Spreadtrum Communications Survives Short Attack: Turning Point for the Sector?

Spreadtrum Communications (NASDAQ:SPRD) became the next in a long line of Chinese stocks to be accused of improper accounting. The stock initially plunged $4, or 34%, but then the market got a surprise as the stock rallied back to breakeven.

A couple of weeks back, our article on Chinese frauds suggested that when the clouds finally lifted on all these fraud allegations, the surviving companies would soar. SPRD might be the signal that the constant allegations are finally being overdone. Clearly the market doesn't believe this one as it lacks the merit of the previous cases against Longtop Financial (NYSE:LFT) or Sino-Forest (OTC:SNOFF).

Additionally, it could signal that a firm like Muddy Waters, which has brought down a few firms this year, is now over reaching on its claims. After all, the basis of these claims is that the turnover of executives in 2009 was suspicious. Surely they realize it's 2011 now?

In essence, they are suggesting that SPRD wanted an auditor in PricewaterhouseCoopers Zhohng Tian CPAs that would go along with 'made up' numbers. Typical of these one sided stories, they make no mention that it's very possible that SPRD cleaned house after a weak 2008/2009 period and that the new executives got the ship turned around. Not to mention that the CEO left at the bottom of the crisis and naturally the 3Q 2009 report would've been much better, no matter who ran the company.

Possibly Muddy Waters is onto something two years after the fact, but the market should understand that they've uncovered nothing new in these facts. If anything, they appear interested in using the successful past attacks to spread fear to gain on this short. After all, the new auditors in 2009 would have to be very complicit to take over an audit with major executive turnover and to have not uncovered any clear fraud such as a surge in revenue.

The claims would be very plausible if this was still 2009, but the market reaction suggests that maybe they've stretched too far this time. This, combined with the fact that Harbin Electric (NASDAQ:HRBN) is now higher than when Citron Research claimed fraud, definitely suggests a trough in the sector. If anything, its surely a sign that the China shorts are running out of the clear cut fraud cases.

It might still take a time to claim a bottom in the sector, but a major turning point might be at hand.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: Article is for informational purposes only and shouldn't be used as investment advice.