Nio (NYSE:NIO) stock is in the red today following a short report from Grizzly Research. The firm characterizes Nio as an “audacious scheme” that inflates its revenue and net income margins in order to meet Wall Street’s expectations.
Wuhan Weineng acts as Nio’s battery asset management provider. The company was formed in 2020 as a joint venture between Nio and Contemporary Amperex Technology. Since then, Grizzly says Weineng has generated “billions in revenue” for the electric vehicle (EV) company through “accounting games.”
The short firm compares Nio’s relationship with Weineng to Valeant Pharmaceuticals’ relationship with Philidor. Philidor helped Valeant (now Bausch Health (NYSE:BHC)) inflate its financials before regulators caught on to the accounting irregularities, ultimately charging Valeant a hefty $45 million fine. For the nine months ended September 2021, Grizzly believes Nio “inflated its revenue and net income by ~10% and 95%, respectively.”
Weineng collects Nio’s monthly subscription revenue for the company’s battery swap system and battery-as-a-service (BaaS) strategy. Nio is the “only major Chinese EV company” to have these features, which differentiates it from competitors. However, Grizzly emphasizes that Weineng is incorrectly recognizing battery revenue. The firm believes that instead of recognizing revenue over the course of a subscription’s duration, Weineng recognizes revenue right away. As a result, Nio recognizes roughly seven years of revenue immediately.
NIO Stock: Grizzly Research Releases Short Report
Weineng recently disclosed that it has 19,000 battery subscriptions. As of Sept. 30, the company held 40,053 batteries in its inventory. Because of this, Grizzly suggests that Nio has “flooded Weineng with up to extra 21,053 batteries (worth ~1,147M RMB) to boost its numbers.”
The firm also points out conflicts of interest between Weineng and Nio; two of the former’s top executives also act as Nio’s Vice President and Battery Operating Executive Manager. Meanwhile, Nio President William Li has been involved with “past ventures” that have “seen their stocks collapse and been taken private at a fraction of their peak valuations.”
Grizzly notes that NIO stock investors may be at risk of a margin call as well. In 2019, Li transferred 5o million shares to establish a fund to give shareholders greater governance of the company. However, Li pledged these shares to UBS (NYSE:UBS) to “secure a personal loan.” NIO stock has declined by more than 50% since that pledge. Accordingly, Grizzly believes shareholders are “unknowingly exposed” to a potential margin call.
Chinese government entities have redeemed $2 billion from Nio. They may also potentially collect another $6.7 billion. Currently, the company has a cash balance of $8.2 billion. As such, Grizzly believes that shareholders are prone to further stock dilution in the future.
On the date of publication, Eddie Pan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.