Bloomberg News

Morgan Stanley Stake Purchase Propels NQ Mobile’s Stock Rally

December 30, 2013

NQ Mobile Apps

Apps produced by NQ Mobile Inc. are arranged for a photograph on an Apple Inc. iPhone 4S in Hong Kong. Photographer: Brent Lewin/Bloomberg

NQ Mobile Inc. (NQ:US), the Chinese mobile services provider accused by short seller Muddy Waters of overstating revenue, surged the most in a month after Morgan Stanley (MS:US) said it bought a stake in the company.

Shares of the Beijing-based company soared 17 percent to $13.90 in New York, the biggest gain since Nov. 11. Morgan Stanley, which helped NQ Mobile raise $173 million in convertible bonds in October, said in a filing that it has a 5.2 percent stake. The Bloomberg China-US Index of Chinese companies trading in the U.S. slipped 0.6 percent yesterday, paring its 6 percent advance this year.

NQ has lost 39 percent since Oct. 23, the day before Muddy Waters founder Carson Block said the company was “a massive fraud” and the shares are worth less than $1. Investors including Toro Investment Partners LP and Oberweis Asset Management Inc. have increased their holdings as NQ Mobile has said its accounting and businesses are legitimate.

“Morgan Stanley is a big name, and this gives investors validation,” Taek-Geun Kwon, San Francisco-based Toro Investment’s chief investment officer, said in a phone interview. “It’s a vote of confidence in the company by a very large institution.”

Kwon said he has increased his NQ holding by almost 10 percent since disclosing a 4.9 percent stake in a Nov. 8 filing.

Morgan Stanley held less than 1 percent of NQ shares at the end of September, according to data compiled by Bloomberg. The new investment makes it among the five largest shareholders in NQ, including Altimeter Capital Management LLC., Oberweis, Chinarock Capital Management Ltd and Toro Investment.

Fictitious Revenue

The purchase of Chinese stocks that plunged following short sellers’ calls isn’t the first by Morgan Stanley. The bank’s private equity unit formed a consortium to acquire U.S.-listed Yongye International Inc. in October 2012 after short sellers including Absaroka Capital Management LLC alleged management of the fertilizer company embezzled funds.

Muddy Waters said in an 81-page report in October that at least 72 percent of NQ’s purported 2012 China security revenue is fictitious. Block shot to fame in 2011 after he accused Sino-Forest Corp., a Chinese plantation company listed in Canada, of fraud, leading it file for bankruptcy protection.

NQ has denied the allegations and the company hired the law firm Shearman & Sterling LLP to review Muddy Waters’s allegations.

Kim Titus, a Dallas-based spokesman with NQ Mobile, declined to comment on Morgan Stanley’s share purchase.

Zach Kouwe, a spokesman for Block, said in an e-mail that he has no immediate comment on Morgan Stanley.

‘Ridiculously Undervalued’

Short interest, or shares borrowed and sold on expectations they will fall, declined (NQ:US) to 11.7 million shares as of Dec. 13, from a record 14.1 million two weeks earlier, according to exchange data. That still accounted for 38 percent of shares outstanding, according to data compiled by Bloomberg.

“People will lose confidence in the shorts and focus will be back to the fundamentals,” said Toro’s Kwon. The company is “ridiculously undervalued,” he said.

NQ trades at 10 times estimated earnings, about a third of the multiple for U.S.-listed Sungy Mobile Ltd., which provides similar mobile services in China.

Morgan Stanley joined Deutsche Bank AG to underwrite NQ’s convertible bonds in October.

Noah Tumbles

The iShares China Large-Cap ETF (FXI:US), the largest Chinese exchange-traded fund in the U.S., dropped 0.6 percent to $37.97 in New York, extending this year’s decline to 6.1 percent. The Standard & Poor’s 500 Index was little changed.

Noah Holdings Ltd., a wealth management company, plunged 15 percent to $16.44, the most since August, after Caixin Magazine reported that regulators may prohibit wealth management agents from selling trust products.

The potential regulation changes may actually be “good news” for the company because it will eliminate smaller competitors, Ou-Yang Jing, director of Noah’s investor relations, said in a phone interview from Shanghai.

The company changed its business model over the past few years as it expanded its own asset management business, instead of selling trust products for others, she said. More than half of the company’s revenue comes from asset management fees, while the trust business accounts for less than 10 percent, she said.

Trina Solar Ltd., China’s second-largest panel maker, rose 6.9 percent to $14.06. The company signed an investment framework agreement to develop 1 gigawatt solar power plant project in western China’s Xinjiang Region.

The Shanghai Composite Index (SHCOMP) advanced 0.9 percent at the 11:30 a.m. local time break, paring this year’s decline to 6.8 percent. The Hang Seng China Enterprises Index in Hong Kong rose 0.7 percent today.

To contact the reporter on this story: Ye Xie in New York at yxie6@bloomberg.net

To contact the editor responsible for this story: Tal Barak Harif at tbarak@bloomberg.net


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Companies Mentioned

  • NQ
    (NQ Mobile Inc)
    • $6.67 USD
    • 0.46
    • 6.9%
  • MS
    (Morgan Stanley)
    • $33.24 USD
    • -0.16
    • -0.48%
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