GIC SUES NIO - WHAT AN UNQUALIFIED AUDITOR SEES THAT A ROOMFUL OF MBAs COULDN'T
This case sits at the intersection of business model innovation, accounting interpretation, securities law. and state policy and industrial strategy. It is a convergence where operational design directly influences financial and legal exposure.
Practically every media worldwide carried this news because it is not everyday that a state sovereign wealth fund sues an investee company. In fact, this is actually the first instance. Local media BT, ST and CNA, and a few western media that I have seen, all ran mostly along similar lines. None provides a full picture that makes for a better understanding of the story.
Battery swapping and Battery-As-A-Service (BaaS):
In the early years, recharging of EV batteries was a big problem. A standard home AC charging takes like forever. A DC fast charger at a station may speed recharging up, but still took hours. Re-charging problem was the cause for the slow adoption of EVs.
Batterg swapping is a way to get around the problem. The EVs go to a swapping station and exchange depleted batteries for fully-charged ones. This way, drivers only spend about 10 minutes waiting for the batteries to be swapped.
BaaS is a business model where a consumer buys a vehicle without battery and signs a separate contract for use of battery at a monthly subscription. The consumer has the benefit of a lower upfront cost for the car w/o battery, continued use of battery beyond its normal lifespan by extending his BaaS subscription, and upgrading to new models of battery as technology improves.
Battery swapping is thus a service whereas BaaS is a financial mechanism similar to asset leasing.
So a buyer of a car with or without a battery would have a swapping service embeded in his contract with Nio, whereas a buyer of car only would have to subscribe to a BaaS contract with Weineng.
BaaS was pioneered by Israeli entrepreneur Shai Agassi. In 2007 he set up Better Place with the goal of selling cars without batteries, letting customers subscribe to battery usage at swap stations. Better Place partnered with Renault-Nissan which developed the Renault Fluence ZE specifically for battery swapping. Network of swapping stations were built in Israel and Denmark for a pilot project. In 2009 the first Renault battery-swap EVs appeared. By 2012 Better Place was bankrupt.
In 2014 Elon Musk's Tesla tested a pilot battery swapping facility in US. By 2016 Tesla shut it down.
Modern day EVs started off with the batteries built into the chasis, that is, "structured batteries". They cannot be easily removed. For swapping, the battery is modularised and placed in a compartment which facilitates easy removeable. There are various trade-offs between structured and removeable battery which we don't need to get into for our purpose here. We just need to understand for battery swapping, removeable batteries are required. Tesla uses structured batteries, Nio uses removeable batteries.
Battery swapping requires massive infrastructure (swapping stations) and massive inventory of battery packs. The operator needs a large float of fully-charged batteries available at all times to avoid a "battery run", similar to a bank which faces a bank run when it holds insufficient cash. The number of batteries to carry is a factor of number of cars sold, number of swapping stations. and the charging technology. Slow charging time means more batteries tied up. Batteries cost a lot, and with a life span of 5-7 years, it is capital intensive with heavy depreciation cost to bear. Battery swapping faces high technology risk. As it turned out, by 2019, supercharging technology shortened recharging time to just 15 mins. This effectively killed the idea for BaaS.
So why did Nio go into battery swapping? When China began accelerating EV adoption around 2018-2020, they saw that standardisation and modularisation could lower battery costs and extend lifecycle utilisation. Chinese manufacturers broke away from Tesla's integrated way of building batteries. They went for modularisation.
The EV industry has great reputational stakes for China. It seeks to lead the industry to legitimise its technological prowess and promote it's " Made-in-China" agenda. China’s EV policy evolved through three overlapping layers of incentives — industrial, consumer, and financial-market. Again let's not get into all the subsidies and incentives provided. Just to understand the state initiatives played right into Nio's strategy. The state helped in the development of the eco-system for battery swapping on the infrastructure and supply chain side. For example facilitating in the energy supply side for supercharging capabilities in swapping stations. It standardised battery modularisation which allows a future pathway for BaaS to scale across all EV brands.
GIC's suit has very bad political resonance. Whilst GIC, and Temasek, are independent, apolitical investors, in reality their actions carry sovereign overtones. Nio, while a listed company, is seen domestically as a strategic Chinese EV brand, supported by local and provincial governments. And Nio is a major Chinese national champion of sorts. Coming at a time amid US-China decoupling and heightened sensitivity over Chinese tech firms facing Western scrutiny, the optics is very bad for Singapore suing a Chinese tech-heavy firm in the US. At best it could be viewed as purely a commercial dispute, at worse, a gesture aligning with Western investor activism.
Sovereign wealth funds usually avoid visible participation in investor class actions for a combination of legal, diplomatic and strategic reasons. There is a high reputational risk as active plaintiff opens the SWF to discovery obligations and jurisdictional exposure in foreign courts, something states that protect high levels of secrecy do not wish to visit. For these reasons, SWFs seat out or stay passive in class actions. Examples are the Wirecard, Luckin Coffee, Petrobass Securities and Tesla Inc class actions.
So why does GIC take on an active plaintiff role in this case? Perhaps it is a signal at frustration over Chinese corporate governance. Or could it be for domestic consumption to manage local sensibilities for when GIC is forced to write off losses on one single investment amounting to possibly US$500m to US$1b.
GIC and Temasek:
On 25 Aug 2020 I wrote about Temasek's investment in Nio. You can read it here.
Temasek invested US$259,458,126 by snapping up 41,446,985 on IPO in 2019. For a long term investor, one wonders why they exited within months in Q1 and Q2 of 2020 for a massive loss which I calculated to be about US$71m.
One wonders also why Temasek exited only for GIC to snap up 54m shares in the same company several weeks later. Afterall, the top honchos of the two sovereign wealth funds share the same bed.
In investment executive wordspeak, we often hear potpourri of impressive word salads like "strategic allocation", "disciplined capital deployment", "conviction in emerging opportunities". "diversified exposure" etc. when in reality, it often is a roomful of MBAs squinting at the same chart and deciding fear of missing out was a strategy. That's how big firm executives dignify what was in truth, just a collective stampede into the latest shining thing.
When prices head North, they self-congratulate on foresight. When the bubble popped, of course the language changed. It becomes a "recalibration of portfolio exposure and a reassessment of market fundamentals". That's just corporate-speak for "we followed the herd off the cliff", but with PowerPoint slides. But if the golden hive of honey we pursued was destroyed by a rummaging bear, let's scapegoat it to death. Thank goodness for Grizzly the scapegoat.
All it takes is just the following graphs to demonstrate my point:
Nio's rise in 2020-2021 was part of a broader "EV euphoria" wave driven largely by Tesla's parabolic rally. It had nothing to do with Nio's fundamentals, and least of all, the US$600m inflated revenue claimed by GIC.
Across China, all EV stocks rose to astounding heights during this period. It was simply a case of "the rising tide lifted all boats".
A look at what happened to some other Chinese EV counters
In the class action period (11 Aug 2020 to 11 Jul 2022 Chinese EV stocks all generally performed very well. After 11 Jul 2022, some continued to do well, some had zig saw trajectories, some slided all the way down.
How do we make sense of this? At Jan 2020 Tesla's market cap was US$75b. Driven by expectations that it would dominate the global auto industry., Tesla's stocks surged and their market cap hit US$1 trillion by late 2021. This sparked a "halo effect" across the EV sector as investors sought the next "Tela", and Chinese EV startups were the main candidates.
