Bloomberg News

Spreadtrum Says Muddy Waters Doubts on Results Are ‘Baseless’

June 29, 2011

Engineers at Spreadtrum's R & D Department

Engineers work at the research and development department in Spreadtrum Communications Inc.'s offices Shanghai. Photographer: Kevin Lee/Bloomberg

Spreadtrum Communications Inc., the Chinese chip designer questioned by short-seller Muddy Waters LLC over its accounting, said a report suggesting it misstated financial results is groundless.

“Our performance is very solid,” Leo Li, the chief executive officer, chairman and president of the Shanghai-based company, said in an interview in his office today. “The allegations, none of them are true.”

Spreadtrum tumbled as much as 34 percent yesterday after Carson Block’s firm wrote it saw a “high risk of material misstatements.” Chinese companies trading in North America including Sino-Forest Corp. have had almost $5 billion in market value erased since Muddy Waters published reports questioning their accounting, according to data compiled by Bloomberg.

“If companies are the target for Muddy Waters, their shares will drop eventually,” said Castor Pang, head of research at Core-Pacific Yamaichi International Ltd. in Hong Kong. “It’s difficult to tell whether the research is trustworthy or not, but it triggers concerns over enterprises in China. Investor confidence is weak.”

Spreadtrum shares pared declines, closing down 3.5 percent in New York trading yesterday, after Needham Group Inc. and Chardan Capital Markets said the Muddy Waters assertions were overblown. The Chinese company was taken public in a June 2007 initial offering led by Morgan Stanley (MS:US) and Lehman Brothers Holdings Inc., with help from Needham and Piper Jaffray Cos. (PJC:US), according to data compiled by Bloomberg.

‘Wrong Company’

“We believe this organization is trying to target China companies with questionable accounting practices,” Shannon Gao, chief financial officer at Spreadtrum, said in a separate interview, referring to Muddy Waters. “In this case, they picked the wrong company. We do not fit their profile.”

Spreadtrum isn’t the only Chinese company having to defend its financial statements this month. Sino-Forest on June 3 denied overstating assets after a Muddy Waters report said city records didn’t match the amount of land the Hong Kong-based timber company said it owned in China’s Yunnan province.

China Yurun Food Group Ltd. (1068) tumbled 20 percent June 27 on speculation Muddy Waters would issue a negative report on the pork producer. Titus Wu, an analyst at DBS Vickers Hong Kong Ltd., said this week Yurun Chairman Zhu Yicai told investors the stock fell because of “hedge funds and market rumors.” Yurun climbed as much as 9.4 percent in Hong Kong today.

Former Victim

Orient Paper Inc. (ONP:US) Chairman Liu Zhenyong, whose company was labeled a fraud by Muddy Waters last year, said this month overseas-listed Chinese companies should conduct investigations by independent third parties to counter questions about their financial statements. A four-month probe found no evidence to support the short-seller’s claims, according to Orient.

Quinn Bolton, an analyst at Needham, wrote in a report yesterday in New York that the Muddy Waters letter raised “nothing new.” Bolton reiterated a “buy” recommendation and $30 stock-price estimate on Spreadtrum.

Short selling (SPRD:US), or the sale of borrowed stock to profit from a decline, rose to a record 14 percent of Spreadtrum’s outstanding shares as of June 24, up from 6.7 percent at the beginning of the month and 1.5 percent at the end of 2010, according to Data Explorers, a New York-based research firm.

Letter to Chairman

“We have identified a number of issues in Spreadtrum’s filings, and we believe that there is a high risk of material misstatements in the reported financials,” Muddy Waters said in a letter addressed toLi.

Part of the Muddy Waters report focused on the departure of Ping Wu as chief executive officer in February 2009 and the resignation of Richard Wei as chief financial officer in April 2009 a month before the disclosure that a unit received about $44 million in new financing from a Chinese bank. In October that year, Spreadtrum said David S. Wu, another chief financial officer, resigned for personal reasons.

The company’s revenue in the third quarter of 2009 was $38.4 million, up 92 percent from a year earlier and 137 percent from the second quarter, according to a PR Newswire statement on Nov. 16, 2009.

“Why would the board have lost confidence in Mr. Wu when the sales pipeline was so promising?” Muddy Waters wrote. “Because it would be unusual to fire a CFO during the financing process, is it fair to assume he chose to leave? If ‘yes,’ why would he have left with such strong sales in the pipeline?”

‘Ancient History’

In a form 6-K filed with the SEC on Nov. 3, 2009, the company said it replaced Deloitte Touche Tohmatsu CPA Ltd. with PricewaterhouseCoopers Zhong Tian CPAs Ltd. as the independent auditor.

Needham’s Quinn said that the management changes were related to a board plan from the beginning of 2009 to “get the company back on a solid footing with customers” following the hiring of CEO Li in May 2008. The changes are “ancient history,” the analyst wrote.

At the end of 2008 and early 2009, the company ’’almost had no customers,’’ no sales pipeline and a $20 million loss, Li said. He turned around the company by developing new products after becoming president in November 2008, he said.

Analysts Say ‘Buy’

Li, promoted following Wu’s departure, “was responsible for an increased focus on product quality, software stability and customer support at SPRD, issues that plagued the company’s products in 2007 and 2008,” New York-based Quinn said. “This focus on product/software quality and customer support is directly responsible for the company’s significant market share gains made over the past two years.”

Spreadtrum has “buy” recommendations from 12 of the 13 brokerages tracked (SPRD:US) by Bloomberg News. Among them is Jay Srivatsa, an analyst with Chardan Capital Markets LLC with a $31 price estimate, who said in an e-mail there is “little to no merit” to the Muddy Waters report.

“Some of the allegations, especially those about why the company had a great 2010, or the history about the ex-CFO, and ex-chairman, to me, they don’t have a lot of legs,” said Jack Lu, who rates Spreadtrum’s stock “buy” at Royal Bank of Scotland Group Plc in Taipei. “I don’t think they understand the company too well.”

To contact Bloomberg News staff for this story: Mark Lee in Hong Kong at wlee37@bloomberg.net; Helen Yuan in Shanghai at hyuan@bloomberg.net; Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net

To contact the editors responsible for this story: Young-Sam Cho at ycho2@bloomberg.net; Nick Baker at nbaker7@bloomberg.net


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Companies Mentioned

  • MS
    (Morgan Stanley)
    • $32.91 USD
    • 0.36
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  • PJC
    (Piper Jaffray Cos)
    • $53.31 USD
    • 1.10
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