The Muddy Waters effect [updated]

Posted by Neil Hume on Jun 28 16:56.

The price action in Shanghai-based, Nasdaq-listed Spreadtrum Communications on Tuesday afternoon.

Via Google Finance:

And it all took was this flash,  from Fly on the Wall.

SPRD: Muddy Waters has taken a short position in Spreadtrum 2011-06-28 15:21:07.140 GMT Muddy Waters has taken a short position in Spreadtrum

A quick bit of blurb on Spreadtrum:

Spreadtrum Communications, Inc. is a fabless semiconductor company that develops baseband and RF processor solutions for the wireless communications market. Spreadtrum combines its semiconductor design expertise with software development capabilities to deliver highly integrated baseband processors with robust multimedia functionality and power management. Spreadtrum has developed solutions based on an open development platform, enabling its customers to develop customized wireless solutions that are feature-rich, while meeting their cost and time-to-market requirements, for a variety of markets. In addition, Spreadtrum also develops AVS audio/video decoder chip solutions for the broadcast television market.

Updates to follow.

Update: 17.02 (BST)
Zero Hedge has a copy of the letter Muddy Waters has sent to Spreadtrum. The independent research house claims to identified issues in the company’s filings and believes there’s a high risk of restatement.

Click for the full experience.

Update: 17.29 (BST).
We haven’t managed to get hold of Tuesday’s upgrade from Jefferies on Spreadtru, but Merrill Lynch was waxing lyrical on Monday.

Reiterate Buy, 77% upside potential to PO (US$25) We reiterate our Buy on Spreadrum as fundamentals appear on track while the recent share price correction offers an attractive buying opportunity.

The stock is trading on 6.7x our 2011E EPS and 1.6x EV/sales. Our 12-month PO ($25) offers 77% upside potential from current levels. We regard SPRD to be in a strong position to capture the low-end 3G smartphone market and to continue to take share in 2.5G.

Three catalysts for the share price
We think:

(1) its inventory will decline in 2Q11 and likely during 3Q11 which should be a catalyst for the stock;

(2) China’s 2G market should decline slightly in 2011 while SPRD should hold its 40% market share but SPRD is on track to take share in the export markets (where it only has 10% share) – we see two more years of growth before the 2G market saturates;

(3) TD-SCDMA net adds from China Mobile (CM) should be 30mn but handset shipments should reach 50mn, while SPRD should get at least 50% share including a tier one brand OEM by 3Q11. TDSCMA upside had not been appreciated
We forecast SPRD to ship 25-30mn TD-SCDMA chipsets in 2011 including about 15-20mn feature phones, 2-3mn smartphones (Android 2.1/2.2) and 7mn fixed wireless.

China Mobile recently lowered its TD-SCDMA handset tender from 12mn to 1.2mn but we understand that’s because CM wants market forces to kick in. Low-end 3G (TD-SCDMA feature phone) demand is rising as CM is promoting phones in order offload 2G network bottlenecks to their TDSCDMA networks.
Spreadtrum is loading the popular CM (OMS) applications on their phones and appears to be ahead of all the competition, including Leadcore, Mediatek, T3G, and Marvell.

Related links:
Sino-Forest coverage – FT Alphaville

This entry was posted by Neil Hume on Tuesday, June 28th, 2011 at 16:56 and is filed under Capital markets, People. Tagged with , , , .

Post a comment or leave a trackback: Trackback URL.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: