riding behavior, and average distance among others. If you forget that the company sells e-scooters, you may think that NIU is a tech company:
We currently collect 462 types of data points covering 72 dimensions such as humidity, lighting and temperature, from our Cloud ECU and up to 32 sensors installed on each smart e-scooter. As of December 31, 2019, our NIU app had been connected with approximately 880,000 smart e-scooters, which had accumulated approximately 4.2 billion kilometers of riding distance of data. In particular, we collect the following three types of data to improve our smart e-scooters’ performance and customer experience: (i) riding behavior, including, among others, riding speed, average distance, acceleration, use of brakes to improve the battery management system and balance control of our e-scooters. Source: 20-F
Let’s think about NIU’s data for a moment. If it sells information about the riding behaviour and e-scooters’ locations, it may generate millions from marketing. NIU could become a new type of computer. Now, don’t think that I am inventing something that revolutionary. In December 2020, NIU signed an agreement with Aurora Mobile to offer smart mobility experience to the users. According to the agreement, Aurora will provide new information about NIU’s users. However, I wonder whether Aurora will also obtain data from NIU. In that case scenario, I believe that NIU’s sales could increase quite a bit in the future.
Aurora Mobile will leverage its industry-leading AI-driven push technical capabilities and machine learning-based intelligent operational data analytics to provide NIU with targeted push services that will enable NIU to gain more comprehensive insights into its users’ needs, accurately tailor user experience to their specific interests, and maximize value creation to its users. Source: Seeking Alpha
Sales Growth And Positive Net Income
NIU continues to report double digit sales growth in China and the international markets. With the COVID-19 pandemic situation, most investors will be very impressed by the results obtained by NIU. In total, sales increased by 36.7% in Q3 2020 as compared to that in Q3 2019. The most interesting market is that of China, where NIU obtained 39.2% sales increase quarter on quarter.
The first two quarters of 2020 were quite detrimental because of the COVID-19 pandemic. As a result, in the nine months ended September 30, 2020, sales increased by only 15%. I want to draw attention to the fact that NIU increased its R&D expenditures. In 9M 2020, R&D expenditures increased by 57% as compared to the figure reported in 2019. I like that the company is working hard to develop new products. With that, I would like NIU to increase its R&D expenditures even more. In 2020 and 2019, the company reported positive net income, which I don’t really understand. NIU is a young company. Most investors will expect NIU to be a growth company. In order to increase sales in the future, it needs to offer good and innovative products. In my opinion, the company needs to invest in R&D for this purpose.
NIU’s expectations for Q4 2020 are in line with the figures obtained in the nine months ended September 2020. Growth investors need to be aware of these figures in order to assess whether NIU is overvalued or not:
NIU expects revenues of the fourth quarter 2020 to be in the range of RMB 565 million to RMB 615 million, representing a year-over-year increase of 5% to 15%. The above outlook is based on information available as of the date of this press release and reflects the Company’s current and preliminary expectation, which is subject to change in light of uncertainties and situations related to how COVID-19 develops. Source: 10-Q
Very Stable Financial Situation And Cash In Hand
NIU continues to show good financial shape. The company’s asset/liability ratio is 1.9x, and the amount of debt is equal to only $26 million. The amount of cash is also significant. As of September 30, 2020, cash, term deposits, restricted cash and short-term investments were equal to more than $217 million. Hence, NIU will interest both growth investors and value investors. We are talking about a company with positive net income as well as a lot of cash to push sales growth from 2021.
I don’t really understand why NIU needs to have $26 million in short-term bank borrowings and a total amount of liquidity of $217 million. I wouldn’t like to be one of the shareholders of the company. It is paying interest expenses to bankers without a clear reason. Despite this bad feature, the company’s deferred revenue and accounts payable are quite beneficial. Clients and providers are financing the operations of the company. It is quite ideal. It also shows that these providers believe in the future of NIU’s business model. As far as the clients are concerned, when they pay in advance, I usually believe that there is a demand for their products. It is another positive feature.
The Share Count Does Not Increase – I Like It
In 2019, the weighted average number of ADS outstanding was 76 million. Right now, the share count is equal to 78 million. Investors will most likely appreciate this fact. NIU does not need cash, so it does not sell equity that often. Certain traders will also believe that the company does not believe that it is expensive. Notice that in December 2020, NIO (NIO), Tesla (TSLA), Li Auto (LI) and other manufacturers sold shares. I appreciate that the company did not do so.
Valuation Could Double if The Company Uses Data Amicably
With 78 million shares at $29-$30, the market capitalization is $2.2-$2.3 billion. With cash of $217 million and debt of $26 million, I obtain a total valuation of $2-$2.1 billion. In 9M 2020, sales were equal to $261 million. So, let’s assume forward sales of $635 million, and EBITDA of $96 million. It means that the company trades at 3.1x forward sales and 20x EBITDA. In my opinion, growth investors will be interested in the company’s profile.
In my opinion, NIU could trade at more than 3x forward sales. Let’s compare the company with Baidu (BIDU), which collects information from users just like NIU. When BIDU was growing at 20%, just as NIU is expected to do, BIDU traded at 6x sales. It means that NIU could be trading with a total valuation close to $4 billion. Yes, the share price could be close to double if the market believes that NIU is another tech company.
Risks
NIU’s sales performance will depend on the company’s technology. Each e-scooter offers a GPS, on-board computer, cloud technology, and other tools. If these tools don’t work, NIU’s reputation will deteriorate. Don’t expect an increase in sales if the brand is not popular among users. Besides, if the company stops the development of smart tools, sales growth could also decline:
Additionally, our competitive advantage also depends on the smart features and data services we provide to our users. Our smart e-scooters are connected to our NIU app. By using smart e-scooters’ built-in GPS, on-board computer, algorithms and cloud technology, our NIU app enables riders to seamlessly receive real-time data including, among others, anti-theft alerts, daily riding habits and power supply, real-time diagnostics and maintenance and service station directory. We cannot assure you that we will be able to continue to innovate and develop new smart features and data services, which may jeopardize customer experience and affect both our sales of scooters and provision of related services. Source: 20-F
Investors need to know that one of the company’s beneficial owners went to prison in China for insider trading. This does not look good. If something like this happens again, the company’s reputation may be damaged. Read the following lines:
In June 2015, in connection with the trading of stock of a public company listed on the Shenzhen Stock Exchange, Mr. Yi’nan Li, one of our beneficial owners at the time, as well as a shareholder of Beijing Niudian, was convicted of one count of insider trading by the Guangdong Shenzhen Municipal Intermediate People’s Court in January 2017, and his prison sentence ended in December 2017. Source: 20-F
Conclusion
If you think that NIU sells vehicles, it may be a bit expensive at 3.1x forward sales and 20x EBITDA. However, if you believe that the company will be able to make a good business with its big data business, the company is cheap. We are talking about a trade that most investors have not seen. It could be extremely profitable for those traders who build a position before others. I plan to buy shares.
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Disclosure: I don’t hold NIU shares
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