IB Equity Research

October 29, 2013

NQ MOBILE INC. Thesis Overview

Up until the recent release by Muddy Waters, NQ Mobile (or NQ) has impressed analysts with significant registered user growth and revenue growth since inception. The Company, as it states in its own words, has been firing on all cylinders and the stock responded positively to the impressive growth and business success before fear struck with fraud accusations. Up until this news, the most recent news had been around a new product offering called NQ Live, which will be put into 470 million Android smart phones integrated with the operating system. In a sense, it will provide the Android user with a new tailored home-page and provide the user with always-on content. With the significant revenue growth, ability to navigate NQ into a truly mobile platform company, and exciting product roll-outs, the management team has proven itself capable of continuing to fuel significant growth. Despite all of this, the stock has been given little credit in the face of short seller Muddy Waters. We discuss the associated mitigants to the Muddy Waters claim on page 7 of this report.

Stock Rating Catalyst Category Price Target Price (10/29/13): $11.01 Upside/(Downside): 269% Ticker: NQ Exchange: NYSE Industry: Technology Trading Stats ($USD millions) Market Cap: $567 Enterprise Value: $419 Price / Book: 1.9x PEG Ratio: 0.21x Dividend Yield: NA EV / 2014E EBITDA: 4.1x EV / 2015E EBITDA: 2.6x Forward P/E Ratio: 8.3x
Source: Company filings, Analyst projections

BUY Secular $40.00

Price Performance 52 Week range: $5.07- $25.90 Analyst Details IB Username: stala Employer: Private Asset Manager Job Title: Analyst Analyst Disclosure NQ Position Held: Yes

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October 29, 2013

Company Overview
Company Overview
NQ Mobile Inc. provides mobile Internet services in the areas of mobile security, privacy, productivity, personalized cloud, and family protection. It operates through two segments, Consumer and Enterprise. The company offers NQ Mobile Security, a mobile security product that protects users mobile voice and data from malicious software, data theft, and privacy intrusion; and mobile security services, such as mobile malware scanning, Internet firewall, account and communication safety, anti-theft, performance optimization, hostile software rating, and reporting. It also provides NQ Mobile Vault, a mobile privacy product that ensures users digital privacy through active control and on -device encryption of content and communication, including contacts, SMS, pictures, videos, and call logs; and Android Booster, Mobile Manager, and NQ Mobile Call Blocker mobile productivity products, which enhance users time and relationship management. In addition, the company offers NQ Family Guardian that allows parents to protect their children on smartphones; NQ Space, which provides personalized cloud services and synchronizes user information; and a cloud security and vault/storage software development kit. Further, it provides mobile games, Interestbased community applications, and advertising services; and enterprise mobility solutions, such as mobile device management solutions, bring-your-own-device platform, cross platform middleware/center enterprise server solutions, enterprise mobile security platform, industry mobility solutions, and architecting mobility strategies, as well as device sourcing, devices and application deployment and optimization, and training and support services. The company was formerly known as NetQin Mobile Inc. and changed its name to NQ Mobile Inc. in April 2012. NQ Mobile Inc. was founded in 2005 and is headquartered in Beijing, the Peoples Republic of China.

Business Description
NQ Mobile is a leading global provider of mobile Internet services. The Company pioneered the consumer mobile security industry in 2005 and has since built a world-class cloud-based platform with proven competency to acquire, engage, and monetize customers globally. NQ Mobile currently offers a variety of products and services for the consumer and enterprise markets in consumer mobile security, mobile games and advertising, and enterprise mobility. As of December 31, 2012, the Company maintains a large, global user base of approximately 283.4 million registered user accounts and 97.7 million monthly active user accounts in its consumer mobile security business; 67.4 million registered user accounts and 12.5 million monthly

IB Equity Research
October 29, 2013

active user accounts in its mobile games and advertising business, and over 1,200 enterprise customers in China in its enterprise mobility business. The Company has a wide range of collaborations with key ecosystem participants.

