Shares of Nio (NYSE:NIO) stock are falling by more than 8% today on the heels of two negative catalysts. First, the Chinese electric vehicle (EV) company’s board announced it has formed an independent committee to investigate the allegations in Grizzly Research’s short report. The committee is moving fast and has already hired an international law firm and a “well-regarded forensic accounting firm” to assist with the investigation.
Second, over the weekend, China’s State Administration for Market Regulation announced a series of fines for “failing to make proper antitrust declarations on previous deals.” Affected companies include Tencent (OTCMKTS:TCEHY) and Ping An Healthcare and Technology (OTCMKTS:PANHF). While these fines were small in nature — about $74,680 for each violation — they signal that China’s strict regime of oversight may not be over yet.
Nio will provide updates on the investigation in “due course.” The company added that it will continue to maintain “high standards of corporate governance and internal control, as well as transparent and timely disclosure in compliance with applicable rules and regulations.” Independent directors Denny Ting Bun Lee, Hai Wu and Yu Long will oversee the investigation.
NIO Stock Falls as Company Hires Accounting and Law Firm
So, what exactly is the committee investigating? Grizzly alleges that Wuhan Weineng, Nio’s battery asset management provider, has helped the company inflate its revenue and margins. Weineng was formed in 2020 as a joint venture and has since generated “billions in revenue.”
The battery management provider collects Nio’s monthly subscription revenue for its battery-as-a-service (BaaS) model. However, Grizzly alleges that Weineng is incorrectly recognizing battery revenue. The firm says that, instead of recognizing revenue over a subscription’s lifetime (about seven years), Weineng recognizes it immediately. As a result, Grizzly believes Nio has “inflated its revenue and net income by ~10% and 95%, respectively” for the nine months ended September 2021.
Weineng says it has around 19,000 battery subscriptions. However, the company held 40,053 batteries in its inventory as of Sept. 30. This has led Grizzly to believe Nio has provided Weineng with some 21,053 extra batteries to inflate its numbers. These extra batteries have an estimated value of about $171 million.
Grizzly also believes NIO stock investors are “unknowingly exposed” to risks of a margin call. In 2019, CEO William Li transferred 50 million shares from the NIO User Trust to UBS (NYSE:UBS) to “secure a personal loan.” Since then, shares have since declined by more than 50%.
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.
