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Spreadtrum Communications: A Turnaround Story in The Middle of Making

|Includes: QCOM, Spreadtrum Communications, Inc. (SPRD)

Leo Li to Spreadtrum Communications (NASDAQ:SPRD) is very much like Steve Jobs to Apple. Each of them made a legend in turning a money-losing technology company into a highly profitable company. Since Leo Li took the CEO job of Spreadtrum, Spreadtrum stock price has increased from $1 as of March 09 to $9.49 as of the market close last Friday. 

Spreadtrum is a fabless semiconductor company. It has two business lines, one in GSM chips and the other in TD-SCDMA, the 3G technology licensed to China Mobile (NYSE:CHL), the largest wireless carrier in China. 

IPOed three years ago and underwritten by Morgan Stanley and Lehman Brothers, Spreadtrum did not fare well in the beginning. The company invested heavily in the 3G wireless technology, however it took long time for the China government finally to issue 3G licenses and much of Spreadtrum's effort went in vain. Its stock price also took a dive from $14 in July 07 to as low as $1 in March 09.  

Feb 2009, Leo Li, an industry veteran, was promoted to the CEO position. Apparently he has a savvy understanding of the semiconductor business. The products introduced under his leadership prove to be much more cost effective than its competitors' and took over the market shares. 

In the GSM chip market, it is gaining shares from the MediaTek, a Taiwan company who used to have over 95% of the market share. Spreadtrum has increased from 10% of the market share from the end of 2009 to 20% at the end of Q2. It is estimated that it will reach 30% by the end of 2010.

In the TD-SCDMA market, the fixed wireless market became a big market in the first half of the year, and Spreadtrum gained 70% of the market. Since China Mobile has committed to the TD-SCDMA technology, more mobile wireless application will become available from now to the end of 2011. Industry followers have predicted that Spreadtrum will introduce multiple chips for TD mobile wireless solutions later this year. Early next year, it will introduce chip sets supporting mobile TV.

In August 12th, Spreadtrum announced its 2010 Q2 earning report. It made 71m USD in revenue, growing 340% compared to the same period last year, above the previous guidance of 65m to 68m USD. It guided 88 - 96m USD revenue for Q3, above the consensus of 75m USD.

For the past 5 quarters, Spreadtrum has been consistently beating the guidance and market expectation. I have reasons to believe that this trend is going to continue. For the next three quarters, it is easy to see that Spreadtrum will grow its revenue by more than 100% compared to the same period of the previous year.

The future drivers will come from 

1) further market share taken from MediaTek in the GSM market. 
2) further revenue growth with the expansion of TD-SCDMA fixed wireless market. 
3) market share and revenue growth in the TD-SCDMA mobile wireless market. 
4) export of cheap chips into the developing country market.

Spreadtrum's book is solid. Recently Silver Lake Group bought about 10% of Spreadtrum's shares. Spreadtrum's auditor is PriceWaterhouseCoopers.

Spreadtrum is very cheap compared to its peers. Its P/S is 1.7, compared to MediatTek at 4.2 and Qualcomm (NASDAQ:QCOM) at 6.0. Its P/E is 9.3, compared to MediaTek at 14.2 and Qualcomm at 16.1. Its P/B 3.6 is about the industry mean. Spreadtrum has the best growth profile among its peers, but its valuation so far reflected caution since the market is expecting more confirmation from the future quarters. It is an opportunity to take.

Technically the stock price is in an uptrend suppressed by a double top at $11. Once the stock moves above $11, there should be less resistance moving upwards. This scenario is quite likely since the business underlying is strong and performing.

Disclosure: Long SPRD