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China Techfaith Wireless (CNTF) soars 30% in 4 trading days

Since our original report on China Techfaith Wireless (see China stock China Techfaith Wireless (CNTF) started with a buy rating), the stock fell from $9.45 to about $8 a few days later when fears of inflation due to a temporary increase in oil costs hit the market.

For those of you who saw this as a great buying opportunity, you've been greatly awarded by a recent run-up in stock price.  CNTF's stock price has risen from $8 on 10/14 to $10.39 on 10/19, a 30% increase in 4 trading days.  CNTF announced their revenue and profits would fall within the range analysts had predicted.  Also, Business Week came out with an article that was bullish on China Techfaith Wireless, giving CNTF another boost.  Importantly, Business Week mentions CNTF is ahead of rivals in developing 3G models.

Non-energy CPI up only 0.1%

The CPI was up 1.2% in September but the non-energy basket was up only 0.1%.  Since the energy price increase is temporary, investors were satisfied.

China to have a $100 billion trade SURPLUS in 2005 (up from 32% in 2004)

According to Bloomberg, China's trade surplus will be $100 billion in 2005, compared to $32 billion for 2005.  For comparison purposes, the trade deficit for the US was $620 billion in 2004 and will likely amount to about $730 billion in 2005.

Bloomberg mentions that China is the world's leading exporter of mobile phones and computers.  That's why we like the Chinese cell phone manufacturer China Techfaith Wireless (CNTF), a company we think is undervalued at the moment.  Thus, China benefits not only from increased consumption within their own country, but also from gaining more and more business since they still have a low cost of goods.

China stock China Techfaith Wireless (CNTF) started with a buy rating

Kaufman Brothers has become the first analyst to cover the China stock CNTF.  CNTF, or China Techfaith Wireless, is a mobile phone designer founded by former Motorola execs.  Here's a short blurb from Kaufman:

CNTF: A WIRELESS WONDER- INITIATING COVERAGE OF CHINA TECHFAITH WITH A BUY RATING

They are setting the 12-month target price at $15, which is good since the price as of market close on September 30th was $9.45.  Fortunately for new investors, CNTF has fallen in price from $16 in early September to current levels.  The stock debuted in a May 2005 IPO at around $15, rose to the high teens in the next few months and then declined steadily.  The China Stock Blog has been collecting buzz to try to explain the result, and most think there is no bad news and the current dip represents tremendous upside.

I didn't purchase the Kaufman Brothers report, but it would seem that they set a price where the forward-looking P/E ratio is about 15.  I say this because the current forward-looking P/E ratio is 8.6 and an immediate rise to $15 would put the forward-looking P/E ratio at 16.5.  Visit Yahoo's Key Statistics page for CNTF for more info.

One thing to point out is that CNTF is holding $137M in cash while having no debt, so while their capitalization is $415M, their enterprise value is $278M (capitalization minus cash).  It's impossible to say the extent to which investors have ignored CNTF's huge cash surplus, but one method of analysis is to assume investors have completely overlooked this.  Assuming this is true and that CNTF will be able to invest the $137M in cash in a way that generates earnings on par with what the company does today, then a fair value for the company's stock would be about $22 to $23 per share (using Kaufman current target of $15 as a base).