On the evening of the 28th Beijing time, the short-selling agency Grizzly Research (Grizzly Research) issued a response
The above report was released on Tuesday
On the morning of the 29th, the company has observed this report. The report is full of false information and misinterpretations of the information disclosed by WEILai. NIO has been strictly abiding by the relevant guidelines of listed companies, and has launched relevant procedures for the report, please pay attention to the follow-up announcement. ”
Although the short report was fully rejected, however, in the early trading of the 29th, Weilai Hong Kong stocks still fell by nearly 8%.
The new energy vehicle sector collapsed
The 200 billion giant is close to falling to a halt
In the morning of the 29th, the A-share new energy vehicle sector collapsed, leading the whole market. As of press time, the new energy vehicle index fell by nearly 4% at one point.
Yesterday, Changan Automobile, which just exceeded the total market value of 200 billion yuan, was close to falling to a halt.
Short-selling reports say: NIO exaggerates revenue and profitability
On June 28, short-selling firm Grizzly Research released a report titled "We Think."
The Grizzly report begins by pointing out that, just as Veleant used philipp, the pharmacy he helped found, to exaggerate performance,
According to the report, the above-mentioned related parties that were not consolidated were the reasons
In the nine months ending September 2021,"
The report also states that
The following is the full text of the short report (from alpha workshop research institute):
Today, we'll reveal a bold plan for NIO.N, which is listed on the New York Stock Exchange. NIO is likely to use an uncollected related party to inflate revenue and inflate profitability.
Presumably, because of these excellent operating performance, retail investors have bid on NIO's shares. > since 2020;;; 450%, making it one of the most valuable electric vehicle companies in China.
Allow us to introduce you to Wuhan Weineng ("Weineng"), the maker of this difference that helped WEILAI exceed Wall Street's growth and earnings expectations.
At the end of 2020, NIO and an investor consortium established NIO. As an unincorporated related party, WEINENG has generated billions of dollars in revenue for NIO.
On the surface, this rapid growth is impressive. However, our investigation found that Since the establishment of Nio, nico's performance has duly exceeded expectations.
We believe that the sales to NIO have inflated NIO's revenue and net profit by about 10% and 95%, respectively. Specifically, we found that at least 60% of NIO's earnings growth in fiscal 2021 was contributed by NIO.
NIO shifted the burden of charging monthly subscription fees to NIO, accelerating revenue growth. NIO allows NIO to immediately recognize revenue from the batteries they sell, rather than during the subscription period (about 7 years). Through this arrangement, we believe that NIO has predicted its income for 7 years in advance.
Revenue that was supposed to be recognized gradually during the subscription period (about 7 years) was confirmed immediately after NIO sold batteries to NIO. Through this arrangement, we believe that WEILAI inflated its income 7 years in advance.
Given THE 19,000 battery orders that Nioneng recently disclosed, we question why NIO still had 40,053 batteries in stock on September 30, 2021.
After careful investigation, we believe that NIO has sold as many as 21,053 batteries (worth about 1.147 billion yuan) to NIO to increase its number. 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 has a huge impact on Weilai's profit and loss situation.
Of course, to accomplish such a plan, a willing potential accomplice is required. Although NIO has limited control over NIO, we found that there are obvious conflicts of interest between the two sides. Two of Weineng's executives are currently vice presidents and battery operations directors of NIO.
Li Bin, chairman and CEO of NIO, is closely related to Joy Capital and Liu Erhai, the central 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 stock crash and have been privatized with a fraction of their highest valuations.
In January 2019, Li Transferred 50 Million Shares to NIO Users Trust, an opaque BVI entity allegedly set up to give NIO users greater influence over the company's governance. In clear violation of these "user" trusts, Li Bin pledged the shares to UBS in order to obtain a personal loan.
With NIO's shares falling more than 50% after the pledge, we believe that shareholders are at risk of a margin call on Users Trust shares without their knowledge. Local governments in China have redeemed $2 billion from NIO and may collect another $6.7 billion. Because NIO's cash balance is only 8.2 billion US dollars. In our view, investors will be at risk of their equity being severely diluted in the future.
Brief introduction
Listed in September 2018, NIO is hailed as one of the most disruptive electric vehicle companies in China.
