Seeking Alpha

NQ Mobile crashes as Muddy Waters calls company a "massive fraud'

  • Muddy Waters has started coverage on NQ Mobile (NQ -30%) with a Strong Sell; the firm's target price is below $1. (report - .pdf)
  • MW claims at least 72% of NQ's 2012 Chinese security software revenue ($32.2M) is "fraudulent," and that much of it ($20.2M) came from a shell company called Yidatong. The firm says an investigation found Yidatong's offices were "either non-existent or completely empty."
  • MW also declares NQ's third-party payments channel to be "non-existent," and its Chinese payments portal to be "purely cosmetic." It estimates (citing survey data) NQ has only a 1.4% share of the Chinese security app market rather than a stated 55%, and that Qihoo (QIHU -0.5%) dominates the space with a 73.5% share. Also, MW's store checks indicated few phones had NQ's software pre-installed, and that its prepaid card sales were limited.
  • Meanwhile, NQ's apps are declared to be "spyware," and its global app revenue below $1M/year. The company's acquisitions are deemed "highly likely to be corrupt," with ghost addresses uncovered for some of them, and its cash balances "highly likely to not exist."
  • Update (2:01PM ET): The selloff has worsened. NQ now -51.8%.
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Comments (56)
  • jason.sullivan
    , contributor
    Comments (18) | Send Message
     
    Is this real? Is Muddy Waters reputable?
    24 Oct 2013, 01:33 PM Reply Like
  • JeffreyLangBoyd
    , contributor
    Comments (663) | Send Message
     
    They do have a good but imperfect record. I don't discount things they say out-of-hand as I do many firms writing similar reports.

     

    I don't see how a phone security firm could be doing as well as they are doing but it is hard to fraudulently state cash balances as they are fairly easy to audit and PWC is their auditor. I'm not willing to go long or short.
    24 Oct 2013, 01:50 PM Reply Like
  • TheLittleGoat
    , contributor
    Comments (101) | Send Message
     
    Read the report and decide for yourself. I found it very compelling.

     

    Also Gotham City Research tweeted that they were/are about to release a report:

     

    "We were preparing to publish an initiation report on $NQ , which we believe is materially fraudulent. Congrats to @muddywatersre"

     

    http://bit.ly/19AX7dr
    24 Oct 2013, 02:06 PM Reply Like
  • Henry Tan
    , contributor
    Comments (61) | Send Message
     
    Interesting, strangle may be good
    24 Oct 2013, 01:36 PM Reply Like
  • jason.sullivan
    , contributor
    Comments (18) | Send Message
     
    What do you mean?
    24 Oct 2013, 01:46 PM Reply Like
  • Henry Tan
    , contributor
    Comments (61) | Send Message
     
    Google "long strangle", good luck trading:)
    24 Oct 2013, 01:54 PM Reply Like
  • Henry Tan
    , contributor
    Comments (61) | Send Message
     
    Google "long strangle", good luck trading:)
    24 Oct 2013, 01:54 PM Reply Like
  • Rope a Dope
    , contributor
    Comments (649) | Send Message
     
    It would take a serious set of cajones for someone to write Puts on NQ after that report.
    24 Oct 2013, 02:08 PM Reply Like
  • jason.sullivan
    , contributor
    Comments (18) | Send Message
     
    Thank you!
    24 Oct 2013, 02:09 PM Reply Like
  • Tim Tim
    , contributor
    Comments (2) | Send Message
     
    people dont have to be writing puts, you can buy the puts that have already been written. But then of course that means the puts will rise in price, especially with this kind of IV.
    25 Oct 2013, 06:51 AM Reply Like
  • Tim Tim
    , contributor
    Comments (2) | Send Message
     
    except with this much volatility, the strangles will cost a bundle even OTM. Further, the only available options I see are due in March, which adds even more time premium. And then you got to take the risk of having the stock be suspended, during which time the price doesn't change, you can't trade, and your options are wasting away. Not sure how good of an idea that is. I would rather go for a short condor, at least you are spending less money up front.
    25 Oct 2013, 06:51 AM Reply Like
  • Rope a Dope
    , contributor
    Comments (649) | Send Message
     
    Tim, good point on buying existing Puts; I hadn’t thought of that. I sometimes sell a portion of my Puts when they achieve substantial gains just to eliminate part or all of my financial risk.
    25 Oct 2013, 08:21 AM Reply Like
  • Jasper85
    , contributor
    Comments (392) | Send Message
     
    Well....damnit.
    24 Oct 2013, 01:40 PM Reply Like
  • Rope a Dope
    , contributor
    Comments (649) | Send Message
     
    Price dropped another 20% while I read the MW Research Report.
    24 Oct 2013, 01:46 PM Reply Like
  • p'off
    , contributor
    Comment (1) | Send Message
     
