NQ Mobile Joins Web Elite With Bond Offer

NQ Mobile issues  $172 mln bond offer

I wanted to take a break from the usual companies I write about to look at the quietly rising NQ Mobile (NYSE: NQ), which has just joined a elite club of top Chinese web firms with a new major bond issue. The fact that NQ, formerly known as NetQin, could issue these bonds at all reflects its growing attractiveness to investors as a strong bet on China’s security software market. I can’t comment too much on its products, as I haven’t used them; but the company certainly looks well positioned to gain share in a market now dominated by Qihoo 360 (NYSE: QIHU), whose free security software is becoming the subject of growing controversy.

Investors have been gaining increasing affection these days for NQ, whose shares have more than tripled since the beginning of the year. The company got off to a shaky start following its May 2011 IPO, after reports first emerged of conflicts with China’s 3 major telcos. But then it reached a deal to offer its products over phones made by Google’s (Nasdaq: GOOG) Motorola Mobility last December, and has signed a series of other promising agreements since then. (previous post) Following the recent surge for its shares, NQ recently entered the relatively elite club of US-listed Chinese tech firms with market values greater than $1 billion, which number less than 20.

All that said, let’s look at the latest headlines that have NQ announcing it has raised $172.5 million through a convertible bond sale. (company announcement) The 5-year bonds can be converted to NQ stock at a price of $25.61 per American Depositary Share (ADS), which is 30 percent higher than the company’s closing price when the terms were set. NQ shares jumped 4 percent after the announcement came out to $21.67, as investors welcomed a decision by the purchasers, Morgan Stanley and Deutsche Bank, to exercise their option to buy an additional $22.5 million worth of bonds.

The issue is just the latest in a string of such offerings by many of China’s Internet leaders. Others who have made major offerings over the last year include Hong Kong-listed Tencent (HKEx: 700), search leader Baidu (Nasdaq: BIDU) and most recently leading online travel agent Ctrip, which raised $700 million earlier this month in another convertible note offering. The inclusion of NQ in this elite group is certainly a status symbol if nothing else, even though the amount of money it raised is far smaller than the others.

NQ’s latest quarterly report contains a wide range of upbeat news about the company, including a doubling of revenue, new agreements with leading telco China Mobile (HKEx: 941; NYSE: CHL) and Baidu, as well as an upward revision of its 2013 revenue forecast. (company announcement) As I’ve mentioned already, NQ also could be well positioned to gain share from security software sector leader Qihoo, whose free product has been the subject of recent controversy due to its intrusive nature.

In the announcement of its new bond offer, NQ says it will use the money partly to fund acquisitions, joining a recent frenzy among China’s leading Internet firms to make such purchases. I would expect that any of NQ’s purchases would be relatively small, most likely $50 million or less, as it tries to pick up share on Qihoo and other rivals like Kingsoft (HKEx: 2333). Purchases could come in a number of areas, including its core security software, its expanding mobile game portfolio and also its growing international business.

Bottom line: NQ’s new $172 million bond offer is the latest sign of the company’s fast rise, and could foreshadow new acquisitions in the $20-$50 million range.

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