Two key differentiators for NIO are its investments in battery replacement systems and battery rental services (BaaS). The investments caused a huge stir among investors and EV enthusiasts, as NIO is the only major Chinese EV company to fund such initiatives, differentiating it from its competitors.
As of June 2022, NIO has completed more than 7.6 million battery replacements and deployed more than 981 battery replacement stations, and this number will grow to 1,300 stations by the end of 2022.
We found that NIO used Wuhan WEINENG, an unincorporated related party entity, to inflate its revenue and improve profit margins. By selling batteries that far exceed NIO's requirements, we estimate that NIO's net loss should be 95% higher in the nine months ending September 2021.
Our research also sheds light on hidden and opaque share agreements that have benefited the Chinese government at the expense of public shareholders, as well as previously affiliated and failed businesses by WEIO CEO Li Bin.
The plan reminds us of a soaring pharmaceutical company that took a storm on Wall Street and was eventually exposed for using related parties to manipulate its finances.
NIO is pulling revenue and manipulating costs to improve profit margins
NIO has been using an uncollected affiliate subsidiary to design its financial position and continue to exceed Wall Street's targets, exaggerating its revenue by 10% and 95% respectively in the nine months ending September 2021.
In August 2020, Wuhan Weineng Battery Asset Co., Ltd. (hereinafter referred to as "Weineng Battery", Chinese name: Wuhan Weineng Battery Asset Co., Ltd.) was established by a consortium composed of WEILAI and government entities and private investors such as CATL. NIO holds 19.8% of nio's shares and uses the equity method to account for the company.
"In August 2020, the Group established a battery asset company with three other third party investors. The Group invested RMB200,000 in battery asset companies and held 25% of the equity of battery asset companies. In December 2020, Battery Asset Company signed an agreement with other third-party investors to invest additionally in a total of RMB640,000. In 2021, the Group further invested RMB270,000 in the Battery Asset Company, and upon completion of the investment, the Group owns approximately 19.8% of the equity of the Battery Asset Company. As a major shareholder of the Battery Asset Company, the Group has the right to appoint one of the nine directors of the Board of Directors of the Battery Asset Company as a director and can exercise significant influence on the Battery Asset Company. Therefore, the investment in battery asset companies is accounted for using the following method of accounting for the 'equity method'. ”
Since the fourth quarter of 2020, NIO's net income has exceeded average expectations by 33% and revenue has exceeded average expectations by 5%. For fiscal 2021, Wall Street expects NIO to lose $5.947 billion. Conversely, NIO reported a net loss of RMB3.007 billion, 50% higher than expected (a difference of RMB2.94 billion).
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 9 months ending in September 2021. However, from these figures, we can see that Weineng is crucial to the upward movement of this earnings.
Replace the battery
NIO owns and operates substations across China, and its owners can swap their batteries for new, fully charged battery packs in minutes. This initiative has historically yielded different results.
In 2008, a startup called Better Place launched the initiative in Israel. After spending $850 million in capital expenditures, Better Place filed for bankruptcy in 2013. Tesla came up with a similar idea in 2013, but abandoned the plan altogether for marketing, technical and financial reasons.
Despite this history, NIO has mysteriously transformed an unsuitable business into a promising business and has become a key factor in the investor bull market. Since the fourth quarter of 2020, the company has rapidly expanded from just 172 sites to more than 981 sites. What is 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 to buy a car without batteries. This structure reduces the total price of the car by at least 70,000 yuan and is believed to increase the adoption of electric vehicles.
Through this program, users can rent batteries from BaaS providers for 980-1480 yuan per month, or 11760-17680 yuan per year, depending on the capacity of the battery rented.
Below is a screenshot of the NIO APP, showing the decrease in prepaid prices and subscription prices when users choose to use BaaS rentals. Our conversation with the sales staff at the NIO Electric Vehicle Center also confirmed the two-month rental price under the 70/75kWh battery, and the 100 kWh battery selection, respectively:
Given the synergy between battery replacement and BaaS, we are confused to see NIO spin off its BaaS business into a non-consolidated entity that must share the economic benefits with other investors. However, after a more in-depth investigation, the answer seems clear. NIO spun off Wuhan NIO to help artificially improve its battery replacement business and overall performance.
