Open Letter To The Board Of Directors Of China TechFaith Wireless From Private Investors

| About: China TechFaith (CNTF)

Summary

Shareholders have suffered enormously under your leadership as is evidenced by the fact that the share price has declined 95% while the company's net assets have increased substantially.

In May 2005 your IPO priced at $16.25 via Merrill Lynch, Lehman Brothers and CIBC, raised $141MM with a market cap of approximately $700MM.

In Sept 2015, 10 years later, the shares trade at 56 cents and have a mkt cap of $30 MM; a decrease of approximately 95% in shareholder value.

The following is an open letter sent October 1, 2015 to the Board of China TechFaith Wireless Communication Technology Limited (NASDAQ:CNTF).

We applaud you for maintaining such balance sheet discipline and strength over a tumultuous period for wireless hardware manufacturers and are aware of the difficulty you have had in your operating business since year end 2011, as is evidenced by net losses in years 2012-2014. We recognize that technology life cycles are short, unpredictable and highly competitive and do not want to examine the past. The fact remains, however, SHAREHOLDERS HAVE SUFFERED ENORMOUSLY under your leadership as is evidenced by the fact that the share price has declined 95% while the company's net assets have increased substantially.

  • In May 2005 your IPO priced at $16.25 via Merrill Lynch, Lehman Brothers and CIBC, raised $141MM with a market cap of approximately $700MM;
  • In Sept 2015, 10 years later, the shares trade at 56 cents and have a mkt cap of $30 MM; a decrease of approximately 95% in shareholder value;

Investors believe in your commercial real estate ("CRE") based balance sheet, along with the corresponding cash balances. The share price is so low relative to these asset values because shareholders have lost confidence and trust in your efforts and doubt that any of the underlying value will be transferred to them via dividends or share repurchases. The following balance sheet metrics clearly exhibit this fact:

2005 Year End

2014 Year End

*2015 Quarter 2

Net Cash (MM's)

137

157

3

Net CRE (MM's) no debt

0

194.4

345

Net Assets

137

351.4

348

Market Cap (MM's)

533

59

30

Shares Out (MM's)

41.7

53

53

Net Assets per ($)

$3.29

$6.63

$6.57

*about $100 MM just transferred from Net Cash to Other non-current assets (in CRE) which represents construction deposits. Actual assets most likely still in cash instruments but marked as long term. 2015 market cap as of 9/30/2105

How does this happen? We keep coming back to the same conclusion, TechFaith leadership has been lackadaisical and done nothing to support shareholder value, let alone maximize it. Management has not articulated a true vision of the CRE transformation, which is disturbing since the accumulation of CRE was fortuitous in the first place as the company's need for facilities diminished after construction commenced in Hangzhou. The CRE strategy has taken too long and is still very unclear what the end goal is; hence the minimal returns demonstrated thus far. Balance sheet strength is the primary reason why many investors, like us, are engaged, but understandably out of patience.

CRE Assets (MM's)

# of Buildings

Sq Meters

# of Future Buildings

2005 Year End

2014 Year End (MM's)

2015 Quarter 2 End (MM's)

Beijing Office

1

0

0

11.9

11.9

Hangzhou Tech Park

3

43500

4

0

62.5

62.5

Beijing Tech Park

16

73557

16

0

59.7

59.7

Shenyang Tech Park

2

10270

4

0

29.1

29.1

Land Use/ Deposits

1

1500

31.2

182.1

Office totals

23

128827

24

0

$194.4

$345.3

*includes Shanghai R&D building, Year-end numbers are "at cost" in $Millions

Shareholder support has declined precipitously since 2011, which is the last year the company has participated in an investment conference. Corporate communications have roughly dropped by 50% in terms of public releases from 2011, and the website maintains a presentation from 2014, which is clearly outdated and not reflective of the CRE transition in terms of dollars invested. Simply put, shareholders want management to become engaged, run the business in order to MAXIMIZE ALL SHAREHOLDER VALUE, proactively communicate and become the SHAREHOLDERS ADVOCATE. If management were outside investors, not personally connected to the company, would you be a shareholder? We highly doubt it.

