NQ Mobile Inc. sank the most on record after Muddy Waters LLC called the Chinese mobile-security service provider a “massive fraud.” The company denied the allegations.
NQ Mobile dropped 47 percent to $12.09 in New York yesterday, the most since the its initial public offering in May 2011, before trading was suspended. Shares had risen 279 percent this year through Oct. 23.
Muddy Waters, the research firm founded by short seller Carson Block, initiated coverage of NQ Mobile with a strong sell rating, saying the company inflated sales. NQ Mobile, whose co-chief executive officer is Omar Khan, a former Samsung Electronics Co. chief strategy officer, raised its 2013 revenue estimate to as much as $188 million on Aug. 12 from the upper limit of its prior forecast of $184 million.
“We believe it is a zero,” Block wrote in an e-mailed report yesterday on NQ Mobile. “At least 72 percent of NQ’s purported 2012 China security revenue is fictitious.”
NQ Mobile rejected the allegations, saying it will respond with more details before the open of U.S. markets today, according to a PRNewswire statement.
Block gained fame for his short-selling calls after regulators halted trading in four of the first five companies he targeted starting in June 2010.
Muddy Waters alleged Tianjin Yidatong, NQ’s largest trade debtor, is controlled by NQ Mobile and not an independent company, according to the report on its Website.
“All of the allegations are false,” NQ’s Khan said in an interview in Beijing. “Tianjin Yidatong is a service provider” and an “unrelated party,” he said.
The company will hold a briefing at 8:30 a.m. New York time to answer questions, Khan said.
NQ Mobile’s market share in China is about 1.5 percent, versus the approximate 55 percent it reports, Block wrote. The company’s paying user base in China is less than 250,000, versus the six million NQ Mobile claims, he said.
The company, which has added online games and a music search application to its services, released NQ Live, a mobile Internet platform that can be customized, Jun Zhang, an analyst at Wedge Partners Corp., wrote in a report this week.
“NQ claims to generate international revenue in obscure markets, and through mysterious counterparties that seem to seldom pay,” Block wrote.
The majority of NQ Mobile’s China revenue is exaggerated or non-existent, according to Muddy Waters. Yidatong, described by NQ Mobile as an independent company that accounted for $20.2 million of NQ Mobile’s $27.9 million in carrier billing revenue in China last year, doesn’t exist, the short seller said.
Muddy Waters said in June 2011 that Sino-Forest Corp., a Chinese plantation company listed in Canada, exaggerated its revenue. Sino-Forest filed for bankruptcy protection the following year.
Not all of Block’s short bets have paid off. Investors in American Tower Corp., the Boston-based operator of cell-phone antennas, were unshaken by Block’s claims that the company is worth less than its share price, and firms from Wells Fargo & Co. to Macquarie Group Ltd. said they disagreed. The stock has gained 4 percent this year.
Short interest in NQ Mobile has doubled since July to a record 11 million shares at the end of September, according to exchange data. NQ Mobile said in December that a report by short seller FJE Research claiming the company inflated its user based was incorrect.
Morgan Stanley and Deutsche Bank AG helped NQ Mobile raise $173 million in a private placement of convertible bonds on Oct. 9. The conversion price was about $25.61 per ADR.
“With the debt, that’s not a good position to be in,” Daniel Yu, the director of research at Gotham City Research, an investment-research firm, said by phone from New York.
NQ Mobile’s co-founder and co-CEO Henry Lin started the company in 2005 with $15,000 he and a high-school classmate cobbled together, Bloomberg Businessweek reported in its Aug. 12 issue. He scored investments from Sequoia Capital, Qualcomm Inc. and Fidelity en route to an $89 million initial public offering in 2011. To expand the company outside China, he recruited Khan, who had just joined Citigroup Inc. to run the bank’s worldwide mobile business.
NQ Mobile, which is based in Beijing and Dallas, was the third-best performer on the Bloomberg China-US Equity Index of the most-traded Chinese shares in the U.S. this year through Oct. 23.