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Edited Transcript of NIU.OQ earnings conference call or presentation 23-Aug-19 12:00pm GMT

Q2 2019 NIU Technologies Earnings Call

Sep 9, 2019 (Thomson StreetEvents) -- Edited Transcript of NIU Technologies earnings conference call or presentation Friday, August 23, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Hardy Peng Zhang

Niu Technologies - CFO & Compliance Officer

* Jason Yang

Niu Technologies - IR Manager

* Yan Li

Niu Technologies - Chairman, CEO & COO

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Conference Call Participants

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* Bin Wang

Crédit Suisse AG, Research Division - China Auto Analyst

* Lianxiu Xin Duan

Needham & Company, LLC, Research Division - Associate

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, thank you for standing by, and welcome to the Niu Technologies Second Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, we are recording today's call. (Operator Instructions)

Now I will turn the call over to Mr. Jason Yang, Investor Relations Manager of Niu Technologies. Mr. Yang, please go ahead.

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Jason Yang, Niu Technologies - IR Manager [2]

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Thank you, operator. Hello, everyone. Thank you for joining us on today's conference call to discuss the company's financial results for the second quarter 2019.

We released the results earlier today. The press release is available on company's IR website as well as from Newswire services.

Please note that 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 statement, except as required by law.

Our earnings press release today and this call include discussions of certain non-GAAP financial measures. The press release contains a definition of the non-GAAP financial measures and a reconciliation of GAAP to non-GAAP financial results. Please note that, unless otherwise stated, all figures mentioned during the conference call are in Chinese renminbi.

On the call with me today are Dr. Yan Li, Chief Executive Officer; and Mr. Hardy Zhang, Chief Financial Officer.

Now let me turn the call over to our CEO, Dr. Yan Li. Yan?

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Yan Li, Niu Technologies - Chairman, CEO & COO [3]

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All right. Thanks, Jason, and thanks everyone for joining us on the call today. We have been navigating a dynamic market in the second quarter that has been challenged by regulatory changes. Despite the fact that overall China market for electric scooters slowed in Q2, we managed to deliver healthy growth. Our scooter sales volume grew by 14% and revenue grew by 38%. We also improved gross margin to 23.7% and net profit margin to 9.6%. Both are significantly higher than Q2 last year and further improved from Q1 this year. We are pleased to continue to operate profitably in this quarter.

Niu is at the forefront of the revolution in urban mobility, and our results this quarter demonstrated our leadership position. We made advances in technology leadership and leveraged our brand awareness into a new adjacent categories. Our brand and product strength really showed in our financial results.

First, as we discussed in last earning call, we launched our 2 new product lines compliant with the new China regulations effective April of this year, namely the U+ and the US. Both products were delivered to the market in late April and both have received very positive feedback from our customers. The U+ and the US volume represented more than 1/3 of our sales volume in Q2 and widely consider a top list products in the market against our competitors.

The US retail price start at RMB 3,499 or approximately $500 and is considered an affordable entry-level product for new customers to experience Niu for the first time.

The U+ retail price ranges from RMB 4,399 to RMB 5,999 and is positioned as a top-end electric bicycle model great for daily commuters and for long-distance urban riding. Both the U+ and US models are powered by our Niu energy technology, which has helped increase the average driving range by 8%, a 40% increase in battery life cycle and the 6% improvement of power generation. Our growth in the second quarter has been supported by those 2 product models.

We're in the process of launching a new product line, and there is a second brand name, [Gova]. By leveraging our design capability and the cost efficiencies, we'll position Gova as a value-for-money product targeting at the mid-end segment. We intended to sell this product line in both China and international markets.

Second, we continue to build a global new brand as a lifestyle urban mobility brand through innovative, yet cost-efficient marketing and branding activities. On June 1, we celebrated our fourth birthday in China, and we launched a social media campaign called "Don't Call Me Electric Scooter" to separate our brand image from traditional low-quality e-bike market.