According to NIO's filings, NIO is the entity that owns the batteries used in the BaaS business and is responsible for managing subscriptions. Therefore, when a user subscribes to a BaaS project, WEINENG is the recipient of all subscription payments. Where does NIO get the batteries it provides? Nothing more than Weilai...
"Under BaaS, we sell the battery to Wuhan Weineng Battery Asset Co., Ltd., the battery asset company, and the user orders the right to use the battery from the battery asset company."
Since the establishment of NIO Battery 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 received 290 million yuan from sales to NIO. Despite a rapid start, revenue attributable to the entity further grew to RMB4.14 billion in 2021, accounting for about 11% of overall revenue in 2021.
The arrangement between Wei Neng and Wei Lai has helped them in three ways:
- Recognize revenue years in advance to help achieve ambitious estimates;
- Provide a counterparty willing to sell batteries that exceed its required network needs;
- Transfer depreciation expense out of its financial statements.
Never stop pulling. How Weilai can use Wuhan Wei to drive future revenue
If NIO does not exist, NIO will have to recognize subscription revenue during the customer's subscription period. Fortunately for WEILAI, they don't have to wait to consider a 70,000 yuan sale. Normally, it takes about 7 years (adjusted for inflation) for NIO to generate the full subscription revenue, but with NIO, they can immediately recognize revenue.
In other words, NIO can advance and immediately recognize about 7 years of recurring revenue, artificially increasing revenue growth without incurring any additional costs.
We were able to retrieve the prospectus of NIO's asset-backed financing, which disclosed key information about its subscriptions. As of September 30, 2021, 19,000 users were served under the BaaS service agreement, of which 18% subscribed to the 100kWh battery BaaS service and 82% subscribed to a 70-75kWh battery.
Using these numbers, we can determine what NIO's financial situation would look like if NIO didn't exist. In contrast to the reported revenue of 2.796 billion yuan, NIO receives about 19.84 million yuan per month, or about 179 million yuan in the nine months ending in 2021 (about 239 million yuan in 2021).
Although WEIN has never submitted any updates to its figures for the third quarter of 2021, the analysis in this report is still very relevant and valid. As of today, NIO continues to provide BaaS to its consumers, while NIO continues to operate as an unincorporated entity.
Through the NIO program, NIO has pulled more than 1.147 billion yuan in revenue, resulting in the same improvement in reported earnings. We estimate NIO's true net income during this period to be a loss of RMB3.02 billion.
The chart below shows how we came up with these numbers, with some conditions attached.
As we will show, we believe that only 19,000 batteries corresponding to Veon's 19,000 service users can be considered a real sale. Instead, the total number of batteries held by Wei Neng is more than double that number. We'll deal with these excess batteries in the next section and explain to the reader why we think NIO is further inflating revenue by overselling batteries to this counterparty.
We define "pull forward" revenue as if NIO merges NIO into one subsidiary, beyond any revenue it earns in the first year of subscription.
Nio "achieved" revenue growth in the absence of corresponding new costs. That's because, regardless of the arrangement, NIO will pay and buy batteries to run its BaaS business. Therefore, these financial costs have been included in NIO's financial data.
The arrangement with NIO helped NIO inflate its revenue for the nine months ending 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'll show how NIO is using this program to sell more batteries than the BaaS business needs and exaggerate revenue.
How Nio oversupply Wuhan WEINENG
We believe that NIO deliberately oversupplied batteries to NIO. By calculating the battery requirements of the BaaS network, we show
The amount that NIO provides far exceeds a reasonable amount.
According to the ABN (Green Battery Asset Backed Note) issuance documents of Nippon Battery, as of September 2021, NIO has 40,053 batteries.
"As of the end of 2020 and the end of September 2021, wuhan Weineng held 4,115 baaS battery assets and 40,053 yuan respectively, and the scale of business increased significantly."
Source: Weineng Battery Green Battery Asset-Backed Notes Issuance Documents
To recall, as of September 30, 2021, only 19,000 subscribers had subscribed to the BaaS plan, which means that there are 21,053 surplus batteries. Assuming that there is the same combination of 20-80 between a 75 kWh and 100 kWh battery, we can infer that flooding with batteries can help NIO report an increase of 1.47 billion yuan in revenue and 294 million yuan in net income. The chart below shows the mathematical rationale behind this conclusion.
