Does Spreadtrum Communications, Inc (ADR) (SPRD) Get a Fair Price?

Recently, Spreadtrum Communications, Inc (ADR) (NASDAQ:SPRD) experienced a gain of more than 16% in one trading day to hit a price of $25.90 per share. The huge daily advance in its share price was due to the fact that the company received a $1.38 billion buyout offer from a unit of Tsinghua Holdings, the government-owned company. Is the offer fair for the company? Let’s take a closer look and find out.

Business focus in Hong Kong

Spreadtrum Communications, Inc (ADR) (NASDAQ:SPRD) is a designer and developer of mobile chipset platforms for smartphones, offering a portfolio of diverse integrated baseband processor solutions to handset device manufacturers, Original Design Manufacturers, Independent Design Houses, and distributors. Spreadtrum is said to be the number one supplier to China’s TD-SCDMA market and the number two supplier to export markets. The company derived the majority of its revenue, $651.3 million, or nearly 90% of its revenue, from Hong Kong, while the nearly $70 million in sales were generated from Mainland China, excluding Hong Kong. The company had quite customer concentration in its operations. Spreadtrum Communications, Inc (ADR) (NASDAQ:SPRD) has three big customers, which combined accounted for around 62.8% of its total revenue in 2012.

In the first quarter of 2013, Spreadtrum Communications, Inc (ADR) (NASDAQ:SPRD) produced around $189 million in revenue, a 17.3% year-over-year growth compared to the first quarter last year. Its net income came in at $20.3 million, 16.5% lower than a net profit of $24.3 million in the first quarter 2012. The lower profit was mainly due to 39% growth in R&D expenses, from $28.4 million last year to $39.5 million. Going forward, Spreadtrum Communications, Inc (ADR) (NASDAQ:SPRD) expected to produce around $220 – $228 million in revenue, a growth range of 16.4% to 20.6%. The company also estimated that in the second quarter, the gross margin would be a bit higher than the first quarter gross margin of 37.3%.

A reasonable valuation?

With an offering price of $28.50 per share, Tsinghua Holdings values the company at nearly 8.9 times its trailing EBITDA. Compared to its peers, including Infineon Technologies and Texas Instruments Incorporated (NASDAQ:TXN), Spreadtrum Communications, Inc (ADR) (NASDAQ:SPRD) is the smallest company but not the cheapest among the three. Infineon Technologies is trading at $8.10 per share, with a total market cap of $8.7 billion. The market values Infineon at a lower valuation of 7 times its trailing EBITDA. In the second quarter of 2013, this German semiconductor and system solution company derived more than 54% of its total operating income from the Automotive segment, while the Power Management & Multimarket segment ranked second with €27 million in operating profit. In the next quarter, Infineon expected to generate around €1 billion in revenue with the estimated third quarter operating margin of around 10%.