Niu Technologies (NIU) Q2 2020 Earnings Call Transcript

Niu Technologies (NASDAQ: NIU) Q2 2020 Earnings Conference Call Aug. 17, 2020

Corporate Participants:

Jason Yang — Investor Relations Manager

Yan Li — Chairman of the Board and Chief Executive Officer

Hardy Peng Zhang — Chief Financial Officer

Analysts:

Vincent Yu — Needham & Company — Analyst

Bin Wang — Credit Suisse — Analyst

Lei Wang — CICC — Analyst

Alexander Potter — Piper Sandler — Analyst

Xinchi Yin — CITIC Securities — Analyst

Presentation:

Operator

Good day, ladies and gentlemen, thank you for standing by and welcome to the Niu Technologies Second Quarter 2020 Earnings Conference 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.

Jason Yang — Investor Relations Manager

Thank you, operator.

Hello, everyone, and welcome to today’s conference call to discuss Niu Technologies’ results for the second quarter 2020. The earnings press release, corporate presentation and financial spreadsheet have been posted on Niu investor relations website. This call is being webcast from the Company’s IR website and a replay of the call will be available soon.

Please note, today’s discussion will contain forward-looking statements made under the Safe Harbor provisions of the United Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks, uncertainties, assumptions and other factors. The Company actual results may be materially differ from those expressed today. For more 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 and this call include discussions of certain non-GAAP financial measures. The press release contains a definition of non-GAAP financial measures and the reconciliation of GAAP to non-GAAP financial results.

On the call with me today are our CEO, Dr. Yan Li, and CFO, Mr. Hardy Zhang.

Now let me turn the call over to Yan.

Yan Li — Chairman of the Board and Chief Executive Officer

Hi. Thanks, Jason, and thanks, everyone, for joining us on the call today.

We had a recovery in the China market in Q2, while in overseas market, our sales performance was still affected by COVID-19.

Now, on performance in Q2, our total sales volume reached 160,000 units, an increase of 61% year-over-year. The sales volume in the China market reached to 155,000 units, an increase of 81% year-over-year, while the international market reached 5,000 units, decreased by 62% due to the impact of COVID-19. Despite the decline in sales in the overseas market in Q2, we remain very, very positive about our performance in the second half as the market gradually recovers from the COVID-19 outbreak.

Now, in Q2 we continued to build our leadership in urban mobility via new product rollout, branding and marketing activities and the retail expansion. So first of all, Q2 has been a very busy quarter for us in launching new products. As I mentioned in the previous earning call, we launched our MQi2 on May 7, our flagship electric bicycle product for the China market in 2020 as an upgrade of our 2016 signature M1 model with the up-to-date technology and complying with China’s new regulations. The product launch was held Zhibo, our online live streaming sales at Taobao platform and achieved a huge success with 3 million plus views online. Since then, M2 has been a key selling product in our electric bicycle category, representing 50.5% of our sales in Q2 and is positioned as our high end electric bicycle product.

We also introduced the MQiS or MS model on July 16. MS is slightly smaller compared with M2 but also inherited the family device dial of M series using the same technology platform as M2. We also applied our innovation in lightweight materials in MS, reducing the weight of MS chassis, which allowed us to expand the battery capacity to 48V 26AH while still compliant with the new regulations. Now, with this new battery capacity, the MS has a longer drive range up to 100 kilometer and leads the drive range for the entire electric bicycle industry. Also, the compact form factor of MS is also very friendly for people with all heights. MS comes with four models, with pricing ranging from RMB3,899 to RMB5,599, representing an entry-level product for the M series, while M2 is with price range from RMB4,599 to RMB6,199.

Now, besides expanding our M series with two new models, M2 and MS, we also expanded our Gova series with three new models, G0, G2 and upgraded G3. G0 is an electric bicycle designed as the entry-level product of the Gova series targeting the mid end market, with two drive range option at 40 km and 60 km priced at RMB2,299 and RMB2,799. G0 has inherited the design style of the Gova series, but it’s more compact and more practical, with built-in back seats and add-on baby seats. G0 was launched at the JD through June 18’s campaign with a presale warmup and online live stream event. During the live stream event, we received close to 4 million views and 2 million likes on JD platform, and the entire product launch campaign generated total sales volume of close to 17,000 units, demonstrating our capability to penetrate the mid-end electric bicycle market.

We also launched G2 and upgraded G3 under the Gova series on June 12 and July 18 respectively. G2 is an electric bicycle products larger than G0 with two drive range options at 60 km and 80 km, priced at RMB3,599 and RMB3,999. Now, G3 is the upgraded electric motorcycle product from our last year’s G3 announcement, targeting cities with no restriction on motorcycles. It’s bigger in size and with faster speed up to 60 kmph. It is equipped with three battery options and with price range from RMB4,299 to RMB6,499.

