Electric Zhijia News, on the evening of June 29, the overseas short-selling institution Grizzly Research issued a report stating that NIO had exaggerated its revenue and net profit through accounting means. On the day the report was released (June 28, Eastern Time), NIO's U.S. stock price (NIO.US) suddenly plunged during the session, closing down 2.57% at $22.36 per share; on June 29, NIO. Automobile Hong Kong stock (09866.HK) fell sharply at the opening and closed at HK$171 per share at midday, down 8.41%.
html On June 29, the relevant person in charge of NIO told reporters that the company had observed this report, which was filled with a large amount of false information and a misunderstanding of the information disclosed by NIO . NIO has always strictly complied with the relevant standards for listed companies and has currently initiated relevant procedures for this report. Please pay attention to subsequent announcements.
A report released by Grizzly said that with excellent operating performance, NIO's share price has risen by more than 450% since 2020, making it one of the most valuable electric vehicle companies in China. But the outstanding performance that supports the rise in stock prices is achieved through financial means.
was accused of exaggerating profitability
The report pointed out that just like Veleant used Philidor, a pharmacy it helped to establish, to exaggerate its performance, NIO may have used a related party that was not included in the consolidated statements to exaggerate revenue and profitability. It is precisely because they feel that NIO has strong performance that retail investors pursue NIO, causing its stock price to rise by 450% since 2020, making it one of the most valuable electric vehicle companies in China. The
report believes that the above-mentioned related parties that have not been consolidated are Wuhan Weineng Battery Assets Co., Ltd. established by NIO. The company helps NIO continue to achieve high growth and profitability expectations, and has created billions of dollars in operating income for NIO. Just like Philidor helped Valeant habitually fabricate data back then, NIO's performance has suspiciously exceeded expectations since the establishment of Wuhan Weineng . The
report wrote: In the nine months as of September 2021, "Weineng exaggerated Weilai's revenue and net profit by 10% and 95% respectively", that is, the revenue and net profit were inflated by 26.17% respectively. billion and RMB 1.777 billion. "We found that at least 60% of (Nio's) better-than-expected earnings in fiscal 2021 were contributed by NIO."
"By shifting the burden of collecting monthly (Battery as a Service (BaaS)) subscriptions to NIO, NIO has accelerated revenue growth. NIO allows NIO to recognize revenue from their battery sales immediately and does not recognize revenue based on the subscription period (seven years). With this arrangement, we believe that NIO has recognized the revenue for seven years in advance. "
" In view of Weineng's recent disclosure that 19,000 users subscribe to battery services, we doubt whether Weineng really has 40,053 batteries in inventory as of September 30, 2021. We believe that NIO has added an additional 21,053 units of batteries to NIO (valued at RMB 1.147 billion). This number will only worsen in the fourth quarter of 2021. We estimate that NIO’s supply of batteries has been inflated by as much as 10%. 15,200. This approach has a huge impact on Weilai's profits. "
Li Bin has a close relationship with Liu Erhai, the core figure in the Ruixing fraud case.
In addition, the Grizzly Report also pointed out that Weilai Chairman and CEO Li Bin has a close relationship with Liu Erhai. Joy Capital and its founding partner Erhai Liu have a close relationship. Liu Erhai is the core figure in the Luckin Coffee performance fraud case.
According to the Grizzly Report, the close relationship between Li Bin, Liu Erhai and Joy Capital is as follows: Liu Erhai has served as a director of the automotive Internet company Bitauto since 2005, and as an independent director since 2011. Bitche has always been controlled by Li Bin. In September 2019, Liu Erhai was appointed as one of the independent directors of the special committee evaluating Bitauto's privatization transaction.
There are reports that Liu Erhai is an early investor in Weilai Automobile and Mobike . NIO Capital and Joy Capital have jointly invested US$315 million in used car trading service provider and Uxin . Another short-selling institution, JCap, disclosed Uxin’s financial fraud in a 2019 report.
The following is the full text of the short-selling report (from Alpha Factory Research Institute):
Today, we will reveal a bold plan of NIO (NIO.N), which is listed on the New York Stock Exchange . NIO is likely to use an unconsolidated related party to inflate revenue and exaggerate profitability.
Presumably, retail investors bid for Nio's shares because of these stellar operating results. 450% since 2020, making it one of the most valuable electric vehicle companies in China.
Allow us to introduce you to Wuhan Weineng ("Weineng"), a difference maker that has helped NIO exceed Wall Street 's growth and earnings expectations.
At the end of 2020, Weilai and a consortium of investors established Weneng. As an unconsolidated related party, NIO has generated billions in revenue for NIO.
On the surface, this rapid growth is impressive. However, our investigation found that NIO’s performance has suspiciously exceeded expectations since the establishment of NIO.
We believe that the sales to Weilai have inflated Weilai’s revenue and net profit by approximately 10% and 95% respectively. Specifically, we found that at least 60% of NIO’s profit growth in fiscal 2021 was contributed by NIO.