Chinese EV stocks rose across the board during this period. Nio's ADR price rose in tandem. This is a classic illustration of how often investor sentiments, not fundamentals, drives the market. Nio's ADR price increase was not the consequence of revenue inflated by US$600m from mis-representation as claimed by GIC but the general price trend of the industry.
Eventually, investors recalibrate expectations to actual delivery volumes, margins and cash flows, and valuations return to sanity. And prices find their new equilibrium. Unfortunately for GIC, Nio is by far one of the worst performers of Chinese EVs post 2022.
In summary, GIC's lawsuit framed around allegations of inflated share price, ignores the broader market context. Nio's ADR price rose in line with Tesla and other Chinese EV makers. The peak in Nio's price reflected sector-wide revaluation, not company-specific mis-statements. The decline after 2022 was not caused by Grizzly's negatively report but by the market reassessing Nio's fundamentals - delivery volumes, cash burn, margins and macro sentiment. There was no 'J' drop of Nio's share price after Grizzly's report came out. Nio's share price slided gradually towards rational valuations, reflecting the company's actual financial performance, not a fraud revelation.
Conclusion:
GIC's case cannot stand because there was no mis-statement of income and no fraudulent reporting. Weineng is a related company and Nio had complied with GAAP standards by not consolidating the accounts of Weineng and disclosed their inter-company transactions in the Notes to Accounts. The claims of Nio having control over Weineng based on the fact the EV maker manages the battery inventory cannot stand because it is not recognising the operational requirements of the business and the swapping tasks performed by Nio which is predicated by a management service contract. The claims that deferred revenue is taken again is incorrect. If it relates to BaaS, such subscription fees accrue to Weineng and Nio takes in nothing. If it relates to the sales of batteries, the high volume was necessary as Weineng had to ramp-up inventory in its start up years for a business model build on availability. The impact on Nio's Profit & Loss is not the US$600m which is the sales price, but rather the usual mark up margins on sales of components estimated at US$63.4m which impacted P&L by about 4.5%, considered immaterial. The rise and fall of Nio's ADR prices can best be explained by the broader market revaluations of EV stocks during the particular period, not specific to Nio's mis-statements in their financials.
GIC's case will be thrown out so fast, their lawyers might still be opening their PowerPoint when it lends. The only thing likely to be awarded here is a polite reminder of "market risk".
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Practically every media worldwide carried this news because it is not everyday that a state sovereign wealth fund sues an investee company. In fact, this is actually the first instance. Local media BT, ST and CNA, and a few western media that I have seen, all ran mostly along similar lines. None provides a full picture that makes for a better understanding of the story.
Battery swapping and Battery-As-A-Service (BaaS):
In the early years, recharging of EV batteries was a big problem. A standard home AC charging takes like forever. A DC fast charger at a station may speed recharging up, but still took hours. Re-charging problem was the cause for the slow adoption of EVs.
Batterg swapping is a way to get around the problem. The EVs go to a swapping station and exchange depleted batteries for fully-charged ones. This way, drivers only spend about 10 minutes waiting for the batteries to be swapped.
BaaS is a business model where a consumer buys a vehicle without battery and signs a separate contract for use of battery at a monthly subscription. The consumer has the benefit of a lower upfront cost for the car w/o battery, continued use of battery beyond its normal lifespan by extending his BaaS subscription, and upgrading to new models of battery as technology improves.
Battery swapping is thus a service whereas BaaS is a financial mechanism similar to asset leasing.
So a buyer of a car with or without a battery would have a swapping service embeded in his contract with Nio, whereas a buyer of car only would have to subscribe to a BaaS contract with Weineng.
BaaS was pioneered by Israeli entrepreneur Shai Agassi. In 2007 he set up Better Place with the goal of selling cars without batteries, letting customers subscribe to battery usage at swap stations. Better Place partnered with Renault-Nissan which developed the Renault Fluence ZE specifically for battery swapping. Network of swapping stations were built in Israel and Denmark for a pilot project. In 2009 the first Renault battery-swap EVs appeared. By 2012 Better Place was bankrupt.
In 2014 Elon Musk's Tesla tested a pilot battery swapping facility in US. By 2016 Tesla shut it down.
Modern day EVs started off with the batteries built into the chasis, that is, "structured batteries". They cannot be easily removed. For swapping, the battery is modularised and placed in a compartment which facilitates easy removeable. There are various trade-offs between structured and removeable battery which we don't need to get into for our purpose here. We just need to understand for battery swapping, removeable batteries are required. Tesla uses structured batteries, Nio uses removeable batteries.
Battery swapping requires massive infrastructure (swapping stations) and massive inventory of battery packs. The operator needs a large float of fully-charged batteries available at all times to avoid a "battery run", similar to a bank which faces a bank run when it holds insufficient cash. The number of batteries to carry is a factor of number of cars sold, number of swapping stations. and the charging technology. Slow charging time means more batteries tied up. Batteries cost a lot, and with a life span of 5-7 years, it is capital intensive with heavy depreciation cost to bear. Battery swapping faces high technology risk. As it turned out, by 2019, supercharging technology shortened recharging time to just 15 mins. This effectively killed the idea for BaaS.
So why did Nio go into battery swapping? When China began accelerating EV adoption around 2018-2020, they saw that standardisation and modularisation could lower battery costs and extend lifecycle utilisation. Chinese manufacturers broke away from Tesla's integrated way of building batteries. They went for modularisation.
The EV industry has great reputational stakes for China. It seeks to lead the industry to legitimise its technological prowess and promote it's " Made-in-China" agenda. China’s EV policy evolved through three overlapping layers of incentives — industrial, consumer, and financial-market. Again let's not get into all the subsidies and incentives provided. Just to understand the state initiatives played right into Nio's strategy. The state helped in the development of the eco-system for battery swapping on the infrastructure and supply chain side. For example facilitating in the energy supply side for supercharging capabilities in swapping stations. It standardised battery modularisation which allows a future pathway for BaaS to scale across all EV brands.
Weineng Battery Asset Co Ltd (Mirattery):
In Aug 2020 Weineng, better known in the market as Mirattery, was established to own the batteries and operate the BaaS. Nio's customers purchase the EV without batteries and sign up a BaaS subscription with Weineng. Customers swap batteries at Nio's swapping stations. The monthly subscription starts at RMB980/RMB1,480 per month for 70/75 and 100 kWh battery for 7 years. For this arrangement, Nio sells it's batteries to Weineng.
EV batteries are very expensive, making up to 40% of sales price to consumers. It makes a lot of business sense for Nio to hive off BaaS to a separate company, separating manufacturing from financial operation. A lower capitalisation requirement for Nio makes for improved capital efficiency. This also allows Nio's EV prices to be priced significantly lower without battery which was felt will improve market adoption of EVs.
Nio-Weineng structure is nothing unique. It is a vertically integrated financing ecosystem, something very common in traditional car retailing business. Let's take a look at a captive-finance model and dealer-mediated financing model. Toyota has a financing arm, Toyota Financial Services. The car dealer acts as "origination channel" for the lender and insurer. This allows Toyota to separate its auto manufacturing and financial business, and frees TFS to use its hire purchase contracts to create asset-backed securities for funding. This is exactly what the Nio-Weineng relationship is all about. It allows Nio to monetise their battery inventory, and Weineng to securitise their BaaS (eg RMB635m Note issuance arranged by ABN). There are slight differences with the Toyota example given EV is a new industry, but this illustration takes away any claims of "fraudulent" arrangement.