    Is this for real? Everybody else misses this except these guys?
    24 Oct 2013, 01:49 PM Reply Like
  • Rope a Dope
    , contributor
    Comments (649) | Send Message
     
    Maybe not. I show 37% of float shorted.
    24 Oct 2013, 01:59 PM Reply Like
  • Brandond
    , contributor
    Comments (397) | Send Message
     
    The chart looked great, until it didn't. The report is on Zerohedge's site here:

     

    http://bit.ly/1d2Tmij
    24 Oct 2013, 01:52 PM Reply Like
  • TheLittleGoat
    , contributor
    Comments (101) | Send Message
     
    Good fundamental research rules all.
    24 Oct 2013, 02:00 PM Reply Like
  • gravyballs1
    , contributor
    Comments (7) | Send Message
     
    Morgan Stanley and DB just finished a note offering! Don't they have to look at the books???
    24 Oct 2013, 02:01 PM Reply Like
  • bazals
    , contributor
    Comments (2) | Send Message
     
    With all the research that goes into these companies. You would think some of these damn experts would have a clue. I've read so many positive articles on NQ. This is the first negative one. Never a hint of anything negative.
    24 Oct 2013, 02:02 PM Reply Like
  • buffett222
    , contributor
    Comments (1126) | Send Message
     
    I love Muddy Waters.
    24 Oct 2013, 02:08 PM Reply Like
  • ekin09
    , contributor
    Comments (121) | Send Message
     
    People are still buying ? Its back up to 11. I held this stock in the past, but this looks like the sketchiest stock right now.. wow
    24 Oct 2013, 02:13 PM Reply Like
  • Mongoose7916
    , contributor
    Comments (230) | Send Message
     
    Could be short covering especially if its machines algo trading.
    24 Oct 2013, 02:39 PM Reply Like
  • ekin09
    , contributor
    Comments (121) | Send Message
     
    Indeed, here is the link to MWs video to back up their claims

     

    http://bit.ly/1d35OyE
    24 Oct 2013, 02:45 PM Reply Like
  • ivonmx
    , contributor
    Comments (16) | Send Message
     
    You know the video is about 2 years old right? And I guess you also know CCTV, although being a government controlled TV station, is notorious for publishing misleading news? And I would also assume you know that Chinese government is willing to admit any fault they made? Yeah, it's your call.
    25 Oct 2013, 12:57 AM Reply Like
  • User 12797961
    , contributor
    Comments (4) | Send Message
     
    This video is 2 years old!!!
    25 Oct 2013, 01:44 AM Reply Like
  • Rope a Dope
    , contributor
    Comments (649) | Send Message
     
    ekin - That video was not made by MW, it was made by CCTV as ivonmx pointed out. MW is using that video as an example of how NQ handled previous allegations of fraud; they simply lied and papered over them. This is detailed in the MW PDF report I posted a link to, but which I can tell people are still not reading. I can tell from some of the comments here that some people are considering buying this falling meat cleaver.

     

    'Due Diligence' people, unless you don't like money.
    25 Oct 2013, 05:50 AM Reply Like
  • Biggatorsims
    , contributor
    Comments (31) | Send Message
     
    Has to be some fire with all this smoke. But hard to believe the bond offering missed all.
    24 Oct 2013, 02:24 PM Reply Like
  • speculatacular
    , contributor
    Comments (5) | Send Message
     
    Gets halted again and again in the last hour.
    24 Oct 2013, 02:26 PM Reply Like
  • George Acs
    , contributor
    Comments (5487) | Send Message
     
    Four words:

     

    Focus Media
    Spreadtrum Electronics

     

    Previous Muddy Waters calls, alleging widespread accounting fraud. Panic selling in each for two days and multiple trading halts. Both went on to quickly recover and prosper, with Muddy Water allegations having no credence.

     

    The current report is damning, but they have traveled this path before. Remember, they are a short selling house.

     

    I did precisely as with the above two and Harbin (also a Chinese company accused of accounting fraud, but not by Muddy Water) and sold put options this afternoon
    24 Oct 2013, 02:48 PM Reply Like
  • mikem9999
    , contributor
    Comments (7) | Send Message
     
    uh remember Sinoforest ??
    24 Oct 2013, 04:31 PM Reply Like
  • TruffelPig
    , contributor
    Comments (4108) | Send Message
     
    CCME anyone?
    24 Oct 2013, 05:33 PM Reply Like
  • George Acs
    , contributor
    Comments (5487) | Send Message
     
    Absolutely and I think they got giddy with their early correct call. But they really had two big misses in succession and Carson Block put in an abysmal appearance in an interview with Herb Greenberg that called him on his approach and significantly questioned the credibility of a short selling house offering the kind of bombastic analyses that they specialized in putting forward.
    24 Oct 2013, 05:35 PM Reply Like
  • Hendershott
    , contributor
    Comments (1619) | Send Message
     
    No position but just doing a little reading, NQ has a bunch of awards for their software including 2 apps voted in the top 25 at CES last year and several of the management people are from Samsung. I never ignore Carson Block but he's been wrong before....and he's been right as well. I don't see any analyst coverage from any major firm. The validity or effectiveness of the software should be easily verifiable. Start by Googling NQ mobile product ratings.
    24 Oct 2013, 02:53 PM Reply Like
  • ekin09
    , contributor
    Comments (121) | Send Message
     
    Yeah... NQ Google Play reviews look like the shady BBM reviews...

