Good day, ladies and gentlemen. Thank you for standing by, and welcome to the Niu Technologies third quarter 2019 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, we are recording today's call. If you have any objections, you may disconnect at this time. Now, I will turn the call over to Mr. Jason Yang, Investor Relations Manager of Niu Technologies. Mr. Yang, please go ahead, sir.
Thank you, operator. Hello, everyone. Welcome to today's conference call to discuss Niu Technologies results for the third quarter of 2019. The call is being webcast from the company's IR website. An investor presentation and replay of the call will be available soon at ir.niu.com. Please note, today's discussion will contain forward-looking statements made under the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Forward-looking statements involve certain risks, uncertainties, assumptions, and other factors. The company's actual results may be materially different from those expressed today. Further information regarding the risk factors is included in the company's public filings with the Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements except as required by law. Our earnings press release and this call include discussions of certain non-GAAP financial measures.
The press release contains a definition of non-GAAP financial measures and a reconciliation of GAAP to non-GAAP financial results. On the call with me today are our CEO, Dr. Yan Li, and our CFO, Mr. Hardy Zhang. Now, let me turn the call over to Yan.
Thanks, Jason. Thanks, everyone, for joining us on the call today. We have observed a gradual market recovery in Q3, being traditionally a peak season of the year. Our sales volume has increased by 24%, and revenue by 33% in Q3. We have also enhanced our gross margin to 22.2%, and net profit margin at 10.1%. Both were beyond our expectation. We continue to build our leadership in urban mobility via product and technology development, marketing events and user-based activities, and retail expansions. First, we launched our GOVA product line with three products, G1, G3, and G5, in late September. The GOVA product line is beautifully designed, but it was a different design style to expand our style diversity.
With product specs biased towards functionality, the GOVA product line is positioned as a value-for-money product, with retail price starting at RMB 2,999 , perfect for entry-level users under the new China regulations. G1 was shipped in late September, and the G3 and G5 were shipped in late October. Despite the market already headed to a low season in October, we have seen quite a bit of demand on this new product line. Second, we have launched our first power-assisted bicycle product, NIU Aero EB-01, in Web Summit in Lisbon in November this year. The NIU Aero EB-01 is a hybrid model of the electric scooter and bicycle, combining the best features from both sides, such as high battery capacity and pedal assistance for longer range, scooter level dual suspension with sports bike wheels for better riding experience, and the intelligent lighting system for safety.
The EB-01 is classified as an electric bicycle in Europe and the United States. This is our first product to target the annual more than 4 million units electric bicycle market in Europe and the U.S. The EB-01 will be manufactured in Europe, and we plan to ship this product first half of 2020. Third, we have also launched our full GT series, led by our newly designed MQi GT scooter, together with the upgraded NQi GT and the UQi GT. Inheriting the design style of our award-winning MQi Series and combined with the GT powertrain technology, MQi GT is a dual-battery electric moped with a top speed up to 70 km per hour and a range of 110 km. We target to ship this product in the first half of 2020 as well.
Lastly, we'll also attend the 2020 CES in Las Vegas with quite a few revolutionary products to be launched at the CES. Make sure you do visit our booth then. Besides our products, we have also enhanced our fleet management solution. It is the hardware and software SaaS solution with our connected vehicles, the fleet management software, and the adapter APIs. It's a one-stop solution for all the sharing operators and the fleet management businesses. We have supported 16 sharing operators across 14 countries year to date. Now, as NIU is a leading lifestyle brand in urban mobility, we continue to enhance our brand awareness through both viral marketing and targeted marketing. We understood that the most efficient approach to enhance brand awareness is through viral marketing or word of mouth of our existing customers. Hence, the continuous improvement of customer experience and engagement is essential.
In July, we have rolled out our new point system on our app. Users can obtain new points via various activities and milestones, and redeem points for NIU lifestyle accessories such as T-shirts, mugs, key chains. Till then, we have more than 86,000 users participating in the program, with over 5 million points distributed. In September, we also rolled out our new wash program. Each user can obtain a free wash coupon via our app and redeem at any of the 1,000 stores in China. The program has been online for about six days, and we have more than 240,000 coupons claimed. In September, we also launched a one-month new user referral promotion sales, where existing users can receive new points by referring a new customer. More than 30,000 users have participated in this promotion.
