Niu Technologies (NIU) Q1 2021 Earnings Call Transcript

Niu Technologies (NASDAQ: NIU) Q1 2021 earnings call dated May 17, 2021

Corporate Participants:

Jason Yang — Investor Relations Manager

Yan Li — Chairman of Board of Directors, Chief Executive Officer, Chief Operating Officer

Hardy Peng Zhang — Chief Financial Officer

Analysts:

Alex Potter — Piper Sandler — Analyst

Vincent Yu — Needham and Company — Analyst

Jing Chang — CICC — Analyst

Bin Wang — Credit Suisse — Analyst

Ellis Ma — — Analyst

Presentation:

Operator

Good day, ladies and gentlemen, thank you for standing by and welcome to the Niu Technologies First Quarter 2021 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.

Jason Yang — Investor Relations Manager

Thank you, operator. Hello everyone, welcome to today’s conference call to discuss Niu Technologies’ results for the first quarter 2021. The earnings press release, corporate presentation, and financial spreadsheets have been posted on the Niu investor relations website. This call is being webcast from 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 States Private Securities Litigation Reform Act of 1995. Forward-looking statements involve 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 reconciliation of GAAP to non-GAAP financial results. On the call with me today are our CEO, Dr. Yan Li and the CFO, Mr. Hardy Zhang. Now let me turn the call over to Yan.

Yan Li — Chairman of Board of Directors, Chief Executive Officer, Chief Operating Officer

Thanks, Jason and thanks everyone for joining us on the call today. So in Q1 we saw a 322% year-over-year jump in China sales. We shipped nearly 145,000 units in China, propelled by aggressive expansion of our retail footprint and a multichannel marketing campaign nicknamed the Year of Niu. Additionally, our overseas markets saw shipments of 5,000 units for the first quarter. The small decline of 15% in the overseas market was primarily due to the orders that could not be shipped out resulting from the ongoing global shipping bottlenecks you are all aware of.

The total Q1 sales for China and international market were up 273% year-over-year. In Q1, not even the Chinese New Year holiday could slow down our retail expansion. We added 300 new branded stores across China reaching 1,916 stores by March 31st. During our global product launch event on April 6th, we announced the opening of our 2,000th store in China, well on track to hit our Q2 target of 300 new stores for the quarter.

For the international market, even under the restraints of COVID-19, we managed to add additional seven flagship and premium stores, which now total 123 across Europe, the Americas, and Southeast Asia. This is in addition to the 1,000 plus authorized Niu dealers in our global markets. For those of you who didn’t already know, our company name Niu actually means bull or Ox in English. The year of 2021 happens to be the Year of Ox in the Chinese lunar calendar. So we kick off the Chinese New Year by launching the Year of Niu, be a Niu nationwide campaign. We enlisted the help of popular musicians and social media influencers, which generated more than 200 million views across multiple social media platforms during the holiday season.

We also kicked off an over-the-air advertisement campaign during the Chinese New Year, which allowed us targeting over 110 million viewers across markets in China that we have identified as key to helping us accelerate our growth. We also collaborated with one of the hottest online documentary series called Exactive Food [Phonetic] on Bilibili, which helped us targeting another 41 million viewers in key demographic segments. Our new branded [Indecipherable] accounts also benefit from those activities with quarterly views reaching nearly 55 million views in Q1, marking a 38% year-over-year increase.

Now in the overseas markets, our social media channels gained nearly 1 million interactions on Instagram and Facebook. We also announced our partnership with Formula E World champion Antonio Felix da Costa as the official Niu Ambassador and kick off our partnership with Line [Phonetic] in the key U.S. and European market, which will help accelerate adoption of electric two-wheelers. We have been making noise both in the China and overseas market in order to position ourselves as the go-to-lifestyle brand for urban mobility and helping us grow sales by more than 300% in China alone.

Now riding our strong sales and marketing performance in Q1, we hit the ground running on April 6th with our global product launch simultaneously announcing both China and international product releases. Building upon the customer demand for our Gova series of electric mopeds, we launched the Gova F series with F0, F2 and F4 and the Gova C Series with the C0. These are two key product groups that will help us expanding into the wide range of urban market and customer segments around China. During that same event, we launched our first electric kick-scooter for Europe and the United States, KQi series. These five new products were also accompanied by four upgrades to our existing series of mopeds and electric bicycles.