NIO has accelerated revenue growth by shifting the burden of collecting monthly subscription fees to NIO. NIO allows NIO to recognize revenue from the batteries they sell immediately, rather than over the subscription period (approximately 7 years). Through this arrangement, we believe that NIO has predicted its revenue 7 years in advance. The revenue that
should have gradually recognized during the subscription period (about 7 years) was recognized immediately after Weilai completed the sale of batteries to Weineng. Through this arrangement, we believe that Weilai has inflated its revenue seven years in advance.
Considering Weineng’s recent disclosure of 19,000 battery orders, we question why Weineng still held 40,053 batteries in inventory on September 30, 2021.
After careful investigation, we believe that NIO sold as many as 21,053 batteries (worth approximately 1.147 billion yuan) to Weineng to increase its volume. For the fourth quarter of 2021, this number will only get worse, and we estimate that Nio has oversupplied another 15,200 batteries. This action will have a huge impact on Weilai’s profit and loss status.
Of course, pulling off such a plan requires a willing potential accomplice. Although NIO has limited control over NIO, we found a clear conflict of interest between the two parties. Two NIO executives currently serve as NIO’s vice president and battery operations director.
Li Bin, the chairman and CEO of NIO, has close relationships with Joy Capital and Liu Erhai (the core figure in the Luckin Coffee fraud case). Although he is known as "China's Elon Musk ". But Li Bin's past businesses have seen their stocks collapse and be taken private at a fraction of their peak valuations.
In January 2019, Li Bin transferred 50 million shares to the "NIO Users Trust", an opaque BVI entity purportedly established to give NIO users greater influence over the company's governance. In a clear violation of the trust of these "users", Li Bin pledged these shares to UBS to obtain a personal loan.
With NIO's stock down more than 50% following the pledge, we believe shareholders are unknowingly at risk of being subject to margin calls on Users Trust shares. Chinese local governments have already redeemed $2 billion from Nio and may collect another $6.7 billion. Because Weilai’s cash balance is only US$8.2 billion. We believe that investors will face the risk of significant dilution of their equity in the future.
Introduction
NIO went public in September 2018 and is known as one of the most disruptive electric vehicle companies in China.
Nio’s two key differentiators are its investments in battery replacement systems and battery rental services (BaaS). The investments have created a huge buzz among investors and EV enthusiasts, as NIO is the only major Chinese EV company to fund such initiatives, setting it apart from rivals.
As of June 2022, NIO has completed more than 7.6 million battery replacements and deployed more than 981 battery replacement stations. By the end of 2022, this number will grow to 1,300 stations.
We found that NIO used Wuhan Weineng, an unconsolidated related party entity, to inflate its revenue and increase profit margins. By selling far more batteries than NIO requires, we estimate NIO's net loss should be 95% higher in the nine months to September 2021.
Our research also revealed hidden and opaque share agreements that benefited the Chinese government at the expense of public shareholders, as well as Nio’s CEO Li Bin’s previous connections and failed ventures.
The plan reminds us of a high-flying pharmaceutical company that took Wall Street by storm and was eventually exposed for using related parties to manipulate its financials.
NIO is boosting revenue and manipulating costs to boost profit margins
Nio has been using an unconsolidated related-party subsidiary to engineer its financials and continued to beat Wall Street targets in the nine months to September 2021. Here, NIO exaggerated its revenue and net income by 10% and 95% respectively.
In August 2020, Wuhan Weineng Battery Assets Co., Ltd. (referred to as " Weineng Battery ", Chinese name: Wuhan Weineng Battery Assets Co., Ltd.) was established by a consortium composed of NIO, government entities, and private investors such as CATL. NIO holds 19.8% of Weineng's shares and uses the equity method to account for the company.
"In August 2020, the Group jointly established the Battery Asset Company with three other third-party investors. The Group invested RMB 200,000 in the Battery Asset Company and held 25% of the equity of the Battery Asset Company. December 2020 , the Battery Asset Company signed an agreement with other third-party investors, and these investors made additional investments, totaling RMB 640,000. In 2021, the Group further invested RMB 270,000 in the Battery Asset Company. After the investment was completed, the Group owned the battery assets. The company has approximately 19.8% equity. As the major shareholder of Battery Asset Company, the Group has the right to appoint one of the nine directors on the battery asset company's board of directors and can exercise significant influence over Battery Asset Company. Investments are accounted for using the 'equity method'."
Since the fourth quarter of 2020, Nio's net income has exceeded average estimates by 33% and revenue has exceeded average estimates by 5%. For fiscal year 2021, Wall Street expects NIO to lose 5.947 billion. On the contrary, NIO announced a net loss of 3.007 billion yuan, 50% higher than expected (a difference of 2.94 billion yuan).
