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

I am sorry to bring up the stock and be inconsistent on the comments. I used to be a firm believer of the company's story. On paper (publicly released infomration by the firm), the firm was definitely undervalued. If the products they design are great and have supported its major client's growth, then I have all the reasons to buy around 9. I was just too reliant on NEC's brandname for the judgement. Actually, since NEC does not have strength on 2G and 2.5G products, it outsources all those design work to China (according to NEC Telecom (China)'s CEO). I do not have to be assertive here. Just go to forum.younet.com (the most popular cellphone website in China) and check out customer's comments on NEC models. The webpage has an image of each model and you can find its counterpart on CNTF's website.

I believe the stock is going to get even higher because the 6-month lock-up will soon expire in early December (it was postponed due to the 3Q earning release). But, I have to say I made a mistake even though I made money on this one. Looks like I'd better shut up.

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

correction: the joint venture was established in Nov 2003. sorry for the mistake. CNTF got a complaint from Wuhan NEC on certain quality issues related to a model designed in Dec 2003 and had agreed to pay $1.5m to Wuhan NEC for the damages. But, the issue was resolved amically in late 2004 after Mr. Lu took office.

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

Follow-up on NEC Telecom (China) and CNTF

Puzzled by the fact that NEC models suck in China (a cold hard fact, at least according to MII and China's Consumer Association) and CNTF takes care of most of its design work anyway (proved by the joint venture), I dig deeper into the issue and found some interesting information.

According to a recent interview of NEC Telecom (China)'s CEO with Sina (you can get it on many web sources), the joint venture takes care of 70% of the design work for NEC globally including 3G. Basically, all the orders except those from Japan are now being designed by the joint venture. Congratulate to all the longs on CNTF: you can have an assurance on CNTF's future revenue. But, do you know why NEC Telecom (China) sticks with CNTF and ask the headquarter to move those work to China?

The CEO of NEC Telecom (China) was the general manager of Motorola (China). He become the CEO of NEC Telecom (China) in may 2004. Later that year, the joint venture was established. Remember CNTF was led by a bunch of Motorola guys? That may explain why NEC models designed by CNTF suck in China but CNTF still get orders. And, it also explains why it takes much longer time for CNTF to crack the nuts to get order from the top 6 vendors. If NEC Telecom (China)'s CEO does not come from Motorola thus having no tie with CNTF's leadership, will CNTF still get order from NEC? You tell.

Anyway, Mr. Lei Lu, the CEO of NEC Telecom (China) really helped a lot on CNTF's business. I am not an expert on plot-making. But, with a strong partnership producing underperforming models, everybody would ask why. I found the answer lies in the special relationship between some former motorola employees.

Maybe the big drop in stock price was for someone who has made special contribution to the firm but the firm can not publicly issue shares to or grant options to. So, how about a big whack on the stock price so you can buy cheap. And, as long as there are olders pouring in, you are always the firm's God.

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.

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

sorry, please disregard Q3 and Q4. I made a mistake when reconciling the 3Q number with its historical numbers.

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

I was wondering where everybody go. Busy trading CNTF? just kidding... Hope those who bought and held at the low enjoy the ride yesterday. What a push upward! Let us congratulate each other on helping an undervalued firm who is doing a great job at optimizing the cost structure of the mobile handset segment.

After all, the earning report was nothing new. All the information in it was disclosed before. So, it was not a difficult task to figure out the numbers before the earning release. The management already told you everything about it well before Nov. 15. On this aspect, I have to say the stock could be rated the No. 1 manipulated stock of the year. Everyone who followed the stock closedly knows what I am saying. I have no interests to dismantle all the tricks played by someone. It was just disgusting as it could be.