We have engaged many social media influencers across TikTok, we won visibility, receiving more than 20 million views. The Chinese Valentine's Day, which is celebrated in July, we started a new love story event and collected more than 2,000 stories from our new users' couples, who fell in love because of Niu and was more than 70,000 page views. We have made a documentary film based on those love stories and will post a movie viewing party among our highly engaged users.

Starting from July, we launched a TVC ad campaign with one of the most popular Chinese Internet drama, called 24 hours in Chang'an. This campaign was a combination of TV ads, social media marketing and user interaction activities on WeChat and off-line stores. We have achieved 1.2 billion views on the Internet TV, 15 million views on Weibo and more than 50,000 users participation in the WeChat and off-line activities.

Now we continue to increase our fan base on all social media from WeChat, Weibo and TikTok. Our monthly views on those social medias have reached to over millions.

We also started an off-line ad campaign, called "Always Niu Forward," with the bus ads, subway ads and billboards, covering 12 cities, and it was more than a billion views.

Additionally, several Chinese and international celebrities were spotted riding a new scooter by the paparazzi, which show the popularity of our products. Those news instantly spread across social and traditional media channels. Those viral activities allowed us to capture more than 1 billion views online of our product, which is just another testimonial to our growth as a lifestyle brand.

Now globally, we have also signed 22 social media influencers across 6 countries, creating new content under the theme, Unlock Your City" and has generated more than 500,000 views. To further build our customer loyalty, we rolled out our Niu points program in July. Users can receive Niu points via various activities and can redeem those points for new lifestyle accessories. Within 1 month of the rollout, we already have 39,000 users participating in the Niu point program.

All of those event-based marketing activities have helped us to continue to improve our brand awareness as the leading lifestyle brands in urban mobility.

Lastly, we continue to expand our footprint in China and globally. In Q2, we opened another 124 stores in China, reaching 1,005 stores in total, which covers 182 cities in China. Internationally, we further expanded our international footprint and entered 6 new countries. Now we sell in 34 countries through 26 international distributors. In June, we opened flagship stores at Seoul in South Korea and Ho Chi Minh City in Vietnam.

Now our solution for sharing operation has also been growing very quickly. So far, we have supported a total 13 operators globally in 11 countries. We provide not only the scooters for their sharing fleets, but also the Out of the Box IoT connectivities and back-end fleet software to allow them to quickly launch their sharing operation. This is a key differentiator for Niu in the sharing space as we are able to provide a full stack of solution, where our competition is just providing a dumb scooter.

The sharing operations we support in the U.S., as mentioned last time, has been very successful and have received positive reviews from New York Times, Vogue, Wall Street Journal, The Verge and Washington Post. The continued success of sharing operation in United States and around the world played a key role in building our global brand awareness, while simultaneously educating a whole new customer base for Niu. All you have to do now is to head over to Brooklyn and see how popular the Niu scooter in Revel sharing program in the U.S. is and how we are building culture for scooters in the America.

So lastly, let me touch upon the China market dynamics 4 months after the implementation of new regulation. As mentioned earlier, the overall regional market has been uncharacteristically soft since the implementation of new regulation. In some markets, we have observed a market contraction by up to 80% since April, when the regulation was put in place. This was partly due to the rushed purchase before the regulation came into effect and part of it because the consumers still need time to adjust to these changes, especially adapting to mandatory smaller form factor scooters and longer process of getting license plates. Additionally, we see a portion of customers are choosing to postpone their purchase as a way to see how the regulatory environment shaped out.

We have seen signs of recovery in July and August, but the total market sales volume is still below last year at the same time. Due to the slow sales of the entire market, many of our competitors have had to close their retail shops, and we see this as an exciting time to grow our sales channel. Despite a sluggish market condition, we have been taking advantage of our competition's reduction in retail outlets and their lack of product to meet the new regulation by rapidly expanding our retail footprint as more retail spaces become available. This strategy now will position Niu for future growth in 2020.

