Recently, the Singapore government investment company (GIC) has filed a lawsuit against NIO, attracting market attention. GIC accuses NIO of artificially inflating its revenue and profits through Wuhan Weineng Battery Asset Co., Ltd., a joint venture with its partners, misleading investors and causing GIC to suffer investment losses.
In response to these allegations, NIO has clarified to the press that this case is not a new occurrence but stems from a short-selling report released by the short-selling firm Grizzly Research LLC in June 2022. NIO emphasized that the report itself is baseless and filled with numerous inaccuracies, unfounded speculation, and misleading conclusions.
The core of this lawsuit revolves around a controversy regarding the accounting treatment of NIO's Battery as a Service (BaaS) business model.
BaaS, or Battery as a Service, is a pioneering business model introduced by NIO in the electric vehicle industry. In this model, consumers can choose not to purchase the battery when buying a NIO car, instead opting to pay a monthly service fee for leasing. This approach reduces the initial purchase threshold for consumers and addresses concerns about range anxiety and battery degradation through NIO's extensive battery swapping network.
To support this battery swapping system, NIO collaborated with industry partners, including CATL, to establish Weineng in 2020. The business logic of Weineng is as follows: NIO sells the produced battery packs to Weineng, which acts as an independent entity holding the "battery assets," leasing these batteries to end users who select the BaaS option and charging users a monthly service fee.
This is precisely the focus of Grizzly's short-selling report and the GIC lawsuit. Grizzly claims that NIO recognized future rental income from battery leases prematurely by selling the batteries to its "affiliated" company, Weineng, alleging that NIO inflated its revenue and net profits in fiscal year 2021. Grizzly attempts to portray Weineng as a non-consolidated off-balance-sheet entity established to "beautify" NIO's financial statements, essentially converting future subscription income into current one-time sales revenue.
In response to the short-selling allegations, NIO announced in August 2022 that its board established an independent internal committee and hired a top-tier third-party law firm and forensic accounting firm to conduct a comprehensive, independent internal investigation of the claims made in the Grizzly report.
The investigation concluded that "the allegations in the short-selling report have no factual basis." NIO reiterated this conclusion in its response to the GIC lawsuit, emphasizing that "as a company listed in the U.S., Hong Kong, and Singapore, NIO consistently adheres to the compliance and corporate governance requirements of all three listings."
Notably, following the release of the Grizzly report in 2022, major international investment banks largely sided with NIO, considering Grizzly's accusations to be a serious misunderstanding of the BaaS innovative model.
Deutsche Bank stated, "Grizzly's concerns regarding NIO's battery asset management business are unfounded, with elements of the business model being severely misinterpreted." Prominent institutions such as Morgan Stanley, JPMorgan, and Daiwa Capital also voiced their support for NIO, not endorsing Grizzly's conclusions.
These analysts generally believe that separating battery assets into an independent entity for specialized operations is a common financial and operational strategy in capital-intensive industries, not a unique "financial magic" by NIO. This model (asset securitization) optimizes corporate cash flow, diversifies risk, and allows specialized teams to manage specific assets.
Weineng, as an independent company jointly owned by NIO, CATL, and other stakeholders, has a clear business logic, and the transactions between Weineng and NIO follow fair accounting standards. Viewing batteries as commodities and selling them outright to Weineng does not pose any issues from an accounting perspective, as the ownership of the batteries has been genuinely transferred.
Given that NIO has an internal investigation conclusion and mainstream Wall Street perspectives have recognized the compliance of the BaaS model, why does GIC choose to initiate a lawsuit two years later as a long-term investor?
Market analysis suggests that this could be due to multiple factors. From a legal standpoint, investors who incur losses due to stock price declines have the right to sue if they believe there are problems with prior disclosures from the company. GIC's actions can be seen as a routine strategy to seek legal recourse after investment losses, with Grizzly's report providing ready-made legal "ammunition."
From the publicly available information, NIO appears to have adequate reasoning and backing from professional institutions. However, the uncertainty brought about by the lawsuit, along with its short-term impact on market sentiment, remains a challenge that the company must actively address.
For NIO, the best response is to continue demonstrating the value of the BaaS model through robust operations, ongoing technological innovation, and open and transparent communication. Only when the BaaS business consistently creates clear value for users and the entire industry chain, ultimately reflected in healthy financial statements, will all doubts dissipate.
This "old case" that has triggered a new storm may become an indispensable trial for NIO in its journey toward maturity.