Weineng was a partnership of Nio, Contemporary Amperex Tech Ltd (CATL - battery supplier), Hunei Science Tech Investment Group, Guotai Junan Intl. Each put in RMB 200,000 for 25% equal share, eventually increasing by another RMB270,000. The 4 founders' share have been reduced to about 19+% with additional state entity shareholders.
Grizzly's claims:
On 28 June 2022 Grizzly Research LLC posted their Nio Report on their website. The report contains many claims and detailed analysis. I actually do not agree with their math. You can read Grizzly's report here and decide for yourself.
Grizzly points out Weineng bought 40,053 batteries but had only 19,000 BaaS subscribers as at 31 Sep 2021. Nio uses a related party to fraudulently register excess sales. Since Nio retains operational control of swap stations and cash flows, Weineng is more a financing vehicle than an independent customer, making the Nio-Weineng arrangement similar to the fraudulent Valeant-style off balance sheet transaction.
Grizzly is a professional shorter, their agenda is obviously to influence stock prices down.
GIC's claims:
On 28 Aug 2025 GIC filed a lawsuit in the US District Court for the Southern District of New York against Nio Inc and its CEO and CFO. GIC alleges -
1. Nio recognised more than US$600m in revenue prematurely by selling batteries to a related entity.
2. The BaaS model means that end-users pay monthly subscriptions fees but Nio booked the full battery sale upfront when Weineng purchased the batteries, thus "pulling forward" revenue rather than recognising it over time.
3. Nio treated Weineng as a related company and as such, had recognised the sales of batteries to an independent customer. The true arrangement is Nio had control and ownership over Weineng. This was not disclosed thus Nio's revenue recognition of US$600m was incorrect and inflated its earnings.
4. The artificially inflated earnings distorts Nio's share and ADR prices causing it to be higher than it should be.
5. GIC bought 54.4m ADR between Aug 2020-Jul 2022 and suffered significant losses.
Nio's rebuttal::
Based on an independent investigation, Nio said the claims are without merit. However, Nio never provided any financial analysis or data to substantiate their rebuttal.
Misunderstanding of EV batteries::
If Weineng is an independent entity, why doesn't it buy batteries itself, why does it have to buy from Nio. In fact, one of Weineng shareholders, CATL, is a supplier of batteries to Nio.
What Weineng buys from Nio are battery packs, it's a plug-and-go pack for use specifically on Nio EVs only. Nio is not a battery manufacturer. It buys battery cells and modules from supplier CATL which Nio then assembles into a pack using its own battery pack architecture, puts in the cooling systems, handles the software integration for controls and diagnostics, integrates with the vehicle and the battery swapping network.
In other words, there is a lot of value-added by Nio and overheads that go into the battery packs sold to Weineng. "The finished pack — the one that can be removed, replaced, monitored, and billed across a nationwide swap infrastructure — is NIO-engineered component Therefore, when Mirattery buys a battery from Nio, it is buying a fully assembled, calibrated pack whose intellectual property, firmware, and integration standard belong to NIO, even if the underlying cells are sourced from CATL."
Weineng buys its batteries from Nio because only these packs are fully compatible with their swap network’s software, telemetry, and safety protocols.
Sale of batteries to Weineng:
(Nio's financial statement for 2021 is here. All 261 pages - not an easy read)
The question is how was this transacted and how was it reflected in Nio's accounts.
So where did GIC obtain this figure of US$600m? In the explanatory notes under "Related Company Transactions and Balances" for y/e 31 Dec 2021 is this :
So sales of goods to Weineng was RMB 290,135,000 (2020) + RMB 4,138,187,000 (2021) = RMB 4,428,322,000 .
This is equal to the US$600m GIC claims was improperly taken into revenue by Nio
But whoops, it should only add to RMB 4,428,322. I checked and re-checked the 2021 accounts. Those figures are not in '000s. Then I checked to 2022 accounts. Yes, indeed they are in 'thousands. There is a description error in 2021 accounts.
Did Nio take these US$600m into its accounts? The consolidated accounts (which does not include Weineng) shows only two main revenue lines - (a) Sales of vehicles, (b) Other Sales.
'Other Sales' (pg 124) was RMB 1,075,411,000 (2020) RMB 2,966,683,000 (2021). This comprises several other specific products and services but no Sales of Batteries. If Nio took in the sales, it had to be reported under Sales of Vehicles.
Did Nio oversell on the batteries:
"The Group recognizes revenue from the sales of battery packs to the Battery Asset Company when the vehicles (together with the battery packs) are delivered to the BaaS users which is the point considered then the control of the battery packs is transferred to the Battery Asset Company." (Pg 200)
Grizzly, and possibly GIC, understood this as Nio sells batteries to Weineng on a back-to-back basis. Therefore if 19,000 consumers signed up for BaaS, Nio should have sold 19,000 batteries to Weineng. Thus 40,053 batteries were oversold to inflate Revenue. Nio uses a third party to sell batteries to itself and create fictitious revenue. That's what they claim.
There is a misunderstanding of the business. "Back-to-back" would be the standard routine once the operation stabilises. "In a nationwide swap network, inventory is not measured by “one battery per subscriber.” Each station requires redundant stock to guarantee instant swaps, maintain service levels, and cover maintenance, logistics, and geographic rotation." Nio has hundreds of swap stations countrywide and therefore in aggregate, a massive operational buffer is required. What should be the optimum is yet unknown for a nascent operation. BaaS is a business build on availability. In its maiden years, Weineng needed to ramp-up its acquisition of battery inventory. The 40,053 batteries were operational requirements, not a scheme by Nio to artificially beef up sales.
In 2021, NIO’s network exceeded 500 stations. That alone accounts for tens of thousands of additional packs. The “21,000 extra batteries” that Grizzly calls excess are simply the operational buffer of a system built on availability. Just like a bank that must maintain sufficient adequate idle cash, or a water utility that must maintain water reserve levels,
Were the batteries sold at arms-length:
Market comparison of batteries is very difficult because there are technical differences, supplier OEM prices are not publicised, we don't know the product mix, and Nio provides no info at all. But it is possible to gauge industry benchmarks based on price per kWh.
According to Grizzly's source, Weineng owns 40,053 batteries as at Sep 2021 and had 19,000. Let's assume in Q4 there were additional 3,000 EVs sold and all signed up for BaaS. That means as at 31 Dec 2021 total batteries sold to Weineng was 19,000 + 40,053 + 3,000 = 52,053. According to Grizzly, of the 19,000 BaaS subscribers as at Sep 2021, 18% were with 70-75 kWh and 82% on 100 kWh battery packs. Let's assume we have only 70 kWh/100 kWh packs. We apply this distribution to batteries. This works out to 9,370 batteries of 70 kWh and 42,683 batteries of 100 kWh weighted average kWh battery packs. Thus for the total sales of US$600m of 52,053 batteries, the cost of battery per kWh = US$122 on weighted average basis.
Bloomberg's Battery Price Survey tracks global average pack-level costs. It's historical trend shows US$ per kWh:
2018 - US$181; 2019 - US$157; 2020 - US$137; 2021 - US$132; 2022 - US$ 151; 2023 - US$139; 2024 - US$115
Bloomberg had noted battery packs from China trends lower as China is a cheaper cost base. Nio's battery inventory was probably built up during 2019/2020. Thus my estimated cost of US$122 per kWh seems in the ballpark against this historical benchmark. The sales to Weineng seems to be arms-length.