Now I will turn the call over to Hardy to discuss our financial results. Hardy?

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Hardy Peng Zhang, Niu Technologies - CFO & Compliance Officer [4]

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Thank you, Yan, and hello, everyone. Our press release contains all the figures and comparisons you need. We have also uploaded figures in Excel format to our IR website for your easy reference.

As I review our financial performance, keep in mind that we are referring to the second quarter figures, unless I say otherwise. And that all monetary figures are RMB, unless otherwise noted.

As Yan mentioned, the second quarter is a challenging quarter due to the difficult macroeconomic environment and the implementation of the New National Standard in China. We managed to deliver a high-quality growth, thanks to the strong sales in international markets and the solid sales in accessory and spare parts. Our profitability further improved as a result of favorable changes in revenue mix and our continued efforts to optimize cost. Total revenues rose 38% to CNY 531 million, below the guidance we provided earlier due to lower-than-expected sales in China.

Despite a challenging market, our scooter sales volume still grew 14% compared with the second quarter last year. China sales was affected by the implementation of the New National Standards. The subjective interpretation had poor implementation in different cities caused the lengthy product certification and registration process, which affected the entire China e-scooter market, including us.

The new regulation also set the top speed limit at 25 kilometer per hour. Customers are not used to this and will take time to adapt to the new speed limits. The impact from the implementation of the new regulation will continue to affect our China sales in the third quarter and possibly for the rest of the year. But we have seen a positive trend in the recent months that the market began to recover from Q2 and retail sales gradually picked up. The slower sales in China was partially offset by strong sales from international market, especially the newly entered market such as in the U.S. and South Korea.

We shipped out 1,500 units to the U.S. market and the 2,000 units to the South Korean market during the second quarter. We have expanded our international sales network to cover 34 countries compared with 23 countries in the same period last year. We made further entry into Southeast Asia market. We opened a dedicated store in Vietnam, and we are in the process of setting up our own company in Indonesia so as to further expand our business in the promising Southeast Asia market. We are very pleased to see that our products are welcomed in this newly entered market.

Our international sales has both 2B and 2C (sic) [B2B and B2C] business, both have enjoyed very healthy growth in the quarter. The 2B business, i.e., the scooters and accessories sold to sharing operators or fleet management companies is becoming sizable and contributed significantly to our revenue growth in the second quarter.

Revenue per scooter was RMB 5,339, up 21% year-over-year. That growth was driven by both higher proportion of international sales and a strong sales of accessories, spare parts and services. The average scooter sales price grew 11%, driven by 2 key factors: First and more important, the higher proportion of scooter sales from international market, where our sales price are much higher than the China sales price. In the second quarter, our international scooter sales accounted for 27% of the total scooter revenue compared with 10.2% in the second quarter last year.

Secondly, in April this year, we increased China retail sales price by 1% to 5% for selective models. So the retail sales price increased and higher proportion of the international sales both helped our average scooter sales price increase in this quarter. The other positive development in the quarter is the stronger sales of accessories, spare parts and services.

On average, for each scooter sold, we also sold RMB 796 of accessories, spare parts and services, increased significantly from the RMB 296 per scooter last year. The increase was mainly driven by accessories and spare part sales from international market, especially those to the sharing operator, who tends to purchase additional accessories and spare parts together with the scooter.

Gross margin was 23.7%, 8.6 percentage points better than this time last year and 2.4 percentage points better sequentially. Over the longer term, we expect our gross margin to be in the range of 20% to 25%, so we are happy to be moving close to our long-term goal.

Margin expansion was helped by favorable revenue mix. Ancillary revenue from sales of accessories, spare parts and services was 14.9% of total revenue compared with 6.7% last year.

International scooter series was 27% of total scooter revenue compared with 10.2% last year. Both ancillary revenue and international scooter sales have a higher margin and hence, helped our margin expansion. Also, of the total 8.6% margin improvement in the second quarter, we estimate roughly 4% came from the favorable revenue mix.