All those programs enable us to engage our users more frequently online and offline, and all those programs rely on our direct interaction with our users on the NIU app, enabled by our smart scooters. With the largest connected user fleet globally, with more than 960,000 units, we have an unmatched competitive advantage over any competitors in this market. We'll continue to add more user interaction features to increase user engagement. Second, being a lifestyle brand and with the fashionable design scooters, we are very unique positioned to go viral on any social media channels. Besides the surprising celebrity spot on we mentioned last quarter, we continue to create content either internally or through our users to go viral on the main social media platforms, such as Weibo, Douyin, WeChat in China, and Instagram, Facebook, and YouTube globally.
Our quarterly Douyin views across multiple accounts has increased from 3 million to 10 million. For example, our long-distance riding event of user riding to Tibet also received more than 8 million views on Douyin. Lastly, our 30-plus KOLs across Europe has also created more than 3,000 pieces of content and received more than 1 million views. We continue to participate in major exhibitions globally to build our brand awareness. We have attended IFA in Germany in September, Autonomy in France in October, Tokyo Motor Show in Japan in October, and the Web Summit in Lisbon, Portugal, and EICMA in Milan, Italy in November. Collectively, we have received more than 100 media coverage. NIU is well-positioned as a new variability for urban mobility in all those shows. Now supported by the new products, the enhanced customer engagement, and brand awareness, we continue to expand our footprint.
By end of Q3, the number of franchise stores in China has reached to 1,020, covering 182 cities. Our flagship and premium stores overseas have also reached to 20 by Q3. We are also very happy that we had our first flagship store open in London, U.K. and Milan, Italy in November, a great milestone for the future growth in those two countries. We are also signing up dealer showrooms across the United States, expecting to have more than 12 dealer showrooms from East Coast to West Coast by end of this year. On the operations side, we have finished the build-up our phase 1 of our new factory. The factory will be fully in operation in December, this will add additional 700,000 units capacity, totaling our overall capacity to 1.08 million units a year. Lastly, let me give you a brief update on the China market.
As mentioned last time, the overall retail market has been uncharacteristically soft since the implementation of new regulations. We have observed a significant market contraction in May and June in the market where the regulations were strictly enforced. We have observed some bounce back in Q3, partially due to Q3 was traditionally a high season, and partially due to the spillover of the Q2's demand. The retail market quickly declined in Q4, as Q4 was traditionally a low season, and the true market demand has not really bounced back yet. The sluggishness will likely to extend to the Chinese New Year in 2020, and we do expect the market will start to bounce back post the Chinese New Year as consumers begin to get used to the new regulations, and the many administrative processes, such like getting license plate, are smoothed out.
Currently, we have four models, the U-Plus, U1, UQi S, and the G1, complying with the new regulations for the electric bicycle category in China, where our N and M series are classified as electric motorcycles. We're accelerating our product development effort and expecting to launch several new product lines for the electric bicycle categories in first half 2020. We believe those new products will put us in a position when the market start to recover next year. Now, I will turn the call over to Hardy to discuss our financial results. Hardy?
Thank you, Yan. Hello, everyone. Our press release contains all the figures and the comparisons you need. We have also uploaded Excel format figures to our IR website for easy reference. As I review our financial performance, keep in mind that we are referring to the third quarter figures, unless I say otherwise, and that all monetary figures are RMB, unless otherwise noted. As Yan mentioned, the China e-scooter market recovered gradually during the third quarter, even though at slow pace. Our Q3 sales volume reached 149,000 units, increased by 23.5% year-over-year, compared with the 13.8% in the second quarter. The new national standards continues to affect the China retail sales market, and the competition become more serious, with competitors lowering sales price to maintain their market share. We are pleased to be able to deliver double-digit growth with improved margin. Our gross margin reached 22.2%, and net margin 10.1%.
