Auriga USA upgraded China's Spreadtrum Communications (SPRD) to 'buy' from 'hold,' saying that the company's gross margin concerns will be offset market share gains.
Shanghai-based Spreadtrum Communications designs and markets baseband communications chips for the wireless telecom market.
Through continuous checks in the last two months, we are convinced that the strength of SPRD's 2G shipments as a result of its continued share gain will likely more than offset the gross margin pressure from price competition, analyst Jie Liu wrote in a note to clients.
Liu said that as the competition for 3G subscribers heats up among the three Chinese telecom carriers, SPRD's chip is becoming increasingly important to China Mobile's ability to offer low-cost 3G mobile phones, thus permitting SPRD to gain significant market share in the TD-SCDMA mobile phone baseband segment in 2011.
Time Division Synchronous Code Division Multiple Access (TD-SCDMA) is being pursued in the People's Republic of China in an attempt not to be dependent on Western technology. This is likely primarily for practical reasons, other 3G formats require the payment of patent fees to a large number of Western patent holders.
The analyst expects shipments of TD-SCDMA 3G mobile phone baseband chipsets and fixed wireless baseband chipsets at about 9 million units and about 7 million units, respectively.
Liu also sees the company's top line to come in close to the high end of the company guidance of $118 million to $125 million. For the first quarter, the analyst forecasts Spreadtrum's revenue to decline by only about 7 percent sequentially, as the multi-SIM solutions continue to help the company gain share in emerging markets.
For fiscal 2011, the analyst maintained its gross margin assumption at 40.6 percent, and raised revenue and pro-forma profit view to $485 million and $1.71 a share, respectively, from $429 million and $1.32 a share.
Wall Street expects the company to earn $1.51 a share on revenue of $468.43 million, according to analysts polled by Thomson Reuters.
ADRs of Spreadtrum closed Thursday's regular trading session at $17.34 on the Nasdaq.