Amid Chinese Wireless Shakeup, Spreadtrum Plunges

Shares of $323 million (market cap) cell phone chip maker Spreadtrum Communications (SPRD), which focuses on chips for phones in China, is down almost 17%, or $1.55, at $7.81, after Roth Capital Partners analyst Jay Srivatsa wrote in a note that his recent trip to Asia reveals handset ships have been down the last two months because of “sluggish demand and weak macro [economic] conditions.” He thinks that means Spreadtrum won’t meet its forecast for the June quarter of $40 million to $41 million in sales, given back on May 15 in the company’s first quarter press release.

Srivatsa lowered his rating on the stock from “Buy” to “Hold,” and he chopped his price target from $12 to $9.

Srivatsa says that in addition to macro-economic factors, the company’s business is threatened by the fact that the Chinese government’s shake-up of the nation’s cellular industry calls into question Spreadtrum’s focus on a home-grown version of cellular technology that has to date received heavy backing from Beijing. That re-org hit shares of China Mobile (CHL), the nation’s largest cellular operator, back on May 27, and today’s action in Spreadtrum is more fallout.

Writes Srivatsa, “The recent wave of consolidation among telecom carriers puts three 3G standards - WCDMA, CDMA 2000 and TD-SCDMA in contention. Given that SPRD has been pursuing the TD-SCDMA route and does not have solutions aimed at WCDMA or CMDA 2000 standard, we remain cautious on its opportunity in the 3G market.”

Srivtsa cut his earnings estimate for 2Q on Spreadtrum by a penny, to six cents, and his sales from $40.55 million to $39.53 million, with an even deeper cut to Q3, from $44.8 million in sales and 10 cents profit per share to $41.5 million and 7 cents. For 2009, his estimates go to $191 million in revenue and 41 cents from $208 million and $.51.

FYI, Spreadtrum will hold a meeting with analysts a week from Wednesday, June 18.