On the afternoon of Oct. 24, 2013, Muddy Waters released a new report on NQ mobile citing they have fictitious revenues and are a massive fraud. This is yet another Chinese company that has been a momentum name so far in 2013 with many traders "renting" a position. The fact it is a Chinese company does spark immediate questions regarding their accounting.
NQ Mobile Inc is a massive fraud. We believe it is a “Zero”. At least 72% of NQ’s purported 2012 China security revenue is fictitious. NQ’s largest customer by far is really NQ. Our research estimates that NQ’s real market share in China is only about 1.5%, versus the approximately 55% it reports. We estimate that its China paying user base is less than 250,000, versus the six million NQ claims.
NQ Mobile Inc Antivirus 7.0 is unsafe for sale to consumers, and we consider it to be spyware that makes users’ phones vulnerable to cyber attack. NQ makes a weak attempt to protect users’ private data as it’s uploaded through the Chinese government’s firewall to NQ’s server. Phones are vulnerable to MITM attacks because NQ fails to adhere to basic security protocols. MW engaged top-flight security software engineers to analyze this product.
NQ’s purported international revenue of $36.5 million is likely less real than its PRC revenue. NQ claims to generate international revenue in obscure markets, and through mysterious counterparties that seem to seldom pay.
NQ Mobile Inc future is as bleak as its past. The recent pivot to advertising and gaming is merely an attempt to change to a fraud that NQ hopes will be less obvious. NQ cannot monetize users that it does not have.
NQ’s acquisitions are highly likely to be corrupt.
NQ Mobile Inc 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.
About the author:
Tannor PilatzkeI am working towards the CPA & CFA designations, and would love to manage an investment partnership in the future. I am a self taught investor through Warren Buffett, Charlie Munger, Ben Graham, Peter Lynch, Joel Greenblatt, David Einhorn, Seth Klarman, Howard Marks, Phillip Fisher and Thornton O'Glove. My focus is a bottoms up Value-GARP strategy with a mix of top down contrarianism.
"When you find yourself on the side of the majority, it is time to pause and reflect." - Mark Twain