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  • SPRD: 1 + 1 = 3 ?

    By Morrison Security Research
     

    Last Friday Jan 5th 2012, Spreadtrum Communications, Inc (NASDAQ:SPRD) was down more than 22%. We anticipate that SPRD is going much lower probably to the single digit. The reason is very simple – investors have found out the truth. SPRD’s RF component supplier RF Micro Devices (NASDAQ:RFMD) preannounced Q3 revenue of approximately $225M, versus the company's previous guidance of $250M and analysts' consensus estimate of $250M. Lower than expected sales of 2G components to China based customers for entry-level handsets contributed to the shortfall, as did weak sales by RF's multi-market products group. Furthermore, 2G demand in general was significantly below customers' expectations at the end of the quarter. Against this US company’s bleak revenue announcement that caused RFMD drop 19%, can anybody believe that SPRD’s Q3 revenue was up 92% (see SPRD’s Q3 earning report at http://ir.spreadtrum.com/phoenix.zhtml?c=212408&p=irol-sec)?

     

    SPRD is a China based handset chip vendor mainly for the low-end 2G feature phones using GSM and GPRS networks predominately in the Chinese market. SORD’s business focuses on low-end 2G Chinese feature phone market. The feature phone market is a dying business as 3G/4G smart phone using CDMA-2000/WCDMA networks are gaining marker shares significantly in recent years. Based on iSuppli and iimedia research, 2010 is the last year for such feature phone to have positive growth in China (see here). Its major competitor in this market space is the leading chip company MediaTek that has about 70% of Chinese market shares (iSuppli.com), while SPRD has about 20%. To gain market shares, the two competitors have been engaging fierce price wars over the past years (see here and here). As a result, their profits have dropped dramatically. Due to the shrinking overall Chinese 2G market and rapidly dropping profit level, in its own first quarter 2011 report, MediaTek reported that its net income plunged 70.3% to NT$3.31 billion (US$115 million), from NT$11.13 billion, a year earlier (see here). As a huge contract, surprising all investors, SPRD reported that its GAAP net income was US$27.5 million, compared with US$6.6 million in 1Q11, a stunning 317% increase; its Non-GAAP net income was US$30.4 million, compared with US$8.7 million in 1Q10, a stunning 249% increase. The technology and market leader MediTek’s profit has dropped 70%, while its small rival SPRD’s profit has increased 249% (Non-GAPP) in the same market space. And the trend continues since the first quarter of 2011: MediaTek’s profit continues to fall, while SPRD’s profit continues to increase at too-good-to-be-true levels.

     

    Some SPRD bulls have argued that maybe SPRD gains market shares from MediaTek and this is why SPRD’s profit is increasing while MediaTek’s profit is decreasing. However how can you explain that SPRD’s component supplier RF Micro Devices (RFMD)’s Q3 revenue has dropped dramatically specially due to lower than expected sales of 2G components to China based customers while SPRD’s revenue has increased 92.0% over the previous year?  Can SPRD now produce 100 chips with one RF component while others can only produce just one chip?

     

    Actually in last November we have encountered the same mathematically impossible mastery from SPRD. SPRD announced to the world that it enjoys a better than 50% market share in TD-SCDMA chips in the Chinese market. But then the US based Marvell Technology (NASDAQ: MRVL) announced that Marvell has "TD smartphone market share of over 70%" according to CEO Sehat Sutadja. "While we expect increased competition from followers in TD smartphones, we expect to maintain our leadership position and grow revenues next year." This sounds like two companies owning 120% of the TD market. One thing is sure, one of them was not telling the truth since one plus one is not equal to three. The question is do you believe a US company that is under scrutiny by all sorts of regulators or a Chinese company under communist rule that is thousands miles away?

    We remind all investors; ask yourself the question and invest cautiously!


    PS: It is not just Morrison Security Research does not believe SPRD's report. Jefferies just reduced SPRD price target by 68%. That surely shows that Jefferies does not believe SPRD's earning number now.


    Jefferies Downgrades Spreadtrum Communications (SPRD) to Underperform,
    Citing TD Competition and Weakening 2G Demand

    Jefferies downgraded Spreadtrum Communications (NASDAQ: SPRD) to
    Underperform with a price target of $11.70. The firm comments, "We downgrade SPRD to Underperform, and reduce our PT by 68% to HK$11.70, implying 22% downside from current level. We lower our non-GAAP net income est. by 22%/27% for 2012/13 to reflect
    increasing TD competition and weakening 2G demand. Our industry checks indicate a more realistic TD TAM is 60mn in 2012 vs. our prior/consensus expectation of 80mn/90mn. Increasing competition leads us to turn cautious on its TD market share and ASPs." 



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    Jan 09 11:48 PM | Link | Comment!
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