Shares of Chinese software company NQ Mobile (NQ) née Netqin Mobil plunged in June 11 trading action on little fresh news, making it appear as though some investors fear total loss and have finally decided to cash in and move on.
The day prior, Beijing-and-Dallas-based NQ announced the sale of a minority interest in NationSky for $18 million, although this had a negligible effect on the company‘s shares. What has pushed shares down is the fact that NQ has still failed to conclusively prove that their numbers are not falsified as reperatedly asserted by famed short-seller Carson Block.
On June 4 NQ issued a report from a special investigative counsel who concluded that NQ’s numbers were above board and legitimate. Muddy Waters was not impressed, issuing an immediate rebuttal that likened NQ’s tactics and excuses to those of Sino Forest, one of several small Chinese companies in recent years that has accused by US short-sellers of securities fraud.
Muddy Waters Sticks to Guns, NQ Remains Largely Mum
In their rebuttal, Muddy Waters pointed out that NQ themselves admitted to widespread data tampering during the special investigation, and questioned why the committee did not consider this information. Their reasoning? Collusion.
Muddy Water’s claimed that the discrepancy between NQ’s supposed clean bill of health despite clear evidence tampering was “undoubtedly the result of a negotiation between the advisors and the company, and which despite making it clear that the tampering was widespread, almost certainly understates the severity of the problem.”
Of course, by June 11 this information was seven days old. So why the drop in stock price? Likely it is as a result of a couple factors. One, the divestment from NationSky indicates that NQ is in need of cash, especially considering they also recently made a major divestment from FL Mobile just 11 days prior.
Two, it’s a domino effect sped up by NQ’s failure to adequately address Muddy Waters’, and other short-seller’s, allegations via a truly independent audit. Muddy Waters has gone as far as to offer to pay outright for an independent firm to audit the company’s books, an offer which was flatly denied.
With NQ, it's Likely Double or Nothing
Volume on NQ’s shares was triple normal volume on June 11, as investors lost their nerve and sparked a sell-off. A panic sell is not terribly surprising as NQ’s not a play for the faint-of-heart or value investor.
The risk-reward on NQ is huge. On one hand, if NQ were ever to be vindicated by a completely impartial audit, a two or three bagger for investors is certainly not out of the question.
However, Muddy Waters gave NQ a price target of zero. In such a scenario, investors would experience 100 percent loss – a rarity for a publicly traded company, but not without precedent.
It’s no coincidence Muddy Waters compares NQ to Sino Forest in their rebuttal. Sino Forest was a previous target of Muddy Waters who issued their own “special investigative report” that supposedly cleared their name. Seven months later, they were bankrupt, taking investors’ money with them.
By 1:15 EST on June 11 shares of NQ had fallen 15.06 percent on the day to hit $7.84 a share. Losses looked to worsen throughout the rest of the trading day.
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