First of the upgrades to the existing electric bicycle mopeds are made under the hood. First, we are very excited to launch the seventh generation of our new energy system, which saw upgrade of our proprietary battery management system, the introduction of Vtech [Phonetic] electric motor and optimization of our SoC algorithm for the motor controller, which can improve the driving range by up to 32% and improve the acceleration by 10% to 15% under the same motor power in most of our existing vehicles. And lastly, as we finalize commercialized version of our urban motorcycles, the RQi, we have made great strides of our mid-mounted motor that can reach speeds of 160 kilometer per hour.

As for our product upgrades, let’s start with the brand new MQi 2S, an upgrade of 2020 MQi 2, which served as our flagship product under the new China national standard for electric bicycles. The Niu M2S is equipped with our latest smart IoT technologies, a color display with navigation that can mirror your mobile phone, the OK G0 [Phonetic] system with distance sensing and keyless ignition which enables user to start a bike as soon as they sit on the seat and those small user experience touches that our customers really appreciate.

The M2S is expected to be priced at up to RMB8,000 and we also upgrade our classic UQi series with the all-new color display, a new handle bar design with more intuitive control functions and most importantly, we have given customers option to upgrade to a larger battery, which increase the driving range by 35% or up to 75 kilometers on a single charge on the Niu UQi. The upgraded Niu UQi series is expected to be priced at up to RMB6,000.

For the new products, we launched two new Gova series, the Gova S and the Gova C series. Those two new series employee a all-new design language for the electric bicycles in China which will further expand our offerings for the mid-end product lines which help us to reach a wider range of customers’ taste. Inside the Gova S series, the F0, F2, and F4. F0 and F2 as classified as electric bicycles in China and we’re introducing to the market on April 6th and May 17th respectively. The F4 is a electric motorcycle and will be introduced later this year in Q3.

The entire Gova S series has a masculine design style, which features the Eagle Eye headlights. All of those models are lithium-ion battery-based. The F0 has two versions primarily differentiated by the battery and drive range of 50 kilometers and 60 kilometers respectively, affordably priced at RMB2,899 and RMB3,299 respectively, we believe those will be well received by the market. Our beliefs were confirmed when we launched the Gova F0 through the JD.com presales on April 6th where we sold 41,000 units and surpassed more than RMB100 million in sales setting the JD.com presale record for urban mobility products.

The F2 has two versions, 50 kilometer and 70 kilometer range options priced at RMB3,699 and the RMB4,099. The F4 has three versions with drive range up to 100 kilometers and expected to be priced at up to RMB7,000. Now enter the Gova C Series, we had first announced the C0, an electric bicycle with a more feminine design style. The Gova C0 come with multiple macros and flavored color choices and a wide variety of accessories including a child seat that enable mothers to ride safely to take their children to and from school every day.

The Gova C0 also has two versions with a drive range from 50 kilometers to 60 kilometers and expected to be priced around RMB3,000. Since first announcing the C0 in April, we have received countless solicitations both online and in our stores around the country. We expect to release the C0 for sales starting in June. Now the Gova F series and C Series significantly expand our Gova product line portfolios. The successful presale campaign for the F0 is direct evidence that there is a large group of consumers who appreciate the design style and aesthetics.

Together with the G series, the three Gova lines will offer our customers thoroughly designed products that meet their taste and desires while being competitively priced and backed by our best-in-class technologies. Now, last but not least, we launched a completely new category in the new ecosystem of products with our KQi kick-scooter. The urban mobility trends are changing around the world as customers adopt new models of safe transport and cities begin to reshape their urban centers.

Our electric moped and motorcycles offer one type of mobility solutions for customers in cities across Europe, the Americas and Southeast Asia. We also recognize a rapid growth in user demand for micro-mobility products that cater to shorter 1 kilometer to 5 kilometer trips and this is primarily being fueled by electric kick-scooters in both sharing and consumer-owned form factors. Now in order to meet this demand and add to our product lines, we have rapidly developed a team of seasoned engineers who are specialized in the development and manufacturing of micro-mobility products.

The all-new KQi-3 kick-scooter will be the first of several models that will release in the coming months for the key overseas market. Now equipped with the best-in-class 350 watts rear-hub motor and powered by our fully able new energy system and with a wider and safer platform decks and the handle bar architecture and wider tires, the KQi-3 will outperform many of the similar priced products in the market in both performance and the riding stability. And of course, like all our products, the KQi-3 is app connected. The KQi-3 has a pro and sports version and will be priced from $599 in United States and the EUR599 in Europe. The online presale will begin in the coming weeks with deliveries directly to the customer homes later in summer in Europe and United States.