     

    http://bit.ly/1d3aBjB
    24 Oct 2013, 03:07 PM Reply Like
  • Hendershott
    , contributor
    Comments (1619) | Send Message
     
    Reviews from PC Advison, Consumer Reports, AppBrain, CNET etc....would indicate the software works.
    24 Oct 2013, 03:15 PM Reply Like
  • Rope a Dope
    , contributor
    Comments (649) | Send Message
     
    None of those outfits would ever look at code. Did you read the research report?
    24 Oct 2013, 03:38 PM Reply Like
  • Hendershott
    , contributor
    Comments (1619) | Send Message
     
    Yes, I did. I don't read code either. Does the product work? or is CNET et al mistaken? Like I said, I never ignore Block, but he was absolutely wrong on SPRD.
    24 Oct 2013, 04:04 PM Reply Like
  • Henry Tan
    , contributor
    Comments (61) | Send Message
     
    Reminds me of EDU one year ago, nothing really happen in the long run. I am neutral on MW's track record, but almost every time they say something the volatility will skyrocket, just take advantage of that.
    24 Oct 2013, 04:09 PM Reply Like
  • dumpandpump
    , contributor
    Comments (221) | Send Message
     
    http://bit.ly/11wf4se

     

    is this so bad ???
    24 Oct 2013, 04:20 PM Reply Like
  • desgnsnprint
    , contributor
    Comments (8) | Send Message
     
    51% down. Wow what happen there? Seems like Chinese stocks are a little on the risky side.
    24 Oct 2013, 04:27 PM Reply Like
  • burned inching
    , contributor
    Comments (2) | Send Message
     
    If these guys can get the backing they need without anyone suspecting a thing, then I think it is time to stop any investing in Chinese stocks. This is inexcusable if true!!
    24 Oct 2013, 04:29 PM Reply Like
  • Saavant
    , contributor
    Comments (11) | Send Message
     
    Email sent to NQ mobile earlier just garnered this response.

     

    we will respond aggressively and completely against these baseless attacks
    --
    Matt Mathison
    Vice President
    24 Oct 2013, 04:32 PM Reply Like
  • Rope a Dope
    , contributor
    Comments (649) | Send Message
     
    I am floored by some of the comments I am reading on here. Does anyone follow the links in these articles to further investigate anything? There is a link to the MW website and that page has a link to MW’s report. From reading the comments here I’d guess that only a handful actually read through all this information. Here’s a link to the report -

     

    http://bit.ly/1alYnSF

     

    MW or someone they hired went knocking on doors in China. Read the report to see how many ‘ghost addresses’ they found. Legitimate companies do not have ghost addresses. This 81 page report is the most damning write-up I have ever seen on a company. Analysts that are attempting to manipulate stock prices don’t normally send their information to the SEC.

     

    The comments on here clearly indicate a lot of you are not performing ‘due diligence’. For those of you who do not believe in due diligence, I’ll make you a deal; for every dollar you send me, I’ll give you 90 cents in return. Trust me, I’ll save you a lot of money this way.
    24 Oct 2013, 05:05 PM Reply Like
  • crookedneck
    , contributor
    Comments (160) | Send Message
     
    NQ responds and to be fair they deserve the opportunity to respond before being cast with a guilty verdict here, isn't that the american way? Cheers!

     

    "NQ calls Muddy Waters allegations "false," shares still off sharply • 3:50 PM "

     

    "NQ Mobile (NQ -47.2%) has issued a brief statement about the detailed fraud allegations provided in Muddy Waters' report. The Chinese mobile app developers calls the allegations "false," and says it will provide "a more detailed response" before the market's Friday open."
    24 Oct 2013, 05:14 PM Reply Like
  • Jasper85
    , contributor
    Comments (392) | Send Message
     
    Am I the only one not jumping on the bandwagon straight away ??
    I'll wait for management to explain themselves about the issues concerning Yidatong etc.

     

    Only then will I jump to conclusions.