Now, with G0, G1, G2 and G3, our Gova series achieved a full spectrum coverage from entry-level electric bicycle to electric motorcycle with price range from RMB2,299 to RMB6,499, meeting a wide range of consumers’ demand. The entire Gova series will help us to expand our market reach to lower-tier cities. Now, besides new products, we continue to enhance our brand awareness via user activity based viral marketing and targeted marketing. On user activity-based marketing, we had two very interesting events in Q2.

First, a new fan from Shanghai spent 261 days riding along the entire border of China with total distance of 30,000 kilometers on our original N scooter. During the trip, the fan drove through the snow mountains, go across the Gobi Desert and challenge the extreme cold temperature of minus 41 degree Celsius in the Northeast China. So this story was published on Weibo and Douyin and then was picked up by all major media across China. It has achieved 35 million views on social media and 10 plus T media coverage with hundreds of article mentions.

Now, second, to celebrate a new fifth anniversary, a new fan from Beijing actually sent a new miniature model up to 20,000 meters above the sea level in inner Mongolia with a hot-air balloon and made a vlog, capturing the entire event. The vlog has also achieved 41 million views and received 9 million likes on Douyin. Both of those activities demonstrate a strong loyalty of our users to our brand and helped us to further build our brand awareness and brand reputation across a mass consumer base.

Third, to promote safe riding we also launched a no-helmet, no-ride campaign together with traffic administrative departments across 10 provinces and cities with Weibo articles and Douyin special videos. This campaign generated 24 million views across both platforms.

Now, with those efforts, we continue to build out our own site and short video platforms like Douyin and Kuaishou with Douyin quarterly views increased to 47 million in Q2, a 23% growth over Q1 and Kuaishou’s 4.5 million views in Q2 versus only 190,000 in Q1.

Now, internationally, despite the impact of COVID-19 virus, we continued to add key opinion leaders to the Niu crew team upgraders. Well worth to mention is a Spanish key opinion leader post on YouTube and his post achieved 1.7 million views, making Niu a hot topic in Spain. And to further enhance the user experience that engage our Niu users, we launched a new social feature on our app called My Riding Journey, allowing users to quickly create a long format pictures with the riding geopath to be easily shared in WeChat and within the app. More than 15,000 journeys have been created and published in our Niu app community. We will continue to add more functions to our app as a means to increase user engagement and view brand loyalty.

So lastly, a very popular hip-hop live competition show called Street Dance of China was launched on July 18 on Youku. It was expected to be one of the hottest shows for this summer in China. We will have two feature advertising in the semifinal and the final during the show as well as an ultimate advertising campaign in September when the show is at its final stage. We estimate an overall exposure over 200 million online and 400 million views offline. Not only this will provide brand awareness exposures, it will also help us to further enhance our brand image as the trending brand leading the urban lifestyle.

Supported by the new products, the enhanced customer engagement and brand awareness, we continue to expand our footprint through store expansions and new market entries. Now, in China, Niu added 51 [Phonetic] stores to 1,084 stores in Q2. We expect to accelerate the store opening pace in Q3 as the COVID-19 situation recovered in China. For the international market, we have increased our market coverage to 45 countries with three more added in South America, mainly the Dominican Republic, Peru and Brazil. We added additional 48 flagship and premium stores with total count reaching 91 flagship and premium stores versus 43 in Q1 despite the COVID-19 situation.

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

Hardy Peng Zhang — Chief Financial Officer

Thank you, Yan, and hello, everyone.

Our press release contains all the figures and comparisons you need. We have also uploaded Excel format figures to our IR website for your easy reference. As I review all the 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.

Our Q2 sales volume reached 160,000 units, increase by 61% year-over-year. China sales volume increased by 81% as a result of demand recovery, retail sales network expansion and new product launch. Our China online sales are particularly worth highlighting. Online sales continues to grow and accounted for 14% of total Q2 sales volume compared with the 2% at the same period last year. The key reason is that this year we launched new products such as to M2 and G0 through online platforms. This helped to mitigate the restriction from COVID-19 for any big offline event and also offered a good alternative for customers who are reluctant to go to offline stores. International sales volume decreased by 82% due to the reverse impact from COVID-19. The lower international sales volume had a significant impact on our Q2 financials. For example, in Q2 we had a lower ASP, lower gross margin and also lower revenues from accessory spare parts. Many of these lines caused by the lower international sales. We will discuss the impact in details later. We also encourage you to keep this in mind when analyzing our financials.

Regarding product mix, as we launched the new products M2, G0 and G2 models in the second quarter, the product mix changed accordingly. The N series accounted for around 20% of total volume. M series accounted for around 20%. U series accounted for 40%, and the Gova series accounted for remaining 20%. The changes in the product mix affected our Q2 revenues and ASP.

Total revenues increased by 21.6% to RMB645 million, in line with the guidance we provided earlier. Revenues from scooters increased by 28% in total, out of which China market increased by 59% and the international market decreased by 53%. Our Q2 scooter revenue was, however, negatively affected by the price discount we offered during the new product launch through e-commerce platforms. For example, we offered RMB500 discount on our new model, G0. Such price discounts affected our revenue by approximately RMB10 million in aggregate, but since we offered a price discount, we are able to save on sales and marketing spend which I will discuss later.