Now in addition to our current 1000 plus authorized Niu dealers, the introduction of kick-scooter will also allow us to open new range of retail channels that were previously not ideal for electric moped including big box retail and electronic chains like Best Buy, MediaMarkt, micro-mobility retailers and online platforms like Amazon.

Now I want to wrap up with short comments about ramping up our manufacturing capacity. For those of you who have been following along for the past few quarters, you know, we have planned to increase our manufacturing capacity by an additional 1 million units per year when we complete the Phase 2 of our Changzhou factory. We expect the Phase 2 to be completed by early Q3, which will bring our total annual design capacity to 2 million units, easily supporting the projected growth in the quarters ahead. Now with this, let me turn to Hardy to talk about financials.

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 formatted figures to our IR website for your easy reference. As I review our financial performance, we are referring to the first quarter figures, unless I say otherwise and that all monetary figures are in RMB, unless otherwise noted.

Our Q1 sales volume reached 150,000 units representing a 273% year-over-year growth. China sales volume increased by 322% as a result of retail sales network expansion and effective branding activity. International sales volume however, declined by 15% due to COVID-19 especially the recent lockdowns in Europe and a more challenging environment for international shipping. In March, the Suez Canal was blocked for weeks and many ships were delayed or canceled. We were not able to deliver our products on time. The situation has improved gradually since April and we are catching up on the deliveries.

With regards to product mix, N series accounted for 9% of total sales volume partially due to the lower international sales. M series accounted for 13%. U series accounted for 21% and Gova series accounted for 57%. Out of the 57% from Gova series, 38% was from the mid-end product G0 model and 14% percent was from G2 model. In China, the COVID-19 rebounded in Q1, which helped to accelerate the adoption of electric bicycles because many people pay more attention to social distancing and try to avoid public transportation. Gova series was a very popular choice for many new customers considering its attractive retail price. This is the key reason for Gova series taking a larger proportion of sales in Q1.

Total revenues increased by 135% to RMB547 million, above the guidance we provided earlier, mainly due to the higher China sales volume and stronger sales in accessories and spare parts. The revenues from accessories, spare parts, and services reached RMB102 million representing 118% year-over-year growth. The strong sales came from both China and the international markets. Sales from China market increased by 111% due to strong offline sales and the international market increased by 123% due to strong sales of battery packs to sharing operators.

The ASP declined by 37% year-over-year. Let’s look at the detailed reasons. For China market, the scooter ASP decreased by 27% mainly due to the sales of low-priced G0 and G2 models as well as sales discount offered. Out of this 27% decline, around 20% was caused by the sales of these two models. The remaining 7% was due to the change in other product mix. For international market, the scooter ASP decreased by 15%. The decrease was caused by depreciation of U.S. dollar and also more significantly, the change in the way distributor place orders. In Q1, many distributors chose to place separate orders for scooter body and the battery pack so as to reduce their international shipping cost. As a result of such separate orders, battery pack sales were booked as accessory and spare parts revenue instead of scooter revenue.

After we normalize this impact, the ASP for international sales only decreased by around 5% [Phonetic]. In other words, out of the total 15% ASP decline for international sales, around 10% was caused by the way of separate orders and around 5% was caused by depreciation of U.S. dollar. This way of separate ordering will likely continue into Q2 and Q3 considering the increasing costs for international shipping. For the ASP of accessories, spare parts, and services, it was RMB682 per scooter, a 42% decrease compared with Q1 last year. The decline was mainly due to the very low volume base in Q1 last year which was only around 40,000 units. Because of the very low volume base, the ASP for accessories, spare parts, and services was abnormally high last year. If you compare the ASP with Q2, Q3 and Q4 last year, our Q1 ASP actually increased.

Our revenues from accessories spare parts and services do not fluctuate as much as the sales volume because a portion of the sales came from existing customers. For example, the data service and some accessories. In summary, even though our ASP was down by 37%, after considering the factors mentioned above, the international scooter ASP, the accessories, spare parts and service ASP were both stable compared with early quarters. The decline of China ASP followed a similar trend as what we saw in Q3 and Q4 last year due to the launch of Gova series.

