NQ Mobile Inc. sank, extending its two-day slide to more than 50 percent, as the Chinese mobile-security service provider denied Muddy Waters LLC’s allegation that it inflated revenue.
NQ Mobile slumped 12 percent to $10.63 in New York after plunging 47 percent yesterday as Muddy Waters, the research firm founded by short seller Carson Block, initiated coverage of the stock with a strong sell rating. The company inflated revenue and is a “massive fraud,” according to Block.
“We welcome any third party the opportunity to check the company cash,” Matt Mathison, the vice president of capital markets at NQ Mobile, said in a conference call this morning set up to answer Muddy Waters’ claims. “The truth and the facts are on our side.”
Block said today in an interview with Bloomberg Television that NQ Mobile will end up like Sino-Forest Corp., the Chinese plantation company listed in Canada that filed for bankruptcy protection last year after Muddy Waters claimed that it exaggerated its revenue. 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 on July 17 that the company is worth less than its share price, and the stock has gained 8.9 percent since the report.
NQ Mobile, whose shares had risen 279 percent this year through Oct. 23., said it plans to take all appropriate legal actions to defend itself against Muddy Waters’s charges and to protect the interest of shareholders.
‘False and Inaccurate’
“The allegations and accusations set forth in the Muddy Waters report are false and inaccurate and contain numerous errors of facts, misleading speculations and malicious interpretations of events,” the company said in a statement distributed by PRNewswire today. “The report makes many misrepresentations about the company, its management team, as well as misrepresentations about its products.”
The company will go forward with its previously announced $35 million stock buyback program after a blackout period following the release of its earnings on Nov. 12.
“We have a share buyback in place we’re ready to use it aggressively,” Mathison said.
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.”
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. A short sale is one in which stock is borrowed and sold, with the hope of profit by repurchasing the shares later at a lower price to be returned to the lender.
“We have seen companies defraud auditors numerous times in China with forged bank statements,” Block said in the Bloomberg Television interview. NQ “cited certain companies elsewhere in China that had all-cash at Level 2,” but that is not the case, Block said. “This is a major red flag.”
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.
The company will disclose information it has never revealed before because of competition in order to prove the accuracy of its financial statement, Khan said on the call.
Regulators will act against NQ “aggressively,” Block said on television. “We pointed out that of all the China companies, Omar Khan is not a director of any of the Chinese companies. It is clear that he is not involved in the management or oversight of any of the China companies.”
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.
Muddy Waters’s accusations show “gross misunderstanding of how the carrier ecosystem works in China,” Khan said in a telephone interview on Bloomberg Television. NQ has six million users in China and 11.3 million globally, 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.
NQ said it will set up an independent committee that will review Muddy Waters’s allegations, according to a separate PRNewswire statement.
Muddy Waters questioned the ownership of some of New Oriental Education & Technology Group Inc.’s schools in July 2012, and the private education company has rallied 188 percent since that date.