The Companys vision is to become the most trusted mobile Internet platform for consumers and enterprises globally. The business was started by offering consumers mobile security services to address the fundamental and rapidly growing needs of smartphone users. Over the years, its proprietary, cloud-based security solution has been recognized as among the most effective for detecting and combating mobile threats. Building upon the success of its mobile security offerings, NQ Mobile expanded its service solutions to protect privacy and enhance productivity of mobile usage for consumers, and started to offer additional consumer mobile Internet services such as mobile games and interest-based online communities. NQ also extended mobile security, privacy and productivity products to families and enterprise customers. In September 2012, NQ launched its family protection product, NQ Family Guardian, and in December 2012, it launched NQSky, its Mobile Device Management (MDM) product for enterprise customers. Today, its services cater to the ever-expanding needs of consumers and enterprises in their usage of mobile devices, and the Company is well positioned to capture market opportunities presented by the rapidly evolving mobile Internet industry. The Company offers products and services in the following main categories: Consumer mobile security: NQ provides mobile security, privacy, and productivity services that are designed to protect users from mobile malware threats, data theft and privacy intrusion, as well as increase productivity. Its products and services include features such as mobile malware scanning, Internet firewall, account and communication safety, anti-theft, performance optimization, hostile software rating and reporting, contacts and media file protection, cloud storage, parental control and other services. NQ offers consumer mobile security services mostly through a

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October 29, 2013

Freemium subscription model. The Company provides users with free services and the option to upgrade to premium services for a fee. Mobile games and advertising: Through its subsidiary Beijing Feiliu, NQ Mobile provides mobile Internet value added services, which include a portfolio of mobile game offerings, applications of interest-based online communities, and advertising services. As of December 31, 2012, NQ Mobile publishes, distributes and operates 12 free-to-play games on the Apple iOS smartphone platform and 19 games on the Android smartphone platform. The Company provides an online mobile portal for users to access its mobile games, as well as other interest-based mobile community applications focused on games, gadgets/IT, automobiles and healthcare. NQ Mobile generates revenues mainly through the sale of in-game virtual items to mobile game players, as well as advertisements in our interest-based online community applications. Enterprise mobility: Through its subsidiary Beijing NationSky, NQ Mobile delivers a comprehensive suite of mobility solutions to assist enterprises to build an efficient, productive and secure mobile environment. NQ provides mobility strategy consulting, architecture design, hardware and software procurement and deployment, mobile device and application management, training, maintenance and other ongoing support services. The Company generates revenues through mobility service delivery, software licensing, hardware procurement and deployment, technical support, maintenance and other services provided to its enterprise customers.

Market Overview
Consumer Mobile Security
NQ Mobiles user base for consumer mobile security has expanded rapidly in recent years. As of December 31, 2010, 2011 and 2012, the Company had 71.7 million, 146.7 million and 283.4 million registered user accounts, respectively. NQ had 23.2 million, 55.1 million and 119.4 million overseas registered user accounts as of December 31, 2010 and 2011 and 2012, respectively, representing 32.3%, 37.6% and 42.1% of its total registered user accounts as of the same dates. For the fourth quarter ended December 31, 2010, 2011 and 2012, NQ Mobile had 25.4 million, 52.3 million and 97.7 million monthly average active user accounts, respectively, and 3.2 million, 5.6 million and 8.9 million monthly average paying user accounts, respectively.

Source: Company presentations

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October 29, 2013

NQ Mobile has captured a dominant market share in Chinas mobile security market. An independent study conducted by SinoMR Research during the fourth quarter of 2012 indicated that its market share, in terms of registered user accounts in China, was approximately 60% as of December 31, 2012. The Companys overseas user base has also expanded rapidly. NQ Mobile currently has a significant number of registered and active user accounts in areas such as Asia and Europe, the Middle East and North America, and plan to continue our overseas expansion. The Companys Freemium subscription model enables it to initially gain as many registered user accounts as it can through the offering of basic services to registered user accounts free of charge, and then turning some of these registered user accounts into paying user accounts by providing fee-generating premium services. Once registered, NQs users are able to communicate directly with its customer service and technical teams through hotlines and instant messages. The Companys cloud-side security knowledge repository grows with user contributions of security knowledge, such as malware and spam samples, each time a user accesses its services. Therefore, the larger user base NQ has, the more powerful its platform becomes, which presents a significant competitive advantage and entry barrier to potential competitors.

