(Update Sept 3) More analysis at 21cbh in Chinese. Coke paid about a PE of 42 for Huiyuan, not surprisingly high considering the huge potential in Chinese juice market.

(Original) It was not too long ago Huiyuan Juice, one of the largest juice producer in China, went public in Hongkong Stock Exchange. Now Coca Cola (NYSE: KO) is buying it for 17.9 billion HKD, at more 200% premium of the stock closing price (4.14 HKD) as of August 29. Coke is paying 12.20 HKD per share.

Chinese story at 21cbh. English story at Bloomberg.

(source: the standard)

As shown in the picture above, their A/R (account receivable) jumped from $1.4 m on Mar 31 to 17.4 m June 30; inventory did not reduced much. This is also evident from its reduced cash postion. Read more details from its earning release if you are interested.

Source: my google spreadsheet, data from SPRD investor relation and SEC filings.

Well, it turns out semi-conductor stock has no MoF. Remember a while ago the star player nVidia (NVDA) fall out from the graphics chip quality problem? My small speculation player SPRD also fell off cliff. Here is the results.

To be honest, I think 2Q results was OK, but the 3Q forecast is disaster. Quote press release: Spreadtrum currently expects revenue in the third quarter to be approximately US$20 million, which represents a sequential decrease of approximately 50% from the US$40.2 million in the second quarter of 2008.

I am not going to do any fundamental or valuation analysis. It seems to me the management (that means Dr. Wu Ping and his associates) blew up badly on this one. The business itself probablly still has some value, but I lost a lot (blind) trust on management team. So I am going to sell all my shares tomorrow morning. Take a loss

Appendix: more quotes from Press Release

Accounts receivable (A/R) increased from US$1.4 million at March 31, 2008 to US$17.4 million at June 30, 2008, as the Company extended credit terms to some select customers in 2Q08.

I should have known this coming because couple days ago I read one of SPRD custoemr, Amoi just reported a very bad 2Q and 1st half of 2008.

Another lesson learned:
Looking back, I entered this postions a week ago, partially due to read this analyst report. Should have done my own homework (e.g., the disappointing 1H 2008 report from Amoi, key customer of SPRD), not trust those analysts who wrote reports for a living

Catalyst for the fall
The short sellers, esp. the naked short sellers. Short sellers have been bashing this baby since its IPO in early 2006. They have been losing money until Nov. 1 2007 when CROX 3Q 07 missed street expectation. After that it’s obvious there is not much risk, esp. considering SEC recently started banning naked shorting on Fannie/Freddie and 19 primary brokers. In other words, SEC was saying go naked shorting oil, coal, retailers,…we will not prosecute you.

How often do you mark to market?

When financial companies reports its quarterly earnings, it has to mark its hedging positions (lots of mortgage papers) to the market, the problem is nowadays there are no market for lots of those papers. So the banks have to estimate, e.g., Berkshire (BRK.A) has reported a loss on its long positions on stock index in its 1Q 08 report; Cheseapeke Energy (CHK) marked its natural hedging positions each quarter too. Companies have to do that because of accounting rules. But we have to differentiate two type of activities: realized loss and unrealzied loss. For BRK’s long term stock index positions, mark to market is a pure accounting thing, no cash is involved; for CHK that’s slightly different, because its positions is mostly 2008, 2009 and 2010 positions, so some will be real loss or gain.

My take is when a person checks his/her stock positions, he/she is marking to the market. So how often do you “mark to market”? Every week, every day, every hour,…

(Original) First, on the book value. According to Yahoo Finance and company Q1 2008 financials, its book value (equity) is $257.5 m (4.858 per ADR/share), market cap as of July 3rd is $192.94 m ($4.47 per share). So the price book ratio is 0.92 (=4.47/4.858).

Now some interesting stuff I read from its annual report:

1) Page 39, Customers: For 2006, one customer accounted for 14.5% of our revenue, and no other single customer accounted for 10.0% or more of our revenue. For 2007, two customers each accounted for more than 10.0% of our revenue: 37.1% and 10.6% respectively. As our business expands, we expect our overall customer composition as well as the identity and concentration of our top customers to change from period to period.

Hm, the top customer in 2007 (37.1%) maybe Amoi (600057.SS)? We know Amoi recent underwent some difficulties in domestic market, and got a new CEO about 6 months ago. Another big customer of SPRD is WingTech.

