INTERNET: Resignations Rock NQ Mobile, Qihoo

Bottom line: NQ Mobile and Qihoo stocks are likely to come under pressure over the next 12 months due to ongoing questions about boardroom stability and aggressive accounting practices.

Qihoo independent board member resigns

“Scandal” seems to be the buzzword in China’s corporate Internet world this week, following the resignations of top officials at 2 of the nation’s leading security software makers, NQ Mobile (NYSE: NQ) and Qihoo (NYSE: QIHU). The former case looks the most serious, with NQ’s Chairman and co-CEO Henry Lin, also known as Lin Yu, resigning for murky reasons. Meantime, another one of Qihoo’s independent board members has resigned, following similar departures earlier this year, suggesting disagreement over aggressive accounting practices favored by the company’s opinionated CEO Zhou Hongyi.

NQ’s shares took a big hit after the announcement of Lin’s resignation, dipping 10 percent in the 2 trading days after the news came out. The company’s shares have become a play toy of speculators over the last year, after taking a major nosedive last fall when a well-known short-seller questioned its accounting. But the shares bounced back after that and traded as high as $21 back in March, before the latest sell-off that has left them at a current price of $5.44.

Meantime, Qihoo’s shareholders looked less concerned by the announcement that independent board member Chen Wenjiang had resigned, with the company’s stock actually rising 1.4 percent in the latest trading session. Of course it’s also worth noting Qihoo’s stock has lost about half of its value from a peak in March, as investors start to question the company’s ability to quickly monetize its fast-growing search business that is posing a challenge to industry leader Baidu (Nasdaq: BIDU).

Let’s begin this resignation round-up with NQ, which has emerged as a lightning rod for controversy following the accusations of misleading accounting last fall by notorious short seller Muddy Waters. Now NQ has just announced the resignation of Chairman and co-CEO Lin, saying he is “unable to perform his duties in this capacity due to personal reasons unrelated to the company.” (company announcement)

The company named officials to temporarily fill the positions, and also took other steps to boost investor confidence. But the departure of such a key figure will clearly put the company’s future prospects into doubt, and some may even wonder whether his resignation could have any connection with last year’s Muddy Waters allegations.

In fact, another report suggests Lin’s departure could be related to personal connections with people outside of NQ who might be under investigation for corruption or other crimes. (Chinese article) Regardless of the reality, NQ’s stock looks set for more turbulence in the next year, and I doubt any serious investors will buy the shares anytime soon.

Next let’s look at Qihoo, which has just announced the resignation of independent board member Chen, and her replacement by academic Liao Jiaowen. (company announcement) Interestingly, the announcement doesn’t give any reason for Chen’s departure, though it suggests she is heading for a “new endeavor”. I would personally suggest that Chen didn’t get along with Qihoo CEO Zhou Hongyi, and was forced to leave the board for that reason.

Wording of the announcement suggests that Chen was chairman of Qihoo’s audit committee, which makes her resignation imply differences of opinion with management over the company’s accounting practices. Anyone sensing deja vu will recall that earlier this year 2 other independent Qihoo board members also resigned, one of whom was on its audit committee and the other from its corporate governance committee. (previous post)

Muddy Waters, Forbes magazine and a number of other respectable sources have attacked Qihoo in the past for its aggressive accounting, and I suspect those practices have become even more aggressive over the last year as Qihoo feels pressure to show quick progress for the monetizing its search business. I do suspect the company will ultimately be forced by its external auditor to rein in its aggressive accounting, and that all of the pressure the company is feeling will put more downward pressure on Qihoo’s stock for the next year.

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