NetQin wades through "muddy water": all charges are cleared and the stock price surges 34%

In response to the fraud allegations made by short-selling agency Muddy Waters against China's NetQin late last year, NetQin announced on Wednesday the results of an independent investigation by a special committee of the company's board of directors into the case. The report stated that "no evidence was found to indicate that NetQin had been engaged in the fraudulent behavior alleged by Muddy Waters."

It is reported that the report was guided by an independent investigation committee formed by the board of directors, and the US law firm Shearman & Sterling LLP and Deloitte Financial Advisory Services Ltd. were hired as forensic accountants.

In this report, which was mainly independently investigated by Shearman & Sterling LLP and Deloitte, the six major allegations made by Muddy Waters against NetQin were clarified one by one:

1) The investigation team determined that the company’s audited cash balance was consistent with the publicly disclosed cash balance.

2) The investigation team found no evidence that the company’s revenue was inconsistent with publicly disclosed information.

3) The investigation team found no evidence that the company’s major expenditures during the reporting period were not for legitimate business purposes or for the benefit of the company and its shareholders.

4) The Investigation Team found that (a) NetQin’s past and present domestic and overseas partnerships (including YiDaTong) had legitimate business purposes, (b) with respect to YiDaTong in particular, NetQin’s revenue and cash flow from customers to operators through YiDaTong were consistent with those verified and disclosed; and (c) the overall relationship between YiDaTong and NetQin was consistent with the Company’s publicly disclosed information.

5) The investigation team found that the company evaluated its acquisition targets after due diligence (using internal resources), including examining the business model, financial information and commercial viability of the target company. The company's mergers and acquisitions helped increase revenue and user business.

6) The investigation team found that the company’s treatment of the proceeds from its IPO in May 2011 did not reflect any deviation from the market.

In today's pre-market trading, NetQin's stock price began to rebound, rising by US$2.6, or 34%, to US$10.22.

On October 24 last year, short-selling agency Muddy Waters released a report accusing China's NetQin of business fraud. The accusations included not only the suspected fraud of part of NetQin China's revenue, the non-existence of the payment service provider YiDaTong, and the fact that NetQin had no business partners and real users.

On the second day after the allegation report was released, NetQin Company made relevant clarifications and responses to the report, and quickly established a special committee composed of four independent directors to conduct an independent evaluation of the contents of the report released by Muddy Waters.

It is understood that Muddy Waters Research is a research institution that publishes research reports to question listed companies, and takes the opportunity to cooperate with hedge funds to make profits by selling high and buying low in the stock market. Muddy Waters mainly targets Chinese companies listed in the United States, using information asymmetry to cause market panic, and then short sells to cash out.

In China, Muddy Waters selected some small and medium-sized companies that are growing rapidly but not well-known in the U.S. Spreadtrum, Focus Media, and New Oriental have all been shorted by Muddy Waters before, and their stock prices have plummeted, but they have recovered and developed better after clarifying the facts.

It is worth noting that in the recent short-selling cases of Muddy Waters, the doubts were all untrue, and Muddy Waters did not take responsibility for its remarks afterwards. During the time the company explained the doubts and provided evidence, Muddy Waters had already exited the market with profits.

This time, NetQin responded to Muddy Waters' accusations through a detailed investigation report and also responded to the corresponding issues.

First, there is the issue of cash flow. NetQin has responded to Muddy Waters' slanderous claim that NetQin's cash holdings are fictitious and forged by publishing all of its bank account holdings, bank names, account numbers and balances.

From the actual bank deposit receipts and recent bank statements of convertible bond proceeds posted by NetQin, it is not difficult to find that NetQin does hold the stated time deposits of approximately US$280 million, and convertible bond proceeds of approximately US$166 million.

At the same time, NetQin also stated that its current cash balance belongs to the company's independent operating scope, is used for operational purposes, and is separate from the company's time deposit balance; classifying cash and time deposits into secondary assets is in line with the fair value measurement principles of US Generally Accepted Accounting Principles.

Secondly, regarding the existence of Yidatong, Muddy Waters' accusation is that Yidatong is just a shell company of NetQin, which forged revenue records for NetQin.

In response, NetQin said that Yidatong is not a customer, but a company independent of NetQin and the main payment service provider of NetQin. Apart from the contractual cooperation relationship as a payment service provider, there is no ownership or other related relationship between Yidatong and NetQin. And Yidatong is not a non-operating company as Muddy Waters said.

In response, NetQin not only provided the specific office address of YiDaTong, but also published the real photos of its main office in Beijing. As for the mutual payment between YiDaTong and NetQin, it can also be clearly found in NetQin's 2012 financial statements.

In addition, regarding the number of partners and users, Muddy Waters claimed that NetQin's retail support business was stagnant, and its Chinese market share was exaggerated, not the so-called 55%, but only about 1.4%.

In response to these, NetQin not only listed the addresses of some of its retail stores that sell NetQin software in China, but also attached several photos of the retail stores. Moreover, NetQin denied the two true and false market share data, and said that Sino, the source of the third-party market research report, has no related party relationship with NetQin.

As for the actual number of users, NetQin said that although the product was not pre-installed on OEM devices under the NetQin brand, NetQin had indeed signed equipment pre-installation agreements with major mobile phone manufacturers in China, such as ZTE, Huawei, Gionee, Coolpad, and Samsung. By the end of the second quarter of 2013, the number of registered users activated through the pre-installation channel had accumulated to about 58 million; the total since 2013 is about 25.4 million.

In addition, NetQin also disclosed various transaction activities of NetQin's Alipay account and YeePay account in recent months; listed the main reasons why operator charges are the most effective charging method; and the real role of NetQin's portal website. During the six-month investigation, NetQin's management and employees fully cooperated with the investigation and together cleared the "muddy water" thrown by Muddy Waters through accusations of fraud.

After the investigation report was released, Lin Yu, chairman of NetQin, sent an open letter to all employees, citing the Chinese thinker Lao Tzu's "blessings and misfortunes go hand in hand" to encourage employees, saying "I believe that after NetQin has waded through the muddy water, it will go further, run faster, and fly higher."

As a winner of Toutiao's Qingyun Plan and Baijiahao's Bai+ Plan, the 2019 Baidu Digital Author of the Year, the Baijiahao's Most Popular Author in the Technology Field, the 2019 Sogou Technology and Culture Author, and the 2021 Baijiahao Quarterly Influential Creator, he has won many awards, including the 2013 Sohu Best Industry Media Person, the 2015 China New Media Entrepreneurship Competition Beijing Third Place, the 2015 Guangmang Experience Award, the 2015 China New Media Entrepreneurship Competition Finals Third Place, and the 2018 Baidu Dynamic Annual Powerful Celebrity.