A key assumption in our analysis is that the profit margin for batteries is about 20%. We think this is a conservative estimate because it is in line with the profit margin of the entire vehicle, and the battery is the cost center of all vehicles.
Although we do not have nippon inventory figures after September 2021, we can show that NIO will continue this plan until the fourth quarter of 2021. Dividing the sales of 2.796 billion yuan between NIO and NIO by 40,053 batteries yields an average selling price of about 70,000 RMB. We also know that in fiscal 2021, NIO's full-year sales were RMB4.138 billion, which means revenue of RMB1.342 billion in the fourth quarter of 2021.
Using our average selling price, this would mean that in the fourth quarter of 2021, NIO sold about 19,000 more batteries to NIO, further increasing its battery inventory by nearly 50%.
The bulls may say that Wei can buy these excess batteries to run smoothly, but as we will show soon:
Nio can come here from WEI and buy battery packs back-to-back, which means that battery sales should match the number of users
The low utilization rate of the battery station negates the excess battery demand
Nio Battery's sales to NIO should be consistent with the number of users
Nio noted in its recent 20-F filing that it sold batteries to NIO in a back-to-back fashion, at the same time as NIO's customers ordered BaaS and bought their cars, without the need 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 buys a car, Wei Neng buys 1 battery corresponding to this sale. In the car
After delivery, the battery was "owned" by Weineng and became part of Weineng's assets.
In operation, WEILAI does not distinguish between Weineng battery and Weilai battery in the replacement power station. NIO does not restrict BaaS users to replace batteries at the replacement station, and can only use NIO's batteries, nor does it restrict non-BaaS users to use NIO's batteries. It is very important not to make such restrictions, because this makes it unnecessary for NIO to sell excess batteries to NIO for logistical reasons.
We sent an investigator to visit a NIO auto center where he spoke with NIO salespeople about BaaS. Our investigators also conducted a test drive and replaced the batteries. We found that there was no difference between BaaS and non-BaaS batteries. The only difference between salespeople is that there are two types of batteries, namely short-range batteries and long-range batteries. The salesperson told us that if the user wanted, they could exchange it for two batteries at the same time.
Interview Transcript [Paraphrase]
Ask (Investigator). Long-range batteries [BaaS plan] can not be replaced with short-range batteries?
A: (NIO sales staff). All battery packs are the same size, they just differ in terms of energy density.
Q: So short-range batteries can also be swapped for long-range batteries.
A: Yes. Your short-range battery can also be swapped for a long-range battery.
We further confirmed that there was no difference by looking at the NIO APP. For example, the screenshot below shows a substation station in Beijing. After selecting this substation, the APP did not ask the user if he/she was a BaaS user. It directly displays how much battery is available for the station. In this case, it shows that there are a total of 13 batteries and there are 13 batteries available for replacement.
The NIO APP also shows more details about the available batteries. There are two options for batteries, one called a standard range (short-range) battery (70/75kWh) and a long-range battery (100kWh). If we click on the Battery 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 NIO batteries, nor does it distinguish between BaaS batteries and non-BaaS batteries.
Since BaaS users can take advantage of NIO's battery network, whether they are owned by NIO or not, NIO is not necessarily necessary
Maintain excess batteries. Therefore, the number of batteries that Weineng has should correspond to the number of users.
However, as of September 30, 2021, Weineng had 19,000 users under the agreement, but 40,053 batteries in stock.
From an operational and structural point of view, WEIN does not need any excess batteries. Therefore, this evidence makes us believe that as of the third quarter of 2021, NIO has oversupplied as many as 21,053 batteries to WEIN to whitewash its financial position.
On-site visits and APP analytics reflect low utilization in some places
In addition, our due diligence team observed some sites during the busiest periods with little to no traffic. Observation leads us to believe that the utilization rate of these substations is likely to be low, thus offsetting such a large inventory.
Our analysis of the NIO APP complements our actual investigation. This analysis gives us several data points, such as available batteries and people queuing up. From these available indicators, we are able to calculate the utilization of the battery.
