Notes reading SPRD annual report

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Reading Time: 3 minutes

(Update July 8) More about the value of SPRD. Last month Datang sold its 32.1% stake in TD chip maker T3G, for 122 m CNY. This values T3G at (122m) / 32.1% = 380 m CNY. That’s $54.3 m (assume $1 = 7 CNY), and I will use that number for the TD business of SPRD. From the outcome of two rounds of China Mobile TD handset bidding, we can say SPRD TD biz is about the size of T3G. As of March 31 2008 SPRD has $97 m in cash, minus total current liabilities $28 m, that’s a net cash of $69 m. As of July 8 the market cap is $199.85 m ($4.63 per share), that values the 2.5G/2.75G business of SPRD at $76.55 m (=199.85 – 54.3 – 69). Note the revenue of last 12 months is $158.80 m, and the company was profitable.

(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.

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.

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