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  • NQ Stands Strong Against Muddy Water's Faulty Arguments 7 comments
    Nov 7, 2013 12:19 AM | about stocks: NQ

    Muddy Water published an article today concerning YidaTong YDT. Unlike their other articles that raises many different red flags, this piece only focuses on NQ Mobile's (NYSE:NQ) biggest Chinese service provider (NASDAQ:SP), YDT.

    Much of MW's article is spent on conjecture. I will not go into too much detail regarding those points because I don't believe they affect NQ in any way shape or form. Certainly at this point, Miss Rong Xu's tenure with NQ from 2006-2008 does not need to be broken down to the day of employment.

    The fact that YDT's office resides within 9H or that YDT has no name brand recognition is not important to investors of NQ. Neither do we need to concern ourselves about how much revenue can be generated from processing billings for e-readers and network clocks.

    Most of their relevant argument hinges on the assumption that YDT reports gross revenue. Upon carefully reading the article, I've come to the conclusion that their argument has a very big hole.

    I've collected the relevant numbers from MW's article.
    1.NQ Revenue from YDT in 2012: 20.2M
    2.YDT Revenue 2012: 2.9M
    3.YDT Business tax 2012: 97,000
    4.YDT pays 3.4% Business tax
    5.NQ generates 60% of YDT's Revenue (1.74M)

    Since NQ collects 20.2M revenue from YDT, we can deduce that YDT charges approximately an 8% fee for their services.

    1.74M/(20.2M+1.74M) = 7.93% charge

    Muddy Waters sites this example to explain the Chinese tax system

    "China's tax system is voucher-based. If China Mobile pays out RMB 100 as cost of sales, it needs a voucher to evidence the expenditure. Without a voucher, the RMB 100 would fall to China Mobile's pretax income line, and it would be taxed on all RMB 100. Therefore, at the time China Mobile pays any vendor - especially a SP like YDT - it would require a voucher for all RMB 100.

    When YDT generates a voucher, it must pay business tax on the entire amount of the voucher. In other words, when YDT generates the RMB 100 voucher for China Mobile, it must pay Business Tax of 3% to 5% of the RMB 100."

    By their argument, YDT would have to pay 3.4% of 21.94M as business tax, or 745,960 rather than the 94,000 on their 2012 filing. This would mean that YDT would have to pay 42% of the revenue it received from NQ (8% or 1.74M) in business taxes. This result would be highly unlikely. We know that NQ also paid taxes on all of its net revenue, including the 20.2M received from YDT.

    By Muddy Water's argument, the 20.2M that NQ received from YDT would be taxed twice!!


    I don't know a single business that would agree to pay taxes on someone else's portion of the revenue. Why would YDT pay taxes on NQ's portion of the revenue? That is a giant hole in their argument. Even if YDT recognizes receiving the cash from China Mobile, it wouldn't pay taxes on the portion of the revenue that does not belong to it. This leads me to believe that either Muddy Water has forgotten how to do simple addition or is resorting to trickery...

    I conclude that YDT does not report gross revenue, and nor does it even have to according to Toro Investment's article clarifying Chinese GAAP.

    Disclosure: I am long NQ.

    Stocks: NQ
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Comments (7)
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  • 14195192
    , contributor
    Comments (85) | Send Message
    Thanks for all of your hard work the last few weeks. As Toro stated YDT works like Paypal. When I charge someone $100 thru them they get $3.20 as a fee for service. They would not be taxed on the whole amount. This has to be his dumbest point yet. I just don't understand why they continue to tout this awful crap in the media.


    This is just more confusion and mud. But guess what, the market obviously believes in Santa. HoHoHo hopefully it will turn into a very Merry Chritmas for all of the longs who believe.
    7 Nov 2013, 08:21 AM Reply Like
  • LT-Investor
    , contributor
    Comments (55) | Send Message
    Well done. Nicely written and explained. Just goes to show how MW tries to confuse and distort with lies and deliberate misinterpretations. You have show that even their math is wrong.
    7 Nov 2013, 08:25 AM Reply Like
  • Bigdaddio45
    , contributor
    Comments (34) | Send Message
    thanks dude - nicely explained.. I think people are starting to recognize carson block's note was never intended to be factual but rather is designed to simply drive down the share price so he can make a profit.
    7 Nov 2013, 09:14 AM Reply Like
  • zorrba
    , contributor
    Comments (428) | Send Message
    LOL what a joke this NQ pumping article is. The author even states he is not talking about MW points. Why? The points are embarrassing to NQ and point to lies and fraud.


    The market is not fooled by you and NQ's stock price has begun it's death spiral. BYE BYE BIRDIE.
    7 Nov 2013, 01:44 PM Reply Like
  • KarlShen
    , contributor
    Comments (128) | Send Message
    Author’s reply » As I mentioned in the article, whether or not YDT has name brand awareness is a perception. Whether Ms Rong Xu has less than acceptable interaction with NQ is a conjecture. Arguing about things one can't prove with facts at this stage in the game is pointless and a waste of time.


    Ofcourse it is your prerogative to create a thesis based on rumor and conjecture. I prefer to use facts. Muddy Water's article hinges on the argument that YDT reports on a gross basis and that argument is faulty because it has to be based on certain facts and those facts don't add up in MW's favor. Therefore he can't back up his claim that YDT is not generating the revenue stated by NQ.
    7 Nov 2013, 02:11 PM Reply Like
  • Sellinpanic
    , contributor
    Comments (901) | Send Message
    It is safe to assume that zorrba bases his thesis on "on what a contact told me". It sounds good! :D
    8 Nov 2013, 04:15 AM Reply Like
  • greedoshotlast
    , contributor
    Comments (5) | Send Message
    Great analysis Karl. Overall I believe NQ Mobile or NetQin creates a sound product and generate a sizable. I have download the app and it works as advertised. They are hiring people both in their Dallas and Beijing offices. The company may have some accounting issues, but it is not a 0. I hope people will soon see the truth and like you I am also long NQ
    10 Nov 2013, 08:34 AM Reply Like
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