We observed 25 of these stations at 2-hour intervals and found that the weighted average utilization rate of NIO's substation was only 39%. Please note that we deliberately avoided areas of China that are under a very strict zero-clearing policy (for example, Shanghai was completely closed during our observation window, with zero utilization at all sites). We did not choose to include it in our analysis).
The low utilization rate further reinforces our belief that NIO has no excess battery demand at these sites, indicating that NIO is likely to oversupply up to 21,053 batteries to NIO.
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 locate Nippon's storage facilities.
Our team also consulted with employees of many battery companies to change power stations, but we were unable to gain any knowledge about 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 extra batteries are still in NIO's storage facilities.
Accounting magic: Transfer 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 swapping infrastructure and equipment (including batteries) is 5 years. Curiously, NIO recently changed its useful life to 5-8 years, which means that the battery depreciation rate on the balance sheet is about 15% per year.
Looking back at NIO's sales to NIO in the nine months ending september 2021, IT was RMB2.8 billion. We believe that the sales of these goods are almost all composed of battery sales. Assuming a profit margin of 20 percent for this revenue, this would mean that NIO transferred its assets, which cost a total of 2.25 billion yuan, from its balance sheet during the period.
This means that for the nine months ending September 2021, these batteries will save UP UP 336 million yuan in depreciation costs for NIO, directly affecting (and inflating) the company's profits.
Coupled with the revenue expansion described in the previous sections, we estimate that Weineng batteries alone can artificially increase Weilai's net profit by more than 3 billion yuan. For the nine months ended September 2021, NIO's net loss was RMB1,874 million. Without all these accounting ruse, NIO's net loss would nearly double to 3.69 billion yuan.
Not only was NIO able to recognize 2.6 billion yuan of additional revenue from the BaaS business (which would not exist if NIO consolidated it), but they were also able to transfer the costs and expenses associated with the battery replacement business off balance sheet. By doing so, NIO fooled Wall Street and investors by reporting financial results that were divorced from the actual business.
The top management of NIO is the current executive of NIO
Among the 20-F risk factors for 2021, NIO said it has limited control over NIO batteries.
However, in the same document, WEILAI said:
"The Group, as a substantial shareholder of The Battery Asset Company, has the right to appoint one of the nine directors of the Board of Directors of Battery Asset Company and may exert significant influence over battery asset company. Therefore, the investment in the battery asset company is accounted for using the equity method"
Based on this contradictory disclosure, NIO's investors may be confused about the extent to which NIO actually controls NIO. Implementing the plans we have detailed in this report requires NIO to exercise significant control over NIO. Our research shows that this is exactly the case.
According to the enterprise investigation data, Shen Fei, the chairman and legal representative of Weineng Battery, and Lu Ronghua, the general manager and director, are both employees of Weilai.
We believe that these two people lead the day-to-day operations and major business decisions of Weineng Battery, enabling them to effectively exercise control over the company.
Our research also found that Shen Fei and Lu Ronghua continued to hold senior management positions at NIO during their tenure at NIO.
According to Shen Fei's Linkedin profile, he is currently the vice president of NIO, a position he has held since November 2015.
Shen Fei also appears in the records of many subsidiaries of NIO China, which owns more than 90% of its shares. The following table lists Shen Fei's corresponding positions in some of these companies.
According to Lu Ronghua's LinkedIn profile, he has worked for NIO since March 2016 and is currently the director of battery operations at Shanghai NIO, one of NIO's major subsidiaries.
Another online article suggests that Lu Joined NIO in 2016.
"Lu Ronghua joined WEILAI in 2016, and one of the assigned tasks was to do the planning of the separation of vehicle and electricity, but at the beginning the resistance was very large."
"Since Lu Ronghua joined NIO in 2016, one of the jobs [he] has been assigned to is to draft a plan for the separation between electric vehicles and batteries, but there has been a lot of resistance in that regard at the beginning."
Some of NIO's top leaders are also in executive positions in Wuhan, a major conflict of interest that shows that NIO can easily plan the plan. We believe that NIO's control over NIO further supports our view that NIO is just a tool for NIO to carry out financial ruse.
NIO is a "tool" to enrich local governments and insiders
In addition to financial fraud, we believe that NIO has been using its status as a listed company to enrich local government shareholders.
