Is The Money Real?

| About: NQ Mobile (NQ)

With little Chinese companies, the most amazing of things can turn out to be a problem. For instance, one can't even be sure whether the most basic stuff is for real. Like, are the audited cash balances on the balance sheet real, does the cash really exist? One usually can't be sure. Notice that I said "audited".

A similar episode is taking place today with NQ Mobile (NYSE:NQ). A month ago, NQ Mobile was the target of a Muddy Waters report which basically alleged NQ Mobile was a giant fraud. Among the allegations, again, were doubts regarding the cash balances:

NQ's cash balances are highly likely to not be real. In NQ's 2012 20-F, PwC classified all cash and term deposits as Level 2 assets (slightly hard to value), which is the first time we have seen this. NQ's purported movements of cash from its IPO almost certainly did not occur due to PRC FX controls. We therefore believe the term deposits are likely forgeries.

With cash balances being $149.5 million on an $810 million market capitalization, we can see how this is relevant. Also, if the cash balances were fake, then certainly everything else could be called into question as well.

Fast-forward to today

After a month of volatility, NQ Mobile is up 6.6% to $14.25 today. In part, this happens because Oberweis's China Opportunities Fund, along with other funds, increased their position in NQ Mobile during the rout. But more important is this:

Oberweis and his staff verified the bank accounts by going to Standard Chartered Bank with employees of NQ Mobile. Bank employees printed out a letter confirming the deposits and showed it to them.

"I found that, step by step, most allegations made by Muddy Waters are really easy to disprove, the most important one being the cash," he said. "The money is there and this illusion that there is no cash is completely false."

So it would seem that Oberweis took decisive moves to confirm the cash balances. And it effectively confirmed the cash balances. So the cash balances are real.

But are they?

Amazingly, the answer is still "we don't know". Although Oberweis did do something to confirm the cash balances, it should be said that audited cash balances already include about the same thing as Oberweis did. So the confidence one gets from the audited cash balances is about the same as that resulting from Oberweis moves. Which is to say, we can't have increased confidence.

Why am I saying this? Precisely because of another Chinese fraud concerning cash balances. The famous Longtop Financial fraud. There, too, there were audited cash balances that turned out to be fake. And why did that happen even in spite of those being audited? Because of this (Source: NYTimes):

Deloitte, which had given clean audit opinions to Longtop for six consecutive years, apparently was well on its way to providing a seventh, for the fiscal year that ended March 31. But for some reason - Deloitte did not say why - the auditor went back to Longtop's banks last week to again seek confirmation of cash balances.

It appears Deloitte sought confirmations from bank headquarters, rather than the local branches that had previously verified that Longtop's cash really was on deposit. And that set off panic at the software firm.

"Within hours" of beginning the new round of confirmations on May 17, the confirmation process was stopped, Deloitte stated in its letter of resignation, the result of "intervention by the company's officials including the chief operating officer, the confirmation process was stopped."

So there you have it, going to the local bank and asking for confirmation of the cash balances is not enough and does not improve on the level of confidence we get from those cash balances being audited. One would have to know whether Oberweis went to the Standard Chartered Bank HQ, and since Oberweis was accompanied by NQ Mobile officials, such would seem unlikely.

In short, are the cash balances at NQ Mobile real? We can't be sure. Not even after Oberweis confirmed them.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.