Revenues from accessories, spare parts and services decreased by 17% in total, out of which China market increased by 70%. International market decreased by 70%. The decline of international sales is mainly due to lower spare part sales to the sharing operators. Here again, we encourage you to look at China and international markets separately to get a better picture of our business for this quarter. Revenues per scooter or ASP decreased by 25%. There are a few key drivers for the decline. First, the lower proportion of scooter sales from international market; the impact on ASP is estimated to be 8.5%. Second, the lower spare part sales from international markets; the impact on ASP is around 6.5%. Certainly, the launch of low priced model, G0, affected ASP by around 6%. The remaining 4% is mainly due to change in product mix in the other models. In summary, out of the 25% ASP decline, 8.5% is due to the lower scooter sales from international markets. With the recovery of international market in the coming quarters, we expect that this negative impact will be much less going forward.

Gross margin was 23%, 0.7 percentage points lower than this time last year. The lower margin was mainly due to lower sales of scooter and spare parts from international market which negatively affected our margin by around the 5.5% in total. However, we are able to offset majority of such negative impact by cost savings on battery packs, various components and warranties.

Our total operating expense, excluding share-based compensation, were RMB82 million, increase by RMB4 million or 4.6% year-over-year. The increase was mainly caused by higher G&A expense of RMB2 million for tax and surcharge and higher R&D expense of RMB5 million, mainly for higher staff costs.

Sales and marketing expenses, however, decreased by RMB3 million. As a percentage of revenue, the sales and marketing expense, excluding share-based compensation, was 6.6% compared with 8.7% in Q2 last year. The decrease of 2.1% was mainly because we moved online — our product launch from online — from offline to online as discussed earlier. We offered direct product discounts to customers, which affected our revenues but we saved on sales and marketing expenses. Going forward, we may have similar approach for sales and marketing activities especially with more direct sales through online, e-commerce platforms.

Our share-based compensation expense was RMB7 [Phonetic] million, increase of RMB8 million compared with same period last year due to the new grants to employees during Q3 last year and Q2 this year.

Our GAAP net income was RMB57 million, and adjusted net income was RMB68 million. Both are higher than Q2 last year. The adjusted net income margin was 10.5%, higher than 10.2% in Q2 last year, mainly due to the lower sales and marketing expenses. We are pleased to return to profitability in this quarter despite continued impacts from COVID-19.

Turning to our balance sheet and cash flow. We ended the quarter with RMB1 billion in cash, term deposits and short-term investment. Our operating cash flow was positive RMB338 million because of improved profitability, reduced account receivable, reduced inventory and increased account payable. Our capital expenditure was RMB59 million, out of which RMB39 million for land use right acquisition, RMB20 million for new store openings in China and international market as well as for additional machinery and R&D spending. We had a very healthy balance sheet and strong cash flow in the second quarter.

Now I’d like to turn to guidance. We expect third quarter revenue to be in the range of RMB850 million to RMB950 million, an increase of 30% to 45% year-over-year.

In the earnings release, we also provided you with the update on our July sales volume. China sales volume grew by 64% even though there were very bad weather conditions in China. The massive flooding affected our logistics and retail sales in July. International sales volume grew by 56% year-over-year.

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

Questions and Answers:

Operator

[Operator Instructions] We have the first question from the line of Vincent Yu. Please go ahead.

Vincent Yu — Needham & Company — Analyst

Yan, Hardy and Jason, congrats on the robust performance and thanks for taking my question. I have three questions. First question is about the expansion of product category and the related volumes. So in July, Niu sold close to 68,000 units in China. Can you share with us which models in particular has driven the strong growth which is about 64% [Phonetic]?

The second question is about, can you share some comments on the cadence of the reopening of the international stores and how should we think about the international unit sales for second half 2020? And third question is about how should we think about the China e-scooter ASP for second half 2020. Will we see a meaningful recovery?

[Foreign Speech]

Hardy Peng Zhang — Chief Financial Officer

Thanks, Vincent. Let me answer your first question. So the key drivers for the July sales volume growth, there is a few new products we launched in July. First is MS. As MS is a electric bicycle category, new product, it’s very much welcomed by our customer. In July, MS contributed around 10% of our sales volume for — in the China market. And another key driver is the Gova series. We launched both G0 in the second quarter, also launched G2; both of them are electric bicycle. They are also the key drivers for the July sales volume growth. So it’s mainly due to three key — key new products driving the growth.

For the second question, I would like Yan to come and talk.