2) Page 60, Revenue: Unit shipments of baseband semiconductors increased by 195% to 26 million units in 2007 from 8.8 million units in 2006. The increase in sales volume in 2007 was partially offset by the decline in our average selling price of 35% from 2006. Our average selling price declined from 2006 mainly because baseband semiconductors, which have lower selling prices compared with turnkey solutions, represented a much larger percentage of total revenue in 2007. This rapid growth in baseband semiconductor sales was largely the result of growing market acceptance of our SC6600D and SC6600M baseband semiconductor, which accounted for a substantial majority of the revenue from our baseband semiconductor sales in 2007.

Note the 2.5G products SC6600D and 6600M are the bread and butter of SPRD. The TD products have no meaningful contribution for now.

3) Page 61: We recorded income tax expense of $1.0 million in 2007, as compared to an income tax benefit of $1.1 million in 2006. It appears the chip maker enjoys a tax break from the Chinese goverment as it is regarded as “high tech” industry.

4) Page 69, Directors and Senior Management: Datong Chen, who continues to serve on our board of directors, resigned as an executive officer effective January 16, 2008, Renyong Fan resigned as an executive officer effective January 16, 2008, Bin Lu resigned as an executive officer effective May 2, 2008, Eva Wang resigned as an executive officer effective June 26, 2008 and Chengyun Zhou resigned as an executive officer effective January 16, 2008.

Note Datong Chen and Renyong Fan are co-founders of the company, and each has 4.18%, 2.31% shares respectively. Bin Lu was VP of engineering and Chengyun Zhou was VP of sales. It does not look good when the co-founders and senior executives leaving the company, but I would not jump to conclusion too quickly either.

Appendix:
SPRD profile at IPO Home, note the IPO price was $14.00. The stock lost 2/3 of its value since IPO.

Sina (Chinese) SPRD IPO special topic, June 27 2007.

Here is a Speadsheet which has the revenue numbers for recent quarters. I think one reason for the continued pressure is the slow cell phone market, as indicated by the shipments slowdown of MediaTek, a bigger rival of Spread.

My current plan: sell some before its Q2 ER. The company revenue guidance for Q2 was $39 to 40 million. It could miss because of challenging macro economy condition and intensified handset market.

BTW, this morning I sold the Yahoo shares which I bought it yesterday.

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

I double checked the F1 filings for secondary offering (principal and selling shareholders), and found its CEO Dr. Ge Li was going to sell 8 million shares, and he unloaded 200,000 shares on May 30 according to AOL finance. BTW, it is a bit strange I could not find those transactions at SEC web site. Adding insult to the injury, United Overseas Bank (UOB) said it was going to sell 2.1 million shares at $18.4 each, according to Reuters. I guess they must need cash badly (hint: sub-prime trouble). Seriously, from its F1 it appears to me UOB is a venture investor in WuXi, and I am not surprised to see it wants to cash out some (note it intended to sell those shares in the now aborted Secondary). In other words, UOB still sells the shares planned in the Secondary, but the Wuxi management did not.

My gut feeling is, WX is a demaged stock now. The big question is it a demaged business? I will do more readings including its 20-F annual report. Hopefully I can get an answer soon.

Appendix:
a message from Yahoo MsgBoard, which I kind agree especially on “get rich quick” mentality in China.

“Somehow, I’m not much surprised by this insiders’ selling news. The mentality of the people in the whole country is pretty much “getting rich overnight” if they can, and no matter how.Those high exec of wx had been waiting so long, once it’s time they could do it, they would by instinct reach to the pot and dig in right away. In their mind, getting $4 million right now for a sure thing compared to getting maybe $6 mil a year later, they would choose $4 mil right away (remember their cost of the stock it 0) - shareholder’s interest is not even on their radar screen. One exec may think if he did not sell, but all others did, he would be the #1 fool. That’s how it happened. That’s why you don’t see the world class company growing up in China yet, not that the people are not smart enough, they are too smart, but mostly for themselves, and loose the sight of long term goal for building a world class corporation.

I recall someone’s predication of wx stock to reach $30 in 30 days here weeks ago, I could see it happen only by reverse split – where is that voice? Also, another one kept saying those exec in wx were more of doers, but less talkers – talking only 50% of the things when they could do 100% - maybe for themselves, not for stock holders, not even for the long teams interest of wx, or correct me if that voice can still make some sense out of it.”

It takes much more than just a few years for a society to be mature in the free market type of environment like the western world (look at stock market in China (up and done just like wx) – people may look alike in those exec chairs, but not think the same way. Nothing wrong with the business model of the wx due to its perfect timing in the industry, but its management team. Not that you could not touch those stocks, just don’t use the same format to measure them. If you lose, you could know why, and learn a thing or two from it.”

