The tiny Beijing-based company, listed on NASDAQ under ticker (NASDAQ:CNTF) this MAY, attracted large volume since the release of 3Q report (11/15), and price went up more than 100%. Then after the presentation at the Lehman Brothers Telco Seminar (12/02), price started falling. I didn't not find the detailed info about this presentation, I will keep researching. And the new subsidiary focusing on smart phone announcement seemed got investors thinking for some time to digest it. But last few days, price rebounded.
CNFT reported a great third quarter, with strong growths in both top and bottom lines, which both hit the record high. The Company leverages relatively low operating costs while supporting a higher revenue base. As the CEO said that the Company continue to leverage the handset application software and design strengths to penetrate high growth and highly lucrative related markets, such as wireless modules, the ultra low cost handset market and embedded software for mobile applications.
Both the two contributors to the top line, namely, design fees and royalty income, increased remarkablly last quarter YoY and QoQ. The Company believes the combination of design fees and royalty income is a better operational benchmark as it represents substantial economic value of the total design compensation received from customers for design services.
Operating expenses increased, which was primarily due to investments in the Company's operational infrastructure to support its business growth, along with higher general and administrative expenses associated with being a public company since May 2005. However, both gross and operating margins improved in 3Q.
The Company has expanded its international presence with a successful release of our first 3G phone in Italy. Considering the 3G release in China next year, we could expect the Company to take the advantage of domestic market.
Regarding to its new subsidiary, the CEO said the Smart Phone market is extremely attractive and rapidly growing, and the Company expects that with the continued convergence of voice and data, Smart Phones will be embraced by both the high-end and mass markets. The new subsidiary's first series of products, being a GSM/GPRS Smart Phone and a Pocket PC based on Windows Mobile 5.0, are expected to launch in Jan 2006. The company is also developing a CDMA 1X Smart Phone and a WCDMA UMTS Smart Phone, which are expected to be ready in the second quarter of 2006.
With the 4Q guidence, the Company estimated $24 million revenues (3% up QoQ) and $0.14 earning per ADS (-15.4% QoQ).
Referring to the ratios, CNTF has a healthy financial position, strong profitability and high management efficiency. P/E is below industry average and PEG ratio also suggests that it may be undervalued.
Looking at its chart, 50DMA is about to across above 100DMA since inception. RSI is hovering arround 50, and MACD is show some supports.
Overall, my recommendation is Medium-term BUY.
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