Nio swiftly responds to fraud allegations

Author | Chai Xuchen

Editor | Zhang Xiaoling

Recently, the news that the Government of Singapore Investment Corporation (GIC) has sued Nio has attracted market attention. GIC accuses Nio of inflating revenue and profits through Wuhan WeNeng Battery Asset Co., Ltd., which was jointly established with its partners, misleading investors and causing GIC to suffer investment losses.

In response to this accusation, Nio clearly stated to Wall Street Journal that this case is not a new event, but originates from a short-selling report released by the short-selling firm Grizzly Research LLC in June 2022. Nio emphasized that the report itself is baseless, filled with a large amount of misinformation, unfounded speculation, and misleading conclusions.

In fact, the core of this lawsuit is a dispute over the accounting treatment of Nio's Battery as a Service (BaaS) business model.

BaaS, or "Battery as a Service," is a business model pioneered by Nio in the new energy vehicle industry. Under this model, consumers can choose not to purchase the power battery when buying a Nio vehicle, but instead pay a monthly service fee for leasing. This lowers the initial purchase threshold for consumers and, through Nio's extensive battery swap station network, addresses range anxiety and battery degradation issues.

To support this battery swap system, Nio, along with industry partners such as CATL, jointly initiated the establishment of WeNeng in 2020. The business logic of WeNeng is that Nio sells the battery packs it produces to WeNeng, which, as an independent "battery asset" holder, leases these batteries to end users who choose the BaaS option and charges them a monthly service fee.

This is precisely the focus of the Grizzly short-selling report and the GIC lawsuit.

Grizzly believes that Nio has prematurely recognized future years of battery leasing revenue by selling batteries in a lump sum to its "related party" WeNeng. The report accuses Nio of inflating revenue and net profit in the fiscal year 2021 by selling batteries to WeNeng. Grizzly attempts to portray WeNeng as a non-consolidated off-balance-sheet entity set up to "beautify" Nio's financial statements, essentially "eating future grain," converting future subscription income into current one-time sales revenue.

In response to the short-selling accusations, in August 2022, Nio announced that its board of directors had established an independent internal committee and hired top international third-party law firms and forensic accounting firms to conduct a comprehensive and independent internal investigation into the allegations in the Grizzly report.

The investigation concluded that "the relevant accusations in the short-selling report have no factual basis." Nio reiterated this conclusion in its response to the GIC lawsuit and emphasized that "as a company listed in the United States, Hong Kong, and Singapore, Nio has always strictly complied with the compliance and corporate governance requirements of the three listing locations."

It is worth noting that after the release of the Grizzly report in 2022, major international investment banks almost unanimously sided with Nio, believing that Grizzly's accusations were a serious misinterpretation of the BaaS innovative model Deutsche Bank pointed out: "The concerns of the bears regarding Nio's battery asset management business are unfounded, and the elements of the business model are severely misunderstood." Authoritative institutions such as Morgan Stanley, JP Morgan, and Daiwa Capital have also voiced their support, rejecting the bears' conclusions.

These investment bank analysts generally believe that spinning off battery assets into an independent entity for specialized operations is a common financial and operational strategy in capital-intensive industries, not a unique "financial magic" of Nio. This model (asset securitization) can optimize corporate cash flow, diversify risks, and allow professional teams to manage specific assets.

WeLion, as an independent company with shareholders including Nio and CATL, has a clear business logic, and transactions with Nio adhere to fair accounting standards. Selling batteries as commodities to WeLion in a one-time transaction is not inappropriate in accounting treatment, as the ownership of the batteries has genuinely transferred.

Since Nio has already concluded its internal investigation, and the mainstream views on Wall Street have recognized the compliance of the BaaS model, why did GIC, as a long-term investor, choose to file a lawsuit two years later?

Market analysis suggests that there may be multiple factors behind this. From a legal perspective, investors who suffer losses due to a decline in stock prices have the right to sue if they believe there were issues with the company's earlier disclosures. GIC's actions can be seen as a routine operation to seek legal recourse after an investment loss, and the bears' report provides ready-made legal "ammunition."

From the currently available information, Nio has sufficient rationale and backing from professional institutions. However, the uncertainty brought by the lawsuit itself, as well as the short-term disturbance to market sentiment, remains a challenge that the company needs to actively address.

For Nio, the best response is to continue demonstrating the value of the BaaS model through robust operations, ongoing technological innovation, and open and transparent communication. Only when the BaaS business can continuously create clear and visible value for users and the entire industry chain, ultimately reflected in healthy financial statements, will all doubts dissipate.

This new wave triggered by the "old case" may become an indispensable experience for Nio on its path to maturity