Due to the lack of regularity in Weineng's financial reporting, we can only infer the true effect of the financial engineering between the two companies in the nine months to September 2021. However, from these numbers, we can see that Weneng will be critical to this earnings upside.
Battery Replacement
NIO owns and operates battery swap stations across China, where vehicle owners can swap their batteries for new, fully charged battery packs in minutes. This move has historically had mixed results.
This initiative was launched in Israel in 2008 by a startup called Better Place. Better Place filed for bankruptcy in 2013 after spending $850 million in capital expenditures. Tesla proposed a similar idea in 2013, but the plan was completely abandoned due to marketing, technical and financial reasons.
Despite this history, NIO has mysteriously transformed a misfit business into a promising one and become a key factor in investors' bull run. Since the fourth quarter of 2020, the company has rapidly expanded from just 172 sites to more than 981 sites. What’s NIO’s secret recipe?
Battery Rental Service (BaaS)
Building on its battery replacement business, NIO has launched a "Battery Rental Service" that gives customers the option of purchasing a car without a battery. This structure reduces the total price of the car by at least 70,000 yuan and is believed to be an effort to increase the adoption of electric vehicles.
Through this plan, users can rent batteries from BaaS providers and pay 980 yuan to 1,480 yuan per month, or 11,760 yuan to 17,680 yuan per year, depending on the capacity of the leased battery.
Below is a screenshot of the NIO APP, showing the reduction in prepaid and subscription prices when users choose to use BaaS leasing. Our conversation with the salesperson at NIO’s electric vehicle center also confirmed the two-month rental prices for the 70/75kWh battery, and the 100kWh battery options, respectively:
Source: NIO APP
In view of battery replacement and The synergies between BaaS, we are confused to see NIO spin off the BaaS business into a non-consolidated entity, they must share the economic benefits with other investors . Upon closer investigation, however, the answer seems clear. Nio spun off Wuhan Weineng to help artificially boost its battery replacement business and overall performance.
According to NIO’s documents, NIO is the entity that owns the batteries used in the BaaS business and is responsible for managing the subscriptions. Therefore, when a user orders a BaaS project, Weineng is the recipient of all subscription payments. Where does Wei get the batteries it supplies? It’s nothing more than Weilai...
"Under BaaS, we sell batteries to Wuhan Weineng Battery Asset Co., Ltd., a battery asset company, and users order the right to use the battery from the battery asset company."
Since Weineng Battery has Since its founding in August 2020, NIO has found it to be a reliable and growing source of revenue. In just four months of operation in 2020, NIO earned 290 million yuan from sales to Weineng. Despite the fast start, revenue attributable to the entity grew further to 4.14 billion yuan in 2021, accounting for approximately 11% of overall 2021 revenue.
The arrangement between NIO and NIO helps them in three ways:
- recognizes revenue years in advance to help meet ambitious estimates;
- provides a counterparty willing to sell more batteries than it needs for its network needs ;
- transfers depreciation expense out of its financial statements.
never stops pulling. How NIO leverages Wuhan NIO to drive future revenue
If NIO ceased to exist, NIO would have to recognize subscription revenue over the customer's subscription period. Fortunately for Nio, they don't have to wait to consider a 70,000 yuan sale. Normally it would take Nio about 7 years (adjusted for inflation ) to generate full subscription revenue, but with NIO they can recognize revenue immediately.
In other words, NIO can bring about 7 years' worth of recurring revenue up front and recognize it immediately to artificially boost revenue growth without incurring any additional costs.
We were able to retrieve the prospectus for Weineng Battery's asset-backed financing, which disclosed key information about its subscriptions. As of September 30, 2021, 19,000 users were provided under the BaaS service agreement, of which 18% subscribed to the 100kWh battery BaaS service and 82% subscribed to the 70-75kWh battery.
Source: Weineng's ABN Prospectus
Using these numbers, we can determine what NIO's financial position would be like if Weineng did not exist. Contrary to the reported revenue of RMB 2.796 billion, NIO will receive approximately RMB 19.84 million per month, or approximately RMB 179 million in the nine months ended 2021 (annualized to approximately RMB 239 million in 2021 ).
Although Weneng never submitted any updates to its third quarter 2021 numbers, the analysis in this report is still very relevant and valid. As of today, NIO is still offering BaaS to its consumers, while NIO continues to operate as an unconsolidated entity.
Below are the screenshots currently provided by NIO.
Source: NIO
Through the NIO plan, NIO has driven more than 1.147 billion yuan in revenue, leading to the same improvement in reported earnings. We estimate that NIO’s true net income during this period was a loss of RMB 3.02 billion.
The image below shows how we arrived at these numbers, with some qualifications.
As we will show, we believe that only the 19,000 batteries corresponding to Weineng's 19,000 service users can be considered real sales. In contrast, the total number of batteries held by Weneng is more than double that number. We will deal with these excess batteries in the next section and explain to readers why we believe Nio further overstated revenue by overselling batteries to this counterparty.