But, I have to agree with goldenlion here. The cash side does not look at all. I have a strong feeling that it becomes very difficult for CNTF to get enough contracts to support the revenue number. The followings are the questions I want to ask the management next Monday on the investor conference. Here I invite you all to share your thought on one or more of these:

1. What happened to the cash? Why the cash flow from operation become so weak?
2. What happened to the advance from customers? Is it an industry trend that clients reduce or stop paying advance or what?
3. Why do we see a surge in the selling and marketing expense in 3Q 2005 as a percentage of the total revenue? Is it becoming more difficult to get customer?
4. And, why did the R&D expense drop this far in 3Q?
5. In what kind of currency do you hold your cash and where? How much interest do you earn on that pile of cash and why do we see a big drop in interest income in 3Q compared to 2Q?
6. What is your DSO? Does it deteriorate in the 3Q? How do you select domestic clients since they are not creditworthy? What will be the mix of revenue in the future?
7. What is your expected capital expenditure in the future?
8. How do you comment on CNTF versus competitor in India and Taiwan and other regions with quality and low-cost labor?
9. Do you have a plan to have your own brand name or be acquired by a brand owner in the future?
10. Do you plan to expand into other area of brain outsourcing?

Although those questions dealing with the financial strength side might be related to short-term things only, but a clear answer would make us feel much better.

Investor Assesses China Techfaith Wireless' Weak Stock Performance (CNTF)

My answer to my own question:

It is almost becoming a destiny that CNTF will head to the same valuation as its Chinese peers Sim and LongCheer.

So, first let us look at why Sim and LongCheer have such a low P/E. It is primarily because their clients, Chinese mobile terminal brand owners have a very bad year so far. Many of them incur loss while some of them went bankrupt. For an example, Soutec who used to the one of the top five Chinese brand owners had a cash-flow problem which led to the courts froze its operating assets. BTW, Soutec owed money to CNTF too and CNTF wrote off the A/R competely in 2Q. So, considering Sim and LongCheer's clients are all Chinese brand owners, I think it is rational for the investors to value the two at low P/E. Tomorrow they may disappear with their clients on the market together. But, look back at CNTF, 70% of its revenue in 2005 comes from international clients as disclosed by the CFO in the 2Q conference call. I expect the percentage will go even higher in the future as CNTF is doing its best at getting away from Chinese clients (disclosed in the Prospectus and other filings). So, it is rational to value CNTF as comparable international players in the mobile terminal sector of the telecom industry. That will price CNTF as 15x 2006 EPS (a sector average), which gives u hint on why analysts have all pointed to a price target of 15 or something. Here I think I found the answer for why Sim and LongCheer have such a low P/E and why CNTF has followed it so far. But, the real picture shows CNTF is designing for the winners which makes CNTF deserve a valuation like its clients and competitors (like HTC) while Sim and LongCheer are designing for the losers. The market will recognize the difference and give CNTF a proper valuation in the future.

A little more on mobile terminal R&D: let us get realistic about it. The R&D units of the mobile terminal sector are functioming as system integrators who combine third-party hardware and software to offer a final solution. Do they add value in the process? Yes, but it is not that big as most think. What they need to do is to offer a trendy outlook, pratical and easy-to-use functions and assure product stability in manufacturing and usage. The designers of enabling components and software applications plus new network capabilities and attractive content provide more value to the customer's experience with a mobile terminal. So, the innovation here boils down to a little bit creativity (mainly enabled by third-paty innovations) and quality. Why quality plays such an important role here? Get back to Chinese brand owners: they have the cheapest price on the market and have the worst product quality also. The latter kills them, not their products' mimic outlook and generic funtions. So, the whole thing let me questiion what R&D units at international brand owners are doing. It has been referred by many sources that designing a new model cost them at least 10M dollars, while CNTF can get it done by 1.5M with a 45% net margin and FLEX can do it with 3M. So, outsourcing a highly-inefficient internal function which adds moderate value makes perfect sense. The future is bright for CNTF and its competitors who will help the sector achieve a better economic structure. Brand owners will focus on sales and marketing and supply chain management like what Dell does. Under this backdrop, do the prominent design houses deserve a P/E like its clients?

