"I want to be a matador in the bull market, but not so I can make a killing. Rather, I just want to wear flamboyant and form-fitting pants that emphasize my genitalia as I stroll down Wall Street."
- Jarod Kintz
Bullfighting is a nasty affair. While dangerous for the matador, it is almost always fatal for the bull. According to PETA (People For The Ethical Treatment of Animals) approximately 10,000 bulls die in bullfights each year. PETA does not provide statistics on "gorings " or matador fatalities but my hunch is it that it's far less than 10,000. Nevertheless, enough "toros" (the Spanish term for "bulls") get their licks in that there are surgeons in Spain that specialize in treating "cornadas", or horn wounds. I will never attend a bullfight, but if I did I think I would be cheering for the toro. Gore away.
Bullfights are generally divided into three stages:
Stage 1: The "tercio de varas" involves the bull being forced into a ring and taunted by a bizarrely dressed matador with a cape.
Stage 2: The "tercio de banderillas" where several men stick brightly decorated barbed sticks in the bull's shoulder to weaken the animal.
State 3: The "tercio de muerte" where the bull is ultimately slain with a sword.
In a few inspiring cases however, in response to "outstanding behavior" in the bullring, a crowd will petition the president of the bullring to pardon the animal with chants of "Toro! Toro!" or by the throwing of handkerchiefs. A pardoned beast supposedly gets to live out his days as a seed bull on a cozy ranch somewhere.
The ongoing battle between Muddy Waters and NQ Mobile (NYSE:NQ) reminds me a bit of a bullfight. The tercio de varas began on October 24th when matador-in-chief Carson Block accused NQ of being a "massive fraud". It feels like we are in stage 2 now with barbed spears being lobbed at NQ from all directions. NQ's survival instincts have kicked in - it is attempting to gore Mr. Block with legal action and win the crowd over by responding to the allegations and taking a series of steps such as transferring cash that Muddy Waters alleged may not exist and striking an "Independent Special Committee". NQ investors are obviously chanting "Toro!" but the crowd isn't joining in yet - shares are still down about 50%.
My handkerchief is still in my pocket.
In my last article I outlined several different (and seemingly inconsistent) answers given by NQ regarding Yidatong principal shareholder Rong Xu's tenure as a consultant and/or employee for NQ. I focused on this issue for a few reasons. First, credibility is important and credibility on these "small" issues may be correlated with credibility on larger issues; time will tell. Second, I could actually do it. I have little to add on Level 1 vs. Level 2 cash, and am in no position to run around China counting kiosks or trying to get my hands on millions of financial transactions between China Mobile, Yidatong, NQ and others. But I can do some basic fact-checking.
Another issue has caught my attention after Muddy Waters released its report and NQ began responding - that of some rather damning coverage NQ received from China Central Television (CCTV) in 2011. CCTV is China's state-run broadcaster and is actually a network of 45 different TV channels. As outlined (appropriately) in NQ's F-1 IPO prospectus:
"On March 15, 2011, a live program broadcast by China Central Television Station, or CCTV, the national television broadcasting network owned by China's central government, in celebration of China's consumer rights protection day, reported various complaints of certain alleged fraudulent practices by Beijing Feiliu, a company in which we hold a 33% equity interest, and by us. Such alleged fraudulent practices generally included, among other things, uploading malware or viruses to imported mobile phones to promote our mobile security products."
Muddy Waters has provided a video of the original broadcast along with an English translation (presumably done by someone at or paid by Muddy Waters) here. Below is a screen capture from that video taken 7 minutes in:
According to Muddy Waters, NQ Mobile has told some investors that "CCTV privately retracted its reporting". China's state-owned broadcaster "retracting" a story would be remarkable indeed, privately or otherwise.
In probing around this issue, some have argued (e.g. here, here, here, and here) that the removal of this video from CCTV's website and/or a subsequent program aired the following month saying positive things about NQ is a de facto retraction.
In NQ's 97-page response to the Muddy Waters allegations, the company confirmed (in writing for the first time from what I can see) that:
"The CCTV news was retracted the following day after the original air."