In April, we launched F0 remodel and the sales price for F0 model was RMB200 higher than G0. We also expect the product mix in China to improve in the second quarter. Both will help to stabilize our China scooter ASP. Gross margin was 23.8%, 0.2 percentage point higher than this time last year. There are three key drivers. First, the sales of low margin models like G0 and G2 reduced our margin by around 4%. Second, the lower proportion of revenue from high-margin international sales [Indecipherable] our margin by around 3%. Third, the cost savings on components, raw materials, and lower other costs for example, manufacturing and labor costs benefited from economies of scale, increased our margin by around 7%.

In summary, the impact from unfavorable change in product mix was offset by various cost savings. This is the key reason for stable margins in Q1. In the past few months, we have seen the commodity price continue to rise, which affected our raw material procurement costs by 5% to 10%. To mitigate the impact on gross margin, we increased retail sales price by RMB100 to RMB300 or 1.5% to 7.5% for selected models in China in May. We may have another price increase for additional models together with performance upgrade in the coming months. We believe the price increase is affordable and reasonable for our customers. This price adjustments will help us to stabilize the ASP and also to mitigate the negative impact on our gross margin.

Our total operating expenses excluding share-based compensation were RMB118 million, increased by RMB35 million or 42% year-over-year. The increase was mainly caused by the higher sales and marketing expense of RMB20 million for branding activities during Chinese New Year. RMB4 million for retail sales network expansion, RMB80 million for higher staff cost and around RMB6 million for foreign exchange loss. Our sales and marketing expenses were particularly high this quarter mainly due to the branding expenditures associated with Chinese New Year event mentioned earlier.

As a percentage of revenues, our operating expenses excluding share-based compensation was 22%, lower than the 36% in Q1 last year but higher than other quarters in 2020. In the coming quarters, we expect the operating expense as a percentage of revenue will fall back to the regular level, similar to early quarters. Our government grant was RMB0.4 million in Q1, decreased by RMB7 million compared with last year due to the delayed payment from governments.

In May, we received a grant of RMB41 million and part of that will be booked into the P&L in the second quarter. Our income tax expense was RMB9 million, much higher than the same period last year, mainly because some entities within the group become profitable and have used up accumulated [Phonetic] loss. This quarter, even though our consolidated profit before tax was only around RMB4 million, we booked some RMB9 million tax expenses for a few reasons.

First, some expenses are not tax deductible. For example, share-based compensation. You need to add that back before calculating income tax expense. Secondly, the profit and loss were not evenly distributed among different entities or companies within the group because we need to pay tax based on each company instead of as a group. Ffor example, in Q1, the company for China sales was a very profitable, but the company for international sales make a big loss.

We have intra-group transfer pricing arrangements to redistribute profit, but that will take time to adjust. If you take a longer-term view, the profit will be more evenly distributed and the impact will be mitigated. Certainly, tax rate applied is average tax rate calculated with some full-year forecast instead of one specific quarter. For this year, we expect the average tax rate will be around 15% on full-year basis.

Our GAAP net loss was RMB5.4 million, but after adjustment of share-based compensation, we made a profit of RMB6.7 million improved by more than RMB25 million compared with Q1 last year. We made GAAP loss this quarter mainly due to the higher brand expenses. We believe the brand expenditures are more investment in nature, was worth spending, it increased our brand awareness and will support our continued growth.

Turning to our balance sheet and cash flow. We ended the quarter with RMB1 billion cash term deposit and short-term investment. Our operating cash flow was negative RMB16 million mainly due to pre-payment for raw materials in order to secure supply for production. Our Q1 capex was around RMB64 million mainly related to capacity expansion of RMB13 million, new store building of RMB48 million and R&D spending of RMB3 million.

Now let’s turn to guidance. We expect second quarter revenues to be in a range of RMB900 million to RMB1,013 million, a increase of 40% to 60% 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. This is coming from the line of Alex Potter from Piper Sandler. Please go ahead.

Alex Potter — Piper Sandler — Analyst

Hi guys. Thanks very much. So I guess the first question I have is just on gross margin in the coming quarters. There is really a lot of moving parts right now. There is new products that are coming in at different price points, there’s raw material inflation, there’s this battery shipment issue, it’s all kinds of different things, some are positive, some are negative. Last quarter I think you had said that you expected gross margin for this year to be roughly similar to what it was last year. Do you still feel that way or are you reassessing after viewing some of these new changes?

