Spreadtrum Communications.: A Chinese pocket of value and growth
Spreadtrum Communications Inc. (Nasdaq: SPRD)
Shanghai, China
http://www.spreadtrum.com
52-week low / high: $9.30 /$17
Shares Outstanding: 41.44 million
Market Capitalization: $441 million
Some market pundits are warning that China’s red-hot stock market bubble may be beginning to show signs of aging, but with China’s economy estimated to grow at a hefty clip in the long term, pockets of value and growth can still be found in the country’s market. Spreadtrum Communications Inc. (Nasdaq: SPRD) is proof of that.
The fabless semiconductor company manufactures chipsets, or “baseband processors,” for cell phones to deliver audio and video to cell phones more efficiently. Spreadtrum offers various multimedia capabilities for the wireless communications market such as MP3 digital audio playback, Motion JPEG and H.264 digital video playback.
While the company also offers turnkey solutions, the real growth engine of this company lies within its baseband semiconductor business.
Revenue from baseband semiconductors rocketed 118% in the third quarter, while revenue from turnkey solutions declined 60% in the third quarter. Revenue from baseband semiconductors comprised 89% of revenue for the third quarter, up from 59% of revenue in the third quarter of 2006. Revenue from turnkey solutions, however, accounted for 11% of revenue, down from 41% of revenue in the third quarter of 2006.
The small cap is continuing to gain share in the Chinese mobile handset market, as exhibited by the fact that it experienced two consecutive quarters of 37% growth in shipments of its baseband semiconductors. What’s more, for the nine-month period ended Sept. 30, shipments of Spreadtrum’s baseband semiconductors already exceeded shipments for all of last year.
Net income for the third quarter was $6.06 million, or $0.13 per share, compared with $3.7 million, or $0.11 per share, for the third quarter of 2006. That’s 64% growth on a net income basis and 18% growth on a per share basis.
Revenue in the third quarter increased 44% to $38.6 million, from $26.7 million earned in the third quarter of 2006.
This year the company is ramping up and is setting the stage for future growth. Spreadtrum has three new chips in the pipeline, which should position the rising star well for 2008. The offerings include Spreadtrum’s SC6600H chip, which enables CD sound quality playback on music mobile phones, while its SC6600R is a high-performance, high-function baseband chip targeting the mainstream mobile phone market.
Additionally, the company’s SC6600H chip, designed to enable The SV6111, which the company believes is the first decoder chip to support the Chinese AVS standard, passed China Netcom's commercial trial tests in October.
Trading at a forward P/E of 16.52 and a PEG of 0.5, the fundamentals and the growth story are present. However, the company is a recent IPO and its stock performance has been erratic — recently sinking to a bottom first reached in August. Shrewd investors ought to let the stock moderate a bit and find support, before riding this rising star.
Note: Spreadtrum Communications Inc. (Nasdaq: SPRD) is on the “Watch List” of Rising Star Stocks, a subscription investment newsletter from Business Financial Publishing, which also publishes SmallCapInvestor.com. As a Watch List company, Spreadtrum displays many characteristics found in successful stock winners, and is being closely monitored for possible inclusion in the Rising Star Stocks portfolio at a later date.