Yan Li — Chairman of the Board and Chief Executive Officer

I think for the international market, basically, I think we do have a pretty good expectation into both Q3 and Q4, partially because, one, all the stores are — all our stores are opened so far in all the countries. So it looks like it’s back to — in the business. And the second; we do observe that because our COVID-19 situation that actually across the globe people start to prefer what you call the individual urban mobility commuting device, which is our — basically our product — product, the electric moped and electric scooters. So that was actually a good sign to actually to drive sales. And then lastly, I think we are also planning to roll out — in the second half of this year roll out our EUB, well, let’s call, our first electric bicycles or the e-bike and their sort of the European categories as the e-bike. So that product will be rolled out most likely in Q4 this year, and that will also help — help us drive a little bit sales in Q4 and actually also over to the 2021.

So net to net, I think right now, it’s very positive, and we’re also start to seeing orders from sharing operators as well. As you know, we just recently actually got opportunity to fill orders from the sharing operators really to expand their sharing operations in Europe. I think due to a similar basically phenomenon that we observe they observe very similar phenomenon as due to the COVID-19 situation people start using this individual commuting device whether it’s owned or shared. And last — and one more thing with July. We mentioned in the previous call actually, we rolled out a new rental program in July in Europe, and this program is actually through an app that user can actually rent new scooter from participated dealers on a weekly basis, daily basis. And so far we’ve had more than hundreds of dealers participate in this new rental program, and we think this will actually will also help to sort of — to lower the what are called entry barriers and give people even a, what you call a cheaper way to try out a new scooter first before making a purchase decision. So those are all the few things that we’re really working hard to get the international market back on track.

Yeah. So that’s my question. For question three on the ASP, I’ll let Hardy to answer that.

Hardy Peng Zhang — Chief Financial Officer

Sure. For the scooter ASP, let’s first talk about the second quarter ASP. So overall, ASP declined by 25%. And as I mentioned, the 8.5% is because lower international sales. And since July, you see we have already seen recovery of the international market sales. In July, our international market sales grew by 56% [Phonetic], China market grows around 64%. So they are growing at a similar speed. Therefore in Q3 — also in the remaining of the year, we believe this 8.5% will not be there anymore. So if you take this 8.5% off of this 25%, that give you remaining 17% that may have a — that may last for the remaining of the year.

And when we look at ASP, we need to separate them into three categories. One is the China scooter ASP, second is overseas scooter ASP and thirdly, it’s accessories spare parts ASP. So the overseas ASP, we believe it will continue to be strong. In this — in the second quarter, our overseas scooter ASP increased by more than 20% — is very strong growth. And for the remainder of the year, because of the order book, we believe our ASP will be at least the same as last year even have a slightly growth.

The China ASP however will decline because of the launch of Gova series. The G0 and G2, their price is lower than the M,U series. Also the MS, the newly launched the product in July also had a lower ASP compared with M2 we launched in the second quarter. So for China scooter we are thinking anywhere between 15% to 18% ASP decrease in the third quarter.

For the accessories spare parts. This is — this part we have some uncertainty mainly because of the overseas sharing operator, how much they take [Phonetic] the order from us. Currently for our Q3 forecast, we have been quite conservative in this part. So in short, I think the ASP for the overall products will decline for the second half of this year mainly because of the change in product mix. So this is my answer to your third question.

Operator

Can we move to the next question, sir?

Vincent Yu — Needham & Company — Analyst

Thank you. No follow-ups [Phonetic].

Operator

The next question comes from the line of Bin Wang. Please go ahead.

Bin Wang — Credit Suisse — Analyst

Question number one is about the gross margin. I actually found the gross margin quite stable. If possible, can you provide the detail about the e-scooter gross margin and is it increase or decline? And second is about the service. And second, just any one-off issue in the gross margin we can explain in the second quarter. That’s just the — second one is that you mentioned that the raw material price decline — or price decline is the key driver for the margin stabilization. Can you quantify how much from the normal path — how much from the battery, etc.? That’s the number one question.

Number two is about the share based compensation. [Indecipherable] is pretty big in the first half. You have mentioned that in — you actually [Indecipherable] in the second quarter this year. Can I assume December [Phonetic] will be similar in the future compared to 2019? How should we think about the share based compensation? That’s the second question.

And third one is about the volume. You actually provided a very good July number. Can you provide kind of for the two week of August what’s the driver for this high growth? [Indecipherable] in China because COVID I think concern [Indecipherable] do you still see the key driver or this driver will continue to be strong because the China’s COVID I think is in good control. so which means growth may be lower — is that the reason why you have the second half — also for the third quarter, only 30% to 45% growth, which is below the 64% in July? So do you still expect the growth to decelerate [Phonetic] because the guidance is lower than the June number? Thank you.

Hardy Peng Zhang — Chief Financial Officer

Sure. Let me first answer your question on the — on the gross margin. Certainly our gross margin is relatively stable compared with Q1, also last year. The key driver is the cost savings. I can — definitely can provide you the breakdown for the — for the markets on different components. And for our scooters, if you take out the logistic cost of warranty is — in the second quarter, the gross margin was around — 20.7% compared with — compared with last quarter increased by 2%. And if you compare with last year, this has increased by around 3%. So this is the scooter — scooter gross margin.

