(Corrects story published April 14 to fix 10th paragraph’s reference to the period in which the company posted negative cash flow.)
Investor concern was rekindled when the Chinese mobile-services provider reported weaker-than-forecast earnings on April 10, triggering a 21 percent plunge the next day that was followed by an additional 13 percent retreat today. The two-day decline is the biggest in five months and leaves NQ Mobile at $11.05, down 52 percent since Block first stated publicly that he believes the company is inflating revenue.
Buyers including Oberweis Asset Management Inc. and Toro Investment Partners LP had been returning to the stock, pushing it to as high as $21.39 on March 4 on speculation that Block’s allegations would prove false. After first-quarter earnings fell 31 percent short of analysts’ estimates, Block said in an e-mail that the report provided further evidence the company is a “fraud,” allegations that NQ Mobile has denied.
“Certainly it’s a name you need to be wary of, not because of the business itself but because of the onslaught by short-sellers,” Tim Ghriskey, chief investment officer at New York-based Solaris Asset Management LLC, which helps manage about $1.5 billion in assets, said by phone on April 11. “A lot of customers just don’t want to deal with this.”
Kim Titus, a spokesman for NQ Mobile, declined to comment on the trading and Block’s allegations.
NQ Mobile’s disappointing results indicate it faced a “more robust” audit in the quarter than in previous years, Block’s Muddy Waters LLC said in a note on its website.
PricewaterhouseCoopers Zhong Tian is NQ Mobile’s auditor, according to the Beijing-based company’s annual report. Chen Yan, a press official at PwC, said the firm doesn’t comment on its clients.
Block wrote in an Oct. 24 report that investors should sell NQ Mobile because it misrepresented its cash balances and exaggerated sales. He said in an interview with Bloomberg Television the next day that the company will end up like Sino-Forest Corp., the Toronto-listed Chinese plantation operator that filed for bankruptcy protection in 2012 after Muddy Waters claimed that it exaggerated its revenue.
“NQ’s contorted excuses for being unable to generate operating cash flow, and its announcement of yet another highly suspicious acquisition further bear out that it’s a fraud,” Block wrote in an e-mail on April 11.
The company’s earnings of 22 cents a share excluding some items fell short of a 32-cent average of four analyst estimates compiled by Bloomberg. It posted negative cash flow from operations of $13.4 million in the fourth quarter. It acquired 58 percent of Tianjin HuaYong Wireless Technology Ltd. in a series of deals between 2013 and the first quarter of 2014, according to the statement.
NQ Mobile said April 10 it will report on an internal investigation initiated in October when it files its annual report.
“They did miss the earnings,” Frederick Ziegel, an analyst at New York-based Topeka Capital Markets Inc., said in a phone interview April 11. “Maybe some people were disappointed that the audit didn’t come out yesterday.”
Last year’s retreat in the stock lured in investors such as Toro Investment Partner and Jim Oberweis of Oberweis Asset Management, who increased their holdings as NQ Mobile has said its accounting and businesses are legitimate.
James Oberweis, president of Oberweis Asset Management, and Taek-Geun Kwon, chief investment officer of Toro Investment Partners LP, didn’t respond to messages seeking comment.
To contact the editors responsible for this story: Nikolaj Gammeltoft at email@example.com Marie-France Han, Rita Nazareth