Did Nio load in a margin:
Of course they did. When Nio sells EVs with batteries, a gross margin is added for all components. Market indicators are Chinese EV makers mark up about 10-15% on components. Since apparently Weineng bought in bulk to build the float for the BaaS operation, it is fair to assume Nio's mark up was lower than their usual rate for one-to-one sales. If we assume an average 12% mark up, the contribution to net profits is only US$64.3m. The sales of batteries therefore inflated P&L by only US$64.3m and not US$600m.
Total loss for 2020+2021 was RMB9.1b (US$1.4b). The margins of US$63.4m from the sales of batteries has only 4.5% impact on profits. It could hardly make any serious impact on Nio's share price.
Another good give away of possible financial shenanigan is often detected in the Gross Profit Ratio. In fact, there was a big improvement in the GP ratio from 13% in 2020 to 23% in 2021. However, I think this can be explained away by the fact these are maiden years. The company only made delivery in end 2018 so production data has not yet normalised. According to Nio, the increase on GP ratio was "driven by the economies of scale achieved as a result of vehicle production and delivery volume increase, and higher average selling price."
Unearned BaaS Subscription Fees:
Although not specifically mentioned by both Grizzly and GIC, both claims implicitly suggest Nio had taken in 7 years future revenue of BaaS fees.
How much are we talking about?
Lets assume a further 3,000 buyers signed up in Q4 of 2021 making a total 22,000 subscribers as at 31 Dec 2021.
Then we compute the number of subscribers x monthly fees x 7 years:
100 kWh batteries : 22,000 x 82% x RMB 1,480 x 12 x 7 = RMB 2,247,732,800
70/75 kWh batteries : 22,000 x 18% x RMB 980 x 12 x 7 = RMB 326,652,480
TOTAL ESTIMATED BaaS FEES = RMB 2,574,385,280 (US$349m)
Since subscribers sign up as and when sales of vehicles are made over the course of 2020 and 2021, let's assume an average of 10 months fees have been earned over the 2 years:
TOTAL ESTIMATED BaaS FEES EARNED = (RMB 2,574,385,280/7/12) x 10 = RMB 257,438,528
TOTAL ESTIMATED BaaS FEES UNEARNED = RMB 2,316,946,752
Let's check whether the estimated Total BaaS Fees is in Nio's account.
We have already seen in the table above on "Other Sales" there is no revenue line for Earned BaaS Fees. BaaS Fee, which belongs to Weineng, have not been taken into Nio's Revenue.
Let's take a look on the Liabilities to see if there is anything on unearned or deferred BaaS Fees. Pg 221 shows a breakdown :
The "Other Revenue" table above has a revenue line "Package Sales". This covers many embeded services in the Car Sales Contract, one of which is "Energy Package" which includes battery swapping service fees. The battery swapping fee is not the BaaS Fees which is a financing item. The notes say "battery swapping service embedded in the vehicle sales contract, with unrecognized deferred revenue balance of RMB1,006,824 and RMB2,164,288 as of December 31, 2020 and 2021, respectively". The major balance in the Deferred Revenue relates to unearned income from swapping service fee, which belongs to Nio.
The Legal Argument:
Nio's claim is Weineng is an independent entity. It owns the batteries and consumers contract with Weineng for the BaaS financing.
GIC's argument is on substance over form, Nio is in full control of the BaaS operation. Weineng's batteries are all in Nio's premises, Nio's ex-staff runs part of the BaaS operation within Nio's premises, Nio guarantees Weineng's loans. For all intents and purposes, Nio owns the BaaS business and Weineng is just a financial mechanism for Nio to pre-sell batteries and BaaS subscriptions to pull in revenue upfront. There is therefore a round-tripping of cash flow Nio to Weineng and back to Nio.
In the explanation I have shown Nio has nothing to do with the BaaS subscription, that BaaS is a model that requires availability of batteries and Weineng had to ramp-up purchases in its start up years. Nio will sell batteries to Weineng on a back-to-back basis when EVs are sold, and the sale of batteries to Weignang was an arms-length transaction.
The question of control rests on who bears the economic risks. Weineng owns the inventory thus depreciation and obsolescence risk for the batteries lie with the Battery Asset Co. Nio puts up RMB470,000 share capital in Weineng and does not guarantee any loans. Weineng securitised their BaaS contracts for structured asset-backing notes for their own funding needs. The only issue may be this. Nio recognises a risk in Weineng's liquidity arising from default by BaaS subscribers. As Weineng's liquidity may impact Nio, to mitigate this, Nio provides guarantee to the Battery Asset Company for the default in payment of monthly subscription fees by users. The maximum amount of guarantee that can be claimed by Weineng for the users’ payment default is capped at the accumulated service fees Nio receives from Weineng. For 2020 and 2021, this was immaterial.
Business Logic, Not Concealment:
Weineng's BaaS business requires battery swapping. This cannot be physically or realistically be separated from Nio's ecosystem. It requires :
* integration with Nio's vehicles and software.
* maintenance and diagnostics only Nio can perform, mostly automated capabilities.
* real-time control of energy logistics.
* customer interface (billing, swap scheduling).
Weineng owns the batteries and manages subscription contracts and financing. Nio provides the physical infrastructure and earns service fees for operating the network. So operational control by Nio is necessary for safety, quality, and brand continuity, not for financial control.
It therefore is business logic, not concealment, for Weineng to:
* have their subscribers do their battery swapping done at Nio's swapping stations.
* batteries to be located at Nio's stations.
* second Nio's experienced employees to run Weineng's operations.
* have Nio's showroom staff as Weineng's "initiator channel" selling the BaaS.
This Nio-Weineng arrangement is obviously a service provided by Nio under a management contract for which Nio earns a service fee. This is a relationship that Grizzly and GIC fail to see.
The Accounting Argument:
GIC's point centres on whether Nio should consolidate Weineng's accounts. The point being, on consolidation, intra-company transactions will be neutralised. Thus the US$600m sales of batteries will have no effect on Nio's consolidated Profit & Loss, ie the profits will not be inflated and stock prices will not be artificially inflated.
If Nio holds less than 20%-25% and has no significant influence, it does not need to consolidate Weineng. The investment is carried at fair value or cost, and any intra-company dealings disclosed in Notes to Accounts. This is exactly the case for Nio.
If Nio owns 20%-50%, has significant influence (not control), the "Equity method" applies. Nio should record it's share of Weineng's profits/losses in its own P&L. Balance sheet shows an "investment in associate" line. There is no full consolidation of assets/liabilities, but related party transactions must be disclosed in Note to Accounts.
If >50% ownership OR effective control, full consolidation under GAAP/IFRS is required. The subsidiary's assets/liabilities and income/expenses are combined. Non-controlling shareholders' interest are shown separately.
"Contol" isn't just about shareholding. It covers voting rights, board control, decision-making power or economic dependence.
GIC's contention is Weineng cannot operate independently of Nio's platform and that, substance over form, Nio might be considered controlling Weineng, thus triggering consolidation requirement. That is where the accounting controversy lies.