We define "pull forward" revenue as any revenue that NIO would earn if it consolidated NIO into a subsidiary in the first year of subscription.
Weilai "achieved" revenue growth despite the lack of corresponding new costs. This is because, regardless of the arrangement, Nio will pay for and purchase batteries to operate its BaaS business. Therefore, these financial costs have been included in NIO's financial data.
Source: Company financial report, Grizzly analysis
’s arrangement with Weineng helped Weilai exaggerate its revenue for the nine months ending in September 2021 by nearly 4%. This flows directly into its net profit; Nio's adjusted net loss should be 61% larger than the reported figure.
In the next section, we will show how NIO used this plan to sell more batteries than needed for the BaaS business and inflate revenue.
How NIO oversupplied Wuhan Weineng
We believe that NIO deliberately oversupplied batteries to Weineng. By calculating the battery requirements of a BaaS network, we show that
NIO provides far more than is reasonable.
According to Weineng Battery’s ABN (green battery asset-backed note) issuance documents, as of September 2021, Weineng has 40,053 batteries.
"As of the end of 2020 and the end of September 2021, the number of BaaS battery assets held by Wuhan Weineng was 4,115 and 40,053 respectively, and the business scale has grown significantly."
Source: Weineng Battery Green Battery Asset Support Note Issuance Document
Review , as of September 30, 2021, only 19,000 users have subscribed to the BaaS plan, which means there are 21,053 excess batteries. Assuming the same 20-80 mix between the 75 kWh and 100 kWh batteries, we can deduce that flooding Nio with batteries could help Nio report increased revenue of RMB 1.47 billion and net income of RMB 294 million. The chart below shows the math behind this conclusion.
A key assumption in our analysis is that battery profit margins are around 20%. We believe this is a conservative estimate as it is consistent with full vehicle margins and batteries are the cost center for all vehicles.
Source: Company filings, Grizzly analysis
While we don’t have inventory numbers for NIO beyond September 2021, we can indicate that NIO will continue this plan into the fourth quarter of 2021. Dividing the 2.796 billion yuan in sales between NIO and Weneng by 40,053 batteries, the average selling price is about 70,000 yuan. We also know that in fiscal year 2021, NIO's full-year sales were 4.138 billion yuan, which means revenue in the fourth quarter of 2021 was 1.342 billion yuan.
Using our average selling price, this would mean that in the fourth quarter of 2021, NIO sold approximately 19,000 additional batteries to Weineng, further increasing its battery inventory by nearly 50%.
Bulls might argue that Weneng is buying these extra batteries to keep operations smooth, but as we're about to show:
Weneng is buying battery packs back-to-back from Weneng, meaning battery sales should match the number of users
Low utilization of battery stations negates excess battery demand
NIO battery sales to NIO should be consistent with user numbers
NIO noted in its recent 20-F filing that it sells batteries to NIO on a back-to-back basis The batteries are sold at the same time as Nio’s customers subscribe to BaaS and buy their cars without having to buy batteries.
battery. Then, when the vehicle (along with the "user battery") is delivered to the customer, NIO confirms the sale, at which point control is transferred to NIO.
This means that when a BaaS user purchases a car, Weineng purchases 1 battery corresponding to this sale. After the car
was delivered, the battery was "owned" by Weineng and became part of Weineng's assets.
In terms of operation, NIO does not distinguish between NIO batteries and NIO batteries at battery swap stations. NIO does not restrict BaaS users to only use NIO batteries when replacing batteries at battery swap stations, nor does it restrict non-BaaS users to only use NIO batteries. Not having such restrictions is important because it eliminates the need for NIO to sell excess batteries to NIO for logistical reasons.
We sent an investigator to visit a NIO car center, where he talked with NIO sales staff about BaaS. Our investigators also took a test drive and replaced the battery. We found no difference between BaaS and non-BaaS batteries. The only difference the salesperson makes is that there are two types of batteries, short range and long range. The salesperson told us that users can exchange both batteries at the same time if they wish.
interview transcript [paraphrased]
asked (investigator). Can’t the long-range battery [BaaS plan] be replaced by a short-range battery?
Answer: (NIO sales staff). All battery packs are the same size, they just differ in energy density.
asked: So the short-range battery can also be replaced by a long-range battery.
Answer: Yes. Your short-range battery can also be replaced with a long-range battery.
We further confirmed that there is no difference by checking the Weilai APP. For example, the screenshot below shows a battery swap station in Beijing. After selecting this battery swap station, the APP did not ask the user whether he/she is a BaaS user. It directly shows how many batteries the station has available. In this case, it shows that there are 13 batteries in total and 13 batteries are available for replacement.
The NIO APP also shows more details about the available battery. There are two battery options, one called the standard range (short range) battery (70/75kWh) and the long range battery (100kWh). If we click on the batteries section, it will show that this station has 8 short range batteries and 5 long range batteries. There is no distinction between NIO batteries and Weineng batteries, nor between BaaS batteries and non-BaaS batteries.