Hardy Peng Zhang — Chief Financial Officer

Thanks, Alex for the question. For us, we still want to maintain a similar margin as what we delivered last year. That’s why in May, we increased our retail sales price by 1.5% to 7.5% and we may make another price adjustment in later months based on how the raw material inflation goes, also based on the pace of new product launch. For the second quarter, of course, our marketing will be a little bit challenging because we began to see the price increase since April, but we increased the retail sales price only from early May.

So there is a one-month lagging for the price increase. For the second quarter, currently, we estimate our gross margin will be anywhere between 20% to 22% but in Q3, Q4 we still want to target around 22% to 23%. And the thing within our hand is price increase and also we will also renegotiate some of the costs with our suppliers, try to secure additional cost savings. So this is the answer to your first question, Alex.

Alex Potter — Piper Sandler — Analyst

Okay, great, that’s super helpful. So then maybe a little bit more on the cost pressure, the inflation. I know obviously, inflation is a topic that a lot of people are thinking about right now. What specifically is it within your supply chain. Is it primarily batteries or is it basically across the board price inflation of all kinds of components and raw materials?

Hardy Peng Zhang — Chief Financial Officer

It’s across the board. It’s because our components also involve steel, plastics, and also battery sales. Most of the raw material, we see the price increases. It’s very much linked with overall commodity price increase.

Yan Li — Chairman of Board of Directors, Chief Executive Officer, Chief Operating Officer

So I think basically in the last few months or so, we actually seen this price increase starting in later March and since it actually hit us in March and April and we started seeing that some of the raw material price actually hit the peak in early May. So we actually increased our product price to reflect sort of the latest update in terms of the bond price. So going forward I mean hopefully, we’ll see the raw material price will stabilize and actually potentially could start to decrease.

Alex Potter — Piper Sandler — Analyst

Okay, great. I’m interested also on this topic of splitting apart battery shipments versus the scooter shipments. Is this a tariff issue. How exactly do international importers save money by taking delivery of the battery pack separately from the scooter body?

Hardy Peng Zhang — Chief Financial Officer

Yeah, the reason is listed because of the shortage of containers, the international shipping companies become more strict, the cargo can be shipped. For the battery pack, because we have a lithium battery within that, it was treated as dangerous cargo. Therefore, the shipping companies charge much higher tariff for anything which has a lithium battery within it. If we separate the order between the battery pack and the body, the body part can still be treated as a regular cargo where the shipping tariff is much lower than the dangerous the cargo.

So the difference is more on whether it’s dangerous cargo or is regular cargo. So that’s the key reason besides different tariff. The different tariff is mainly in the U.S. In the U.S., there is different tariff on battery pack and body part, but because of the shortage of the containers, shipping company become very, very strict on what kind of things are within the container. Therefore, they check all the things and many distributors try to put them separately to enjoy lower tariff for regular tariff. So that’s the backgroud.

Alex Potter — Piper Sandler — Analyst

Interesting. Okay, very good. Thanks, I appreciate it. I’ll pass it on.

Operator

We have the next question. This is coming from the line of Vincent Yu from Needham and Company. Please go ahead.

Vincent Yu — Needham and Company — Analyst

Thank you, management for taking my question. I have three questions. First one is, so we had very good — strong number for first quarter ended strong and the store opening pace all seems to be on track, but my question is how should we think about previously guided to sell more than 1 million units for 2020 is there a higher annual number that we are comfortable that we would be able to hit after the strong quarter. My second question is in ridesharing platform for international business.

So we have seen continued investments made by ridesharing platforms into the e-scooter ridesharing market and can management talk a little bit more about what should we think about challenges and the opportunities that such trends brings for Niu. And my last question is that for the new vehicle — new energy vehicle industry have been seeing chip shortage. We know we are — we have less demand for some chips but we also have — I know we have quite some chips associated for our apps. What kind of effects we have on our products in terms of margin or production schedule, if there is any. Thank you.

Hardy Peng Zhang — Chief Financial Officer

So let me give the first cut of for the three question and then we will ask again to supplement. First of all, the store opening, definitely we are on track to achieve our target. We have opened 300 in Q1. We are going to open another 300 in the second quarter. With the mall opening, definitely, we do see volume continuing to grow and definitely in Q1 we gave — in March, we gave a guidance of 900,000 unit volume to 1.1 million unit. We do see potential upside for the volume growth, but I think we will wait until the end of Q2 before we make another adjustment for our full year forecast. So this is more on your first question.