Total revenues rose 33% to RMB 654 million, in line with the guidance we provided earlier. The revenue growth was mainly driven by volume growth of 23.5% as a result of the recovering China market, and continued strong performance in the international market. I want to highlight that our revenue growth in this quarter has high quality. First, our accounts receivables reduced from RMB 120 million in the second quarter to RMB 62 million in the third quarter. The customer receipt in advance, or in other words, the prepayment from our distributors was RMB 44 million. Second, we maintained a high gross margin at 22.2%, which is 9.8% higher than Q3 last year. We managed to grow our top line with higher profitability. All of this translated to our strong cash flow and increased the cash balance.
By the end of Q3, we had cash, term deposits, and short-term investments of RMB 919 million in aggregate, compared with the RMB 667 million in the second quarter, an increase of RMB 252 million to our cash balance. All above demonstrated the high quality of our revenue growth. Revenue per scooter was RMB 4,380, up 7.4% year-over-year. That growth was driven by both higher average sales price per scooter, and the strong sales of accessories, spare parts, and services. The average scooter sales price grew 1.5%, driven by three key factors. First, and more important, the higher proportion of scooter sales from international markets, where our sales price are much higher than China sales price. In the third quarter, our international scooter sales accounted for 7.6% of the total scooter revenue, compared with the 5.1% in the same period of last year.
Secondly, in April this year, we increased China retail sales price by 1%-5% for selective models. Third, the unfavorable change of product mix in China market, this partially offset the two positive factors mentioned above. The proportion of sales volume from the N Series and M Series was around 35% in the third quarter, compared with 65% in the same period last year. N Series and M Series, in general, has higher sales price, therefore, the lower proportion of sales from these two series negatively affected our average sales price per scooter. Our sales of accessories, spare parts, and services continues to be very strong in this quarter. On average, for each scooter sold, we also sold RMB 524 of accessories, spare parts, and services. Increased significantly from the RMB 278 per scooter last year.
The increase was mainly driven by strong accessory and spare parts sales in both China and international markets, and also by the R&D service revenue from the development collaboration agreement we signed with Volkswagen Group early this year. Gross margin was 22.2%, 9.8 percentage points better than this time last year, and 1.5% lower sequentially, mainly due to seasonality. Over the longer term, we expect our gross margin to be in the range of 20%-25%, so we are happy to be moving close to our long-term goal. Margin expansion was helped by three key factors. First, the favorable revenue mix. Ancillary revenue from sales of accessories, spare parts, and services was 12% of total revenue, compared with 6.8% last year. International scooter sales was 7.6% of total scooter revenue, compared with 5.1% last year.
Both ancillary revenue and international scooter sales have higher gross margin, and hence, helped our margin expansion. I, however, want to caution you that our sales have a seasonality, and the above-mentioned revenue mix will fluctuate from quarter to quarter. Second, the margin expansion was helped by the price increase. As mentioned earlier, we increased retail sales price in April this year, and adjusted the wholesale price to our distributors accordingly. Such price increase contributed to the improved gross margin. Third, our continued efforts to optimize cost helped the margin expansion. The cost of revenue on a comparable basis further declined. We secured cost savings on raw materials and benefited from the economies of scale in our production. We were able to negotiate lower procurement price because of our larger scale and in-depth knowledge of the supply chain.
We believe such cost reductions are sustainable and will continue to benefit our gross margin for the coming quarters. In summary, out of the total 9.8% margin expansion in the third quarter, we estimate roughly 2 percentage points came from revenue mix. Another 2% came from price increase, and the remaining 6 percentage points came from cost reduction. Operating expenses on comparable basis increased in line with the growth of our business. Our total operating expense, excluding share-based compensation, was RMB 86 million, increased by 46% year-over-year. Operating expense as a percentage of revenue was 13.1%, 1.2 percentage points higher than the same period last year. The increase was mainly due to our marketing and promotion activities in the third quarter, and also higher depreciation and amortization expense as a result of expanded retail sales network.