Source: NIO APP
Since BaaS users can take advantage of NIO's battery network, regardless of whether they are owned by NIO, NIO does not have much need
to maintain excess batteries. Therefore, the number of batteries Weineng has should correspond to the number of users.
However, as of September 30, 2021, Weineng had 19,000 users under the agreement but had 40,053 batteries in inventory.
From an operational and structural perspective, Weineng does not require any extra batteries. Therefore, this evidence leads us to believe that as of the third quarter of 2021, NIO has oversupplied Weneng with as many as 21,053 batteries to whitewash its financial position.
Site visits and APP analysis reflect low utilization in some locations
In addition, our due diligence team observed some sites during the busiest times with little to no traffic. Observations lead us to believe that utilization at these swap stations is likely to be low, offsetting such a large inventory.
Source: NIO physical battery swap station
We supplemented our actual investigation through the analysis of NIO APP. This analysis gives us several data points, such as available battery and people in line. From these available metrics, we are able to calculate battery utilization.
We observed 25 of the sites at 2-hour intervals and found that the weighted average utilization rate of NIO's battery swap stations was only 39%. Note that we intentionally avoided those regions of China that were under very strict zeroing policies (e.g., Shanghai was completely shut down during our observation window with 0 utilization for all sites). We did not choose to include them in our analysis middle).
's low utilization further strengthens our belief that Weneng has no excess battery needs at these sites, indicating that Nio is likely oversupplying Weneng with as many as 21,053 batteries.
Of course, when you buy thousands of batteries, you need to store them. However, to our surprise, after months of searching, we were unable to identify or find Weineng's storage facility.
Our team also consulted with many battery company employees at battery swap stations, but we were unable to gain any knowledge on where the batteries could be stored.
Weineng’s prospectus also ignores the disclosure of battery storage (that is, 99% of Weineng’s fixed assets are batteries). At best, this leads us to believe that many of these excess batteries are still in Nio's storage facilities.
Accounting Magic: Transferring Depreciation Costs
Another benefit of creating a NIO battery entity is that NIO can save huge depreciation. According to NIO’s 2020 20F, the service life of charging and battery swapping infrastructure and equipment (including batteries) is 5 years. Oddly, Nio recently changed its useful life to 5-8 years, which means the battery depreciation rate on the balance sheet is about 15% per year.
Review NIO’s sales to Weineng were RMB 2.8 billion in the nine months to September 2021. We believe that the sales of these goods are almost all made up of battery sales. Assuming a profit margin of 20% on this revenue, this will mean that NIO will transfer assets with a total cost of 2.25 billion yuan from its balance sheet during this period.
This means that in the nine months to September 2021, these batteries will save Weilai up to 336 million yuan in depreciation expenses, directly affecting (and inflating) the company's profits.
Coupled with the revenue inflation mentioned in the previous sections, we estimate that Weineng Battery alone can artificially increase Weilai's net profit by more than 3 billion yuan. In the nine months ended September 2021, NIO’s net loss was RMB 1.874 billion. Without all these accounting shenanigans, Nio's net loss would have nearly doubled to 3.69 billion yuan.
Source: Company financial report, Grizzly analysis
Not only was NIO able to recognize RMB 2.6 billion in additional revenue from the BaaS business (which would not have existed if NIO had consolidated it), but they were also able to convert the revenue related to the battery replacement business costs and expenses are transferred off the balance sheet. In doing so, Nio fooled Wall Street and investors by reporting financial results that were divorced from the reality of its business.
Weineng’s top managers are current NIO executives
In its 2021 20-F Risk Factors, NIO stated that they have limited control over Weineng Battery.
However, in the same document, NIO said:
"As the major shareholder of Battery Asset Company, the Group has the right to appoint one of the nine directors on the Battery Asset Company's board of directors and can exert significant influence on Battery Asset Company. Therefore. , investments in battery asset companies are accounted for using the equity method"
Based on this contradictory disclosure, NIO's investors may be confused about the extent of NIO's actual control over NIO. Executing the plans we detail in this report will require NIO to exercise significant control over NIO. Our research shows that this is exactly the case.
According to enterprise data, Shen Fei, the chairman and legal representative of Weineng Battery, and Lu Ronghua, the general manager and director, are both Weilai employees.
Source: Qichacha
We believe that these two individuals lead the day-to-day operations and major business decisions of Weineng Battery, allowing them to effectively exercise control over the company.
Our research also found that Shen Fei and Lu Ronghua continued to hold executive positions at NIO while working at NIO.
Source: Qichacha, Linkedin, GrizzlyAnalysis
According to Shen Fei’s Linkedin profile, he is currently the vice president of NIO and has held this position since November 2015.
