Muddy Waters Risks Curbing Chinese IPO Demand

Muddy Waters Risks Curbing IPO Demand: China Overnight

By Belinda Cao and Matthew Kanterman  Oct 24, 2013

Short seller Muddy Waters LLC’s call to sell shares of Chinese mobile-security service provider NQ Mobile Inc. (NQ) will hinder initial public offerings from the country, Needham & Co. said. Shares of NQ Mobile tumbled as much as 63 percent in New York yesterday before trading was halted. The Bloomberg China-US Equity Index of the most-traded Chinese stocks in the U.S. climbed 0.5 percent to 103.26, led by New Oriental Education & Technology Group (EDU) and Vipshop Holdings Ltd.Muddy Waters, a research firm founded by short seller Carson Block, initiated coverage of NQ Mobile with a strong sell rating, saying the company inflated sales. Block accused in 2011 Sino-Forest Corp. and Focus Media Holding Ltd. of inflating their financial statements. Travel-booking website Qunar Cayman Islands Ltd. and online marketplace 58.com Inc. plan to raise funds in IPOs in the U.S. next week, according to data compiled by Bloomberg.

“This just kind of fans the flames again,” Rudy Balseiro, the managing director of equity capital markets at Needham, said by phone from New York yesterday. “Whether it’s true or not doesn’t matter, it’s the perception that this is still going on. It will strip out some of the guys who were getting comfortable with the Chinese IPOs.”

The plunge yesterday cut NQ’s market value by $561 million, after its American depositary receipts rallied 279 percent this year through Oct. 23. The ADRs fell 47 percent to $12.09 in New York before trading was suspended.

‘Fictitious’ Revenue

“We believe it is a zero,” Block, wrote in an e-mailed report on NQ Mobile yesterday. “At least 72 percent of NQ’s purported 2012 Chinasecurity revenue is fictitious.” NQ’s market share in China is about 1.5 percent, versus the approximate 55 percent it reports, Block wrote. The company’s China paying user base is less than 250,000, versus the six million NQ claims.

NQ rejected the allegations, saying the company will respond with more details before the open of the U.S. markets today, according to a PRNewswire statement.

58.com, based in Beijing, seeks to sell 11 million ADRs for a price between $13 and $15, it said in a filing Oct. 17. Qunar plans to debut trading on the Nasdaq Stock Market Nov. 1. 500.com Ltd., a Chinese online sports-lottery operator, plans for a $150 million IPO while Sungy Mobile Ltd., a Guangzhou-based provider of mobile applications, seeks to raise $80 million in a U.S. IPO, according to their filings this week.

Phoenix New Media Ltd. (FENG), a TV and Internet news outlet, tumbled 9 percent on a third day of declines to $11.08, sinking the most in two weeks. Trading volume was 2.4 times the three-month daily average compiled by Bloomberg.

Margin Forecast

ADRs of New Oriental, China’s biggest private educational company, soared 6.1 percent to $28.08, the highest price in four months. At least seven analysts increased their price estimates for New Oriental after it raised a margin forecast for its 2014 fiscal year while operating margin rose for the quarter ended in August.

ADRs of TAL Education Group (XRS) advanced 2.1 percent to $18.43, the highest level since its U.S. listing in October 2010. The ADRs have jumped 16 percent in the past three days after the tutoring service provider reporting better-than-estimated earnings Oct. 22.

“Both educational service companies have sought-after balanced growth with a focus on profit margin, and they will continue to expand with stable or expanding margins,” Tian X. Hou, the founder of T. H. Capital LLC, which compiles research on U.S.-traded Chinese companies, said in a telephone interview from New York yesterday.

Vipshop, a web retailer of clothing based in Guangzhou, advanced 5.6 percent to $73.30, rising the most since Oct. 11.

ETF Declines

The iShares China Large-Cap ETF (FXI), the largest Chinese exchange-traded fund in the U.S., slumped 1.2 percent to $36.48 in New York. The Standard & Poor’s 500 Index added 0.3 percent as corporate earnings beat estimates and signs of slower economic growth fueled bets the Federal Reserve will maintain stimulus.

The Hang Seng China Enterprises Index (HSCEI) slipped 1.3 percent to 10,322.12 yesterday, falling for a third day, while the Shanghai Composite Index slid 0.9 percent to 2,164.32, the lowest price since Sept. 27.

To contact the reporter on this story: Belinda Cao in New York at lcao4@bloomberg.net

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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