Mobile Games, Interest-Based Online Community Applications and Advertising

As of December 31, 2012, Beijing Feiliu had 67.4 million registered user accounts and 12.5 million monthly active user accounts through its mobile game center, various interest-based community apps and Feiliu Download. Since Beijing Feiliu commenced operating mobile games, its gaming community has undergone a rapid expansion and the number of game developers Beijing Feiliu cooperated with reached over 100 by the end of 2012. The Company believes its rich game portfolio and cross promotion across different games and services will enable it to continue building the scale of its gaming community. NQ offers advertisers the access to its users through games and on interest-based online community applications on the Beijing Feiliu platforms. The Companys advertisers consist of those from mobile game companies and online/offline merchants. As the Company expands its interest-based online communities and further diversifies its user base, NQ plans to collaborate with advertisers from additional industries. Beijing Feiliu acquires users through advertising on various mobile advertising networks, social recommendations and online downloads from app stores such as Apples app store. On the iOS platform, Beijing Feiliu relies on the Apples app store as its

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October 29, 2013

primary payment channel. On the Android platform, Beijing Feiliu cooperates with multiple third-party payment service providers such as Alipay, Shenzhoufu, and Yibao, as well as prepaid cards of China Mobile, China Unicom and China Telecom.

Enterprises Mobility
NationSky is a leading provider of managed mobility services to Chinese enterprises. As of December 31, 2012, NQ Mobile has more than 1,200 large and medium enterprise customers, covering a significant number of the Fortune 500 companies in China. Its enterprise customer are diversified across different industries, including financial services, insurance, health care, pharmaceutical, manufacturing and energy. The Company has also built strong industry alliances with global brands such as Apple, BlackBerry, China Mobile and Global Enterprise Mobility Association (GEMA). As of December 31, 2012, NationSky had over 80 sales, presales and marketing professionals in major cities including Beijing, Shanghai, Shenzhen, Tianjin, Guangzhou, Chengdu, Qingdao, Jinan, Ningbo and Nanjing. NationSky acquires its enterprise customers through direct inbound customer requests, direct outbound customer engagements or partner referrals.

IB Equity Research
October 29, 2013

Muddy Waters Risk & Associated Mitigants

In my mind, fraud is an extremely serious accusation; one that needs to be met fervently with refutation and substantive rebuttals by the accused. NQ has done as much as any Company really can do in this degree. Some of their responses have been: Conference call within 24 hours of the Muddy Waters report to address major concerns Proof of cash through account balances and more recently an opening of a $100 million cash account of which $16M has been already transferred (Muddy Waters had said there was effectively zero cash) o On this point, the stance of Muddy Waters is that all of their cash (audited by a reputable firm) is Level 2, which they have stretched to say that this must mean it isnt there, in some form. It should be noted Baidu and SINA also have significant amounts of cash classified as Level 2

Announced confirmation of NQs intention to buy back $35 million in stock (who would buy back stock in a fraudulent company?) Extensive and compelling presentation refuting line by line Muddy waters claim can be found here Announcement of an agreement with China Mobile, Ltd. (worlds largest wireless carrier) to license audio based search technology from NQ Mobile

In a sense, I believe NQ has been aggressively destroyed for a couple of big reasons. Obviously, the report of fraud from Muddy Waters, a firm that has been right (and wrong) in fraud cases in the past, creates a sense of panic in any investor. But more so, NQs own strong growth (and for good reason) in its stock price has, in my view, created an exaggerated willingness to part w ays with the Company for many investors who were invested in the stock prior to the last several months. Instead of risking a potential fraud, these investors hastily (and I cant blame them) rushed for the exit and saved some amount of profits or at l east

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October 29, 2013

limited their loss because of the significant gain they had until this past week. Some others are seeing value here today as well. Macquarie has stepped in to say that this is a rare opportunity to buy a high growth stock.

