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NQ: Where Could Henry Lin Be?

|Includes: Link Motion Inc. (LKM)

NQ Mobile (NQ) recently issued a press release and conducted a conference call announcing the resignation of Dr. Henry Lin, founder and Co-CEO of the company. According to the release, he was stepping down due to unspecified personal reasons unrelated to the company. Since then, there have been few reports coming out of the Western media in relation to his resignation. However, the Chinese media has published many reports speculating as to the possible reasons for Lin's departure, including that Lin's personal relationship with detained CCTV anchor Rui Chenggang got him into trouble. On Thursday's conference call, this issue was raised in a rather dramatic way by none other than Carson Block himself. Omar Khan did address the (partial) question afterwards by reiterating that the departure had nothing to do with the company, they are not aware of any connection with Rui Chenggang, and that they wish to protect the privacy of Henry Lin. They did not address whether they were still in contact with Lin or deny outright any connection between Lin's resignation and the anchor. Since there is so little discussion of this issue in English language publications compared with the Chinese media, it is important for investors outside of China to be fully aware of what is being discussed in China.

After reading as many of the Chinese articles as I could find, there seems to be three primary hypotheses as to why Lin is no longer with the company. First is that he may have had to step down for medical reasons. Second, that he was forced out due to pressure from other members of the board. Finally, and by far the most widely discussed, is that his relations with CCTV anchor Rui Chenggang got him into trouble either by paying for positive coverage or using the relation to get him speaking positions at the "Summer Davos" summit in China. In any case nobody has seen Lin in some time, and NQ employees contacted by the Chinese media seem unable to confirm if they can still contact him. Two phones owned by Lin called by Chinese reporters were turned off.

The medical thesis is the one I've seen put forward the most in investor discussions outside of China, but it is the least convincing to me. A Chinese reporter searched hospitals across Beijing looking to see if the Henry Lin was undergoing medical care and came up with nothing. A departure for medical reasons is generally not something that needs to be kept private at the cost of allowing rampant negative speculation to occur. If this was the case, we should have expected to see a letter of resignation from Lin explaining why he needed to step down in order to smooth the transition over.

The possibility that Lin was forced out by the board is more likely than the medical thesis. In the last six months, there have been a number of high profile resignations starting with former CFO KB Teo and chairwoman of the audit committee Ying Han. Including Lin and the two others who were announced to have resigned prior to the Dec. 18th conference call, there have been a total of five major resignations. It is impossible to know exactly what is going on within the company, but it seems likely there are some stark disagreements between some of the members and that these disagreements may have resulted in this shakeup. While this is more likely than the medical thesis, it doesn't explain the complete dissapearance of Lin from the earth in the weeks prior to his resignation.

The most interesting (and dramatic) theory is of the speculation as to whether Henry Lin as been detained as a part of the investigation into CCTV anchor Rui Chenggang. Since this would fall in the realm of a anti-corruption investigation, it is useful to know a little about how these play out in China. In general, these investigations begin when the CCP (Chinese Communist Party) detains an individual they suspect of committing some type of infraction. At this point the detained person generally has no contact with the outside world and is held under monitored house arrest on the first floor (because of suicide risk) of a building somewhere. During this period of isolation they are interrogated and encouraged to name names of others who might be involved in corruption. After this initial period you are officially arrested and are sentenced to some kind of punishment ranging from minor fines to, in higher profile cases, death. Any leniency in the sentence depends on the number of new leads you give to the CCP officials investigating you. A more thorough treatment of this topic can be found in the book 'The Party' by Richard McGregor.

Detained CCTV anchor Rui Chenggang is known to have had a close personal relationship with Henry Lin according to several sources in Chinese media. Rui's boss was arrested prior to him and possibly gave him up during interrogation. This has been part of a wider investigation into CCTV as part of the broad anti-corruption campaign enacted by Xi Jinping. As to the direct cause for detainment, Chinese media have speculated on two issues. First is the possibility of bribery for positive news coverage, something considered to be common in China. One example of this could have been in 2011 when CCTV played a negative report on NQ, which was then followed by a glowing report just a few months later. It is also possible that this worked in an opposite direction. The negative report was timed to coincide with NQ's IPO and could have been a case of competitors bribing CCTV to play negative stories, or blackmail from CCTV itself against NQ. None of these would be without precedent in China.

The second possible link between Lin and Rui is related to Lin's attendance at the World Economic Forum summer meeting in China. Chinese media speculate that Lin may used his relationship with Rui to attend and speak at these events. Indeed there is video of Lin speaking at these events from 2012 and 2013 (in full hard-hat regalia no less). However, Chinese media sources say Lin did not attend the most recent event in 2014 and I was unable to find any video of Lin from that event. The 2014 meeting occurred shortly after the detaining of Rui.

Whatever the truth of the matter turns out to be, the sudden disappearance and loss of contact of a CEO can hardly be seen as a normal development for any company, especially a company in the situation NQ finds itself in. The intricacies of China make these situation doubly difficult because if Lin was actually detained the company would essentially be forced to act exactly as they are acting now. It's not kosher to comment directly on these disappearances, and were NQ to do so they could incur the displeasure of the CCP which is the last thing they need at this juncture. This is why Chinese media doesn't actually explicitly say Lin has been detained, only imply that his disappearance is related to his relationship with Rui. Despite this, the message they are sending is clear. Even though the reasons for Lin's detainment (if he was detained) are separate from the operations of the company, this could be yet another blemish on the already tarnished reputation of NQ should it eventually be verified. If there is a more reasonable explanation for all of this the company needs to get in contact with Lin and figure out a way to more effectively communicate the circumstances surrounding his retirement as it is unlikely this issue will simply fade away.

As a side note if you want to look up Chinese news yourself and don't know how to use type Chinese characters copy and paste these into the search bar:

NetQin - 网秦

Henry Lin - 林宇

Disclosure: The author is long NQ.

Additional disclosure: Small number of LEAPS