In the digital era, companies monetise assets in the "X-as-a-Service" model. Examples are:
*IaaS - Infrastructure-as-a-Service (Amazon AWS, Microsoft Azure, Google Cloud).
* SaaS - Software-as-a-Service (Adobe Creative Cloud, Salesforce, Office 365).
* MaaS - Mobility-as-a-Service (Uver, Grab, Volvo Care).
* EaaS - Energy-as-aService (Sneider Electric, Siemens, Enel X).
* Eaas - Equipment-as-a-Service (Rolls-Royce, GE Industrial).
* DaaS - Device-as-a-Service (HP, Dell, Apple).
* PaaS - Plarform-as-a-Service (Bloomberg Terminal, Snowflake).
All these share the same core transformation as BaaS - capital-intensive asset is turned into subscription-based, usage-linked revenue streams. This shift blurs accounting lines (asset vs service), legal lines (ownership vs access) and policy lines (industrial vs digital regulation). This is exactly the tension seen in this Nio-Weineng case.
Very unfortunately, accounting profession is often behind the curve on such innovation driven by business needs. The interpretation from the profession often comes from inadequate understanding of the business process. In this case, not understanding the nature of EV batteries (which explains the need for Weineng to buy from Nio and to buy an initial huge inventory) and operations control vs corporate control (where Nio has operational control over swapping service, but no policy pricing control of SaaB).
What other experts say:
Following Grizzly's report in 2022, several investment banks publicly disagreed with their conclusions. For example Deutsche Bank AG, Morgan Stanley, JP Morgan, Daiwa Capital Markets all challenged Grizzly's data interpretations and maintain that the BaaS model was being misunderstood by the short seller. I would add GIC too.
Nio's auditor then, and still is, PricewaterhouseCooper-Zhong Tian LLP. Post Grizzly's report, the auditor would certainly have conducted the following tests:
* Check to ensure the arms-length nature of the sale of batteries (as what I have done). They are better-placed with access to costing info.
* Check the materiality of the impact the sales of batteries had on the bottom line (as what I have done).
* Check to ensure no revenue of deferred nature relating to BaaS had been taken into Nio's books (as what I have done).
* Check various contracts (BaaS, Nio Management Services, etc) to determine risks and exposures.
* Check separation of battery inventory between Nio and Weineng.
* Check cashflows to ensure no round tripping.
* Ensure Nio has no board control over Weineng.
* Nio has no control over pricing policy regarding BaaS.
Since PwC-Zhong Tian has remained as auditors, one can assume they are satisfied there were no fraudulent transactions, no misrepresentation, and no exception to accounting standards.
The Law:
Chinese law does not allow foreign capital. Companies circumvent this by creating an offshore entity, located in tax havens, which issues ADRs. Nio Inc is domiciled in Cayman Island. These securities are listed on NYSE and subject to US Securities Exchange Act.
Under US Securities Act, investors can bring suit against a company to claim civil damages (compensation) from mis-statements of inflated revenue, mis-disclosure of related entity. Although plaintiff can claim fraud was committed, it is the state that will pursue a felony charge.
Why does GIC sue:
There are two other class action suits against Nio filed in August and September 2022. The court has consolidated these two actions and appointed Mohammad Siddiqui as Lead Plaintiff. Nio had filed a motion-to-dismiss and the briefing was completed on 31 Jul 2023. Decision remains pending.
The class period for the class action is 11 Aug 2020-11 Jul 2022. The class period is the window of time which the alleged misconduct affected the market price of a security. 11 Aug 2020 is Weineng's incorporation. Grizzly published their report on 28 Jun 2020. But that is not the date for the close of the class period. A few days are allowed for the market to fully absorb and react to the allegation. Thus the end date 11 Jul 2022 was determined.
Any investor who purchased during the class period is automatically included in the class unless they opt out. Thus GIC is already a member of the class action.
A separate litigation is very expensive (goes into million SSS). GIC's suit is a duplicate effort - same documents, same witnesses, same accounting issues. Courts usually stay or consolidate identical suits. Which is exactly what happened.
GIC has said their action is for a "placeholder" filing. This is quite common in litigation involving investment cases. A party may have a different strategy, they fear the class action may settle for a smaller amount, the distribution of compensation may not be fair. The filing is to allow them a foot in the door to opt out later and sue on their own. Due to Statute of Limitations pressure, GIC had to file their case now to preserve their rights to act separately.
In Aug 2020 Weineng, better known in the market as Mirattery, was established to own the batteries and operate the BaaS. Nio's customers purchase the EV without batteries and sign up a BaaS subscription with Weineng. Customers swap batteries at Nio's swapping stations. The monthly subscription starts at RMB980/RMB1,480 per month for 70/75 and 100 kWh battery for 7 years. For this arrangement, Nio sells it's batteries to Weineng.
EV batteries are very expensive, making up to 40% of sales price to consumers. It makes a lot of business sense for Nio to hive off BaaS to a separate company, separating manufacturing from financial operation. A lower capitalisation requirement for Nio makes for improved capital efficiency. This also allows Nio's EV prices to be priced significantly lower without battery which was felt will improve market adoption of EVs.
Nio-Weineng structure is nothing unique. It is a vertically integrated financing ecosystem, something very common in traditional car retailing business. Let's take a look at a captive-finance model and dealer-mediated financing model. Toyota has a financing arm, Toyota Financial Services. The car dealer acts as "origination channel" for the lender and insurer. This allows Toyota to separate its auto manufacturing and financial business, and frees TFS to use its hire purchase contracts to create asset-backed securities for funding. This is exactly what the Nio-Weineng relationship is all about. It allows Nio to monetise their battery inventory, and Weineng to securitise their BaaS (eg RMB635m Note issuance arranged by ABN). There are slight differences with the Toyota example given EV is a new industry, but this illustration takes away any claims of "fraudulent" arrangement.
Weineng was a partnership of Nio, Contemporary Amperex Tech Ltd (CATL - battery supplier), Hunei Science Tech Investment Group, Guotai Junan Intl. Each put in RMB 200,000 for 25% equal share, eventually increasing by another RMB270,000. The 4 founders' share have been reduced to about 19+% with additional state entity shareholders.
Grizzly's claims:
On 28 June 2022 Grizzly Research LLC posted their Nio Report on their website. The report contains many claims and detailed analysis. I actually do not agree with their math. You can read Grizzly's report here and decide for yourself.
Grizzly points out Weineng bought 40,053 batteries but had only 19,000 BaaS subscribers as at 31 Sep 2021. Nio uses a related party to fraudulently register excess sales. Since Nio retains operational control of swap stations and cash flows, Weineng is more a financing vehicle than an independent customer, making the Nio-Weineng arrangement similar to the fraudulent Valeant-style off balance sheet transaction.
Grizzly is a professional shorter, their agenda is obviously to influence stock prices down.
GIC's claims:
On 28 Aug 2025 GIC filed a lawsuit in the US District Court for the Southern District of New York against Nio Inc and its CEO and CFO. GIC alleges -
1. Nio recognised more than US$600m in revenue prematurely by selling batteries to a related entity.
2. The BaaS model means that end-users pay monthly subscriptions fees but Nio booked the full battery sale upfront when Weineng purchased the batteries, thus "pulling forward" revenue rather than recognising it over time.
3. Nio treated Weineng as a related company and as such, had recognised the sales of batteries to an independent customer. The true arrangement is Nio had control and ownership over Weineng. This was not disclosed thus Nio's revenue recognition of US$600m was incorrect and inflated its earnings.