IB Equity Research
October 29, 2013

Financial & Valuation Overview

PROJECTED CASH FLOWS
(USD in millions, except per share data) 996 2008 4.0 2.0 51.6% (3.6) (92.1%) 0.1 14.7% -3.8 (94.8%) 0.0 -3.8 0.1 (0.7) (18.6%) 0.0 (1.6) (40.5%) -6.0 997 2009 5.3 32.9% 2.8 53.4% (5.1) 38.5% (95.9%) 0.3 72.0% -5.3 42.3% (101.5%) 0.0 -5.3 0.3 (0.4) (7.7%) 0.0 2.1 39.1% -3.4 (43.3%) 998 2010 17.7 236.2% 5.2 29.3% (9.3) 84.1% (52.5%) 0.3 59.9% -9.6 80.5% (54.5%) 0.0 -9.6 0.3 (0.6) (3.3%) 0.0 (7.5) (42.7%) -17.4 412.7% 999 2011 40.7 129.8% 8.1 19.8% 6.0 (164.6%) 14.8% 0.5 20.5% 5.5 (157.5%) 13.6% (1.7) 3.9 0.5 (2.3) (5.6%) 0.0 (6.6) (16.1%) -4.5 (74.3%) 1000 Fiscal Year Ending December 2012 | 2013E 2014E 91.8 | 188.1 301.0 125.6% | 105.0% 60.0% 25.7 | 52.8 84.4 28.0% | 28.0% 28.0% 3.7 | 56.4 102.3 (38.8%) | 1435.3% 81.3% 4.0% | 30.0% 34.0% 1.4 | 1.9 2.3 60.2% | 68.1% 76.1% 2.3 | 54.5 100.0 (59.0%) | 2299.4% 83.5% 2.5% | 29.0% 33.2% (0.7) | (16.4) (30.0) 1.6 | 38.2 70.0 1.4 | 1.9 2.3 (2.3) | (2.8) (3.0) (2.5%) | (1.5%) (1.0%) 0.0 | 0.0 0.0 (12.1) | (1.9) (6.3) (13.2%) | (1.0%) (2.1%) -11.5 | 35.4 63.0 156.0% | (408.2%) 78.1% 0.09 6.0 0.67 56.5 2015E 421.4 40.0% 118.2 28.0% 160.1 56.5% 38.0% 2.8 84.1% 157.3 57.2% 37.3% (47.2) 110.1 2.8 (3.4) (0.8%) 0.0 (10.5) (2.5%) 99.0 57.2% 1.67 75.5 2016E 505.7 20.0% 141.8 28.0% 202.3 26.3% 40.0% 3.3 92.0% 199.0 26.5% 39.4% (59.7) 139.3 3.3 (3.5) (0.7%) 0.0 (14.2) (2.8%) 124.9 26.1% 2.67 80.9 2017E 556.2 10.0% 156.0 28.0% 244.7 21.0% 44.0% 3.9 100.0% 240.9 21.0% 43.3% (72.3) 168.6 3.9 (3.9) (0.7%) 0.0 (13.9) (2.5%) 154.7 23.9% 3.67 85.2 4.17 CAGR 2013-2017 31.1%

Total Revenue Annual Growth Cost of Revenue Margin EBITDA Annual Growth Margin Less: Depreciation and Amortization % of Capital Expenditure EBIT Annual Growth Margin Less: Income Taxes 30.0% Unlevered Net Income Plus: Depreciation and Amortization Less: Capital Expenditure Margin Less: Additions to Intangibles Less: Increase in Working Capital Margin Unlevered Free Cash Flow Annual Growth Discount Factor - Mid-Period Convention PV of Yearly Cash Flows

44.3%

19.3% 45.0%

45.0% 8.4%

64.9% 44.6%

Present Value of Equity @ October 29, 2013 PV of 2013 Free Cash Flow Stub(1) PV of 2014-2017 Free Cash Flows(1) PV of Terminal Value(1) Enterprise Value Less: Total Debt Preferred Stock Minority Interest Plus: Cash and Equivalents Equity Value Shares Outstanding Implied Per Share Value Current Price Premium/(Discount) to Current Price 6.0 298.1 1,740.5 2,044.6 0.0 0.0 (7.2) 128.4 2,165.7 53.4 40.59 11.01 268.6% % of TEV 0.3% 14.6% 85.1% 100.0% % of MVE 0.3% 13.8% 80.4% 94.4% 0.0% 0.0% (0.3%) 5.9% 100.0%

