Toro DD Day 2

[Bondguy8]

NQ DD, Day 2 update:



As noted in our reports, we are in Beiing for 2-3 weeks for some on-the-ground DD in China to visit NQ, it subsidiaries, YDT, and major partners. This DD effort will take us to Beijing, Shanghai, Shenzhen, and Guangzhou to visit all the major ecosystem partners and then to various Tier 2+ cities to verify distribution and users.



Summary of Day 2 of DD in Beijing:



1. Second interview with Rong Xu. Walked through every MW point and refuted. Examples include:



Ghost addresses: every single one of the addresses listed in MW report was old. Companies move over an 8-year period, which is how far back some of those addresses go. The first three were addresses from YDT’s former owner, when Rong Xu hadn’t even bought the business yet. The newest SAIC filings were updated to include YDT’s new HQ address, same as 9H address. Since Rong took over, YDT has always shared office space with 9H, which can be verified in SAIC filings.



Email server: easy explanation. Both companies use the same email service provider, a company named Wanwang.



Same customer service number, customer service contact person, SAIC filing address: Fairly common practice for large customers of SPs to take calls directly from customers since the CP is best suited to address any issues with the product. SAIC filing information is very old, does not apply now.



2. Interview with UMPay (a carrier-owned SP, JV between China Mobile and UnionPay, that is an alternate non-YDT SP to NQ). Confirmed 6-year relationship with NQ, that NQ is a customer in good standing, that NQ revenue ramp is among 10% highest of their customer base (“growing very quickly&rdquo, confirmed payment flow discussed in Part 2 of our rebuttal series (however, different SPs pay out at different times, UMPay does so in 2 weeks, not the usual month)



3. Meeting with CFO KB Teo and corporate lawyer (from Skadden) who advised on setting up corporate structures for NQ that allow NQ to receive foreign capital and bring it on-shore as RMB.



NQ corporate structure very standard with ADRs, involving 5 separate structures: a Cayman entity, various international entities (e.g. NQ US, NQ Japan, NQ Switzerland, etc.), a HK entity, a WFOE, and a VIE. The Cayman entity sits “in the middle” and has legal contracts with the HK entity which acts as a proxy to the WFOE, which flows to the VIE. The international entities are owned by the Cayman entity.



The two key ways in which foreign capital can be received in RMB to be transferred off-shore are:

(a) The VIE has a technology support contract (covers substantially all of NQ’s domestic business operations since NQ is a pure technology company) with the Cayman entity that is sanctioned by the central bank, the People’s Bank of China (PBOC). This allows the Cayman entity to transmit funds to the HK entity, where they can be converted to RMB and then sent on-shore. PBOC is one regulator of China’s capital controls, and for technology companies such as NQ that have verifiable uses of capital, e.g. for running a technology business, it is not uncommon to receive approval for allowing capital to flow into the country from off-shore.

(b) For companies established before 2007, in order to allow foreign direct investment (e.g. venture capital) for on-shore companies, there is a special status (“file 75” or “rule 75&rdquo granted by the State Administration of Foreign Exchange (SAFE), that allows companies to take investment in foreign currencies that are converted to RMB in HK and then sent on-shore.



The transfer of funds occurs through major banks such as China Merchant Bank, and typically funds are received in HK, converted to RMB in HK, and then wired on-shore. These banks provide this service as a standard offering, as long as the proper approvals (in the case of NQ, both a and b above) are in place and it is the same entity that has approval from PBOC or SAFE requesting the services for itself only.