At the same time, I expect we will see more players enter the mobile terminal segtor in the future. A strong force is network operators. Their networks put them most close to the end users. Almost all the cool functions and rich content have to be delivered through the networks, which make them most interested with integrating the terminals into their product portfolios. They tend to offer the machines that are best catering to the network capabilities and content offerings. This makes perfect sense. Why use Nokia and Moto since it is so easy to get a customized terminal by just calling a design house like CNTF and a EMS like FLEX? On the other side, Dell and HPQ will join the force since they will see the small terminal performs more fuctions of a PC and they know it is the future form of PC or whatever you call it. The No. 3 PC sellers in the world, Lenovo, already joined the race and it fares pretty good as one of only two Chinese mobile terminal brand owners who make profit so far this year. Its supply chain for PC must have functioned well for the cellphone also. So, it makes sense for PC vendors to join the race to proect their turf. This is certainly a good news for CNTF and its competiors. Get back to CNTF's edge: now I adjust it to design quality/ cost considering mobile terminal's R&D process is heaviy dependent on third-party innovations (design quality should assure product's stability in manufatcuring and usage after meeting client's feature requirement). So, the segment reminds me of an industry that has fuled China's growth in the past 20 years: manufacturing outsourcing service. Since it is just a low-end R&D process which emphasizes cost after assuring quality, will Chinese be the king of it? You tell. I think they will. CNTF already told you: they offer the cheapest price available (from public sources) and still enjoy a 45% net margin. Should investors benefit from this new trend of outsouring to China? We will see.

Investor Assesses China Techfaith Wireless' Weak Stock Performance (CNTF)

well, I was sort of speechless after seeing the price and volume on the second half of the tranding. In fact, when CNTF first hit 8.75 on 9/29 then suddenly got a boost from an analyst report, I felt the report was really a bad timing for those who have pushed the price down. Based on CNTF's historical trading pattern, the mastermind had not reached his target before the report came out. So, I waited to see if the gap would be filled. No suprise, it was done pretty soon, thanks to the cooperation of the broad market. Under such a glooming backdrop, no one will blame a downturn here. Although I feel disgusted of talking about the trading and technical stuff, I have to clap for those who did this. These guys are great with firm determination and well-scheduled agenda to move the price as they want. I was thinking what the guys from Singapore were thinking when they saw their heavy position depreciated 50% in 3 months. This is brutal. But, I really want to know based on the light trading volumes all the way down to here, how much will these masterminds profit? They were as foolish as they could be to push the price down to here since I bet they will not be the ones who can benefit most from this.

Investor Assesses China Techfaith Wireless' Weak Stock Performance (CNTF)

It is really a difficult question to answer considering I was not behind all this sharp drop of CNTF's stock price. Psychologically, you should prepare for the worst that could happen. That is a rule for living in the investment environment. If that does happen, it would be a shopping spree for long-term shareholders. For Chinese stocks, you had better be well prepared for some price manipulation in the short term. That is typical of Chinese stocks. But, for those listed in the US, you will see them jump around its intrinsic value since too further away from the proper value will be corrected comparably quickier in the US market. Let us be patient. If CNTF can live up to its own ambition, shareholders will benefit.

Investor Assesses China Techfaith Wireless' Weak Stock Performance (CNTF)

Regarding CNTF's competitors, Sim and LongCheer do not present a serious threat in my point of view. If you look closely at LongCheer's sec filings, you will find a business whose margins at all levels are decreasing over the three years of operation. Like Sim, it sells PCB (or PCBA) and software solutions together. Apparently, LongCheer's clients do not evaluate its service on software well. A deeper look at its financial statement will reveal it. If what the clients pay is rational, then it means LongCheer's software solution is really kind of generic and does not add much value. On the other side, Sim holds onto its own turf on software solution pretty well compared to LongCheer when it sees its charge on software solution per unit has been relatively stable. These two firms' cost of sales are pretty much hardware-related of which they outsourced everything from others. So, you can get a basic idea of how big their pie of software solution is through a liitle bit tooling on the data. I believe these two firms are working on the low end. LongCheer's leading R&D guy comes from ZTE Corp. whose own product sucks. Sim's leading R&D guy comes from CNTF's STEP Tech. Wow, does that say something about who is the king in China? On Cellon, I used to take it very seriously. It is backed by heavyweight players and it was heading to Nasdaq for an IPO once upon a time, actually ahead of CNTF. Something outsiders do not know went wrong. Acording to some insiders, Cellon is a place for the retired. Anyway, its close tie with CEC means something. Anyone associated with big, state-owned company with a government background will have some special story on inefficiency and internal conflict. Oh, BTW, as Cellon always boasted, it has taken over Philips' cellphone R&D unit (a gift from CEC). Congratulations on having those high-paid and low-talent French as employees. French do not like working. They prefer vacation than everything. Do you guys know French only work 11 months in a year? I saw CNTF's office lights are burning 24 hrs. No kidding.

