Spreadtrum Communications
Spreadtrum Communications, 2011: Spreading into Mobile Telecommunications in China
By Dominic Bow, Dingding Feng, Winston Lin, Aloka Singh, and Elisabeth Cai under the supervision of Professor Andrew Karolyi – 23 pages. Current version dated: 06/22/2011.
Case Summary
In March 2010, DW Associates assessed Spreadtrum Communications (NASDAQ: SPRD) as a strong buy at $6.76 per share. The company then took an aggressive position in Spreadtrum whose share price subsequently appreciated by 215% over the following year. However recent research suggested that the company might now be overvalued. Spreadtrum was scheduled to release its 2010 fiscal year earnings on March 3, 2011, and the fund wanted to critically assess its one-year position in the company.
Spreadtrum Communications was founded on April 11, 2001 by Dr. Ping Wu, Dr. Datong Chen (currently on the Board of Directors), Dr. Renyong Fan, and others. It is headquartered in Shanghai, China, and is a semiconductor company that designs and develops radio processing chips and turnkey solutions for the wireless communications and mobile television market in China.
With revenues increasing from $12.9 million in 2004 to $105.1 million in 2009, Spreadtrum attributed its success to two features of its business model. First, Spreadtrum did not own or operate any wafer fabrication or assembly and testing facilities. This model enabled Spreadtrum to focus on designing products while avoiding significant capital expenditures related to building and maintaining fabrication, test, and assembly facilities. Second, ties to the Chinese government provided Spreadtrum with various incentives in the form of reduced tax rates, exemption from certain taxes, favorable lending policies, and research grants. Additionally, Spreadtrum’s research and development expenses were partially offset by subsidies.
However, these two key aspects of Spreadtrum’s business model also faced a number of risks, namely a highly competitive environment and uncertainties in intellectual property protections. The threat of an evolving technological environment forced Spreadtrum to constantly invest in research and development, subjecting the company to significant external pressures and high costs. The risk associated with a heavy reliance on research and development was also exacerbated by a historically ineffective intellectual property system in China.
Some portfolio managers were bullish on China and Spreadtrum’s tremendous growth, while others were looking for an excuse for the fund to lock in its gains and report some positive news to its institutional clients during an otherwise uneventful quarter. Spreading into mobile telecommunications in China seemed to be a popular move for investors as of late, but did concerns regarding Spreadtrum, the mobile telecommunications industry, and China as a whole warrant a more cautious approach moving forward?
Discussion Objective
This case provides students the opportunity to take a look at the telecommunication industry in China, one of the fastest growing industries in the world’s biggest emerging market. China’s growth over the last several decades has been enormous; students get the chance to discuss whether they think this growth is temporary or more permanent, and whether further investing into China, particularly its telecommunication industry, is a smart move or not.
Subjects Covered
- Emerging Markets Corporate Strategy
- International Finance
- Corporate Valuation
- Investment Risk Assessment
Geography Covered
China; United States.
Supplementary Materials Available
Teaching Note (Upon request from the case supervisor)
Case Link