Spreadtrum 3Q11 Earnings Preview: Clear Waters Ahead

Date:2011-11-09yangliangyu  Text Size:

Spreadtrum Communications (SPRD) reports its 3Q11 results on November 9th. The Street expects the company to earn $0.67 per share on $178.3 million in revenue.

About four months ago in the midst of Sino Forest scandal, Muddy Waters published an open letter to Spreadtrum’s Chairman, Leo Li, in regards to the abnormal revenue growth in the company’s 2010 and 2011 financial results. The stock fell to as low as $8 per share from the previous day’s close of $12.49 before paring losses when investors realized that Muddy Water’s open letter was not an in-depth analysis of Spreadtrum’s potential fraud.

Since then, the management hosted a call to address some of the issues mentioned in the report (which was also addressed by my fellow contributor here at Seeking Alpha), issued a cash dividend of $0.05 per share and executed 35% of the $100 million stock repurchase program. The management also reported buying 282,000 ADRs (~0.5% of Spreadtrum’s total outstanding ADRs) to express their confidence in the company.

In early August, Spreadtrum reported a solid 2Q11 result in which revenue climbed 124.2% y/y to $160.2 million, and EPS climbed 178.9% y/y to $0.60. The company attributed the strong result to continuous market share gains in the 2G, 2.5G, and 3G TD-SCDMA market, in which it controls +50% of the market share.

Recently in September, Spreadtrum secured a TD-SCDMA design win for the Samsung Galaxy S II smart phone that targets China Mobile’s (CHL) 38 million 3G users. The design win indicates the strength behind Spreadtrum’s new TD-SCDMA chipset and China Mobile’s 3G subscriber base is likely to expand due to growing adoption of low-cost 3G phones in China.

Heading into the earnings, investors should focus on two major catalysts that are expected to drive the business in 2012. During the last quarterly conference call, the management highlighted several product plans for the remainder of the year and next year when Spreadtrum is expected to launch low-end ICs that can run Android 2.2 OS and dual-mode 4G ICs.

The recent low-end smartphone boom presents investors with a highly attractive investment opportunity. Currently the market is dominated by rival MediaTek (IMKI.PK) but Spreadtrum could prove to be competitive in both operating system (Android vs in-house OS) and lower price phones (~$100 vs $200+ smart phones).

The company is also expected to utilize the technology that it acquired via MobilePeak to introduce several WCDMA product lines and dual-mode 4G ICs that run on both TD-LTE and FDD-LTE wireless standards. Before the acquisition, Spreadtrum’s 3G product only supported China Mobile’s TD-SCDMA standard and had no WCDMA/FDD-LTE technology. MobilePeak fills this gap by providing Spreadtrum with the WCDMA technology, which is considered a global 3G standard, allowing it to expand the addressable market beyond China. In addition, WCDMA lays the groundwork for Spreadtrum to compete in the 4G space. Assuming that the demand for dual-mode 4G ICs will be strong, Spreadtrum could potentially gain an equal footing with Qualcomm (QCOM) and MediaTek as one of three companies providing dual-mode 4G ICs in the world.

Since Muddy Water published its open letter, Spreadtrum’s stock has more than doubled to Friday’s closing price of $27.77 as investors' fear over its financials subsided.

While Muddy Water’s analysis on Sino Forest and Duoyuan Global Waters helped the market to identify fraudulent companies, they have yet to publish a comprehensive report on Spreadtrum, and it is uncertain that we will see one since four months have passed when it took Muddy Water “over two months” to analyze Sino Forest.

Investors can assume that Muddy Water does not, and possibly will never, have any concrete evidence behind their open letter and that the firm has done nothing but to take advantage of its fame to stage a public stunt at the expense of the common investors.

 

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