In April 2020, NIO announced that it had reached a final agreement with a group of investors (collectively referred to as "Strategic Investors") including Hefei Construction Investment Holding (Group) Co., Ltd., CMG-SDIC Capital Co., Ltd. and Anhui High-tech Industry Investment Co., Ltd. The investors invested about 7 billion yuan in NIO China and hold a 24.1 percent stake in the entity.
Since then, NIO has redeemed the shares three times in separate times. Details are listed in the table below.
Local governments or related entities have cashed out 13.5 billion yuan from NIO. According to NIO's latest valuation, if the company buys the remaining 7.87% of NIO's local government shares, the local government can cash out another 41.7 billion yuan from NIO.
This is worrying because NIO has been burning money historically and has had to dilute its stake to fund its operations. After going public in the United States, NIO raised $10.9 billion, but redeemed these and spent more than $2 billion. If the local government decides to redeem more, NIO will need another $6.7 billion to buy back, while the company has $8.2 billion in cash and short-term investments as of December 31, 2021.
In the process of these redemptions, NIO China's valuation mysteriously doubled several times. Between September 2020 and February 2021, THE IMPLIED VALUATION OF NIO China jumped by about 28 times, and seven months after entering 2021, the implied valuation of NIO China has further increased by 3 times. In just one year, NIO China's valuation has increased by nearly 89 times.
As NIO China reaches higher valuations, local governments are withdrawing more money from NIO through the stock market. We think this may have been funded by early local governments to NIO called "VAM Agreements". As NIO's valuation continues to increase, NIO must pay more to the Chinese government. If there is no stable cash flow, this will come at the expense of shareholders.
An undisclosed VAM agreement between NIO and local governments
The media recently reported that in 2020, when Weilai accepted a capital injection of 7 billion yuan from Hefei. At this time, there is also a "VAM agreement" between Weilai and Hefei, which:
1. NIO China shall submit an IPO within 48 months after receiving the investment and complete the listing within 60 months; Shareholders' demands that NIO or Li Bin redeem the company's shares cannot result in a change in control of NIO or NIO China;
2. The controlling shareholders of NIO and NIO China should not change, if so, the local government will require Li Bin to repurchase all shares;
3. If the IPO is not completed, or the controlling interest changes, Li Bin will repurchase the shares of NIO China, the redemption price will be the total investment of hefei strategic investors, and the interest will be calculated at an annual interest rate of 8.5%;
4. Require NIO China to achieve revenue of 120 billion yuan in 2024.
The agreement put pressure on NIO and created significant risks for NIO's shareholders. While it only mentions that NIO needs to buy back from local governments at an interest rate of 8.5 percent, there may be more clauses in private that could hurt NIO's shareholders.
The agreement calls for NIO to achieve revenue of 120 billion yuan by 2024. To achieve these goals, NIO will need to achieve positive growth in the coming fiscal year. We believe that this goal cannot be achieved through normal means, and we believe that local governments and NIO know this. In addition to meeting Wall Street's expectations, this "VAM deal" could be another motivation behind what we describe as a financial ruse involving Wuhan Weineng.
As stated in Requirement 2, NIO's controlling shareholder cannot change, which means that Li Bin will most likely have to find creative ways to monetize his shares and unlock value.
Chairman NIO pledged NIO's User Trust to UBS group in June 2021
In January 2019, Bin Li transferred a total of 50 million ordinary shares to the newly established NIO User Trust Fund, including (i) 189,253 Class A common shares and (ii) 49,810,747 Class C common shares.
The goal of NIO User Trust is to create a deeper connection between the company and its users. According to the document, in 2019, the company adopted the NIO User Trust Charter and established a user council to discuss the management and operation of the NIO User Trust and provide recommendations. The members of the NIO User Council will be elected by the NIO User Community. The company's documents also state:
According to the nio User Trust's bylaws, the income and proceeds of the trust assets shall be used primarily for the following purposes: (i) environmental protection and sustainable development, (ii) NIO user community care projects, (iii) community activities and other necessary projects that promote the common growth of users, and (iv) the operating expenses of the user trust.