Both the accessory and spare parts gross margin is around 48%, very similar to what we have in Q1, also in Q2 last year, so relatively stable. For the service gross margin this quarter is the low — relatively low — only about 30% compared with 70%, 80% in the previous quarters mainly because in this quarter we have service revenue coming from Volkswagen project. You may recall, we provide R&D service to Volkswagen for new products that they plan to launch next year. But because of the COVID-19, the project had to be suspended. Therefore, even though we have the same revenue, we have to incur additional costs, mainly for staff cost and retain the team for their project. That’s what dragged down our service revenue gross margin. So this is — this is marked by product lines.

And specifically on the raw material, how much we save on that. So if we compare with our Q2 raw material procurement cost with Q2 last year, our battery cell costs actually declined by around 10% and the battery pack and BMS also have a few percentage decline. Overall, the battery pack — the overall battery pack, including both battery cell, BMS and the pack had a decline of 8% compared with same time last year. The other component on the scooter also have around 4% cost up [Phonetic] overall. If you calculate by the weighted average, it contributes to around 5.6% cost up. So this is really the key driver to help us to make sure our gross margin was relatively stable. And so this is the answer to your first question.

And your second question is the share-based compensation. The share-based compensation is mainly because last year, in the second — in the third quarter, in August, the Board approved additional share-based compensation for the management team, also for some of the key employees. So that strike up our SBC cost by around RMB4 million. You may — Q2 last year, the SBC is around RMB4 million per quarter. So, because of the SBC we give you in August last year that drove up the SBC spend by above RMB4 million. And in April this year, because some of the employees — their share based compensation — pre-IPO share based compensation already fully lifted [Phonetic]. So the Company decides to grant some additional share-based compensation — continue to provide for additional four years. That also drove up the costs by around RMB3 million. So this is the majority of the SBC we granted. And for the remaining of the year, we do not expect any — significant further share-based compensation to increase. So that’s the answer for your second question.

The third question is — I’ll give it to Yan to comment on — talk of the sales volume.

Yan Li — Chairman of the Board and Chief Executive Officer

Yeah. I think for the August sales volume growth, we’re looking at multiple factors here. The first factor which actually the plus side is actually the back to school, right. So with kids back to school, I think now actually provide a positive — catalyst to the market where we think we can actually will drive the volume growth. I think the second is actually — I think Bin, you just mentioned. If you look at basically our guidance, which is actually the year-over-year growth in terms of fee, I think you’ve mentioned we — what the [Indecipherable] for the second quarter — guidance on the third quarter?

Hardy Peng Zhang — Chief Financial Officer

Higher, 30% [Speech Overlap]

Yan Li — Chairman of the Board and Chief Executive Officer

Yeah, it’s actually higher than the second quarter. So I think that — well, we think that back to school help us. Second is actually a lot of our new products, looking at the — as I mentioned, the G2 — the G0, the G2, the G3, the MS, all those product basically with the first, G0 and G2 announced in mid-June. The rest was actually in July. So if we think about those products will kick in — the effect of those new product will kick in practically in Q3 this year. So typically when we first announce a new product, usually we’d have our own ramp-up period, and also roughly 12 months or so for the market to fully start to assess the product and really ramp up the sales. So I think this — those new product will help us in terms of drive up the August sales.

And then lastly, I think with a phenomenon we observe, as I mentioned in the call, where with the G0, now we start sign of G2 where with G0 and G2, it actually also helps us to penetrate what are called the lower-tier cities in the market where used to be — we don’t have a perfect product for those markets. And that actually helped us I think with our store expansions in Q3. Those also will contribute in term of the Q3 growth.

Hardy Peng Zhang — Chief Financial Officer

Just to add to Yan’s comments on August sales trends. In the first half of August, our sales volume growth maintained at least the same speed at what we delivered in July. In the second half of August, the expect growth will accelerate then they because we started new school opening promotion activity from Monday, from today. Normally that will drive the volume further up. Yeah. So that’s the answer to your question on August sales volume growth.

Bin Wang — Credit Suisse — Analyst

But about that third quarter guidance of 30% to 45%, which is well below the 64% in July and August?

Hardy Peng Zhang — Chief Financial Officer

It’s mainly because of the ASP. I mean the — as I said, because we launched G0, G2, also MS — their ASP is lower than the average ASP. So these will drag down the ASP. But the volume, they will still be quite strong.

Bin Wang — Credit Suisse — Analyst

Okay. Lastly on, what about the COVID-19 impact? Because at the end of the second quarter, whole China actually, volume increased by a 45% because of COVID-19. So do you just see the COVID-19’s impact or help will be less going forward because COVID-19 seems to be better controlled in Mainland China? Thank you.