For the second question about the ridesharing business. We are mainly supporting ridesharing business in the international market and we do see the demand continue to go very, very strong. Because during COVID, we do see people pay more attention to social distancing and mainly there is also fast adoption of electric two wheelers in the overseas market. Some of our sharing operator already started to deploy our vehicles in many cities across the world and that is very positive for our business growth in both the second quarter, also in the quarters ahead and we believe that’s not only a short-term momentum, that’s maybe change the people’s behavior in the longer-term, maybe full upside in the longer term.

For the third question, about the chip shortage, first of all, we do see the threat for chip shortage. However, compared with the EV manufacturer, the chips we use in our scooters are less complicated compared with the EV manufacturer. Therefore, we are able to secure majority of the things we want to get. Currently, we need to give a three to six month rolling forecast to our suppliers. Sometimes we also need to make a small prepayment to secure the supply. Therefore, we do see the challenges, but so far we have some action we can take to mitigate the impact. So I’ll leave the other comments to Yan.

Yan Li — Chairman of Board of Directors, Chief Executive Officer, Chief Operating Officer

No, I think that captured it. I think the only thing to add is basically when we initially announced about 1 million plus units, I think that only talked about scooters and mopeds. So it hasn’t really covered our new products like kick scooters. Obviously, the kick scooters will be — we already announced that it will be on pre-sales in the next month or so and then will be shipped basically in early Q3. So that will actually start to add volumes in addition to the 1 million units of the moped scooters.

Vincent Yu — Needham and Company — Analyst

Thank you very much.

Operator

Thank you. We have the next question. This is coming from the line of Jing Chang from CICC. Please go ahead.

Jing Chang — CICC — Analyst

So. Hi, thanks for Yan, Hardy, and Jason for your interpretation of first quarter results. So, I have two questions. The first is about the expense. So the selling expense in first quarter increased a lot we can see. Hardy has just explained that we adopt small price discount and also other marketing activities. So I want to know that is it caused by the more fierce competition or just due to our subjective or how to see the trends in the future.

And also, my question is, the second question that we can see the number of stores increased by 300 in the first quarter, so maintaining rapid growth. What is the regional distribution of new stores? Can we see an obvious trend of most of the stores opening in lower-tier cities and with also our new products F and C series targeting more on mass media market. So what is the proper price range we can expect in the future? These two questions. Thank you.

Hardy Peng Zhang — Chief Financial Officer

Thanks, Jing for the question. Let me answer the first one about the expenses. The sales and marketing expenses very high amount, it was mainly due to the branding activities we made during the Chinese New Year. This year, Lunar Chinese New Year is the Year of Ox or in China we call it Niu [Phonetic] New Year. Because of that we spent quite some money for the branding purpose. We also engaged a very popular singer who take a video and help us to spread the Niu brand.

So it’s mainly for the branding purpose instead of for pure marketing purpose because Chinese New Year is kind of one-off event during Q1. Therefore, we do not expect the sales and marketing expense to be — continue to be a very high percentage of revenue. We do believe the percentage will fall back to the normal level as what we see in other quarters. So this is answer to your first question. For the second question on the store distribution, I will ask Yan to comment on that.

Yan Li — Chairman of Board of Directors, Chief Executive Officer, Chief Operating Officer

All right, so I think just quickly I’ll comment on the stores. It tilts towards more — more tilts towards the lower-tier cities basically Tier 2, Tier 3 and some of the Tier 4 cities that support the initially Tier 1 cities. I think this is partially driven — this fast store expansion is really driven by our suitable product for lower-tier cities basically the three series the Gova series — the Gova G series and Gova actually Gova F series coming April and I think and hopefully also the Gova C series coming in June and July.

So we are actually seeing — actually start seeing the Q4 we start seeing that phenomenon where with the suitable products and we have actually have a strong brand recognition and brand name in the lower tier cities, but in the past we just don’t have a suitable product for those cities to open more stores. We actually expect the store opening speed is basically — we hopefully to maintain a constant speed of at least 300 stores-ish per quarter.

Jing Chang — CICC — Analyst

Yeah, got it. So what is maybe proper price range or average selling price we can expect in the future, maybe RMB3500 to RMB4000?

Hardy Peng Zhang — Chief Financial Officer

Yeah, you mean the blended ASP for the coming quarters?

Jing Chang — CICC — Analyst

Yes.