In view of the above commitments, we believe that NIO shareholders and NIO users will be surprised to find that Li Bin has pledged 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", whose registered address is "Maples CorporateServices (BVI) Limited, Kingston Chambers, PO Box 173, Road Town, Tortola, BritishVirgin." Islands."。
Documents we were able to retrieve from the BVI show that in June 2021, NIO User Trust had been mortgaged to UBS.
A document known as the "Certificate of Change" shows that NIO Users Limited was charged against UBS on June 28, 2021.
NIO Users Limited was established on December 11, 2018 with the same registered address as disclosed in NIO's 2021 20F.
We believe that Li Bin deliberately ignored the public disclosure or media reports surrounding this pledge. Ironically, given that the shares were pledged under the NIO User Charter and the NIO User Committee, Li Bin seems to have violated the trust of this group of people with the same vision.
Investors should not only question Li Ka-shing's credibility, but should also be aware of the significant risks associated with this pledge in their investments. The company's stock has fallen from $50 on the day of the pledge to $23. While the pledge rate is unknown, we can only imagine that a 54% drop in stocks could result in a margin call for these stocks. Li Bin owns 177.7 million shares of NIO or about 10.4% of the company's shares. If UBS asks Li Bin to provide more collateral, shareholders will face the consequences of being forced to liquidate the pledged shares in the open market.
Sadly, after reviewing Li Bin's past companies, associations and relationships, we are not surprised that Li Bin has put his shareholders at risk.
Weilai's chairman and CEO Li Bin, a worrying past, is full of shady connections and the destruction of shareholder value
We delved into Li Bin's past, and our findings were worrying.
We found that in the past, Li Bin worked closely with people involved in the Luckin Coffee fraud case. He was also chairman and CEO of BITA (formerly a U.S.-listed company that was later privatized) and the controlling shareholder of CreditEase (currently a Hong Kong-listed company). He also served as chairman of Mobike, which is accused of embezzling more than 600 billion yuan in user deposits. All of Li Bin's past companies eventually destroyed a lot of shareholder value.
Li bin also has close ties with Joy Capital and its founding partner, Liu Erhai( a key figure known in the Luckin coffee fraud case).
Readers are encouraged to read the anonymous research report on Luckin Coffee, which later admitted to financial fraud and was removed from the stock exchange. The study listed Liu Erhai of Pleasure Capital as one of the "Golden Triangle" and a key figure in the Luckin coffee scandal.
Considering that Liu Erhai was previously involved in Hong Kong-listed company Shenzhou Car Rental (0699. HK) (delisted) and U.S.-listed Luckin Coffee (LKNCY.OO), we believe investors should be very cautious when a public company or management gets too close to Joy Capital and Liu Erhai.
On our growing list of concerns, we find that NIO and its chairman and CEO, Li Bin, have close ties to Joy Capital and Liu Erhai.
Below we summarize the connection between WEILAI/LI Bin and Joy Capital/Liu Erhai:
Erhai Liu has been a director of THE BOARD of DUTA since 2005 and an independent director since 2011. BITA has always 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 is reportedly an early investor in NIO and Mobike;
NIO and Joy Capital have jointly invested up to $315 million in UXIN.US, and a study published by U.S. short-selling agency JCap exposed Uxin's ruse;
BITE
From 2010 to 2020, Bin Li served as Chairman of the Board of Directors of BITA Holdings Limited. BITA went public at $12 per ADS in 2010, and after rising to nearly $100 in 2014, the stock plummeted to around $10 in 2020. Eventually, the company was privatized for $16. Investors who participate in the stock at a higher price will never have the opportunity to recover their losses.
According to media reports, the company failed due to strategic decision-making errors. BITA relies heavily on external (internet) traffic, which decreases as costs increase. This has led them to continue to generate losses since 2014. After founding Weilai and Mobike, Li Bin abandoned BITA to focus on these two companies.
CreditEase
CreditEase conducted an IPO in the Hong Kong market in 2017 – in which BITA has more than 50% of the voting rights – and financially integrated the company. Unfortunately, the stock price peaked shortly after going public and has steadily declined since then. Details of its decline are not the focus of this report, but the performance since 2018 has been lackluster and worrying.
Mobike
Mobike is a private company and Mr. Li is the chairman of Mobike. The company leads one of the hottest trends in China – bike sharing and is actively trying to capture market share. To the disappointment of investors, Mobike's positive growth initiatives have led to large-scale underuse.