Yan Li — Chairman of the Board and Chief Executive Officer

Yeah. I didn’t capture the full question, but hopefully I can answer it. I think basically now with the COVID-19 impact — we saw full impact in Q1, a little bit in Q2, but as of now, I think for China, we’re back effectively — I think we’re — safe to say we’re back to what you call, the pre COVID-19 market condition or even better because of COVID-19 actually drive quite a lot of people to choose not to take public transportation and really start to move to electric bicycle product in China. So I think in China market, we’re actually better positioned — even in a better position than the pre- COVID-19 situation. I think that was one of the reasons we keep — we’re building our multiple new products lines this — in the last quarter and also in July and really try to take advantage of this and capture this market growth. I think similarly — I think in Q3, we expect to add more stores where because of COVID-19, our Q1 store adds or store expansion was subpar because the many construction site — construction were shut down. So we were not able to open a lot of stores. But now we have quite a bit stores ready to be opened in the backlog which will happen in Q3. So that will help on the China situation.

Now, on the international situation, I think it’s actually back to normal. But the only thing with the international situation, as Q3 has traditionally has been a slow quarter for international, especially in Europe where people take vacations. Still, we expect to, to actually to getting a faster growth in Europe in Q3 to really make up the gap for Q2. But having said that, keep in mind Q3 — typically, there are people are taking vacations in Europe. So it’s a little bit sluggish in term of our retail.

Bin Wang — Credit Suisse — Analyst

Okay. Thank you so much.

Operator

Thank you. We have our next question from the line of Lei Wang. Please go ahead.

Lei Wang — CICC — Analyst

Good morning, Dr. Li and Hardy. This is Wang Lei speaking from CICC. So first of all, congratulations on the strong sales despite of the impact from coronavirus. That’s very inspiring for sure. Basically, I have three questions, some on financials and some other factors. The first question is about the ASP of the spare parts. This was around like RMB800 in second quarter of 2019 and then dropped to like RMB500 in the third quarter and then increased to RMB1,200 in the first quarter of 2020 even with the COVID-19 impact in China. So what could be the driver that makes the key differences to spare parts ASP? That’s the first question.

And then, the second question is about the new regulations that we believe will redefine the two-wheeler industry in China. So, it seems individual cities are having different law enforcement stress. For instance, in Beijing, it seems we have a more restricted environment where Shanghai is not taking that regulation seriously for now. How do you view the enforcement in the following quarters? That’s the — that’s the second question. And then, the last question and the third question is about the impact on the sharing economy. So, looking forward, do we think the rising of the sharing economy will lead to a negative impact to your sales in the future or will Niu become a key vehicle supplier for this industry? That’s all my questions. Thanks.

Jason Yang — Investor Relations Manager

Sure. Thanks, Lei. Let me answer your first question about the spare parts ASP. I think we need to first talk about the total revenue for accessory, spare parts and services. I think the revenue come from two source. One is the sales from the China market and secondly it’s the revenue coming from overseas markets. So, even though in the second quarter, our total revenue from this category reduced by 17%, but if you see that in the international market — and also the China market. China market actually grew by 70%. Overseas markets declined by 70%. So, in China, if you calculate the average ASP per scooter, the price is actually quite stable. So the decline or the fluctuation is mainly coming from the overseas market. So, the overseas market, the key driver for our revenue in this category is actual battery and some spare parts we sold to sharing operators in overseas markets, in both Europe, also in the US.

This year, because of COVID-19 continue to affect US, continue to affect Europe, therefore, we have much less spare parts goes to the overseas market. So that’s really the driver who contributes to the fluctuation of the ASP. We think this will continue for probably in the next one or two quarter and we hope next year to become more or less stable. So that’s my answer to the first question. I’ll now let Yan comment on the remaining two questions.

Yan Li — Chairman of the Board and Chief Executive Officer

Yeah. I think, Lei — I think on the regulations enforcement, I actually agree with you. We do observe different cities actually apply a different, what do you call — enforce it differently. Top cities — what we observe basically, like top 10 to 20 cities, actually top 20 cities, we’re talking about Beijing, Shanghai, Hangzhou, Nanjing, even [Indecipherable] those cities, and Hangzhou, those ones, and [Indecipherable] and Guangzhou, Shenzhen. Those ones, actually, they enforce very strictly. And so, in those cities, actually, owning the electric bicycle products that are being sold. And after the — those cities largely represent about — traditionally, in term of market size, they’re roughly about 6 million units a year in term of market size, out of that 30 million units total market size annually.

And then, after that 20 cities, I think we’re still seeing a — cities still enforce the electric bicycle rules. And obviously, there are also cities actually that allow electric motorcycles, that actually allow motorcycles, so that the products didn’t fall under the — what do you call, the electric bicycles are being sold as electric motorcycles. And a little bit caveat on this is actually is more enforcement. First of all, regardless which cities, the enforcement is actually very strictly on manufacturers. Basically, for the products that manufacturer provide, the product has to be either compliant with the electric bicycle or electric motorcycle. There couldn’t be a different — a third category product, which is not combined with either regulations. So, from a manufacturing perspective — Niu, as any other manufacturer, the product we ship are in either electric bicycle or electric motorcycle, and they are being sold as electric bicycles or electric motorcycles.