Hardy Peng Zhang — Chief Financial Officer

I think it will be similar to what we achieved in Q3 last year. It’s around RMB3,500. It may have a potential upside up to RMB4,000 depending on few things. First about the price increase, how much we get that and whether we continue to increase the retail sales price. Secondly, it depends on the recovery of international sales. The more quicker international market begin to recover, the more quicker we can solve the shipping problems. Then of course, we are going to have more.

Certainly, those also depends on the sharing business because part — one of the key contribution for our high ASP coming from the battery pack sales to sharing operators if the adoption rate of sharing vehicles in overseas market become high and higher, then the sharing operator will continue to purchase the battery pack. I think this is the three key drivers for the potential from RMB3,500 moving towards RMB4,000 RMB in the future quarters.

Jing Chang — CICC — Analyst

Okay, got it. Thank you.

Operator

We have our next question. This is coming from Bin Wang from Credit Suisse. Please go ahead.

Bin Wang — Credit Suisse — Analyst

Thank you. My first one is about sales momentum in April and first two weeks of May because you actually give some color about F Series in April. So that’s why I just wonder if you can share about the momentum in the past 1.5 months. That’s number one. Then number two is about the margin. You actually give the guidance for second quarter.

I just want to confirm it’s about 20% to 23% in the second quarter and the second half will be 22% to 23%. I assume this is the gross margin guidance or will the net margin likely because in the first quarter, we’ve got a similar or even higher gross margin by 0 [Phonetic] in the bottom line. So what should we expect in the bottom line net margin should be around 5%, 6%. Thank you.

Hardy Peng Zhang — Chief Financial Officer

Sure, I think for the first question about the sales momentum. I think our sales continue to be very strong in April. I think our sales growth was more than 60% close to 70% [Phonetic] growth in April and that was still with a backlog of quit a lot of F0 models that we were not able to deliver in April and then we continue to deliver some of the pre-sales orders in May. So in short, we do see quite a good momentum into the second quarter. That’s why when we gave the revenue guidance, we gave 40% to 60%. It’s relatively wide guidance mainly because there is too many uncertainty about the delivery shortage etc. So in general, we do see continued strong sales momentum.

In terms of gross margin, I think you are right, I mean the second quarter, we are looking to achieve anywhere between 20% to 22% and in the remaining two quarters we target anywhere between 20% to 23%. So our annual basis is likely we end up somewhere around 22%. So that’s how we see the gross margin potential. Of course, there are so many moving parts as I mentioned earlier, there is commodity price increase, there is so much speculation that makes things complicated. Also there are so many things coming from our international market. The international markets has definitely impact our gross margin, but our target is to maintain that and we have price increase tools in our hand. We can manage that. There’s also quite a few other things like launching KQi e-bikes to help with that. So that’s the answer for your second question.

Bin Wang — Credit Suisse — Analyst

Actually you all talk about the gross margin right because in the first quarter you have a pretty decent gross margin but you actually have zero in the bottom line. So my question is about bottom line — okay.

Hardy Peng Zhang — Chief Financial Officer

I think in terms of bottom line, the after gross margin what will be next is the operating expenses as a percentage of revenue. So you need to deduct operating expense. The operating expense as a percentage of revenue will fall in Q2, Q3. Q4 will be similar to what we achieved last year. So, Q1 is kind of a special case because we spent quite a lot in the sales and marketing, but if you look at R&D, the G&A, they are very reasonable amount.

The G&A is slightly higher in Q1 because we have around RMB5 million coming from foriegn exchange loss but it is throughout the remaining of the year that you won’t see that much. Only the sales and marketing was a little bit higher in Q1 because of this Chinese New Year you had. In the remaining quarter, last year in average our operating expenses as a percent of revenue was around 15%. So 14% to 15% is something we can think about. So after you deduct the 14%, 15% from the 22% you got like 7% before tax, 7% to 8% before tax.

Yan Li — Chairman of Board of Directors, Chief Executive Officer, Chief Operating Officer

I think being basically the Q1 is ad quarter because traditionally Q1 has always been a low sales quarter. If you look out the sales has a seasonality but this year in Q1, we did spend quite a bit in marketing because to kick off the Chinese New Year really tried to make sure this year start with a high note. That’s why we kicked off the Year of Ox to be newer things and coupled with lower sales season in Q1 by lower — I mean, with respect to the four quarters within the entire year, that’s why in Q1, you see a huge marketing expense, but in if we spread over the entire year, the average marketing expense actually will be in line with what happened last year.