In an effort to maximize shareholder value we IMPLORE the Board to undertake the following:

- Form a special committee of Directors, led by new CEO Deyou Dong, to study and implement a broad-based plan to MAXIMIZE VALUE FOR ALL SHAREHOLDERS. THIS IS MANAGEMENTS' OBLIGATION TO SHAREHOLDERS which we view as a shareholder "Advocacy" program and request, as a minimum, that the following to be included in the study:

  1. Reinstate the existing $10 MM share buyback program, only 61K shares have been purchased under this authorization since 2009;
  2. Hire an external advisor to divest the wireless business and IP in order to become a pure play CRE business;
  3. Articulate to investors whether you are a CRE business with a plan to deliver returns back to shareholders or simply just a collection of CRE assets with no monetization plan.
  4. Study the benefits of a one-time special dividend;
  5. Study the benefits of a one-time tender offer to buy back 25% of the outstanding ADS;
  6. Study the benefits of a corporate rebranding to reflect the CRE transformation away from the wireless business.

The balance sheet continues to have the flexibility to execute any number of initiatives when considering its strength versus current market capitalization. Simply put, any combination of the aforementioned initiatives should quickly produce a much higher share price that would generate shareholder enthusiasm and provide managements clear objective that its' interests are ALIGNED WITH ALL SHAREHOLDERS.

We direct the Board to consider and implement the aforementioned initiatives based upon the following:

  1. The Directors, led by the CEO, have a duty to act in the best interest of the company with the unwavering go being MAXIMIZATION OF SHAREHOLDER VALUE. TIME IS OF THE ESSENCE considering the recent NASDAQ deficiency notification on minimum bid requirements, as special actions will be mandatory to bring the per share price above $1. A reverse stock split is NOT ACCEPTABLE and will not be tolerated in this case as it solves none of the aforementioned problems.
  2. The company has done virtually NOTHING TO ENHANCE OR SUPPORT SHAREHOLDER VALUE since the prior CEO purchased shares in the market in 2011. Investors set expectations, which, in this case, are abysmally low. If management can exceed the expectation for OVERT shareholder communication and surprise to the upside, the share price will benefit dramatically.
  3. The balance sheet maintains considerable flexibility to execute any of the share buyback or special dividend suggestions.
  4. The company recently sold 3 additional floors in the Beijing office building and will receive total proceeds of $25.8 MM. This transaction alone will generate income just under the company's current market cap.
  5. The company has not bought back shares since 2009.

The Board MUST ACT WITH DISPATCH and take immediate action to implement the suggested initiatives in an effort to benefit ALL SHAREHOLDERS. CEO Deyou Dong stated it clearly himself on the Q1 conference call by saying, "we will work even harder and try new ideas to get a higher valuation for our shareholders." We appreciate your attention to this serious matter and trust that you will follow through and implement a plan that MAXIMIZES SHAREHOLDER VALUE.

Respectfully,

John Romero

Patrick Small

Disclosure: I am/we are long CNTF.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Certain statements in this release are "forward-looking statements" which reflect our opinions, assumptions, and thoughts regarding valuation possibilities and, any appreciation in the value of the various assets, results of operations, performance and business prospects and opportunities. Wherever possible, words such as "may", "should", "would", "could", "believe", "realize", "estimate", "could easily", "freezes out", "windfall" and similar expressions have been used to identify these forward-looking statements. Such forward-looking statements reflect our current beliefs with respect to future events and are based on information currently available to us. Forward-looking statements involve significant known and unknown risks, opinions and assumptions. A number of factors could cause actual results or achievements to be materially different from any estimates, valuation methodologies or possibilities and projections that may be expressed or implied by such forward-looking statements including, without limitation, those risks and uncertainties discussed in this release. Investors should conduct their own research and not place undue reliance on these forward-looking statements. Although the forward-looking statements in this release are based on what we believe to be reasonable assumptions, we cannot assure anyone that actual results or achievements will be consistent with these forward-looking statements. These forward-looking statements are made as of the date on the release and we do not intend, nor assume any obligation, to update or revise these forward-looking statements to reflect new events or circumstances.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

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