Coverage began today on the American Depository Shares of Chinese fabless semiconductor vendor Spreadtrum Communications (NASDAQ:SPRD) by three of the four bankers who underwrote the company’s June 27 IPO: Lehman Brothers, Piper Jaffray and Needham & Co. (Morgan Stanley is awol at this point).
Surprise - all three have the equivalent of Buy ratings on the stock. The ADRs are down about a third since the stock closed its first day of trading at $15.95.
Spreadtrum designs chips used for cellular communications standards such as GRPS, GSM and for forthcoming 3G phones.
Needham & Co.’s N. Quinn Bolton says Spreadtrum could ride the wave of several trends in wireless communications, including the fact that more manufacturing (including, one assumes, the design of chips) is moving to Asia; the fact that local Asian manufacturers of cell phones are picking up steam; and the fact that wireless chips are in general demanding more integration of features and a greater integration of what were once discreet chips. Bolton says the company has a clear advantage in China’s burgeoning market for cell phones, especially as the government starts to promote its home-grown technology, TD-SCDMA:
We believe Asia-based baseband chipmakers, including Spreadtrum and MediaTek, have clear local advantages in terms of sales, service, support and closer customer relationships over multi-national chipmakers. Further, we believe SPRD has a substantially lower cost structure than its multi-national peers that will enable low-cost and feature rich baseband solutions.
The most interesting part about this is Bolton’s contention that Spreadtrum’s chips are media-rich: that this should be an advantage in the Chinese market goes against the common impression that the Chinese market is all about cheap, entry level phones:
Unlike many competitors, including Texas Instruments (NYSE:TXN), Analog Devices (NYSE:ADI) and NXP Semiconductor, which integrate low-level multimedia capabilities, Spreadtrum’s baseband integrates rich multimedia capabilities including TV-out, MP3 digital audio playback, Motion JPEG, MPEG4 video decode, H.264 video decode and 64-channel polyphonic ring tone playback.
Bolton thinks sales for Spreadtrum will grow by 30% this year and then by 50% next year, to $208 million in 2008, while profit will nearly double next year to 90 cents a share. Bolton thinks the shares are reasonably valued at 13.4x his estimate for GAAP earnings per share next year of 76 cents a share.
- Meantime, Lehman Brothers’s Tim Luke thinks the stock should trade at 17x his 84-cents-per-share estimate for next year, excluding some costs, or $14, for similar reasons to those cited by Bolton. He thinks Spreadtrum is gaining share in China and that TD-SCDMA could be a big support for 45% or better annual growth rates.
I don’t have the Piper report yet, but will post it as soon as I come across it.
Spreadtrum shares today are up nearly 7% at $10.85.