Below is a screen capture of NQ's presentation (page 43):
At this point it's probably worth pausing and explaining a little bit about CCTV. As mentioned previously, CCTV is actually a network of 45 TV stations (22 are free and 23 must be paid for). As shown in the screen capture above, the episode in question was aired on CCTV-1. CCTV-1 is the flagship channel. CCTV describes itself as "the mouthpiece of the Party and the government", and CCTV-1 is its lead channel. I found it rather stunning that NQ was supposedly able to have a program pulled from the flagship channel of the Chinese government, and the very next day! An email to NQ's IR last week requesting clarification has so far gone unanswered but I know they are rather busy at the moment, and probably focused on larger issues.
A few months later CCTV-13 was embroiled in a scandal when a reporter accused Da Vinci Furniture, an importer of Italian-made furniture of selling fakes and then extorting 1 million RMB in "PR fees" to "calm public anger". Several stories on the case can be found here, here, and here. A screenshot from a clip of the CCTV-13 broadcast is shown here as well as some news coverage I found on Youtube.
It's difficult to distinguish the perps from the victims. The following excerpt from an article about the Da Vinci scandal is an eye opener:
"Zhang Zhi'an, an associate journalism professor at Sun Yat-sen University in Guangzhou, China, says the episode highlights a common problem with Chinese journalism today.
"When there's negative news, a company hires a public relations firm to buy advertisements or pay off journalists to suppress the news from coming out," Zhang says.
Over the years, reporters at smaller news organizations have been arrested for trying to extort money from various businesses, including a gas station, a food-processing company, a coal mine and a TV shopping network. Zhang says the Da Vinci case stands out because it involves the Communist Party's biggest news institution.
"CCTV is the national commercial network," says Zhang. "It's a strange monster that has lots of power behind it. So, to expose corruption at CCTV takes a lot of courage."
Could NQ be the victim here? Sure.
Some NQ investors are in China at the moment conducting on-the-ground "due diligence" and graciously sharing their notes and even asking questions on behalf of interested parties. I am thankful for this and encourage everyone interested to read these reports as they make up their own minds. The question of the CCTV retraction was reported to have be raised yet again with NQ and the response was consistent - that NQ contacted CCTV and they pulled the program off the air immediately, as well as from the CCTV website which is why the only people that have it are those that recorded it and put it on third-party sites (like Muddy Waters has done on Vimeo).
So where am I going with all of this? It's really quite simple:
The video in question is still, in fact, being broadcast online by CCTV.
That's right. The video that CCTV-1 supposedly scrambled to pull from broadcast immediately and remove all traces of it from the website after a mere phone call from NQ is actually online at CCTV's website and streaming away, 968 days later. Please don't take my word for it; look for yourself:
CNTV is China Network Television, CCTV's web-based broadcaster and online video platform. In fact, the site above is the same site hosting the positive CCTV-13 broadcast a month later as shown in the screenshot below (note the logo in the top left corner):
In case there are any lingering doubts about this not being the same broadcast, below is a screenshot of the video uploaded by Muddy Waters to Vimeo at the same point (06:40 into the video), as well as a Google Chrome translation of the CCTV/CNTV site:
I'm not sure if I need to ask the obvious questions here but I will anyway:
- If CCTV "retracted" the story the next day and purged the content, why are they still broadcasting it?
- Am I really the first person to punch "网秦" ( the Chinese characters for NetQuin) and "CCTV" into Google? It's a first page hit….
Maybe I should give NQ the benefit of the doubt here before rushing to any conclusions. After all, CCTV's retraction department may just have missed this back on March 16, 2011. Now that they are aware of the oversight, NQ should be able to call the same person at CCTV and report the error and have the broadcast removed immediately. A perfect opportunity to boost their credibility and small opportunity to deliver one of these to its critics:
"I'm the relief pitcher in the bottom of the ninth... and I've fumbled the ball."
- Pierce Brosnan as Julian Noble, The Matador
Disclosure: I am short NQ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article reflects my personal views only. I have a small speculative position in out-of-the-money NQ put options. All data and calculations presented are accurate to the best of my knowledge but have not been vetted, checked, proofread, or independently verified. This article should not be relied upon for any purpose other than for entertainment. I welcome comments and or corrections.