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Time to cut Spreadtrum SPRD loose

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I felt lucky I did sell some Spreadtrum (Nasdaq:SPRD) shares a short while ago when it exceeded $6 (a quick pop). But I don’t know why I bought some back couple days ago at $4.48. I did not bet on earning these days, but this one had dropped quite a bit from the pop, and the expectation is low. So I thought I am relatively safe. Remember margin of safety.

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 🙁

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Notes reading SPRD annual report

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(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.

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Pain in SpreadTrum

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Obviously I pulled trigger too earlier on this one, SpreadTrum Communications (Nasdaq: SPRD).

SPRD SpreadTrum chip pic

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.