Chinese financial blogger Ye Tan wrote a piece titled Who bears the cost of cheap sale of CCB? I agree with some of her comments. But I also would like to add my own 2 cents: I am not going to talk politics (as the US presidential election already made my head spin); I am only talking about the financial aspect of the things here.

1) This BoA deal is done before the IPO of CCB. Like many things in China, the IPO of CCB, the first IPO of the big 4 Chinese banks (other 3 are ICBC, BoC and Agriculture bank), is not a purely financial decision for the owner (goverment): it was also a political one. This got to be a success. A success of IPO has different means for different people. In this case the goverment decided leaving some money on the table (stock price going up after IPO) is important. This also explained goverment infused massive cash before IPO (quoted below, source ccb.com):

2004 marked a historic milestone for the Bank. At the end of 2003, a capital injection of US$ 22.5 billion was received from China SAFE Investments Limited, previously known as Central Huijin Investment Co., Ltd. (“Huijin”), as part of the decision of the State Council of the People’s Republic of China (“the State Council”) to enhance the financial condition and competitiveness of the state-owned commercial banks….

2) Put it in another context, this deal happened after China joined WTO, and agreed to open the banking industry to foreign competitors. Chinese banks felt compelled to learn things from foreign partners to enhance its competitive positions. Because the Chinese banks thought their management efficiency is no where near the international players, and worried they will be defeated. Lack of confidence. This lack of confidence also led to its under-estimation of its growth (way too low).

3) A very small circle of bidders (foreign banks) were invited. CCB only wanted the elites. But as we saw from the unwinding of subprime and credit crisis, many international banks are over-rated: note the CitiBank, AIG, Deutch Bank,…all took big loss in lately?

4) Unmotivated seller (economically): at the end of the day, the Chinese banks are owned by the goverment. The people in charge are just acting as agents. It’s not their own assets after all.

Lesson learned:
It appears the goverment did slightly better after the 70% Off sale of CCB shares. This can be seen on the ICBC IPO: they sell a much smaller stake to Goldman (compared to BoA) etc.

How it related to me
I am not the sour loser here, although as a Chinese citizen, I think I am entitled to a small slice of the Chinese state owned banks.

Recently I bought 2 shares of BRK.B, and through that I owned both CCB and ICBC indirectly, because Berkshire has significant shares of BoA and American Express. As you guessed it, American Express got a small piece before ICBC IPO, at dirt cheap price too (about 1.20 Yuan, $0.15, refer to this ICBC share structure).

GSI Techonology
As I talked in my previous post (a while ago), this is the little semi-conductor (very fast SRAM) stock (Nasdaq: GSIT) I bought a year ago at its IPO. Since its IPO it reported two disappointing quarters at first, more recently it reported two decent quarters (Fiscal Q4, Fiscal Q3). But I sold it this morning due to the following:

1) Lack of liquidity: the daily volume on this stock is thin because of lack of institutional support. Basically if I want to sell, the day after earning report is a good time because of the volume spike.

2) Fundamental: I am still no expert on this SRAM and Semi after holding it for one year. But I felt Semi is a tough business in general. Just look at the leaders in Semi such as Intel and NVDA, they make money by volume (while cutting prices). They are also cyclical. People used to say they are commodity business. But if you do grocery shopping, you know the real commodities (eggs, milk, bread…) all raised the price (a lot!) in past year. In other words, compared to food, chips have no pricing power.

The only way for Semi/chip industry to make money is sell more (to offset the R&D, marketing cost). Intel and NVDA can do that by selling more PC and laptops. But GSIT can not duplicate that easily because they derives 30% sales from Cisco, and we know that revenue is relatively flat in last two quarters ($4.0 million). Separately, Cisco is expected to grow revenue at 12% to 17% in next few years. So only if Cisco uses more SRAMs or GSIT finds new markets for SRAMS, the growth for GSIT will be low teens…

Mindray
Mindray (NYSE:MR) reported its first quarter results yesterday, and they got good number. Unfortunately I no longer have the stock: sold my last few shares on April 3. Remember rule No. 2: stock usually goes up after I sold it?

MR Mindray Medical International… Sell Mar 17, 2008 65.00 25.93 7.00
MR Mindray Medical International… Sell Mar 17, 2008 51.00 25.58 7.00
MR Mindray Medical International… Sell Apr 3, 2008 60.00 31.88 7.00

Seriously, I still hold my previous view on MR: at $39 and PE=52, with growth rate of about 45%, it is fully valued.

Interestingly, the company announced it will switch the financial reporting currency from RMB (CNY) to USD. Besides its offically stated reasons, I think there is another compelling reason for them to do so. Can anybody tell me what is that reason?