I want to caution you that we do not expect this favorable revenue mix will sustain for the coming quarters when the China e-scooter sales begin to recover from the slow season in the second quarter. The margin expansion is also helped by our continued efforts to optimize cost.

The cost of revenue on a comparable basis further declined. We secured cost saving on raw materials of 5% to 7% versus last year and 2% to 3% versus last quarter. We were able to negotiate lower procurement costs because of our larger scale and in-depth knowledge of the supply chain. We believe these cost reductions are sustainable and will continue to benefit our gross margin for the coming quarters.

Operating expense on a comparable basis increased in line with the growth of our business. Our total operating expense, excluding share-based compensation, was RMB 18 million, decreased by 14% year-over-year and was 15% of revenue below the 24% we saw last year.

G&A expenses, excluding share-based compensation, decreased by 47%, representing 3.3% of revenue versus 8.6% last year. In April 2018, there was a fire incident, which caused a damage loss of RMB 22 million. After excluding this amount, our G&A expenses increased by 60%, mainly due to higher staff costs and related office and travel expenses.

R&D expense, excluding share-based compensation, grew by 79% as we continued to invest in new product development and design.

Sales and marketing expense, excluding share-based compensation, decreased by 9%, mainly because of the timing of marketing expenditure.

In 2018, we had higher marketing expenditure in the second quarter because of our product launch event at Paris in June 2018. This year, considering the impact from the New National Standards in the second quarter, we limited our marketing spending and deferred sales and marketing activities to the third quarter.

Our GAAP net income was CNY 51 million with net margin of 9.6%. 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 CNY 667 million in cash and equivalents. Operating cash flow was positive CNY 23 million. Capital expenditure was CNY 64 million, mainly for building the new manufacturing facility in Changzhou and for expanding our retail sales network.

Now let's turn to guidance. We expect third quarter revenue to be in the range of CNY 600 million to CNY 700 million. This represents year-over-year growth of 22% to 42%. We expect to continue to operate profitably in the third quarter. Please keep in mind that this forecast reflects our current expectations and could change.

With that, let's now open the call for any questions that you may have for us. Operator, please go ahead.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have the first question from the line of Vincent Yu.

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Lianxiu Xin Duan, Needham & Company, LLC, Research Division - Associate [2]

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This is Roger in for Vincent. And congrats on a great quarter. So my first question is can the management help us to break down the unit sales in terms of China versus international? And how should we think about the gross margin trend going forward for the second half of the year?

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Hardy Peng Zhang, Niu Technologies - CFO & Compliance Officer [3]

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Sorry, the quality of the line is not very good, so we didn't hear your earlier question. Do you mind to repeat your question and speak slowly?

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Lianxiu Xin Duan, Needham & Company, LLC, Research Division - Associate [4]

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Yes. Sure. Can you hear me all right now?

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Hardy Peng Zhang, Niu Technologies - CFO & Compliance Officer [5]

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Excuse me, operator?

(technical difficulty)

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Operator [6]

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Ladies and gentlemen, the speaker is facing technical difficulties. We will be dialing them back and connect them to the conference. Your line will be on music hold until then. Ladies and gentlemen, we have Mr. Yan joining back the conference. Thank you. (Operator Instructions) We have a question from the line of Bin Wang.

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Bin Wang, Crédit Suisse AG, Research Division - China Auto Analyst [7]

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My first question came from the M-Series. I understand maybe in a short period of time, not only one product called U can be sale in the dealerships. So can -- what's the revised version of M can be eligible to sale as a scooter, which must can you specify the timing? That's number one.

Number two is about the new brand [Gova]. Can you elaborate what will be the pricing range and the potential margin because it was in the higher market? So how do you think about the lower market's profitability? Do you see this will be a long-term issue for margin? The second one.

And the third one, actually I want to understand. If you think about the [raw] material has been declined by 5% to 7% year-over-year in the second quarter. Do you also know which is the key component? Is it the battery or other issues?