As you may recall that during our second quarter earnings release, we advised you that we intentionally postponed some of our sales and marketing expenditures from the second quarter to the third quarter due to the implementation of the new national standards. The 1.2% higher sales and marketing this quarter was mainly driven by the timing of the spending. When look at the first three quarter numbers, our sales and marketing expenses, excluding share-based compensation, was 8.5% of total revenue, reduced by 1.7% compared with the 10.2% in the third quarter last year. We continue to see the leverage of OpEx. In the third quarter, we have RMB 12.6 million government grant, out of which RMB 5 million is a one-off reward and the remaining is related to our new factory expansion in Changzhou. Our GAAP net income was RMB 66.4 million, with net income margin of 10.1%.
We are pleased to operate profitably even as we invest heavily in growth, which demonstrates the strength of our business model. Turning to our balance sheet. We ended the quarter with RMB 990 million cash, term deposit, and short-term investment, RMB 252 million higher than last quarter. Operating cash flow was positive RMB 276 million. Capital expenditure was RMB 39 million, mainly for building the new factory in Changzhou and for expanding our retail sales network. Now, let's turn to guidance. We expect fourth quarter revenue to be in the range of RMB 450 million-RMB 515 million. This represents year-over-year growth of 5%-20%. We recognize the challenging market environment, and we are working hard to accelerate the growth next year with enriched product portfolio in both China and the international market. Please keep in mind that this forecast reflects our current expectation and could change.
With that, let's now open the call for any questions that you may have for us. Operator, please go ahead.
Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question, please press star one on your telephone keypad and wait for your name to be announced. If you wish to cancel your request, please press the pound or the hash key. Once again, that's star one on your telephone keypad and wait for your name to be announced. We have the first question from the line of Alex Potter. Please ask your question.
Hi, guys. Thanks for taking my question. Very nice quarter. I wanted to ask, first of all, about the competitive environment, given the new regulations. You mentioned a lot of the lower-end competitors are cutting price in order to try to maintain market share, yet you are increasing price, or you did in April, and it seems like your market share is increasing. It sounds like the pressure on the low-end competitors must be rising pretty substantially. If you could comment on your ability to continue consolidating the market, that'd be helpful. Thanks.
Thanks, Alex. I think that's a great question. What we have observed, basically when the new regulation was in place, in the China market, actually due to the sluggish of the retail market, we do see traditional players really slashing prices, try to maintain the volume. We have seen fierce competition on product, which used to sold at RMB 2,000-ish, now being sold at almost RMB 1,500 or RMB 1,200. Most of those products are still lead-acid based, because at this point, there's still one version of lead-acid based electric scooter that meet the new regulation requirement. It's a 48 volt and 12 amp hour, lead-acid battery based scooter. It very much looks like a bicycle type. Most of the pricing competition is on that particular product line where people competing really RMB 1,500, less than RMB 1,500.
If you look at that particular p roduct, market segment that product is addressing to is actually very different with our product lines. With the exception of GOVA, before with the NIU, even our cheapest one, UQi S, is RMB 3,500 , and GOVA is at RMB 3,000 . We're actually addressing sort of at least the mid to high-end of the entire market, where that market, to our extent, really there hasn't really been any sort of price competition there, and we're sort of enjoying more or less a unique leadership there.
Okay, very good. You mentioned, obviously, the gross margin holding up very nicely. You mentioned the raw material pricing. Obviously, you're getting some procurement benefits as your scale rises. Is this specifically related to battery procurement, or is it across the board? What raw materials, in particular, are you benefiting from?
Yeah. This is Hardy. I think across the board, we do see the cost decline. Normally we see the body parts of the scooter has declined anywhere between 3%-5%, depending on different components. For the entire battery cell, also the battery pack, we see close to 10% decline. This is compared to the cost base last year. In the third quarter, we see slightly decline compared with the second quarter. So far, based on the current trend of this market, of the supply in the market, we do believe there is potential for us to further negotiate for this cost so that we can benefit further in the future. Hope this answers your question.