I think only the city that’s a little bit loose on this are cities doesn’t require people to get license plate on their electric bicycles or electric motorcycle. That’s where the enforcement little bit loose. But I think I gave a really long for a short question here. But I think as time passes, you’re going to see more and more cities going to enforce the rules. For example, last year, we didn’t see Suzhou, basically a third tier city in [Indecipherable] really enforce this. But this year, Suzhou actually start offering — require people to get license plates on electric bicycles practically — basically April, May this year. So, you’re going to see more and more cities actually will apply the policy. I think the reason it’s slower because it requires quite a bit of administrative effort to establish what are called the license plate protocol, getting the local traffic management to set up post, to get bicycles to get license plate registration. It takes time, but I think within a couple of years or so, you’re going to see [Indecipherable] get it enforced strictly.

Lei Wang — CICC — Analyst

Okay. So it seems — not only to lobby the central government, but also really to take some time to lobby the local governments, asking them to implement the implementations, right?

Yan Li — Chairman of the Board and Chief Executive Officer

Actually, it doesn’t require lobbying. It’s really that the local administrative governments actually, what you call, have the task force.

Lei Wang — CICC — Analyst

Yeah, okay. Correct.

Yan Li — Chairman of the Board and Chief Executive Officer

So, basically, where they turn around to you, well, we need to do this, do we have the task force ready. Suzhou didn’t do it last year because they didn’t feel like they had the task force ready to get all the — things will come with — what do you call, the implementation of it. And this year, Suzhou is ready to join the club. So, you’re going to see more cities.

Lastly, on the shared operations, yes, we also observed quite — some sharing — mostly, still on tier three or tier four or tier five cities. For example, I visit a city called [Indecipherable] so I see a lot of sharing — electrical bicycle sharing. There’s one deployed by Hello, there’s one deployed by Meituan, and they’re electric bicycle sharing operators. We think that actually complements as part of solution for urban mobility. It has little impact to our business because all our products are in the mid end to high end products. If you actually look at the bikes that sharing operators deploy, it’s very simple. It doesn’t even have, what do you call, a display. Minimum plastics. It simply just lets you get by. So we think if there’s massive of those being deployed in those cities, I think the market segment got hurt most probably on the low end side.

Lei Wang — CICC — Analyst

I see. So, basically, it won’t have impact to your future sales in those lower tier cities as you’re sort of having more advanced products. All right. Thanks.

Yan Li — Chairman of the Board and Chief Executive Officer

Yeah. We got those questions in 2016 or 2017 with — when the — we got a lot of questions in 2016, 2017 when the sharing bicycles hit its prime. Currently, the sharing of electric bicycles, sort of the operation, to me, basically allows them to run the longer distance. But other than that, it serves a right market, right?

Lei Wang — CICC — Analyst

All right. Okay. So, that answers all my questions. Thanks, Li, and thanks, Hardy.

Yan Li — Chairman of the Board and Chief Executive Officer

Great. Thank you.

Lei Wang — CICC — Analyst

Thank you.

Operator

Thank you. We have the next question from the line of Alex Potter. Please go ahead.

Alexander Potter — Piper Sandler — Analyst

I guess a question — two questions maybe on margins. First one, going back to gross margin, obviously, the cost control that you mentioned was really strong. I was wondering if you could elaborate specifically on why battery costs and why these components costs are coming down? Is this a function of just cost cuts from your suppliers? Is it because you now have more scale and you’re able to negotiate better pricing? Like, what specifically is driving the cost declines, and is it sustainable? So that’s question number one.

Question number two is on the mix of e-commerce. I know that, theoretically, at least, your e-commerce sale should be higher margin than your sort of traditional in-store retail sales. Was this driver of the gross margin outperformance in the quarter as well or how would you quantify the impact there on margins? Thanks.

Hardy Peng Zhang — Chief Financial Officer

Sure. Thanks, Alex. For the — for your first question on the gross margin, the way how we negotiate with our suppliers is that in the beginning of the year we agree on our volume and we also agree on the price. And also, we agree on our volume based discounts. So the more we purchase from them, the lower discounts we can get from them. Of course, this is one of the key drivers why you see the large volume give us a lot of benefit for cost savings.

Let me go back to the negotiation early — at the beginning of the year. In the beginning of the year, definitely, we need to have an expectation about the raw material for manufacture of battery cells, etc., etc. Based on that expectation, we negotiated with our suppliers. In China, because of the capacity build-up for the EV segment, also because declining of some of the raw material costs, therefore, when we negotiated with our supplier in the very beginning of the year, we also negotiated quite aggressive target price for the various part of the components.

So, in short, there is two key drivers. One key driver is the overall market, how we see the capacity in different components or how we see the cost of raw material devices for the year. Secondly, it really depends on the volume. Normally, the more volume we have, the lower discount — the more discount we can receive from our suppliers. So, this is the answer for your first question.

For your second question, you are definitely right. The e-commerce gross margin normally should be higher than the sales through offline if we are talking about the same product, same model. But in the second quarter, unfortunately, the e-commerce channel is not the key driver for the stable gross margin, mainly because when we launch new products online, we also give discounts on the new products. Therefore, in the second quarter, actually our e-commerce gross margin was lower than last year, mainly because of the discounts we provided to end consumers.