Bin Wang — Credit Suisse — Analyst

Great, thank you.

Operator

Thank you. We have our next question. This is coming from Ellis Ma [Phonetic]. Please go ahead.

Ellis Ma — — Analyst

Hi, management team. Thanks for taking my question. I have two questions here. The first one is could you please remind us of the OTA function, like how many times have you done OTA for the previous intellectual scooters and I saw that you have improved some of the intellectual properties of just characteristics in the new products launched in April. And could you — like how do you view the end consumers are viewing such intellectual characteristics. And my second question is about the batteries you used for different segmentation of your products like for the lower tier products, do you still use like the NCM or LFP battery or what kind of battery will you use in the future. Could you please give us some guidance. Thank you.

Hardy Peng Zhang — Chief Financial Officer

So I think good questions. First of all on the OTA. Typically we do a OTA after every quarter or so, every two or three months or so. I think it’s really just the OTA to upgrade the ECU, the software in the ECU as well as some of the softwares in the motor controllers. So now, as I mentioned in the call, some additional smart functionality like color display with the navigation mirror of your phone, that actually requires not just the OTA software upgrade, it actually also require hardware upgrade.

So that’s why we actually build the hardware upgrade into the new model as well as the existing models and along with the upgrade, we managed also to increase the product price that allow us to actually to increase ASP to offset the downward pressure on the price due to the product mix and so far, I mean based on the — some of the upgrade product like the M2s hasn’t really come to the market yet, it will be in the market in May.

The UQi upgrade will also be the market in May, so we haven’t really seen the actual user feedback from those upgrades yet, but based on the user comments from our product launch as well as the user comments from our social media, basically users are actually asking for those upgrades, even we have users with existing and MQi 2 product asking whether their current product can be upgraded by paying — they’re willing to pay more than RMB1,000 just to get the upgrade on the color display all the smart functionalities. So I think we expect those upgrades to be welcomed by the users.

Now the second one, the battery solutions, I think you’re absolutely right. So basically for the higher end products like the N series and M series, we tend to use more NCM batteries the lithium ion battery due to the higher battery densities such that we actually put more battery capacities in the scooter to give the scooter a longer drive range, but we also recognize the cost of NCA and NCM is a bit higher than the RFP batteries.

So for majority of Gova series, the Gova F, the Gova G and the potential of the Gova C Series, we use the RFP batteries where actually will help to reduce the cost such that we can price at a relatively lower price to our users while maintain similar margin as our higher end priced product. Now what — actually what sacrifice or the compromise we took is with the LSP batteries, we are not able to put a lot of added capacity into those batteries because the weight constraint of it is 5 kilos of the entire scooter.

So what the user will compromise is actually on the drive range. So on those ones we try to compensate that with basically the upgraded the V technology motors and also improve the tires such that for example the low resistant tires will give slightly bumped up on the drive range, but I think that’s practically how we line the battery solution in order to basically to offer a wide range of pricing product to our users at the same time maintaining a healthy margin.

Ellis Ma — — Analyst

Okay, thank you. A little catch up on the previous question. So you will for sure not using the SLB battery in the future. Right. And also, since I also heard some comments from the end users that the normally the scooters from Niu are having a more accurate like the battery management system comparing with the other products in the market, you could have a better accurate manufacturer — like how much the SoC of the battery. So when you use the LSP battery, can you also reach such accuracy in the future?

Hardy Peng Zhang — Chief Financial Officer

Yeah, I think that’s a great technical question. So when we first adopt using the LSP batteries, we actually realized that without EOF Without using a better SOC solution, the reading of battery capacity is not as accurate as NCM batteries. So we start exploring with the LSP batteries last year actually, yes, last year. So we quickly actually improved the SOC within the LSP battery pack as well as basically the battery management system as well as the SoCs in the controllers so that actually to improve the battery reading capacity accuracies. So our accuracy is 20% higher than what it used to be in the market and that actually will get us almost on par with the NCM/NCA batteries.

Ellis Ma — — Analyst

Okay, very clear. Thank you.

Operator

[Operator Instructions] Seeing no further questions, I would like to hand the conference back to our host. Please take over, sir.

Yan Li — Chairman of Board of Directors, Chief Executive Officer, Chief Operating Officer

Thank you, operator and 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.

Operator

[Operator Closing Remarks]