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Speculating on Spreadtrum Communications SPRD

Let me put up the negatives (risk, downside) first. If it still stands after all the beatings, it may work out eventually. We all know semi-conductor is a tough business, and as you may know making cell phone is a cutting throat competitive business in China.

SpreadTrum chip pic

Negatives
SpreadTrum (Nasdaq:SPRD) supplies chips to domestic cell phone makers (Amoi, Lenovo, etc.). Recently the cheaper Shanzhaiji caused much trouble to the domestic brand makers, because Shanzhaiji are much cheaper with ok quality. You can read more about this Shanzhaiji thing from my del.ico.us bookmarks (articles in Chinese). I learned about Shanzhaiji from pacificepoch article by LiJing (yes, it’s in English).

Other percepted negatives include: SPRD bet on inferior domestic brewed 3G standard TD; co-founders leaving on Feb; consumer slowdown. But I view those more as glass half full, rather than glass half empty. Let me explain.

TD-SCDMA is not as mature as other 3G standards WCDMA or CDMA2000. But the Chinese goverment is determined to push it through: ask the leader China Mobile to implement it is one sign. More importantly, if the consumer skip the TD or 3G because the improvement over 2.5G/2.75G EDGE is nominal, there is a path from TD to 3.5G HSDPA, and 4.0 TD-LTE. I am not electrical engineer, but I don’t think the R&D investments in TD will NOT be wasted.

Co-Founders leaving: there is nothing new here. All parties come to an end. The co-founders are entrepreneurs and they may want to start something new; they may want spend time on family. Note neither the insiders nor the VCs have cashed out yet. Another pressure for the stock if they do sell in the near future…

But the near term challenge for SPRD is to ward off the threat posed by Shanzhaiji.

Valuation
This is important. According to google finance, its ttm EPS is 0.52. At Friday close of $5.32, the PE is 10.26. You can read more financial information from its investors relationship web site.

Keep in mind, the Q1 2008 revenue and earning is down compared to Q4 2007, due to the weakness in China handset makers, and the reason mentioned above (Shanzhaiji).

Disclosure: I bought some SPRD shares yesterday June 20.

PS: I got a question, why the customers of SpreadTrum are all domestic brands, not even one foreign brands like Nokia, Samsung, LG or Sony Ericsson? Anyone has the answer please let me know. Thanks in advance…

PS2 (June 23 2008) Got more falling shares today 🙂

4 replies on “Speculating on Spreadtrum Communications SPRD”

I agree with you. At least, the book value is 4$/share. This drop is not linked with any news. At the price of 5$/share, this is a sale time. I bought some today.

Pros:
1) The expectation is very low. Today another analyst downgrade the stock (see below). Current price reflected all those negatives, and even more (people are thinking SPRD may not survive amid competition from MediaTek).

2) Poential upside: moderate success in TD deployment; domestic brands Amoi, Lenovo come back to beat Shanzhaiji.

3) The key management (CEO, CFO) is intact, and they are sound.

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Piper Jaffray Lowers Estimates/Price Target on Spreadtrum Comm (SPRD) to $11; Maintains Buy

June 23, 2008 8:49 AM EDT

Piper Jaffray lowers their price target on Spreadtrum Communications (NASDAQ: SPRD) from $16 to $11, but maintains their Buy rating. The firm lowers their EPS estimates from $0.50 to $0.38 for 2008 and from $1.01 to $0.73 for 2009.

The firm said, “Following the earthquake, we believe Chinese domestic handset sales have slowed. With our belief Spreadtrum’s customers’ sales have slowed leading to increased uncertainty regarding demand trends ahead of the Olympics, we believe Spreadtrum’s visibility is deteriorating and we are reducing our estimates. Given concerns of inflation in China exacerbated by recent hikes in gas prices, we believe near-term sell-through trends could remain challenging, and we now expect much lower September quarter seasonal growth.”
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I think you have a fundemental error in your argument. I am Chinese and read all the articles about Shanzhaiji, Shanzhaiji is actually SPRD’s most important customer…there were 150M units domesticaly made phone, 20% of which is powered by SPRD, most of them are Shanzaiji. Mediat tek is also in the same market, and their MKT share is about 3~4 times bigger.

Despite the error, I think your conclusion is right. Shanzhaiji will not go out of business any time soon, and the only competitor in this space is Media tek, SPRD will have its share and will not disappear overnight.

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