The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

By Katrina Hamlin

HONG KONG, Oct 16 (Reuters Breakingviews) - Singapore's sovereign wealth fund is creating multiple headaches for Nio 9866.HK. GIC sued the $17 billion Chinese electric vehicle maker in the U.S., alleging that it used a related party to recognise revenue much earlier than accounting rules normally allow. Although Nio has denied similar claims before, news of the case spooked investors: the company's Hong Kong-listed stock fell 9% on Thursday. It all casts a harsh light on the unprofitable group's cost-intensive strategy.

In the complaint, filed in August, GIC said that Nio sold electric-vehicle batteries to a related party, Weineng Battery Asset. That practice facilitated an "end run" around generally accepted accounting principles, in the filing's words. Nio could sell to Weineng and improperly book the revenue upfront, the argument goes, even though the real customers might only pay for batteries much later. GIC reckons this helped drive the stock to record highs, meaning that it and other investors overpaid for shares and subsequently suffered bigger losses. Nio's stock has fallen 90% from its peak, despite a rally in recent months before news of the legal action.

Nio did not comment on the allegations. But it has investigated and dismissed similar allegations previously, prompted by a report from short seller Grizzly Research in 2022. GIC's complaint cites the Grizzly work extensively. Nio at the time said it had conducted an independent internal investigation, which concluded the contents of the report were not substantiated.

That makes the move by GIC all the more punchy. It was among Nio's pre-IPO backers, and has serious financial clout, with around $800 billion in assets per the Sovereign Wealth Fund Institute. Suing a Chinese company is an eye-catching development for a group owned by the Singaporean government, which has generally tried to keep both sides happy amid tensions between the U.S. and Beijing.

Another potential concern is that Nio's sales to related parties have increased since the events relayed in the complaint. Those included nearly 10 billion yuan ($1.4 billion) in sales of goods, services and more to an entity named Wuhan Weineng Battery Assets last year - triple the 2022 figure.

Whatever the merits of the allegations, the whole episode focuses attention on Nio's cost-heavy strategy at a moment when the company's battered shares were starting to revive. GIC notes that the carmaker's business model, which involved building a battery-swapping network with 3,542 facilities as of September, strained Nio's finances. That's fair. The group reported a net loss of over $3 billion last year. Analysts do not expect it to break even until 2028, per forecasts gathered by Visible Alpha. That would be years after rivals Li Auto 2015.HK and Xpeng 9868.HK, despite recent efforts to cut costs and to grow Nio's new mass-market brands. In other words, GIC is poking at one of Nio's soft spots.

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CONTEXT NEWS

Singaporean sovereign wealth fund GIC has sued Chinese electric-car maker Nio in a New York court, according to a lawsuit filed in August.

In the complaint, GIC said Nio and two executives misled investors with false statements and withheld information about its business and prospects. Per the complaint, this allowed Nio to recognise revenue from the sale of batteries more quickly than accounting rules allow.

Nio has denied similar allegations before, after short seller Grizzly Research issued a report in June 2022. The company subsequently conducted an independent internal investigation, which concluded the contents of the reports were not substantiated.

Nio's Hong Kong-listed shares fell 9% to close at HK$49.28 after Chinese financial news magazine Caixin reported the case on October 16.

(Editing by Liam Proud; Production by Shrabani Chakraborty)

((For previous columns by the author, Reuters customers can click on HAMLIN/katrina.hamlin@thomsonreuters.com; Reuters Messaging: katrina.hamlin.thomsonreuters.com@reuters.net))