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Yan Li, Niu Technologies - Chairman, CEO & COO [8]

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Bin, this is Yan Li. So let me address the first few questions. I'll have Hardy answer on the build material question. So yes, I mean, for the first half of this year, until now, the product we have actually meeting the new regulations are basically the U+, the U, the US, essentially the product family of the U family. We are -- actually, we are working hard to actually get one of the M family to meeting the new regulatory requirement. There has -- to be honestly, there has been a delay on that product because there has been, what you call, the interpretation of the new regulation, which is announced on March 25, which has -- which actually tightens the new regulation a bit more in terms of the extra spacing and the battery compartments in terms of the, what we call, the backseat rest, the requirement of the backseat rest. So that actually caused us to literally scratch our internal design of the new M and then restart over. Now we are looking at the new M probably will come out in the first half of next year. So that was with the M product.

Now secondly, while having said that, the -- we also have the M+ and also N passing the light motorcycle certifications. And those -- by having M+ and N passing the light motorcycle certifications, we were able to sell N and M+ as light motorcycles in areas where they don't have the restriction on light motorcycles. And that has been generating quite a bit in terms of our sales boost.

So the second question on [Gova]. So the Gova -- right now, the -- we have -- in terms of Gova , we have essentially 3 product lines on Gova , which is G1, G3 and G5. G3 and G5 are not ready for production probably until later this year -- Q4 this year. And the G1, we're planning to roll that out in early September. And the price range on G1 is anywhere between RMB 2,999, basically just a little bit below RMB 3,000, to RMB 3,999. So basically anywhere -- basically in the price range of RMB 3,000 to RMB 4,000. The reason we launched this as a second brand and actually launched this product here is, first of all, G1 is new regulation compliant. Second, we look at our product offerings, the chips in our product is actually U.S., which actually add RMB 3,500. So we're a little bit short in terms of the product in below RMB 3,000 and in a range between RMB 3,000 and RMB 3,500. Those are basically, what you call, a -- the price stack area that we did not cover using Niu products. But in order to get us the Gova to get to that price range, while maintaining a healthy margin, we had to deliberately separate some of the functionalities between Gova and Niu. For example, Niu is viewed as smart electric scooter, it is connected, where the Gova , we do have to stream down -- strip down the connectivity part. So this is what I position saying Gova is the product, which can be used to serve the main segment. But having said that, we do offer accessory, what you call, a sky eye option, which allow users to add a little box on Gova to enable that connectivity. So that's the option that users can buy as accessory. So I think those answered the question on Gova , and then I'll hand over to Hardy to talk about the bottom part.

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Hardy Peng Zhang, Niu Technologies - CFO & Compliance Officer [9]

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Yes. For the reduction of costs related to the procurement of raw materials, we achieved 5% to 7% cost down compared with the Q4 last year. This cost down is across different parts of the scooter. In average, the body parts, including frame, lights, tires, et cetera, we reduced the cost by around 4%. And so the battery pack, including the battery cell, the pack and BMS, in total, we reduced the cost by around 9%. So in average, it gave us 5% to 7% cost reduction. I hope this answered your question.

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Operator [10]

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We have the next question from the line of Vincent Yu.

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Lianxiu Xin Duan, Needham & Company, LLC, Research Division - Associate [11]

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This is Roger again. Sorry about that. My line was disconnected. So my question was can the management team help us to breakdown unit sales in terms of China versus international? And how should we think about the gross margin going forward for the second half of the year?

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Hardy Peng Zhang, Niu Technologies - CFO & Compliance Officer [12]

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I think in the revenue, we do have a split between China sales and international sales. The international sales account for 27% of the revenue. China sales account for 73% of the revenue. So by market-wise, total revenue at this percentage gives you total China sales. If you compare the second quarter China sales revenue with same period last year, that has growth of around 2%. We still have some growth in China, but at a slower rate.

