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Tuesday, December 13, 2005


CNTF for the Long Term

On November 15, China TechFaith Wireless Communication Technology Limited (CNTF), a Chinese wireless handset application software and handset solution provider, reported earnings per ADS (grouping of 15 shares which trades as 1 unit in the U.S. as CNTF) of $11.4 million, or $0.26 per ADS, a 207.9% increase over the previous year. Revenue increased 93.7% over the previous year. Earnings for the whole of 2005 is expected to be at least $0.93 per ADS (non-GAAP, $1.01 using U.S. GAAP accounting):

These results mean that CNTF at $14.48 is trading at a PE of 15.6 (or lower) for earnings growth of 100%+. That's an incredible bargain, as that growth justifies a much higher multiple. Considering that this is a Chinese stock in a hot sector, CNTF could easily trade at an above average multiple.

I listened to the earnings call, a replay of which you can listen to at There's also a pdf file with their earnings presentation there. The transcript of the call is available here: I was impressed that they are planning huge growth over the next year. Currently, they have about 2000 employees, and are planning to grow to 3400 employees by the end of 2006. In the Q&A session (transcript here:, the president said "for revenue, 2006, we hope we can have 100% increase... Year-on-year, 100% increase." Even if they only grow revenue by 20%, CNTF is undervalued, but if they grow revenue 100%, the stock will be several times higher next year. This isn't a tiny company, which you usually find in a company reporting earnings growth this huge. This company has a market cap of over $500 million, so it has more analyst coverage and institutional involvement than much smaller companies.

When CNTF was trading higher than current levels on the way up to the $18.80 high, Kaufman Brothers issued the following upgrade on CNTF:

CNTF China Techfaith Wireless tgt raised to $18.50 from $15 at
Kaufman Bros (14.76 )
Yesterday, China TechFaith hosted its first Analyst and Investor Meeting in
Beijing, China that was available via webcast. On the back of this meeting,
firm raising its 12-month price target to $18.50 (18x 2006 est of $1.01)
from $15. In firm's view, China TechFaith is the best positioned of any ODP
(original design provider) to benefit from the planned issuance of 3G
licenses in China with capabilities in WCDMA/UMTS and CDMA 2000 EVDO
technologies, while also developing TD-SCDMA capabilities. Kaufman believes
that as investors become more comfortable with mgmt and begin to more fully
appreciate the exceptional profit and growth characteristics of China
TechFaith's business model (that firm believes is still in the embryonic
stages of some very powerful long-term secular trends), Kaufman believes
co's P/E multiple will expand. Despite the sharp rally in the shares over
the past week (up approx 70%) from very depressed levels and the potential
for some profit taking, Kaufman believes the stock will move higher before
the year is finished.

If you look at a chart of CNTF, it came public in the U.S. in May in the $16 area, rallied to near $20, and then sold off in August, hitting a low of under $8 in October. It spent a couple of months forming a trading range between around $8 and $11 and then after the earnings report broke out of this trading range and rallied as high as $18.80 before pulling back to its current $14.48 price. Part of the selloff was spurred on by stock commentator Jim Cramer saying he wouldn't buy CNTF because he only likes one Chinese company. Cramer tends to blow off stocks he doesn't know in favor of his favorites.

Yesterday, CNTF hit a low of $14, a technical support area and nearly a 50% retrace of the earnings rally (a typical support level). It also rallied back to close down just .12, printing a pretty good bottoming candlestick. The Point & Figure chart shows a target of $29.00:,PLTADANRBO[PA][D20051212][F1!3!!!2!20]&pref=G

CNTF in the $14's should be a great buy for the long term.

nice call!
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