But on the other side, we are able to save on the sales and the marketing expenses. But going forward, if we can continue the faster growth on the e-commerce platform with stable price, no more discounts, then definitely e-commerce platform will be one of the key contributor for the market growth going forward. So, this is my answer to your second question.

Yan Li — Chairman of the Board and Chief Executive Officer

Okay. I’ll just a little bit add on the margin part on the cost cut. So besides the scale, the annual negotiations, I think there’s one more thing within the electric bicycle category that we actually — very, very interesting. Because there was, what do you call, a 55 kilogram of weight limitation, so there is quite a bit innovation in term of lightweight materials. For example, if we reduce the chassis’ weight by a half a kilo, but at the same time, we’re able to add that half kilo weight to the battery pack, it will allow us to use lower density batteries, but achieve the same battery capacity. And by doing so, we have observed in cases that we’re actually able to save RMB100 to RMB200 on a per scooter basis.

If you look at it on a scooter of RMB4,000 or RMB5000, this is basically 5% savings. So, this is actually due to — to figure out where — simply, it’s a math — what do you call, it’s a math question where the total weight is restricted to 55 kilos. So where should I reduce the weight and where should I increase the weight and such that give me a lower cost product at the same performance. So, there are a few tricks or innovations we’re also doing on that domain which actually helps quite a bit as well.

Alexander Potter — Piper Sandler — Analyst

Great. Very good. Thanks. That’s very helpful.

Operator

Thank you. We have our next question from the line of Xinchi Yin. Please go ahead.

Xinchi Yin — CITIC Securities — Analyst

Thanks for taking my question. This is Xinchi Yin from CITIC Securities. So, I have a couple of questions about the new products. So, we just noticed that [Indecipherable] is also releasing new products, the pedal assisted electric bikes. What’s your — I was wondering what’s your point of view about this niche market, and when exactly will your new products launch? And in your opinion, what size of this market will be in the future? And I have another question about the new brand Gova. Can you tell us what’s the approximate gross profit margins of Gova? Thanks.

Yan Li — Chairman of the Board and Chief Executive Officer

All right. So, Xinchi, actually quickly talk about the first — I assume you mentioned the power assisted bicycle, or what we call the paddle-lite or e-bike, basically [Indecipherable] this product category. So., our product, we actually announced at CES this year in January — it’s EUB-01, and this product is targeted at European and the United States market. The reason we targeted Europe and the United States market because market size is huge. Basically, it’s a 5 million units a year market, with average retail ASP of $2,500. And that market has been doubled in the last three years and expected to be doubled again in the next three or four years.

So, I think it’s actually — and for us to get into that market is actually also very simple. It uses motor. The only thing it requires is the power assist sensors. But in term of design frame, we have all that capability internally. The only caveat with that product for Europe is the power assisted bicycle in Europe, there’s anti-dumping policy from Europe against China so that our product has to be locally manufactured in Europe. So we actually are able to secure a local manufacturer partner in Europe and will help us to produce that product in Europe.

This product got a little bit delayed this year because of the COVID-19 situation. Our team couldn’t get to Europe, there have been a lot of on-site negotiation, checking the site, all that stuff. So, it got a little bit delayed. But, hopefully, we should be able to get this product out the door in second half and it will drive a huge future growth for the Europe and the United States market. This particular product, we don’t think this product actually has a market in China, particularly because China, people actually — the power assisted bicycle is not as friendly as our electric bicycle products. So consumers who actually prefer electric bicycle first over the power assisted ones where you actually require to pedal a bit before you actually have the power output. So, hopefully, that will answer the e-bike market, power-assisted bike market.

On the Gova brand, before I hand to Hardy on the gross margin, so we don’t view Gova as a second brand. We still view Gova as the Gova series and a Niu brand. That will help to leverage our existing sales channel and also leverage our brand awareness. But on a gross margin, I’ll let Hardy to answer your question there.

Hardy Peng Zhang — Chief Financial Officer

Yeah. For Gova, we have a quite wide range of models from G0 to G2 with different packs. But it does give you a range, the gross margin for different products. And the Gova series, anywhere between 13% to 22% depending on which model, which packs we’re talking about. So, this is answer to your second question.

Xinchi Yin — CITIC Securities — Analyst

Okay. Thanks, Hardy. Thanks, Yan. Thank you for your time.

Yan Li — Chairman of the Board and Chief Executive Officer

Thank you.

Operator

Thank you. Seeing no more questions in the queue, let me turn the call back to Mr. Li for closing remarks.

Yan Li — Chairman of the Board and Chief Executive Officer

All right. Thank you, operator. And thank you, all, for participating on today’s call and for your support. So, we really appreciate your interest, and we look forward to reporting to you again next quarter on our progress. Thank you. Operator?

Operator

[Operator Closing Remarks]