R&D's strength can be measured by Innovation/ Cost, of which innovation is the priority but the cost is also important considering the globalization. Correspoindingly, we can measure a R&D unit's strength via talent/ cost. The ratio clearly points to three regions for the best resources: China, India and East Europe. So, the real threat to CNTF, if not coming from China, comes from India and East Europe. India, as a software powerhouse, has strong presence in the relevant area. HCL Tech, Wipro, Flex (acquring talents in India) are all looking at this niche field. The cellphone design work is 70% software-related as disclosed by CNTF's CEO during the 2Q 2005 call. So, let us see who is the king on software engineering. Although Indians have enjoyed the reputation in the west, my personal experience told me Indians are not that good on computer science as most think. What they really have as advantage is they speak English, a great gift from the colony period. Personally, I believe their education status falls short of that of Chinese. I think as long as Chinese can send people into space walking around (a bundle of technologies that can only be developed by yourself), these guys have the brain to build anything they want either when they were forced to by the government or when the market drives them.

Based on current information, CNTF has an edge on cost at least over FLEX. Let us see who will be ultimate winner.

Investor Assesses China Techfaith Wireless' Weak Stock Performance (CNTF)

I agree that low-end phones will not present a material threat to CNTF. If brand owners are focusing on the low-end models, their financial statements will get ugly pretty soon. Those models are catering to the need in poor areas where brand owners want to see some penetration.

Overall, I believe the whole handset market will see a convergence of phone, consumer electronics and software applications. This requires innovative and efficient R&D, which is CNTF's focus and competitive advantage. I have confidence in its ability to get orders. But, I worry that the margin will probably narrow. Its current gross margin, operating margin and net margin are so impressive in any industries. Sure, this fat margin might come from the efficiency of its operation. If that is the case and CNTF can hold onto this strength in the future, its margin will not be affected much. In the long run, I foresee a growing number of orders but declining revenue per order.

Its two Chinese competitors, LongCheer and Sim went public this year in Singapore and HK respectively. As disclosed by CNTF's CEO during the 2Q conference call, those two are not pure play as design house. Their filings seem to confirm this. Anyway, their income statements look much worse than CNTF's. Either CNTF has the ability to get big orders or CNTF is superior in efficiency. But, theie market evaluation presents a harsh benchmark to CNTF. Those two firms are now traded around 8X of 2005 EPS or lower. I think the relatively unfamilarity with the niche (mobile handset design house) contributes a lot to the low evaluation. Investors may think those firms could evaporate overnight in the near future because traditional thinking regards R&D as un-outsourceable.

Based on current information available to the public, I believe the stock has hit its floor value. Any price we see below it may present great Return/ Risk ratio. And, I agree the IPO price and the concensus estimate present an ideal value of the stock if everything goes right for CNTF.

But, if we refer to the valuation of the two Chinese competitors, we will see a further declline in its share price, probably to 6 or 7, which will be a big slap on the face of its underwritters. But, who knows? it seems CNTF attracted some big names including Government of Singapore and its affilated entities. No kidding: the three Singapore entities hold more 5% of the total shares outstanding. Their cost should be over $16 per share. I got confirmation from CNTF's IR that they bought on open market after IPO. It is interesting to see the heavyweight player like that is trapped over there with a huge position. Let us see how this relentless fall ends.