4. The artificially inflated earnings distorts Nio's share and ADR prices causing it to be higher than it should be.
5. GIC bought 54.4m ADR between Aug 2020-Jul 2022 and suffered significant losses.
Nio's rebuttal::
Based on an independent investigation, Nio said the claims are without merit. However, Nio never provided any financial analysis or data to substantiate their rebuttal.
Misunderstanding of EV batteries::
If Weineng is an independent entity, why doesn't it buy batteries itself, why does it have to buy from Nio. In fact, one of Weineng shareholders, CATL, is a supplier of batteries to Nio.
What Weineng buys from Nio are battery packs, it's a plug-and-go pack for use specifically on Nio EVs only. Nio is not a battery manufacturer. It buys battery cells and modules from supplier CATL which Nio then assembles into a pack using its own battery pack architecture, puts in the cooling systems, handles the software integration for controls and diagnostics, integrates with the vehicle and the battery swapping network.
In other words, there is a lot of value-added by Nio and overheads that go into the battery packs sold to Weineng. "The finished pack — the one that can be removed, replaced, monitored, and billed across a nationwide swap infrastructure — is NIO-engineered component Therefore, when Mirattery buys a battery from Nio, it is buying a fully assembled, calibrated pack whose intellectual property, firmware, and integration standard belong to NIO, even if the underlying cells are sourced from CATL."
Weineng buys its batteries from Nio because only these packs are fully compatible with their swap network’s software, telemetry, and safety protocols.
Sale of batteries to Weineng:
(Nio's financial statement for 2021 is here. All 261 pages - not an easy read)
The question is how was this transacted and how was it reflected in Nio's accounts.
So where did GIC obtain this figure of US$600m? In the explanatory notes under "Related Company Transactions and Balances" for y/e 31 Dec 2021 is this :
This is equal to the US$600m GIC claims was improperly taken into revenue by Nio
But whoops, it should only add to RMB 4,428,322. I checked and re-checked the 2021 accounts. Those figures are not in '000s. Then I checked to 2022 accounts. Yes, indeed they are in 'thousands. There is a description error in 2021 accounts.
Did Nio take these US$600m into its accounts? The consolidated accounts (which does not include Weineng) shows only two main revenue lines - (a) Sales of vehicles, (b) Other Sales.
'Other Sales' (pg 124) was RMB 1,075,411,000 (2020) RMB 2,966,683,000 (2021). This comprises several other specific products and services but no Sales of Batteries. If Nio took in the sales, it had to be reported under Sales of Vehicles.
Did Nio oversell on the batteries:
"The Group recognizes revenue from the sales of battery packs to the Battery Asset Company when the vehicles (together with the battery packs) are delivered to the BaaS users which is the point considered then the control of the battery packs is transferred to the Battery Asset Company." (Pg 200)
Grizzly, and possibly GIC, understood this as Nio sells batteries to Weineng on a back-to-back basis. Therefore if 19,000 consumers signed up for BaaS, Nio should have sold 19,000 batteries to Weineng. Thus 40,053 batteries were oversold to inflate Revenue. Nio uses a third party to sell batteries to itself and create fictitious revenue. That's what they claim.
There is a misunderstanding of the business. "Back-to-back" would be the standard routine once the operation stabilises. "In a nationwide swap network, inventory is not measured by “one battery per subscriber.” Each station requires redundant stock to guarantee instant swaps, maintain service levels, and cover maintenance, logistics, and geographic rotation." Nio has hundreds of swap stations countrywide and therefore in aggregate, a massive operational buffer is required. What should be the optimum is yet unknown for a nascent operation. BaaS is a business build on availability. In its maiden years, Weineng needed to ramp-up its acquisition of battery inventory. The 40,053 batteries were operational requirements, not a scheme by Nio to artificially beef up sales.
In 2021, NIO’s network exceeded 500 stations. That alone accounts for tens of thousands of additional packs. The “21,000 extra batteries” that Grizzly calls excess are simply the operational buffer of a system built on availability. Just like a bank that must maintain sufficient adequate idle cash, or a water utility that must maintain water reserve levels,
Were the batteries sold at arms-length:
Market comparison of batteries is very difficult because there are technical differences, supplier OEM prices are not publicised, we don't know the product mix, and Nio provides no info at all. But it is possible to gauge industry benchmarks based on price per kWh.
According to Grizzly's source, Weineng owns 40,053 batteries as at Sep 2021 and had 19,000. Let's assume in Q4 there were additional 3,000 EVs sold and all signed up for BaaS. That means as at 31 Dec 2021 total batteries sold to Weineng was 19,000 + 40,053 + 3,000 = 52,053. According to Grizzly, of the 19,000 BaaS subscribers as at Sep 2021, 18% were with 70-75 kWh and 82% on 100 kWh battery packs. Let's assume we have only 70 kWh/100 kWh packs. We apply this distribution to batteries. This works out to 9,370 batteries of 70 kWh and 42,683 batteries of 100 kWh weighted average kWh battery packs. Thus for the total sales of US$600m of 52,053 batteries, the cost of battery per kWh = US$122 on weighted average basis.
Bloomberg's Battery Price Survey tracks global average pack-level costs. It's historical trend shows US$ per kWh:
2018 - US$181; 2019 - US$157; 2020 - US$137; 2021 - US$132; 2022 - US$ 151; 2023 - US$139; 2024 - US$115
Bloomberg had noted battery packs from China trends lower as China is a cheaper cost base. Nio's battery inventory was probably built up during 2019/2020. Thus my estimated cost of US$122 per kWh seems in the ballpark against this historical benchmark. The sales to Weineng seems to be arms-length.
Did Nio load in a margin:
Of course they did. When Nio sells EVs with batteries, a gross margin is added for all components. Market indicators are Chinese EV makers mark up about 10-15% on components. Since apparently Weineng bought in bulk to build the float for the BaaS operation, it is fair to assume Nio's mark up was lower than their usual rate for one-to-one sales. If we assume an average 12% mark up, the contribution to net profits is only US$64.3m. The sales of batteries therefore inflated P&L by only US$64.3m and not US$600m.
Total loss for 2020+2021 was RMB9.1b (US$1.4b). The margins of US$63.4m from the sales of batteries has only 4.5% impact on profits. It could hardly make any serious impact on Nio's share price.
Another good give away of possible financial shenanigan is often detected in the Gross Profit Ratio. In fact, there was a big improvement in the GP ratio from 13% in 2020 to 23% in 2021. However, I think this can be explained away by the fact these are maiden years. The company only made delivery in end 2018 so production data has not yet normalised. According to Nio, the increase on GP ratio was "driven by the economies of scale achieved as a result of vehicle production and delivery volume increase, and higher average selling price."
Unearned BaaS Subscription Fees:
Although not specifically mentioned by both Grizzly and GIC, both claims implicitly suggest Nio had taken in 7 years future revenue of BaaS fees.
How much are we talking about?
Lets assume a further 3,000 buyers signed up in Q4 of 2021 making a total 22,000 subscribers as at 31 Dec 2021.