After burning a lot of cash, Mobike was sold to Meituan.com, a Hong Kong-listed company. The chairman of Meituan is an early investor in Mobike and one of the largest shareholders of Meituan. Tencent is also one of the largest shareholders of Mobike.
The most interesting thing is that Mobike reportedly embezzled more than 600 billion yuan of user deposits during 2017.
Free money. The chairman of NIO used the company to make interest-free loans
Another problem we found Li Bin had was that NIO provided an interest-free loan to a company called Ningbo Meishan Bonded Port Zone Weilan Investment Co., Ltd. ("Ningbo Meishan").
Nio's 2020 20F note mentions:
In 2017, the company issued an interest-free loan to Bomeishan Bonded Port Area Weilan Investment Co., Ltd. As of December 31, 2020, these loans remained unresolved. "
According to the enterprise investigation, Ningbo Meishan Company was established in August 2016, and its business scope includes investment consulting and management. Shareholder information shows that Li Bin, chairman of WEILAI, owns 80% of Ningbo Meishan, making him a direct beneficiary of these interest-free loans.
NIO's 2021 20F noted 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 stakes in companies linked 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 shareholders. The loan is repaid in full in 2021. In November 2021, we acquired certain equity interests in companies related to NIO Capital from Ningbo Meishan Bonded Port Area Weilan Investment Co., Ltd. for RMB 50 million.".
NIO did not disclose details about the investment, but we believe the series of incidents is very suspicious.
1. NIO loaned 50 million yuan to Ningbo Meishan (80% owned by Li Bin) in 2017;
2. Ningbo Meishan, acquiring the equity of an unknown investment fund, the amount of which was not disclosed;
3. The loan remains unpaid for several years;
4. Then in November 2021, Ningbo Meishan mysteriously transferred 1.03% of the fund's equity to NIO, with a fair value of 68.5 million yuan.
"In November 2021, the Group purchased an equity investment in an investment fund owned by Ningbo Meishan Bonded Port Area Weilan Investment Co., Ltd. ("Weilan"), a company controlled by the Company's substantial shareholders (and chief executive officers) (Note 26). (A company controlled by a substantial shareholder (and chief executive officer) of the Company ("Weilan") (Note 26) for a total consideration of RMB50 million.) On the Date of Purchase, the Investment was recorded at a fair value of RMB68,535 and the portion of RMB18,535 in excess of the Purchase Consideration of RMB50,000 was recorded as additional paid-up capital of the shareholders.
The Group has 1.03% ownership of the Fund, but as a member of its Investment Committee, it has the capacity to exercise significant influence over the Fund's funds, which determines the Fund's investment strategy and makes investment decisions. TheRefore, the Group accounts for this investment in accordance with the equity method".
On paper, the stake helped NIO recover its initial $50 million loan, but shareholders did not disclose what the investment fund was, its strategy or any other information. We also don't know how fair value has changed, and fair value is likely to decline significantly since November 2021.
summary
While NIO is the darling of the retail industry and a popular stock for U.S. investors seeking access to Chinese electric vehicle applications, we believe the company is being backed by financial ruse and is fraught with red flags of corporate governance.
NIO's financial position has been exaggerated through a plan to utilize uncollected related parties.
By oversuppling batteries to NIO and pulling revenue in advance, NIO overstated 2.6 billion yuan (about 10% of revenue for that period) in the nine months ending September 2021. To make matters worse, the net loss that should be reported for the period was RMB3.6 billion, which is double the actual reported loss of NIO.
In this accounting context, we believe that NIO has made local governments and insiders rich. The disclosed and undisclosed agreements between NIO and local governments have led to redemptions at outrageous valuations, and this is likely to continue in the future. According to our estimates, NIO may also have another $6.7 billion in local government share redemptions, which will put a huge strain on its financial position.
The documents we retrieved from the British Virgin Islands show that Li Bin mortgaged NIO's User Trust to UBS without any disclosure, aiming to increase the influence of NIO users on the company, and Li Bin used the User Trust fund for private interests, exposing shareholders to potential margin collection, resulting in the risk of stock decline. With NIO's share price losing more than half, this risk is becoming more and more serious.
This article originated from China Fund News