DCF Assumptions Weighted Average Cost of Capital Terminal EBITDA Multiple Implied Perp. Growth Rate of Unlevered Free Cash Flow(2) Tax Rate 17.63% 14.0x 12.5% 30.0%

(1) Assumes 63 days remain in 2013; Mid-Period Convention for annual cash flows; Terminal value cash flow occurs at December 31, 2017. Terminal value equals present value of 2017 EBITDA of $244.7 * 14.0x Terminal Forward EBITDA Multiple. (2) Implied Perpetual Growth Rate of FCF = [(Terminal EBITDA)*(Terminal EBITDA Multiple)*(WACC) - (Terminal Year FCF)] / [(Terminal EBITDA)*(Terminal EBITDA Multiple) + (Terminal Year FCF)]

IB Equity Research
October 29, 2013
SENSITIVITY ANALYSIS
(USD in millions, except per share data)

NQ WACC 15.63% 16.63% 17.63% 18.63% 19.63%

Discounted CF 2013-2017 316.3 310.1 304.1 298.3 292.7

12.0x 1,602.5 1,545.9 1,491.8 1,440.1 1,390.5

Present Value of Terminal Value EBITDA Exit Multiple 13.0x 14.0x 15.0x 1,736.0 1,869.6 2,003.1 1,674.8 1,803.6 1,932.4 1,616.1 1,740.5 1,864.8 1,560.1 1,680.1 1,800.1 1,506.4 1,622.2 1,738.1

16.0x 2,136.7 2,061.2 1,989.1 1,920.1 1,854.0

12.0x 1,918.8 1,856.1 1,795.9 1,738.4 1,683.2

Present Value of Enterprise Value EBITDA Exit Multiple 13.0x 14.0x 15.0x 2,052.3 2,185.9 2,319.4 1,984.9 2,113.7 2,242.5 1,920.3 2,044.6 2,168.9 1,858.4 1,978.4 2,098.4 1,799.1 1,914.9 2,030.8

16.0x 2,453.0 2,371.4 2,293.2 2,218.4 2,146.7

NQ WACC 15.63% 16.63% 17.63% 18.63% 19.63%

Net Debt(1) at 06/30/13 (121.2) (121.2) (121.2) (121.2) (121.2)

12.0x 2,040.0 1,977.2 1,917.1 1,859.5 1,804.3

Present Value of Equity EBITDA Exit Multiple 13.0x 14.0x 15.0x 2,173.5 2,307.1 2,440.6 2,106.0 2,234.9 2,363.7 2,041.4 2,165.7 2,290.1 1,979.5 2,099.5 2,219.5 1,920.2 2,036.1 2,152.0

16.0x 2,574.1 2,492.5 2,414.4 2,339.5 2,267.8

Divided By 53.4 Shrs =

12.0x 38.23 37.05 35.93 34.85 33.81

Equity Value per Share EBITDA Exit Multiple 13.0x 14.0x 15.0x 40.73 43.23 45.74 39.47 41.88 44.30 38.26 40.59 42.92 37.10 39.35 41.59 35.98 38.16 40.33

16.0x 48.24 46.71 45.25 43.84 42.50

NQ WACC 15.63% 16.63% 17.63% 18.63% 19.63%

=>

12.0x 9.8% 10.8% 11.7% 12.7% 13.6%

Implied Perpetual Growth Rate of FCF EBITDA Exit Multiple 13.0x 14.0x 15.0x 10.3% 10.6% 11.0% 11.2% 11.6% 11.9% 12.2% 12.5% 12.9% 13.1% 13.5% 13.8% 14.1% 14.5% 14.8%

16.0x 11.2% 12.2% 13.2% 14.1% 15.1%

12.0x 247.2% 236.5% 226.3% 216.5% 207.1%

Premium/(Discount) to Current Price per Share EBITDA Exit Multiple 13.0x 14.0x 15.0x 269.9% 292.7% 315.4% 258.5% 280.4% 302.3% 247.5% 268.6% 289.8% 236.9% 257.4% 277.8% 226.8% 246.6% 266.3%

16.0x 338.1% 324.2% 310.9% 298.2% 286.0%

(1) Equals Total Debt plus Preferred plus Minority Interest Less Cash and Equivalents.