China Techfaith Needs Long Term Faith

| About: China TechFaith (CNTF)
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Dr. Ge submits: China Techfaith Wireless Communication Technology Ltd. (NASDAQ:CNTF) reached $18 two months after I profiled the company in my blog and then it started a long and painful slide to current price of $7. If you remember what Benjamin Graham said “Investment is most intelligent when it is most businesslike”; the stock price of CNTF dropped because the business went bad.

One of CNTF’s major customers NEC exited from the China market at the beginning of this year and CNTF’s other Chinese customers (major cell phone manufacturers) were killed by Nokia and Motorola from the high end and Chinese counterfeit manufacturers (so called "black" phones in Chinese) at the low end. I warned my readers about the problems CNTF might face when I saw that the cash flow from the operation decreased significantly in Q3 2005. The company soon shifted its focus from low end GSM phones to high end 3G smart phones but the transition process was not as smooth as the management predicted.

In my opinion, the company grew too fast in last several years and it lacks the human talents (few employees including senior executives can barely speak English) to deal with carriers in the U.S. and Europe, two major markets it hopes to break into. The company itself is transforming from a cell phone design house to a mobile software outsourcing provider. Therefore, the stock price may fluctuate further in the coming quarters. However, I am bullish on the company in longer term because:

  • it has 2000 skilled and cheap engineers ($500/month for an experienced programmer);
  • it has a good established relationship with 2 mobile software powerhouse – Qualcomm and Microsoft;
  • it's still the No. 1 mobile design company in China;
  • 3G in China will come, probably in 5-6 months;
  • it has plenty of cash and a beautiful balance-sheet;
  • the company is controlled by the CEO and he hasn't cashed the majority of chips yet;
  • the company is buying back its stocks - rare for a Chinese company and good for investors;
  • I think price at $7 or below may be a good entry point for CNTF.

    CNTF 1-yr Chart