Okay. That's great. Then last question. Obviously, you're generating cash. What are your plans for deploying this cash that you're raising? I mean, is it primarily into more sales and marketing, new product development, breaking into overseas markets? What are your priorities? Because obviously, having a positive cash position and positive operating cash flow is a nice position to be in. Just wondering how you're going to spend it. Thank you.
I think that's a great question. We're looking at, actually, any sort of cash we're generating, eventually it has to translate to profit. We're looking at the profit are coming really through three parts. One is actually continue to really accelerate the growth from this revenue from a sales volume perspective. That means some part of cash will be invested in building out the retail expansions. You look at this year, we actually have significantly accelerated our effort in the first half of this year to build up stores. We also start to build up retail stores globally, and each store require a minimum anywhere between, in China, it will be somewhere around $10,000 versus globally, it's about EUR 20,000-ish of CapEx investment per store. Having the retail footprint is actually essential for us to build up the brand and also support the sales growth.
I think that's one part of cash got invested in. I think second, yes, we do have put cash into building up the capacity to support the growth. This year, you see we actually build up the new factory this year to add another 700,000 units of annual capacity, and really to support the future growth. The third part is actually, I think, obviously. The first two, I mainly talk about the CapEx part of it. I think the last part is actually, it's a cash, or you can think of a portion of profit will be reinvested into the R&D such that we can continue to come up with new product lines, as well as the marketing and the branding expenses. I'll turn to Hardy, the additional add.
No, I think that's it.
Okay.
Okay. Very good. Thanks a lot, guys.
Thank you for your question.
We have the next question from the line of Bin Wang. Please ask your question.
Hi. I'm Bin Wang. I actually have a few questions. Number one, about the competition, we see the news flow this month, Yadea, the number one producer, has been announced to build a 1.5 million plant in Chongqing, meaning focused on the high-end. Naturally, provide annual target will be around the 6 million. In point, ASP is around RMB 4,000. If they can deliver, it's head-to-head competitor, 1.5 million. I just want to seek your view about this high-end production base from Yadea, the competitors. That's number one questions. Number two is about the dealer expansion, because in this quarter, only 515 dealers established compared to a few hundred in the past several quarters. I just want to know the reason why the expansion has been slowing down, because this used to be the key driver for future growth.
You have just mentioned you have so many cash, you are able to support the dealer expansion. Why is that just 15, and what's the guidance for the year end? That's the second question about the dealer expansion. Third one is about new products. You just mentioned in the CES, we have some new products, in the same time, you also mentioned The revised version for M Series will also be debuted. I also just want to check whether these are the same products. I mean, new M will be in the CES or it's two different products. This is pretty much my questions. Thank you.
Nice. I think have been great questions. Let me try to address one by one. Hopefully I don't miss any. I think, first of all, I think the market's there. There's nothing we can prevent other players to enter the market and to try to sell or try to attack or address our market there. If we look at the Yadea and the other competitors in this market, obviously, we have seen those competitors actually announce or actually commercialize high-end products. I don't think actually by simply building up a 1.5 million high-end capacity will allow them to actually obtain that market share. I think it's a combination of branding, having the right product, and also having the right retail to actually address that high-end market. Far we're still very confident.
I don't have the exact data, but if you look at at least on a city-by-city basis, if we look at some of the cities, basically, you look at the price range, anywhere between RMB 4,000 and up in some of the key cities, we're almost holding more than 50% of market share. As really a demonstration that de facto, we are the dominant force in the mid to high-end market. With the competition coming in, obviously we're going to continue to also ramp up our games as well with new product rolling out. Let me address on the new product part, and then I'll talk about retail expansion. If you observe how we build up this business and build up this team, in 2015, 2016, 2017, that three years, each year, we only announced one new product line. 2018, we did about three.