Shen Fei
Source: LinkedIn
Shen Fei also appears in the records of many subsidiaries of "Nio China", of which NIO owns more than 90% of the shares. The following table lists Shen Fei's corresponding positions in some of these companies.
Lu Ronghua
According to Lu Ronghua's LinkedIn profile, he has worked for NIO since March 2016 and is currently the battery operations director of "Shanghai NIO", one of NIO's main subsidiaries.
Source: LinkedIn. LinkedIn
There is also an online article indicating that Lu Ronghua joined Weilai in 2016.
" Lu Ronghua joined Weilai in 2016, and one of his assigned tasks was to plan the separation of vehicle and electricity. However, there was great resistance at the beginning."
" Since Lu Ronghua joined NIO in 2016, one of the tasks [he] was assigned was to draft a plan for the separation between electric vehicles and batteries, but there began to be a lot of resistance in this regard. "
Some of NIO's senior leaders also hold executive positions in Wuhan Weineng, which is a significant conflict of interest and illustrates the ease with which NIO was able to orchestrate this plan. We believe NIO's control of NIO further supports our view that NIO is just a tool for NIO’s financial shenanigans
NIO is a “tool” that enriches local governments and insiders
Beyond financial fraud, we believe NIO has been exploiting its listed companies. identity, making local government shareholders rich.
In April 2020, Weilai announced that it had entered into cooperation with a number of investors including Hefei Construction Investment Holding (Group) Co., Ltd., CMG-SDIC Capital Co., Ltd., and Anhui High-tech Industry Investment Co., Ltd. Collectively, the "Strategic Investors") reached a final agreement to invest approximately RMB 7 billion in NIO China, holding a 24.1% stake in the entity since then. These shares have been redeemed three separate times. Details are listed in the table below.
Local governments or related entities have cashed out 13.5 billion yuan from NIO, if the company buys the remaining 7.87% of NIO. shares, local governments can cash out another 41.7 billion yuan from NIO.
This is worrying because NIO has historically burned through cash and had to dilute its stake to fund its operations after listing in the United States. 10.9 billion, but it cost more than $2 billion to redeem these. If the local government decides to redeem more, Weilai will need another $6.7 billion to repurchase, and as of December 31, 2021, the company has 82. billion in cash and short-term investments.
During the course of these redemptions, NIO China's implied valuation mysteriously doubled between September 2020 and February 2021. Jumped by about 28 times, and 7 months into 2021, NIO China's implied valuation has further increased by 3 times. In just one year, NIO China's valuation has increased by nearly 89 times.
NIO China has reached a higher valuation, and local governments have withdrawn more funds from NIO through the stock market. We believe this may be due to the financing provided to NIO by early local governments called "gambling agreements". NIO China's valuation continues to increase, and NIO must pay more to the Chinese government without stable cash flow, which will be at the expense of shareholders.
Undisclosed gambling agreement between NIO and local governments.
media recently reported that when NIO received a capital injection of RMB 7 billion from Hefei City in 2020, there was a "gambling agreement" between NIO and Hefei City, in which:
1, NIO China received. Submit an IPO within 48 months after the investment and complete the listing within 60 months; shareholders requiring NIO or Li Bin to redeem the company's shares cannot lead to a change in the control of NIO or NIO China;
2, NIO and NIO The controlling shareholder in China should not change. If it changes, the local government will require Li Bin to repurchase all shares;
3. If the IPO is not completed, or the controlling rights change, Li Bin will have to repurchase the shares of NIO China at the redemption price It is the total investment of Hefei strategic investors, and the interest is calculated at an annual interest rate of 8.5%;
4 requires Weilai China to achieve revenue of 120 billion yuan in 2024.
This agreement puts pressure on NIO and poses significant risks to NIO’s shareholders. Although it only mentioned that NIO needs to buy back from local governments at an interest rate of 8.5%, there may be more terms privately, which may hurt NIO's shareholders.
The agreement requires NIO to achieve revenue of 120 billion yuan by 2024. To achieve these goals, Nio will need to achieve aggressive growth in the fiscal years ahead. We believe this goal is simply unachievable through normal means, and believe both local governments and NIO know this.In addition to meeting Wall Street's expectations, this "bet agreement" may have been another motivation behind the financial shenanigans we've described involving Wuhan Weineng.
As stated in requirement 2, NIO’s controlling shareholder cannot change, which means Li Bin will likely have to find creative ways to monetize his shares and unlock value.
NIO Chairman pledged NIO’s user trust to UBS in June 2021
In January 2019, Li Bin transferred a total of 50 million common shares to the newly established NIO User Trust fund, including (i) 189,253 shares of Class A common stock and (ii) 49,810,747 shares of Class C common stock.
