NQ Mobile Inc. rose last week, halting a one-month retreat, after the Chinese mobile-security service provider replaced PricewaterhouseCoopers Zhong Tian LLP with a new auditor to review its 2013 financial statements.
While investors initially worried the change of auditor would fuel short-seller allegations that NQ Mobile has misrepresented financial data, the July 18 announcement triggered buying later in the day on speculation the move will clear the path for the filing of an audited 2013 annual report. The stock has lost four-fifths of its value since Muddy Waters LLC, the research firm founded by Carson Block, said Oct. 24 that the company overstated revenue.
American depositary receipts of Beijing-based NQ Mobile jumped 15 percent to $5.01 on the last trading day of the week after plunging as much as 21 percent immediately following the announcement. The advance erased a loss for the week, making it the best performer on the Bloomberg index of the most-actively traded Chinese stocks in the U.S. The gauge climbed 1.9 percent to 107.90 for the five trading days.
“It’s good news that NQ Mobile finally took action to get a new auditor in its efforts to file a 20-F because PwC had delayed its audit work for a long time and the company can’t afford to wait too long,” Jun Zhang, an analyst at Rosenblatt Securities Inc. said by phone last week from San Francisco. “NQ can move on to focus on its normal business once the uncertainty of 2013 report filing is removed.”
NQ Mobile said in a statement that it hired Marcum Bernstein Pinchuk LLP as its new auditor because PricewaterhouseCoopers’s request for information that isn’t in the company’s possession may hamper its obligation to file its 2013 annual report. The company reiterated that previously disclosed financial results are accurate even as it has twice delayed the filing of full-year audited results to U.S. regulators.
The Internet company plunged 32 percent on July 3 after saying PricewaterhouseCoopers sought to expand its review of the company’s 2013 financial statements. It also said the head of its audit committee was stepping down for “personal reasons.”
PwC’s refusal to issue an audit opinion “results from the fact NQ is a fraud,” short seller Block said in an e-mail on July 18. “By not issuing any opinion, PwC effected a backdoor resignation that attempts to save face for its client, NQ.”
NQ Mobile’s audit committee said in the statement that “there is no disagreement between NQ Mobile and PwC on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure.”
The company’s business has been performing well and looks attractive to private investors, Rosenblatt’s Zhang said. The company said in a June statement that it sold a 3.4 percent stake in its unit Beijing NationSky Network Technology Inc. for $18 million and planned to sell an additional 2.3 percent for $12 million in the next two months.
Traders profiting from stock declines have increased bets against NQ Mobile to a 12-week high. Short interest on the stock rose to 11 percent of shares outstanding on July 17, from this year’s low of 5.4 percent on Jan. 21, according to data compiled by Markit, a London-based research firm. That may have prompted a short squeeze in the stock.
The stock’s “volatility is extremely high because of the shorts,” Sachin Shah, a special situations and merger-arbitrage strategist at New York-based Albert Fried & Co., said in e-mailed response to questions July 18. “They are increasing their positions and covering positions. So the movement is sometimes technical and not necessarily driven by the fundamentals.”
Short sellers borrow stock to sell in the hope of profiting by repurchasing the securities later at a lower price and returning them to the holder. In a short squeeze, a rally convinces pessimists to close their positions by purchasing shares, driving prices even higher.
The iShares China Large-Cap ETF, the largest Chinese ETF in the U.S., added 0.7 percent to $38.24 for a 0.9 percent advance on the week. The Standard & Poor’s 500 Index gained 1 percent as Google Inc. rose and concerns eased over crises in the Ukraine and Middle East.