Seeking Alpha
Profile| Send Message| ()  
I am putting myself in limbo by writing this article one day before the earnings release and risking the possibility that what the company will say is just contrary to my prediction.

Admitted that China Techfaith Wireless (CNTF) has disappointed investors again and again, but its current price is extremely depressed. And more importantly its future course is to be different from the past.

What is happening inside CNTF is the cost alignment with the revenue. With the restructure, the company should be on its way to sustainability of the profitability. Looking more broadly and longer term, the industry is bright. Smart phones and the software design are going to grow for years. With the release of iPhone, smart phones are attracting early market entrants. And the market has just got started, in my opinion.

CNTF is a leader in this industry and should benefit from the growth. With 2007's revenue estimate to be $146 million and a cash balance of $104m, it is traded with a market cap of mere $181, or 0.53 times of the sales. (The stock closed at 4.18 as of August 10.) Put in perspective, even those wireless ringtone services companies are traded at two times of the revenue.

Alternatively, a LBO can take the entire company for free (without cash outflow). Here is the schema: Put a tender off of $6 per share, a 43% premium. Finance with the company's own rich cash and a borrowing of $160m at 10% interest rate. The company needs to generate only $16 million cash a year to cover the interest obligation, or about 10% of the revenue. And it should not have any problem reaching that after the cost reduction. Companies in the outsourcing industry tend to have a much fatter margin than 10%.

My prediction is that as soon as the company shows a sustained profitability, its stock will shoot up. It should be worth at least $8. At $8, the company would be traded still at only 1.27 times next year's sales.

And finally, 3G would be great. But CNTF will still do without 3G.

Disclosure: author is long CNTF.

CNTF 1-yr chart:
CNTF 1-yr chart

Source: China Techfaith Wireless Is a Bargain Going Into Earnings