NIO User Trust's goal is to create deeper connections between companies and users. According to the document, in 2019, the company adopted the NIO User Trust Charter and established a User Council to discuss and provide suggestions for the management and operation of the NIO User Trust. Members of the NIO User Council will be elected by the NIO user community. The company's document also states:
"According to the articles of association of the NIO User Trust, the income and gains from the trust assets shall be mainly used for the following purposes: (1) Environmental protection and sustainable development, (2) NIO user community care projects, ( 3) community activities and other necessary projects that promote the common growth of users, and (4) operating expenses of user trusts. "Income can come from investment returns, dividends or pledging these shares.
In view of the above commitments, we think NIO shareholders and NIO users will be surprised to find that Li Bin has pledged the NIO User Trust.
According to NIO's 2021 20F, NIO Users Limited is "a holding company controlled by NIO User Trust, which is controlled by Mr. Li Bin" and its registered address is "Maples CorporateServices (BVI) Limited, Kingston Chambers, PO Box 173 , Road Town, Tortola, British Virgin Islands."
Documents we were able to retrieve from the British Virgin Islands show that in June 2021, the NIO User Trust had been pledged to UBS.
A document called a "certificate of change" shows that NIO Users Limited was charged to UBS Group, and the charge was registered on June 28, 2021.
NIO Users Limited was established on December 11, 2018, and its registered address is the same as that disclosed in NIO’s 2021 20F.
We believe that Li Bin deliberately ignored public disclosures or media reports surrounding this pledge. Ironically, given that these shares were pledged in accordance with the NIO User Charter and NIO User Committee, Li Bin seems to have violated the trust of this group of people who share the same vision.
Investors should not only question Li Ka-shing's credibility, but also be aware of the significant risks to their investments associated with this pledge. The company's stock has fallen from $50 on the day of the pledge to $23. While the pledge ratio is unknown, we can only imagine that a 54% drop in the stock could result in a margin call on these stocks. Li Bin owns 177.7 million NIO shares or approximately 10.4% of the company's shares. If UBS requires Li Bin to provide more collateral, shareholders will face the consequences of forced liquidation of pledged shares in the open market.
Sadly, after reviewing Bin Li's past companies, associations, and relationships, we are not surprised that Bin Li is putting his shareholders at risk.
NIO Chairman and CEO Li Bin has a worrying past, filled with shady connections and destruction of shareholder value
We dug into Li Bin's past, and what we found is concerning.
We found that Li Bin worked closely with people involved in the Luckin Coffee fraud case in the past. He was also Chairman and CEO of BITA (formerly a US-listed company that was later privatized), which is also the controlling shareholder of CreditEase (currently a Hong Kong-listed company). He also served as chairman of Mobike, which was accused of misappropriating more than 600 billion yuan in user deposits. All of Li Bin's past companies ended up destroying a lot of shareholder value.
Li Bin also has a close relationship with Joy Capital and its founding partner Liu Erhai (a known key figure in the Luckin Coffee fraud case).
Readers are encouraged to read the anonymous research report on Luckin Coffee, a company that later admitted to financial fraud and was delisted from the stock exchange. That research report listed Liu Erhai of Joy Capital as one of the "Golden Triangle" and a key figure in the Luckin Coffee scandal.
Source: Luckin Coffee’s anonymous research report
Considering that Liu Erhai previously participated in the Hong Kong-listed company China Car Rental (0699.HK) (delisted) and the US-listed Luckin Coffee (LKNCY.OO), we believe that when a company Investors should be very cautious when listed companies or management get too close to Joy Capital and Liu Erhai.
On our growing list of concerns, we discovered that NIO and its chairman and CEO Li Bin have close ties to Joy Capital and Liu Erhai.
Let’s summarize the connection between Weilai/Li Bin and Joy Capital/Liu Erhai:
Liu Erhai has served as a director of BITA’s board of directors since 2005 and as an independent director since 2011. BITA has been controlled by Li Bin;
Liu Erhai was appointed as one of the independent directors of the special committee to evaluate BITA's privatization transaction in September 2019;
Liu Erhai was reported to be an early investor in Weilai and Mobike;
NIO Capital and Joy Capital jointly invested up to US$315 million in Uxin (UXIN.US). A research report published by the American short-selling agency JCap exposed Uxin’s tricks;
BITA
From 2010 to 2020, Li Bin was in BITA Holdings Ltd. serves as Chairman of the Board of Directors. BITA went public in 2010 at $12 per ADS, and after rising to nearly $100 in 2014, the stock dropped sharply to around $10 in 2020. Eventually, the company was taken private for $16. Investors who participated in the stock at a higher price never had a chance to recoup their losses.
According to media reports, the company failed due to strategic decision-making errors. BITA relies heavily on external (Internet) traffic, which declines as costs increase. This resulted in them continuing to incur losses from 2014 onwards. After founding Weilai and Mobike, Li Bin gave up BITA and focused on these two companies.
CreditEase
CreditEase IPOed in the Hong Kong market in 2017 - in which BITA held more than 50% of the voting rights - and consolidated the company financially. Unfortunately, the stock price peaked shortly after listing and has steadily declined since then. The details of its decline are not the focus of this report, but its lackluster performance since 2018 is concerning.
