This post replaces my previous post with some clarifications.The...

This post replaces my previous post with some clarifications.

The Malaysian FY10 budget was handed down on Oct 23, so, presumably, the earliest the Malaysia project could be reinstated will be Jan 2012 (Malaysian FY corresponds to the CY). But I think the company is probably putting some positive spin on this news. I have serious doubts the Malaysia contract will ever materialize now. It is evidently not a priority for this cash strapped Malaysian govt. In some early media releases from 2008, the then immigration minister spoke of a short term "trial" to showcase Nexcode (because it was a Malaysian technology), for a potential contract worth only around $4mill. This info contradicted the numbers and project scope that NBS was putting out at the time, but it now looks to have been fairly accurate. (It is becoming increasingly clear that virtually all of NBS' ASX releases over the last 12-18 months are misleading to a greater or lesser extent – see my old posts).

And you would have to assume that the Malaysia cancellation will make it difficult for NBS to sign new contracts (given that the Malaysian contract was the spearhead for Nexcode into the govt sector).

I think anyone considering trading NBS for a bounce should turn their attention to the significant China uncertainties.

As I've been saying for some time now, China receivables are well past due, and NBS' auditor probably does not have a sufficient handle on the nature of the China debtor. NBS' auditor, like most analysts, thinks this debtor (called CITP) is a Chinese govt entity. The reason the auditor and analysts think this is that NBS has told them so. On page 10 of NBS final FY09 results, it is claimed that CITP was "formally known as AQSIQ." Since AQSIQ is a Chinese govt entity, this statement clearly implies that CITP is one and the same as AQSIQ. And since AQSIQ is a Chinese govt entity it is at almost zero risk of default. Thus, we have been led to believe that NBS’s China debtor is at almost zero risk of default. Lodge partners, in particular, have emphasized this point in their recent reports.

However, the following document outlines the true owners of CITP:
http://www.hoovers.com/free/co/secdoc.xhtml?ID=115393&ipage=5740614-1087-7606

This document shows that CITP is only 12% owned by AQSIQ. The other owners of NBS' China debtor is Philadelphia based TPID (70%) (market cap of only $700k) and some private Chinese company that doesn't have website (18%). Now TPID is 95% owned by the well known pornographer James Mackay (who had some uncomfortable dealings with ERG in Perth in a similar looking deal a few years ago). The Mackay group of companies have a long and sorry history of making major contract announcements in relation to distant Asian govts, which do not become actual revenue generating contracts. See http://www.australianit.news.com.au/story/0,24897,21017138-15316,00.html

The key point here is that it is not strictly true that NBS' Chinese debtor is the Chinese govt. The debtor is in fact basically 70% owned by James Mackay (via Mackay's TPID vehicle). It is difficult to avoid the conclusion that NBS' auditor and all of its analysts and major shareholders have been intentionally misled by NBS into thinking that the Chinese debtor is the 'safe' Chinese govt.

(For those interested in detail, TPID’s interest in the China contract was transferred to a British Virgin Islands front company called Saddington in exchange for a 5% share of the China revenue. The China contract supposedly started around 7 months ago, and TPID are still yet to receive a cent from Saddington. It is possible that James Mackay also controls Saddington, although I can’t confirm this).

When a possible Mackay connection to NBS’ china contract first arose a this thread a few months back, I asked a couple of analysts if they could explicitly put the question about NBS involvement with James Mackay to NBS management. John Houston fired back an email to these analysts saying that (1) NBS had no relationship to James Mackay or to Saddington whatsoever, (2) NBS had done an incredible amount of due diligence on the China contract, and (3) the contract was going to be great for the company. NBS also organized for a few fund managers to go to China and actually see some cards being printed in June 09. Safe to say that all the big investors as well as the analysts had very good reasons to believe that the China contract was/is genuine, and that the Chinese debtor is very low risk. I reported some of this info (in a positive light) on this thread at the time.

However, the 8-k report cited above from TPID indicates that Houston’s email was misleading. As noted, NBS’ counter party in the China contract is 70% owned by TPID/Saddington/Mackay, and only 12% owned by the Chinese govt. So, contrary to Houston’s claim, NBS’ Chinese counter party is majority controlled by Mackay. And it is possible that even this 12% figure of govt ownership is false; it may be part of an elaborate scam by Mackay to raise funds for a 'govt contract' that may not be what it appears to be. After all, NBS paid CITP $5mill supposedly as a “bond” just to participate in the China deal. And this $5mill has effectively gone to a James Mackay controlled vehicle. Furthermore, Mackay seems to have raised some $50mill from other sources to get this China contract off the ground. It is possible that Mackay raised these funds (including the $5mill from NBS) under false pretenses.

At the very least, it is difficult to avoid the conclusion that CITP is a much higher risk debtor than what NBS management (and its auditor) have led us all to believe.

I'm not explicitly saying NBS has been defrauded by Mackay, nor am I explicitly saying that Mackay has defrauded anyone in relation to this particular China deal. I'm only speculating on these possibilities and drawing attention to inconsistencies between what NBS management and auditor have lead the market to believe (i.e., that they have no financial connection with Mackay or Mackay controlled entities) and the from 8-K cited above.

It is still quite possible that China is a legitimate govt contract and the China cash will come in soon (as recently as last week NBS management was still telling at least one fund manger that China was going gangbusters and the cash was "immanent"). But as each day passes, the likelihood that NBS has been caught up in a larger $50mill scam by James Mackay grows. In light of the default risks of CITP, I personally rate the probability that NBS will receive all of the cash owed to it from China at no more than 50%.