Moving back on top again

Updated: 2012-06-15 08:39

By Ariel Tung (China Daily)

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Moving back on top again

Leo Li, Spreadtrum chairman and CEO, believes smartphones will propel his company's growth for the foreseeable future. Kevin Lee / Bloomberg

Chip-maker Spreadtrum bounces back from negative publicity

For Spreadtrum Communications Inc, business is on the upswing a year after the Shanghai-based maker of chips for smartphones drew flak from a short-seller out to expose alleged accounting improprieties - and even fraud - at some Chinese companies.

Muddy Waters LLC, a US broker that engages in short selling of stocks including those of Chinese companies trading on North American exchanges, leveled its attack against Nasdaq-listed Spreadtrum on June 28, 2011.

"We have identified a number of issues in Spreadtrum's (2010 and 2011) filings, and we believe that there is a high risk of material misstatements in the reported financials," Muddy Waters founder Carson Block wrote in a letter posted on his firm's website.

The Chinese company swiftly denied Block's claims, but not until they had sent Spreadtrum's shares tumbling by as much as 34 percent.

Earlier that month, Block began grabbing headlines with allegations that Sino-Forest, a Hong Kong-based operator of Chinese timber plantations, had fraudulently exaggerated the value of land it owned in Yunnan province. The highest-profile target of the Muddy Waters campaign, Sino-Forest is arguably its hardest-hit victim: The company faces a sale of itself as it restructures under bankruptcy protection in Canada, while its shares have been delisted from the Toronto Stock Exchange and it and some executives are under investigation for alleged misrepresentations to the Ontario provincial securities regulators.

Spreadtrum's fortunes have played out more favorably. The share-price scare lasted less than a day, with the stock closing just 5 percent lower in the hours following Block's letter. For most of the past 12 months, it has traded well above its close on the day before the letter.

The rebound of the stock, and to operations at Spreadtrum, can be attributed to its handling of the negative publicity with strong rhetoric coupled with action - chiefly, a quarterly dividend payout of 1.67 cents per share to investors.

"For Spreadtrum to quickly step in and issue a cash payout, at a time when few Chinese companies pay out dividends, demonstrated to shareholders that this company has the cash they say they have, and it created instant confidence among investors that the allegations weren't that strong. It was a huge move," said Kevin Pollack, managing director of Paragon Capital LP, a New York-based investment firm.

"It's a very good model of how companies should respond to short-sellers' allegations. I haven't seen a stronger response than Spreadtrum's since then," he said.

According to Pollack and other analysts, Muddy Waters' research report was questionable. It lacked a "smoking gun" or compelling information against Spreadtrum, unlike the findings on Sino-Forest, which relied on filings with Hong Kong regulators.

Lately the Shanghai company has been winning contracts to supply chips for smartphones aimed at subscribers of China Mobile Ltd, the Chinese mainland's biggest mobile communications provider.

Spreadtrum also was selected by the Republic of Korea's Samsung Electronics Co and Taiwan-based HTC Corp to launch new products for China's growing market of third-generation, or 3G, network devices.

In a strange twist, Spreadtrum may have Muddy Waters to thank for the "better exposure" it received in the wake of last year's accusations.

"People on Wall Street now recognize Spreadtrum, and that we are a financially sound company. When they saw that Muddy Waters was wrong, they started to buy our stock," Chairman and CEO Leo Li told China Daily in September, three months after the dustup.

"They were trying to drive down the stock by playing on the fears or sentiments of investors," he said. "There was a sense that if you are based in China, you are dangerous."

While Spreadtrum shares have swung sharply since a year ago - a high of almost $30 in November gave way to a $13.67 low in mid-April - Pollack regards the volatility as "unrelated to the allegations of Muddy Waters".

In an interview with China Daily in late May, Li attributed the stock swings to the "transitional period" his company is going through - phasing out old products as it focuses on producing smartphone chips under new, lucrative contracts in 2012.

"Usually when you are having new products, you don't have the usual growth. I'm basically looking at growth in the next two to three years instead of two to three quarters," the CEO said.

"This is the first time our company has introduced smartphone chips. China is the biggest smartphone market in the world; it is in the early stage of growth yet it is already very impressive in terms of numbers."

The company recently said it plans during the second quarter to ship 1 million units of two new chips - the 1-gigahertz TD-SCDMA and EDGE/WiFi - approved for Google Inc's Android operating system for mobile devices. For this year's first quarter, Spreadtrum's sales revenue was $161.1 million, up 17.5 percent from the same period in 2011.

Spreadtrum shares have been rising since late May when analysts Qin Zhang of JP Morgan Chase & Co and Aaron Jeng of Nomura Securities upgraded them - to "overweight" from "neutral" and to "buy" from "neutral", respectively - on the strength of the company's new supplier contracts, particularly with China Mobile. Spreadtrum chips are in five of six new handsets bound for China Mobile's network - two smartphone and three standard-phone designs.

"Spreadtrum's new products showed it was on schedule to produce chips enabling low-priced smartphones, as the feature phone market is shrinking," Michael Walkley, a technology-stock analyst for Canaccord Genuity Ltd, told Bloomberg News. Buoyed by China's fast-growing smartphone market, new shipments "will boost Spreadtrum's earnings in the second half while some contributions will start from the second quarter," he said.

The company is also expanding into India, having invested $10 million recently in Micromax, the third-largest handset brand in the Asian nation. The deal positions Spreadtrum as Micromax's favored chip supplier in the world's second-most-populous country.

(China Daily 06/15/2012 page6)