NIO recently came under attack by Grizzly Reports, after claims in regards to exaggeration of revenue and profitability.
“Today, we reveal what we consider an audacious scheme by NYSE-listed NIO. Reminiscent of the Philidor-Valeant relationship, NIO is likely using an unconsolidated related party to exaggerate revenue and profitability.”
GOLDMAN: Following several investor queries, we see two areas meriting comment: 1) We view Nio as a manufacturer whose revenue and profitability is based on production and distribution of the cars it sells, plus potential monetization of its software business in the future. However, we do distinguish between the business models.
We view Wuhan Weineng (19.8% owned by Nio; other shareholders include CATL 10.9% and other state-owned or private investors; details here, pages 237-238), on the other hand, as an asset management company who owns the underlying asset (i.e. the battery) and whose revenue and earnings are based on monthly subscription fees (paid by the car buyers over seven years of the leasing term) and also residual value beyond the seven year lease term.
We do see analogues to OEMs and vehicle financing. An OEM books all the revenue when it sells the cars to customers while the AFC (whose underling asset or collateral is the car) recognizes monthly mortgage fees paid by customers.
We also note questions as to whether Nio has oversold an excess of batteries to the battery asset management company, boosting Nio’s revenue or profitability. Nio’s latest HK IPO prospectus (click here) has detailed disclosure and discussion on its BaaS business (pages 225-227, 239-244, 263-264). Specifically, those 19,000 units of batteries were only part of the total underlying assets (40,053 units of batteries) when Wuhan Weineng issued ABS in September 2021.
Wuhan Weineng can continue to issue more ABS to expand its portfolio in the future with either remaining batteries or future batteries (from new BaaS subscribers) as underlying assets. This disclosure also indicates that every battery held by Wuhan Weineng has a corresponding underlying subscriber.
Recommendation: We remain positive on Nio. Following the company’s recent 1Q22 result call and comment on the 2022 outlook, we believe the company’s vehicle margin will hit a trough of -15.5% in 2022 but rebound strongly to -18-19% in 2H22. Likewise, we project Nio to deliver -70-80% QOQ sales growth in 3Q22 and another -30% in 4022