Investor Assesses China Techfaith Wireless' Weak Stock Performance (CNTF)

hi, guys, nice to see someone showing up here. I think the EPS revision might be partly due to the share-outstanding factor. Anyway, it is not important since the CFO disclosed the estimated 2005 revenue and net margin during the 2Q conference call: $90-100 million and 45%.

In fact, the only news I could find is an article from Reuters. It can be found in many sites including CNTF's IR page, but not on Yahoo! Finance. Take a look. It seems CNTF is a favorite partner for the Japanese and Kyocera has promised big orders to CNTF.

Japan looks offshore for cell phone R&D
TOKYO (Reuters) - Japanese cell phone makers are venturing out of their home-based product development shops and testing the vibe at outsourcing firms in China and India, heeding a wake-up call from their more aggressive global rivals.

The move by Japanese companies is still at an early stage, with industry heavyweight NEC Corp. (6701.T: Quote, Profile, Research) and lesser-known rival brands Kyocera (6971.T: Quote, Profile, Research) and Mitsubishi Electric Corp. (6503.T: Quote, Profile, Research) leading the wave of offshore migration for new product development.

Other major players such as Matsushita Electric Industrial Co.'s (6752.T: Quote, Profile, Research) Panasonic brand and Toshiba Corp. (6502.T: Quote, Profile, Research) have dabbled in buying finished phones from Taiwan to sell under their own names, but they still do the bulk of the design work at home for their most important models.

Analysts said the move to offshore design work, which has been a long time coming, mirrors a similar trend at major western rivals and is a critical step if Japanese firms ever want to become serious players on the global stage.

Despite Japan's prowess in many consumer electronics segments, its mobile phone makers command a relatively meager 5 percent of global handset sales away from their home turf, according to market research firm IDC.

LOOKING TO CHINA

IDC analyst Kimura Michito said Japanese players have typically stuck to high-end model design, a factor that has kept them out of many developing markets and limited their ability to become serious global players.

"Their cost structure is too high," he said. "Costs are very high in Japan. If handset vendors want to become worldwide players, they have to be prepared to offer a variety of products."

NEC, Kyocera and Mitsubishi Electric have looked to China in their early steps abroad, forming relationships with China TechFaith Wireless Communication Technology Ltd. (CNTF.O: Quote, Profile, Research), a Beijing-based design shop set up by former Motorola (MOT.N: Quote, Profile, Research) employees.

NEC began working with TechFaith the earliest, setting up a joint venture with the company in late 2003, said TechFaith Chief Financial Officer Eva Hon. Kyocera and Mitsubishi became clients in mid-2004, she added.

"We are talking with some other Japanese companies now," she said, declining to give names. "It's significantly cheaper for them. We usually charge about $1.5 million per model. That's significantly lower than their own costs, maybe eight to 10 times lower."

SOFTWARE POWERHOUSE

Kyocera Chairman Yasuo Nishiguchi said China had been a good design shop for models sold in emerging markets, but the more selective home market could be a tougher nut to crack in the near term.

"For the Chinese market, we have already started out with TechFaith.... The Latin American market will be with TechFaith," Nishiguchi said at the Reuters Asia Technology and Telecoms Summit in Tokyo on Tuesday.

NEC and other Japanese players are also looking to software powerhouse India, joining industry heavyweights Motorola and Nokia (NOK1V.HE: Quote, Profile, Research), which already outsource significant amounts of research and development to Asia's third-largest economy.

In June, NEC formed a joint venture with HCL Technologies Ltd. (HCLT.BO: Quote, Profile, Research), India's fifth-largest software services exporter, to design wireless applications software.

That venture is likely to post revenue of about $25 million by its third year, and has the potential to grow to $75 million to $100 million in sales in five years.

Indian software outsourcing giant Wipro Ltd. (WIPR.BO: Quote, Profile, Research) also counts some Japanese cell phone makers among its large client base in that area, said I. Vijaykumar, vice president for wireless and mobile networks. He declined to provide any names.

"The main reason why global players come to us is because we shorten the time to market for mobile products," he said