Then we compute the number of subscribers x monthly fees x 7 years:
100 kWh batteries : 22,000 x 82% x RMB 1,480 x 12 x 7 = RMB 2,247,732,800
70/75 kWh batteries : 22,000 x 18% x RMB 980 x 12 x 7 = RMB 326,652,480
TOTAL ESTIMATED BaaS FEES = RMB 2,574,385,280 (US$349m)
Since subscribers sign up as and when sales of vehicles are made over the course of 2020 and 2021, let's assume an average of 10 months fees have been earned over the 2 years:
TOTAL ESTIMATED BaaS FEES EARNED = (RMB 2,574,385,280/7/12) x 10 = RMB 257,438,528
TOTAL ESTIMATED BaaS FEES UNEARNED = RMB 2,316,946,752
Let's check whether the estimated Total BaaS Fees is in Nio's account.
We have already seen in the table above on "Other Sales" there is no revenue line for Earned BaaS Fees. BaaS Fee, which belongs to Weineng, have not been taken into Nio's Revenue.
Let's take a look on the Liabilities to see if there is anything on unearned or deferred BaaS Fees. Pg 221 shows a breakdown :
The Legal Argument:
Nio's claim is Weineng is an independent entity. It owns the batteries and consumers contract with Weineng for the BaaS financing.
GIC's argument is on substance over form, Nio is in full control of the BaaS operation. Weineng's batteries are all in Nio's premises, Nio's ex-staff runs part of the BaaS operation within Nio's premises, Nio guarantees Weineng's loans. For all intents and purposes, Nio owns the BaaS business and Weineng is just a financial mechanism for Nio to pre-sell batteries and BaaS subscriptions to pull in revenue upfront. There is therefore a round-tripping of cash flow Nio to Weineng and back to Nio.
In the explanation I have shown Nio has nothing to do with the BaaS subscription, that BaaS is a model that requires availability of batteries and Weineng had to ramp-up purchases in its start up years. Nio will sell batteries to Weineng on a back-to-back basis when EVs are sold, and the sale of batteries to Weignang was an arms-length transaction.
The question of control rests on who bears the economic risks. Weineng owns the inventory thus depreciation and obsolescence risk for the batteries lie with the Battery Asset Co. Nio puts up RMB470,000 share capital in Weineng and does not guarantee any loans. Weineng securitised their BaaS contracts for structured asset-backing notes for their own funding needs. The only issue may be this. Nio recognises a risk in Weineng's liquidity arising from default by BaaS subscribers. As Weineng's liquidity may impact Nio, to mitigate this, Nio provides guarantee to the Battery Asset Company for the default in payment of monthly subscription fees by users. The maximum amount of guarantee that can be claimed by Weineng for the users’ payment default is capped at the accumulated service fees Nio receives from Weineng. For 2020 and 2021, this was immaterial.
Business Logic, Not Concealment:
Weineng's BaaS business requires battery swapping. This cannot be physically or realistically be separated from Nio's ecosystem. It requires :
* integration with Nio's vehicles and software.
* maintenance and diagnostics only Nio can perform, mostly automated capabilities.
* real-time control of energy logistics.
* customer interface (billing, swap scheduling).
Weineng owns the batteries and manages subscription contracts and financing. Nio provides the physical infrastructure and earns service fees for operating the network. So operational control by Nio is necessary for safety, quality, and brand continuity, not for financial control.
It therefore is business logic, not concealment, for Weineng to:
* have their subscribers do their battery swapping done at Nio's swapping stations.
* batteries to be located at Nio's stations.
* second Nio's experienced employees to run Weineng's operations.
* have Nio's showroom staff as Weineng's "initiator channel" selling the BaaS.
This Nio-Weineng arrangement is obviously a service provided by Nio under a management contract for which Nio earns a service fee. This is a relationship that Grizzly and GIC fail to see.
The Accounting Argument:
GIC's point centres on whether Nio should consolidate Weineng's accounts. The point being, on consolidation, intra-company transactions will be neutralised. Thus the US$600m sales of batteries will have no effect on Nio's consolidated Profit & Loss, ie the profits will not be inflated and stock prices will not be artificially inflated.
If Nio holds less than 20%-25% and has no significant influence, it does not need to consolidate Weineng. The investment is carried at fair value or cost, and any intra-company dealings disclosed in Notes to Accounts. This is exactly the case for Nio.
If Nio owns 20%-50%, has significant influence (not control), the "Equity method" applies. Nio should record it's share of Weineng's profits/losses in its own P&L. Balance sheet shows an "investment in associate" line. There is no full consolidation of assets/liabilities, but related party transactions must be disclosed in Note to Accounts.
If >50% ownership OR effective control, full consolidation under GAAP/IFRS is required. The subsidiary's assets/liabilities and income/expenses are combined. Non-controlling shareholders' interest are shown separately.
"Contol" isn't just about shareholding. It covers voting rights, board control, decision-making power or economic dependence.
GIC's contention is Weineng cannot operate independently of Nio's platform and that, substance over form, Nio might be considered controlling Weineng, thus triggering consolidation requirement. That is where the accounting controversy lies.
In the digital era, companies monetise assets in the "X-as-a-Service" model. Examples are:
*IaaS - Infrastructure-as-a-Service (Amazon AWS, Microsoft Azure, Google Cloud).
* SaaS - Software-as-a-Service (Adobe Creative Cloud, Salesforce, Office 365).
* MaaS - Mobility-as-a-Service (Uver, Grab, Volvo Care).
* EaaS - Energy-as-aService (Sneider Electric, Siemens, Enel X).
* Eaas - Equipment-as-a-Service (Rolls-Royce, GE Industrial).
* DaaS - Device-as-a-Service (HP, Dell, Apple).
* PaaS - Plarform-as-a-Service (Bloomberg Terminal, Snowflake).
All these share the same core transformation as BaaS - capital-intensive asset is turned into subscription-based, usage-linked revenue streams. This shift blurs accounting lines (asset vs service), legal lines (ownership vs access) and policy lines (industrial vs digital regulation). This is exactly the tension seen in this Nio-Weineng case.
Very unfortunately, accounting profession is often behind the curve on such innovation driven by business needs. The interpretation from the profession often comes from inadequate understanding of the business process. In this case, not understanding the nature of EV batteries (which explains the need for Weineng to buy from Nio and to buy an initial huge inventory) and operations control vs corporate control (where Nio has operational control over swapping service, but no policy pricing control of SaaB).
What other experts say:
Following Grizzly's report in 2022, several investment banks publicly disagreed with their conclusions. For example Deutsche Bank AG, Morgan Stanley, JP Morgan, Daiwa Capital Markets all challenged Grizzly's data interpretations and maintain that the BaaS model was being misunderstood by the short seller. I would add GIC too.
Nio's auditor then, and still is, PricewaterhouseCooper-Zhong Tian LLP. Post Grizzly's report, the auditor would certainly have conducted the following tests:
* Check to ensure the arms-length nature of the sale of batteries (as what I have done). They are better-placed with access to costing info.
* Check the materiality of the impact the sales of batteries had on the bottom line (as what I have done).
* Check to ensure no revenue of deferred nature relating to BaaS had been taken into Nio's books (as what I have done).
* Check various contracts (BaaS, Nio Management Services, etc) to determine risks and exposures.
* Check separation of battery inventory between Nio and Weineng.
* Check cashflows to ensure no round tripping.
* Ensure Nio has no board control over Weineng.
* Nio has no control over pricing policy regarding BaaS.
Since PwC-Zhong Tian has remained as auditors, one can assume they are satisfied there were no fraudulent transactions, no misrepresentation, and no exception to accounting standards.