     

    Anyways good luck to all, glad we still own the other real sure thing crookedneck :)
    24 Oct 2013, 05:18 PM Reply Like
  • hyeduk
    , contributor
    Comments (115) | Send Message
     
    And this came out from a short seller lool not from deutsche bank or morgan stanley !!!!
    24 Oct 2013, 06:30 PM Reply Like
  • TruffelPig
    , contributor
    Comments (4108) | Send Message
     
    I think the SEC will read very careful the company reply. Let us see how long the stock will not trade.
    24 Oct 2013, 09:39 PM Reply Like
  • joei
    , contributor
    Comments (129) | Send Message
     
    If MW profits from lies/misleading statements, then why haven't they been sued for libel and burned crisp?!!
    24 Oct 2013, 11:06 PM Reply Like
  • Dantes_Will
    , contributor
    Comments (387) | Send Message
     
    MW has been sued countless times by Chinese companies in attempts to silence their whistle blowing.

     

    This isn't China where the company can pay the local police and local government officials to have reporters and whistle blowers' (and even their family) split apart, detained and beaten for indefinitely, until they 'confess'.

     

    GOOGLE ZOOMLION, their fraud, and how they silence reporters and whistle blowers.

     

    I for one, applaud MW and their exposure of fraud, corruption, and deceit. If they are found lible and slanderous, then make sure MW is punished in court.

     

    So far, MW has been proven right most of the time and the companies that have sued for libel have had their cases thrown out for lack of supporting evidence.
    25 Oct 2013, 04:40 PM Reply Like
  • George Acs
    , contributor
    Comments (5487) | Send Message
     
    By and large I agree with your comments and I also believe that those who seek to point out situations in which there may be accounting irregularities or outright fraud are doing the investing public a great service.

     

    In the past, my rule has been to stay away from Chinese companies, with the exception of Baidu, which I believed to have had reasonable transpareny and utilizing commonly accepted accounting standards.

     

    However, I have also attempted to capitalize on some previous Muddy Waters positions by selling puts in a couple of companies that they had targetted. I recently did so for NQ. I do take some exception to the highly charged manner in which Muddy Waters makes its claims and the personal short term gains that they may derive from promoting investor (over)-reaction. They take on a role of judge and jury, as opposed to bringing issues to light in a methodical manner and letting market and regulatory mechanisms sift through data. Additionally, they imperil exisiting investors ostensibly as they derive benefit.

     

    The concern that I have with your comment is that you state that "MW has been proven right most of the time."

     

    Given the nature of MW's allegations in the past I believe their threshold should be 100% and not "most of the time." They allegations against FOcus Media and Spreadtrum Communications were pretty bombastic and appeared to be without merit. However, the initial impact on shares was no different from those just seen with NQ.
    26 Oct 2013, 10:13 AM Reply Like
  • Julian Qin
    , contributor
    Comments (2) | Send Message
     
    who has a screen shot of NQ products' download information on Google Play? I can only see the download information from here in China and it is not positive. NQ may have a stronger performance overseas.
    25 Oct 2013, 12:58 AM Reply Like
  • Rope a Dope
    , contributor
    Comments (649) | Send Message
     
    I posted this on another SA NQ thread but it is a worthwhile read and wanted to post the same link here. I was digging for a little more info on NQ and ran across this Instablog that was posted on SA on March 8th, 2013 by someone using the (SA) handle ‘bettercorporategovern... With all due respect to Muddy Waters, this person reported the NQ fraud 7 months ago.

     

    http://seekingalpha.co...
    25 Oct 2013, 01:20 PM Reply Like
  • Gary Jakacky
    , contributor
    Comments (2741) | Send Message
     
    Don't trust a Chinese company further than you can throw it. I'll bet the PRC's government books are more of a fraud than this company could even imagine. Hope they go to zero.
    25 Oct 2013, 04:22 PM Reply Like
  • maxlw2000
    , contributor
    Comments (3) | Send Message
     
    Though a Chinese myself, I have to admit fraudulent accounting are rampant in Chinese companies. I feel ashamed of these fraudulent public traded Chinese companies revealed by MW. I don't necessarily agree with everything MW states, such as the case for EDU. However NQ does look like a fraud to me. I asked my friends in China about this company and no body knew it. I also Bidu it ( Chinese version of Google). Their products got very bad review. How could a company with almost no brand recognition can grow the revenue crazily ? Something smells fishy to me. MW report also raises the questions about the ownership of YDT. How come not a single employee be found in all 10 different cities? When MW made the accusation about EDU, I knew it was wrong as EDU is brand name every Chinese household knows. I also attended their Prep school in Bei Jing 10 years ago. I was even lucky enough to sit in one class taught by the founder , Mr. Yu. He impressed me like someone who really caresabout integrity and reputation of the business. I think MW is likely to be right this time.
    28 Oct 2013, 02:00 AM Reply Like
  • hyeduk
    , contributor
    Comments (115) | Send Message
     
    maxlw2000, what people in China think about YY Inc. ?? Is it legitimate? their quarter revenue and sales growth look pretty good !!!
    28 Oct 2013, 11:05 PM Reply Like
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