So far this year, we already announced, counting myself, it's almost five to six to seven. We had a U-Plus, UQi S, that's two, we had the GOVA G1, G3, G5. Those are commercialized, and also the bicycle. We also have the product that ready to be commercialized next year, which is the NIU Aero EB-01, as well as the NQi GT and the UQi GT. We really up our games in term of getting new product development. For the CES, the couple revolutionary product to be announced at CES are very different with the new M Series. We will have a new M Series announced in the first half next year, the product that we're going to show in the CES are actually different. Actually next year, we're not just talking about three products.
I think if you look at how, I guess, the number of product we developed in 2019, I think we're going to try to roll out Basically, I don't have the exact number in count, but we're going to try to roll out as many products as possible as well in 2020, basically with the ramp-up R&D team. Lastly, on the retail expansions, yes, we have slowed down our retail expansion in Q3. Even if you look at our historically, look at 2018 and 2017, Q3 has always been a very low season to open retail stores because the Q3 has been traditionally a very hot season for selling scooters. It was actually very difficult to turn over the stores. Typically, the hot season to open stores are Q1 and the Q4.
We're actually try to accelerate our store opening in Q4 as well as the Q1 2020.
Thank you. I actually have last questions about the outlook. It's not guidance, it's outlook. For next year, what's roughly the volume number which you're expecting? If you possibly can break down about the overseas and China, or especially in the China, can you break down about the NIU brand and the [inaudible] ?
This is-
You're asking for the outlook for next year?
Yes
for the first quarter?
Next year, for sure. Full year, next year. 2020.
Let's do working on numbers. I think we'll probably provide an update through the release in next quarter.
Okay. Thank you.
We have the next question from the line of Tan Ho. Please ask your question.
Good evening, management. A couple of detailed question. Number one, for the bike you sold, 149,000. Could you please give us the breakdown for the N, M, U series? Also, how much did you sell for GOVA this series? That is number one. Number two, the ASP in Q3 was down to RMB 3,856, compared with 2Q at RMB 4,543. I wonder, what are the reason behind that? That's number two. Number three, Q4, what's the plan for the store opens in Q4? Thank you. That's all my questions.
Sure. It's Hardy. Let me first answer your first two questions. For the mix between our product lines, as I mentioned, the N and M, the top end, two series, they account to around 35% of the total sales volume in the third quarter. GOVA accounted to around 5% of the total volume. The remaining 60% came from our U Series. This is the mix of the product in the third quarter. In terms of ASP, normally, we encourage you to look at the year-over-year comparison instead of quarter-to-quarter comparison, mainly because of the seasonality. If you look at the ASP from last year, you'll see the similar trend. Normally, the third quarter has the lowest average ASP throughout the year. The reason behind that is because the third quarter is the peak season for China sales, but the slowest season for overseas sales.
Normally, the sales price of overseas products is more than double of the China sales price. Because of this mix of products, you see there is the change in the ASP. This is first reason, part of the seasonality. Second, it links to your first question because of the change of the product mix. In last year, our top models, N and M, they accounted for around 65% of the total sales volume in that quarter. This year, that percentage has reduced to around 35%. That also has an impact on our average sales price. That's the two key contributors for the lower ASP compared with the second quarter. For the last question on the retail expansion for the fourth quarter, I'd like Yan to comment on that.
Obviously, the Q4 hasn't really ended yet, so we still have a number of stores actually in construction. I wouldn't be able to give an exact number by end of Q4 what number store we're going to have open. I think there will be a combination of either some of the stores will get to open in December or some of the store will get open actually January next year. Basically, we're always looking at the Q4 this year and the Q1 next year, are sort of the season we need to open stores. Obviously, some store got shifted in Q4, some store maybe got shifted to Q1.
Okay. Thank you.
Once again, ladies and gentlemen, if you wish to ask a question, please press star one on your telephone keypad and wait for your name to be announced. Once again, ladies and gentlemen, if you wish to ask a question, please press star one on your telephone keypad and wait for your name to be announced. At this time, there are no further questions. I'd like to hand the call back to your speakers for any closing remarks.
Well, thank you, operator. Thank you all for participating in today's call and for your support. We appreciate your interest and look forward to reporting to you again next quarter on our progress.
Thank you, sir. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.