NIO stock is trading sharply lower in US premarket price action today after short-seller Grizzly Research accused the company of accounting fraud and inflating its revenues and profits.
In its report, Grizzly Research said that NIO used transactions with Wuhan Weineng, an unconsolidated related party entity, to increase its revenues. It said that the company’s net loss in the first nine months of 2021 would have been 95% higher and revenues lower by 10% if not for these related party transactions.
The reports talk about NIO’s battery swapping and BaaS (battery as a service) transactions. NIO lets car buyers subscribe to the battery instead of buying it upfront. The arrangement helps car buyers to purchase NIO vehicles at lower prices. Notably, the battery is the most important cost element in an electric car and by de-bundling the car from the battery, NIO has been able to lower the car price. The company is also eligible for China’s EV (electric vehicle) subsidy due to battery swapping technology. The cars don’t otherwise qualify for the subsidy due to the higher price tag
Grizzly said that through its agreement with Wuhan Weineng NIO recognizes the subscription revenue upfront which inflates its earnings. It also said that Wuhan Weineng held 40,053 batteries as inventory at the end of September while it had only 19,000 subscriptions. The report said that NIO “flooded” Wuhan Weineng with batteries to inflate its revenues.
Grizzly Research Accuses NIO of Accounting Fraud
In its report, Grizzly Research raised doubts over NIO’s relationship with the Chinese government. It said, “Our research also revealed hidden and opaque share agreements which benefit the Chinese government at the expense of public shareholders.” It added that Chinese government entities have already redeemed $2 billion from NIO and could collect another $6.7 billion, which would be a drain on the company’s cash flows.
Here it is worth noting that when NIO was facing a survival crisis in 2020, Chinese government entities came forward to bail out the company. The bailout helped NIO survive the cash crunch and the stock gained over 1,100% in 2020. It has, however, looked weak since then.
In 2022, lockdowns in parts of China have hurt EV companies, including Tesla which is now expected to report a fall in its second-quarter deliveries. Tesla’s CEO Elon Musk has already warned of a “tough quarter.”
The short-seller report has hit NIO at a time when the stock has been recovering from the 2022 lows amid the reopening in China. Notably, Disney is also reopening its Shanghai Theme Park from tomorrow, albeit with restrictions.
NIO Has Denied Allegations
NIO has denied any wrongdoings mentioned in the short-seller report. It said, “The report is without merit and contains numerous errors, unsupported speculations and misleading conclusions and interpretations regarding information relating to the Company.” It however added, “The Company’s board of directors, including the audit committee, is reviewing the allegations and considering the appropriate course of action to protect the interests of all shareholders.”
Notably, US-listed Chinese companies have been facing higher scrutiny from the SEC after the Luckin Coffee accounting scandal and the subsequent law which mandates foreign companies listed in the US to get their books audited. NIO, like fellow Chinese companies, faces the risk of delisting from the US markets is it non-compliant with the rules.
However, NIO has tried to offset the delisting risk by listing in Hong Kong and Singapore. While Xpeng Motors and Li Auto also listed in Hong Kong, NIO went a step further to also list in Singapore.
Other EV Companies were Also Targeted in Short-Sell Report
Before NIO, Nikola and Lordstown Motors were also targeted in a short-sell report by Hindenburg Research. In due course, both these companies admitted to some of the findings, and the top leadership had to step down. While Lordstown denied that the exit of its CEO and CFO were linked to the short-seller report, the timing made it obvious.
Wall Street analysts are quite bullish on NIO stock and most rate it as a buy. However, as more details emerge about the alleged accounting scandal, analysts might also take a relook at their recommendations.
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