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China Techfaith Wireless Beats By $0.04; Guides Above Consensus; Stock Up 12% in After-Hours Trading (CNTF 3Q05 Earnings)

A shocking reality

After seeing the biggest gain in one day on a position I have ever held, I did some follow-up research that was long time due. I tried to be as neutral as I could be as I refrain from being too optimistic about the stock normally following a big reversal. Something unexpected came up and I believe it is material.

Remember CNTF's biggest client: NEC? They have a joint venture and CNTF takes care of most of the design work for NEC's models in China. According to the China Consumer's Association, NEC is the No. 1 on the complaint list. The complaints point to two areas: quality and repair. If you type "NEC handset quality" in Chinese in Google and Baidu, you will find out pages of links saying bad things about NEC models in China. It was shocking. I have to admit. But, apparently, it was not a joke. Customers complain about many design drawbacks including all kinds of problems you can think of. Some of them directly point to the design features and software bugs. Either the features were not useful or comsumers need to take software upgrades many times. Basically, the problems with the machine drive customers crazy. And, the bad customer service let them become outraged. I am not exaggerating this. Find someone who can read Chinese and let them type the keyword for you in Google and Baidu. The results speak for itself.

An excuse for CNTF could be the chaos inside NEC China. NEC China has huge internal HR problem. In one word, they spend more time on fighting against each other than on anything else. This has become so infamous that some insiders wrote a book on it. I immediately called one of my friends who is using a NEC model. He told me he changed the PCB within two months after buying it and then encountered a series of problems. He vows to never buy another model from NEC again. Then I arranged a meeting with an industry insider who gave me another excuse: NEC China is releasing models too quickly and did not give CNTF enough time on design work so the bugs are inevitable.

I have to admit if all these information were true, I would have had a second thought on the investment. I regret I did not call my friend and this insider before because I thought Japanese, especially NEC, is the leader on quality, so I do not have to worry about it.

I hope the managemet could give a clear answer to this. Actually, I contacted the IR immediately. She had no idea of what I was talking about. After seeing all the negative coverage on the web, her answer was those models were not designed by CNTF but she promised to check back on this. I know it was a lie or at least an ignorance. According to the industry insider, CNTF takes care more than half the pie. And, just to use common sense, if the pie is not big enough, why do they have to construct a joint venture on design? The question was why NEC is still using CNTF. The industry insider told me NEC China is a place where no one takes reponsibility for these issues.

It seems my marriage with CNTF will probably end very soon.