For the gross margin, Q3 -- Q -- sorry, Q2, we achieved 23.7%. Q1, we have 21.3%. In -- out of the, -- as I mentioned, out of the 8.6%, the margin improvement around 4% coming from this revenue mix. The revenue mix, we do not expect it will sustain for the next quarter. However, for the cost reduction, we believe it will continue to benefit us in the next quarter. We estimate the gross margin for next quarter will be slightly in the range between 18% to 20%.

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Lianxiu Xin Duan, Needham & Company, LLC, Research Division - Associate [13]

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Okay. That's great. Okay. Yes. My second question is do we have any visibility on how much e-scooter purchase will be made by the sharing platforms in the second half of the year?

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Hardy Peng Zhang, Niu Technologies - CFO & Compliance Officer [14]

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We have some visibility. First of all, the sharing operator, they are not the main contribution of our international sales, but majority of our international sales do sell to the end consumers. In -- the sales to sharing operators normally account between 10% to 30% of the sales across different markets depending on the sales order. For the second half, we believe it will be in a similar percentage.

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Lianxiu Xin Duan, Needham & Company, LLC, Research Division - Associate [15]

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Okay. Great. Okay. My last question is can you maybe talk a little bit about some of the feedbacks you guys heard from distributors or customers? How they think about the new regulation? And also, when will we see the demand become more normalized from your standpoint?

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Yan Li, Niu Technologies - Chairman, CEO & COO [16]

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Yes. I think that's a good question. This is Yan Li. So as we -- we've been on the field talking to the distributors and the retailers as well as customers. I think they still need a bit time for the consumers to get adapt to the new regulations because the new regulation -- a few things on -- key things on new regulation. One is actually on the size of the scooter, second on the weight of the scooter as well as it's actually, there's this, what you call, a more stringent check on the speed. So all this actually is very different with -- before with the previous case before the regulations were in place. So what do we have out there that is what as I mentioned on the call some people actually did a rash purchase in Q1 before the regulation in place. And then some consumers decided to postpone because a major part of this market is a replacement market, where every year people replace their old scooters and purchase new scooters. And we do see actually -- observe that some people decide to postpone that replacement by keeping their old scooter for another 6 months or for another year before switching to the new regulation scooters.

So -- but having said that, the market has been slowly -- has a slowly recovery, where in the cities where the new regulation started to being heavily enforced, I think the entire market at the month of April or May really -- some of the cities actually dropped -- their entire resale dropped by like 80%. But now seeing they're back to the last year level, but the -- month-by-month, the sales have been improving.

Yes, I think that's with some consumers. The last thing I want to add is actually a lot of retail shops, to be honest, in the last few months has been suffering because the volume has been dropped. And then the only -- actually, if you look around, the major portion of scooter being sold in those market are very cheap scooters, basic -- anywhere ranging from RMB 1,400 to RMB 2,000. And there's little margin to be made on those cheap scooters. And so many retail shops from our competitor brands really has shut down the shops. So that -- actually, we did manage to take advantage of that and actually able to acquire some hot retail spaces, which we wouldn't be able to previous year.

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Operator [17]

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(Operator Instructions) We have the next question from the line of [Joyce Lin Wang].

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Unidentified Analyst, [18]

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You explained that the sales and marketing expense may be larger in the coming quarter. Could you give guidance about how large it could be?

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Hardy Peng Zhang, Niu Technologies - CFO & Compliance Officer [19]

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I think for the sales and marketing, just on a comparable basis, it will be slightly larger than the second quarter, but we don't believe it will be a significant increase in the market spending. There won't be any amount submitted.

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Operator [20]

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(Operator Instructions) Seeing no more questions in the queue, let me turn the call back to Mr. Li for closing remarks.

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Yan Li, Niu Technologies - Chairman, CEO & COO [21]

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Okay. Thank you, operator, and thank you all for participating on today's call and for your support. So we appreciate your interest and look forward to reporting to you again next quarter on our progress. Thank you.

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Operator [22]

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Thank you. Thank you, all, again. This concludes the call. You may now disconnect.