The Law:
Chinese law does not allow foreign capital. Companies circumvent this by creating an offshore entity, located in tax havens, which issues ADRs. Nio Inc is domiciled in Cayman Island. These securities are listed on NYSE and subject to US Securities Exchange Act.
Under US Securities Act, investors can bring suit against a company to claim civil damages (compensation) from mis-statements of inflated revenue, mis-disclosure of related entity. Although plaintiff can claim fraud was committed, it is the state that will pursue a felony charge.
Why does GIC sue:
There are two other class action suits against Nio filed in August and September 2022. The court has consolidated these two actions and appointed Mohammad Siddiqui as Lead Plaintiff. Nio had filed a motion-to-dismiss and the briefing was completed on 31 Jul 2023. Decision remains pending.
The class period for the class action is 11 Aug 2020-11 Jul 2022. The class period is the window of time which the alleged misconduct affected the market price of a security. 11 Aug 2020 is Weineng's incorporation. Grizzly published their report on 28 Jun 2020. But that is not the date for the close of the class period. A few days are allowed for the market to fully absorb and react to the allegation. Thus the end date 11 Jul 2022 was determined.
Any investor who purchased during the class period is automatically included in the class unless they opt out. Thus GIC is already a member of the class action.
A separate litigation is very expensive (goes into million SSS). GIC's suit is a duplicate effort - same documents, same witnesses, same accounting issues. Courts usually stay or consolidate identical suits. Which is exactly what happened.
GIC has said their action is for a "placeholder" filing. This is quite common in litigation involving investment cases. A party may have a different strategy, they fear the class action may settle for a smaller amount, the distribution of compensation may not be fair. The filing is to allow them a foot in the door to opt out later and sue on their own. Due to Statute of Limitations pressure, GIC had to file their case now to preserve their rights to act separately.
GIC's suit has very bad political resonance. Whilst GIC, and Temasek, are independent, apolitical investors, in reality their actions carry sovereign overtones. Nio, while a listed company, is seen domestically as a strategic Chinese EV brand, supported by local and provincial governments. And Nio is a major Chinese national champion of sorts. Coming at a time amid US-China decoupling and heightened sensitivity over Chinese tech firms facing Western scrutiny, the optics is very bad for Singapore suing a Chinese tech-heavy firm in the US. At best it could be viewed as purely a commercial dispute, at worse, a gesture aligning with Western investor activism.
Sovereign wealth funds usually avoid visible participation in investor class actions for a combination of legal, diplomatic and strategic reasons. There is a high reputational risk as active plaintiff opens the SWF to discovery obligations and jurisdictional exposure in foreign courts, something states that protect high levels of secrecy do not wish to visit. For these reasons, SWFs seat out or stay passive in class actions. Examples are the Wirecard, Luckin Coffee, Petrobass Securities and Tesla Inc class actions.
So why does GIC take on an active plaintiff role in this case? Perhaps it is a signal at frustration over Chinese corporate governance. Or could it be for domestic consumption to manage local sensibilities for when GIC is forced to write off losses on one single investment amounting to possibly US$500m to US$1b.
GIC and Temasek:
On 25 Aug 2020 I wrote about Temasek's investment in Nio. You can read it here.
Temasek invested US$259,458,126 by snapping up 41,446,985 on IPO in 2019. For a long term investor, one wonders why they exited within months in Q1 and Q2 of 2020 for a massive loss which I calculated to be about US$71m.
One wonders also why Temasek exited only for GIC to snap up 54m shares in the same company several weeks later. Afterall, the top honchos of the two sovereign wealth funds share the same bed.
In investment executive wordspeak, we often hear potpourri of impressive word salads like "strategic allocation", "disciplined capital deployment", "conviction in emerging opportunities". "diversified exposure" etc. when in reality, it often is a roomful of MBAs squinting at the same chart and deciding fear of missing out was a strategy. That's how big firm executives dignify what was in truth, just a collective stampede into the latest shining thing.
When prices head North, they self-congratulate on foresight. When the bubble popped, of course the language changed. It becomes a "recalibration of portfolio exposure and a reassessment of market fundamentals". That's just corporate-speak for "we followed the herd off the cliff", but with PowerPoint slides. But if the golden hive of honey we pursued was destroyed by a rummaging bear, let's scapegoat it to death. Thank goodness for Grizzly the scapegoat.
All it takes is just the following graphs to demonstrate my point:
Nio's rise in 2020-2021 was part of a broader "EV euphoria" wave driven largely by Tesla's parabolic rally. It had nothing to do with Nio's fundamentals, and least of all, the US$600m inflated revenue claimed by GIC.
Across China, all EV stocks rose to astounding heights during this period. It was simply a case of "the rising tide lifted all boats".
A look at what happened to some other Chinese EV counters
How do we make sense of this? At Jan 2020 Tesla's market cap was US$75b. Driven by expectations that it would dominate the global auto industry., Tesla's stocks surged and their market cap hit US$1 trillion by late 2021. This sparked a "halo effect" across the EV sector as investors sought the next "Tela", and Chinese EV startups were the main candidates.
Chinese EV stocks rose across the board during this period. Nio's ADR price rose in tandem. This is a classic illustration of how often investor sentiments, not fundamentals, drives the market. Nio's ADR price increase was not the consequence of revenue inflated by US$600m from mis-representation as claimed by GIC but the general price trend of the industry.
Eventually, investors recalibrate expectations to actual delivery volumes, margins and cash flows, and valuations return to sanity. And prices find their new equilibrium. Unfortunately for GIC, Nio is by far one of the worst performers of Chinese EVs post 2022.
In summary, GIC's lawsuit framed around allegations of inflated share price, ignores the broader market context. Nio's ADR price rose in line with Tesla and other Chinese EV makers. The peak in Nio's price reflected sector-wide revaluation, not company-specific mis-statements. The decline after 2022 was not caused by Grizzly's negatively report but by the market reassessing Nio's fundamentals - delivery volumes, cash burn, margins and macro sentiment. There was no 'J' drop of Nio's share price after Grizzly's report came out. Nio's share price slided gradually towards rational valuations, reflecting the company's actual financial performance, not a fraud revelation.
Conclusion:
GIC's case cannot stand because there was no mis-statement of income and no fraudulent reporting. Weineng is a related company and Nio had complied with GAAP standards by not consolidating the accounts of Weineng and disclosed their inter-company transactions in the Notes to Accounts. The claims of Nio having control over Weineng based on the fact the EV maker manages the battery inventory cannot stand because it is not recognising the operational requirements of the business and the swapping tasks performed by Nio which is predicated by a management service contract. The claims that deferred revenue is taken again is incorrect. If it relates to BaaS, such subscription fees accrue to Weineng and Nio takes in nothing. If it relates to the sales of batteries, the high volume was necessary as Weineng had to ramp-up inventory in its start up years for a business model build on availability. The impact on Nio's Profit & Loss is not the US$600m which is the sales price, but rather the usual mark up margins on sales of components estimated at US$63.4m which impacted P&L by about 4.5%, considered immaterial. The rise and fall of Nio's ADR prices can best be explained by the broader market revaluations of EV stocks during the particular period, not specific to Nio's mis-statements in their financials.
GIC's case will be thrown out so fast, their lawyers might still be opening their PowerPoint when it lends. The only thing likely to be awarded here is a polite reminder of "market risk".
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