Mobike
Mobike is a private company, and Mr. Li is the chairman of Mobike. The company pioneered one of China's hottest trends - shared bikes - and is aggressively trying to capture market share. To the dismay of investors, Mobike's aggressive growth initiatives have led to massive under-use.
After burning a lot of cash, Mobike was sold to Meituan, a listed company in Hong Kong. The chairman of Meituan is an early investor in Mobike and one of Meituan’s largest shareholders. Tencent is also one of the largest shareholders of Mobike.
What is most concerning is that Mobike reportedly misappropriated more than 600 billion yuan in user deposits during 2017.
free money. NIO’s chairman used the company for interest-free loans
Another problem we discovered with Li Bin is that NIO provided interest-free loans to a company called Ningbo Meishan Bonded Port Area Weilan Investment Co., Ltd. (referred to as "Ningbo Meishan").
Source: NIO Financial Report
NIO's 2020 20F note mentioned:
"In 2017, the company issued interest-free loans to Weilan Investment Co., Ltd. in Bomeishan Bonded Port Area. As of December 31, 2020, These loans have not yet been repaid. "
According to Qichacha, Ningbo Meishan Company was established in August 2016, and its business scope includes investment consulting and management. Shareholder information shows that NIO’s chairman Li Bin owns 80% of Ningbo Meishan’s shares, making him a direct beneficiary of these interest-free loans.
Source: Qichacha
NIO’s 2021 20F pointed out that the loan has been fully repaid in 2021.However, it also said that in November 2021, NIO paid 50 million yuan to Ningbo Meishan to acquire certain equity interests in companies related to NIO Capital.
"In 2017, we issued an interest-free loan to Ningbo Meishan Bonded Port Area Weilan Investment Co., Ltd., a company controlled by our major shareholder. The loan is to be repaid in full in 2021. In November 2021, we Ningbo Meishan Bonded Port Area Weilan Investment Co., Ltd. acquired certain equity interests in companies related to NIO Capital for a price of RMB 50 million."
NIO did not disclose details about this investment, but we think this series of events is very suspicious.
1. NIO loaned RMB 50 million to Ningbo Meishan (80% held by Li Bin) in 2017;
2. Ningbo Meishan acquired equity in an unknown investment fund for an undisclosed amount;
3. The loan has not been repaid for as long as Several years;
4. Then in November 2021, Ningbo Meishan mysteriously transferred 1.03% of the fund’s equity to Weilai, with a fair value of 68.5 million yuan.
"In November 2021, the group purchased an equity investment in an investment fund. The holder of the investment fund is Ningbo Meishan Bonded Port Area Weilan Investment Co., Ltd. ("Weilan"), a major shareholder (and chief executive officer) of the company. (Note 26) (a company controlled by the Company’s major shareholder (and CEO) (“Weilan”) (Note 26)), with a total consideration of RMB 50 million. On the date of purchase, the The investment was recorded at a fair value of RMB68,535, with the excess of the purchase consideration of RMB50,000 of RMB18,535 being recorded as additional paid-in capital to the shareholders.
The Group has a 1.03% ownership interest in the fund but serves as a member of its investment committee. , has the ability to exercise significant influence over the fund's capital, and the committee determines the fund's investment strategy and makes investment decisions. Therefore, the Group accounts for this investment according to the equity method.
On paper, this equity. It helped NIO recoup the original 50 million loan, but shareholders did not disclose what this investment fund is, its strategy or any other information. We also do not know how the fair value has changed since November 2021, and the fair value may have changed. Significant decline.
Summary
While Nio is a retail darling and a popular stock for U.S. investors seeking exposure to China's electric vehicle applications, we believe the company is being propped up by financial shenanigans and is riddled with corporate governance red flags.
NIO's financial position was inflated through a scheme to exploit unconsolidated related parties
By oversupplying batteries to NIO and driving revenue ahead of schedule, NIO overstated its claims by 26% in the nine months to September 2021. RMB 3.6 billion in revenue (about 10% of the period's revenue). To make matters worse, the reportable net loss for the period was RMB 3.6 billion, which was double Nio's actual reported loss in this accounting. In context, we believe NIO has enriched local governments and company insiders, and NIO's disclosed and undisclosed agreements with local governments have resulted in redemptions at outrageous valuations. This may continue in the future. According to our estimates, Nio may have another $6.7 billion in local government share redemptions, which will put significant pressure on its financial position.
Documents we retrieved from the British Virgin Islands. It shows that Li Bin mortgaged NIO’s User Trust to UBS without any disclosure, aiming to increase the influence of NIO users on the company. Li Bin used the User Trust fund for personal gain, exposing shareholders to potential margin calls. The resulting risk of a stock decline has become increasingly serious as NIO’s stock price has lost more than half of its value.
