Sky’s the Limit for Chinese Chips Star

12/21/2010 10:42 am EST

Focus: GLOBAL

Nicholas Vardy

Editor, Bull Market Alert, The Alpha Investor Letter, and The Global Guru

The tech upstart favored by China’s top wireless carrier is eating its Taiwanese competitors’ lunch, writes Nicholas Vardy in Global Bull Market Alert.

Spreadtrum Communications (Nasdaq: SPRD) is a company in one of the hottest sectors, technology, in one of the hottest countries, China. Spreadtrum is the leading Chinese fabless semiconductor provider, and develops the advanced technology and software that drive the inner workings of your cell phone.

Here's why I think this stock will soar over the coming weeks.

In the 1980s, Silicon Valley was the global leader in the manufacture of semiconductors. That industry has long moved to Taiwan, which today is home to some of the world's largest semiconductor manufacturers. In 2010, there is yet another shift taking place and that's toward China. Even as Taiwanese rivals like Mediatek announce that their sales are collapsing, Spreadtrum is growing by leaps and bounds, poised and ready to take its place by competing successfully on both on price and technology.

Friends in High Places
Spreadtrum also has a secret weapon—one that I believe gives it an unfair advantage vis-à-vis competitors. Since it is involved in the strategic area of semiconductors, the company is perfectly positioned to benefit from favorable loans and government-brokered deals that are the unwritten rules behind business success in China. In fact, much of Spreadtrum's current success has been due to the special relationship it has with China Mobile (NYSE: CHL) in providing China’s biggest cell phone company with low-end, subsidized TD-SCDMA standard chips.

While this area will continue to be a key growth driver in 2011, Spreadtrum's future is much more interesting. Spreadtrum has been supplying transceivers to Korean giant Samsung since 2009. So if you have a Samsung cell phone, chances are that you have a Spreadtrum transceiver in it. And just last month, Spreadtrum announced that it will be supplying even more sophisticated transceivers to Samsung. That means that Spreadtrum transceivers soon may be found in many of Samsung's red-hot new Android products, including the Galaxy S smartphone, which some observers already are calling the “Apple iPhone Killer.”

Extraordinary Growth
As with many Chinese small-cap stocks, Spreadtrum's growth is extraordinary. In the third quarter, its revenue jumped 151% to $96.2 million. Net income was $19.5 million, or 37 cents per share, compared with only $630,000, or a penny per share, only a year earlier. That beat analysts’ expectations of earning 33 cents per share on revenue of $92.6 million. Spreadtrum also announced that it expects fourth-quarter revenue to be between $118 million and $125 million. That also topped analysts' consensus forecasts of $102.6 million. Yet, even after its recent run-up, Spreadtrum is trading at about 50% of the valuation of its better-known rivals.

So buy Spreadtrum and place your stop at $14. [Shares closed at $18 Friday—Editor] If you want to play the options, I recommend the May $17.50 calls.

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