Nio stock drops following new short report from Grizzly Research

Asian Tech Press (June 29) -- Chinese electric car startup Nio Inc. (NYSE:NIO) closed down 2.66% on Tuesday after short-seller Grizzly Research LLC issued a report saying the automaker inflated revenue and net income margins through accounting games.

In the report, Grizzly Research mentioned that Nio's shares have risen more than 450% since 2020 on the back of its stellar operating results, making it one of the most valuable EV companies in China. But it's Nio's manipulation of its financials that has achieved the outstanding performance that has underpinned the share price rise.

According to Grizzly Research's investigation, Nio spun-off Wuhan Weineng helped to boost the EV maker's battery swapping business and overall performance through affiliate transactions.

Grizzly Research mentioned in the report that sales to Wuhan Weineng boosted Nio's revenue and net income by about 10% and 95%, respectively. Specifically, the short-seller found that at least 60% of Nio's fiscal year 2021 earnings beat attributable to Wuhan Weineng.

Nio launched a battery leasing service, called "battery as a service" (BaaS), which was once seen as a successful business innovation. Consumers can can opt to pay a monthly rental fee to Nio for the use of batteries under various plans.

However, according to Grizzly Research, Nio has accelerated its revenue growth by shifting the burden of collecting monthly subscriptions to Wuhan Weineng.

For customers with several years of subscriptions, Wuhan Weineng allows Nio to recognize revenue from the batteries they sell immediately. In this way, Grizzly Research expected the Chinese EV maker to recognize revenue from its battery leasing service for at least the next 7 years in advance.

Grizzly Research said that for this to happen it would require potential accomplices at both Nio and Wuhan Weineng. From the results of the investigation, the short-seller identified notable conflicts of interest between the two parties, as Wuhan Weineng's top two executives currently double as Nio's vice president and battery operating executive manager.

Based on the above findings, Grizzly Research believed that Nio has control over Wuhan Weineng.

The short-selling report also mentioned that in January 2019, Nio co-founder and CEO William Li transferred 50 million shares to NIO User Trust, which Li pledged to UBS AG six months later to secure a personal loan.

Nio shares have fallen by more than 50% since the pledge. Thus, Grizzly Research believed that the EV maker's shareholders are unknowingly at risk of a margin call on the shares of NIO User Trust.

Nio has recently been in the midst of a quality and safety crisis, as a test vehicle fell from the third floor of the parking building at Nio's headquarters in Shanghai last week, killing two digital cockpit testers.

In early June, a Nio customer publicly posted that his 13-day-old ET7 electric sedan suddenly suffered a power failure and brake malfunction while driving.

Following the report, Nio shares suddenly plunged in midday trading, closing down 2.66% on Tuesday.

In response, Nio said, "The company has observed this report, which is full of substantial inaccuracies and misinterpretations of Nio's disclosures."

"Nio has always strictly adhered to the relevant guidelines for public companies and has initiated relevant procedures in response to the report, so please stay tuned for subsequent announcements," the company stressed.

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