RealMoney Silver - China Questions Linger

China Questions Linger
By Tero Kuittinen
RealMoney.com Contributor
2/5/2008 8:38 AM EST

National Semiconductor (NSM) warns and blames the Chinese phone market, and investors are now flailing in the crosscurrents of conflicting information about handset sales in China.

The National Semi warning was a brisk one: the sequential sales decline guidance midpoint came down to about 9% from 3%. The company did not mince words about where it places the blame -- it pegs it on "lower-than-expected shipments to global original equipment manufacturers (OEMs) as well as handset companies in China, which National serves through distribution channels." This sounds wider in scope than the RF Micro Devices (RFMD) warning of last week -- RFMD seemed to attribute its problems specifically on the domestic vendors of China.

Why are the National Semi and RFMD warnings so surprising? China Mobile (CHL) , Asia's mobile behemoth, added more than 6.5 million new GSM subscribers in December, far above the 4.8 million level it reached in December 2006. The October-December period of monthly mobile sub adds in China in general marked the all-time high for the market, millions above what had been projected a year earlier. The new drive of finding growth in rural areas using $30-$50 handsets has been highly successful, and Nokia's (NOK) numbers affirmed that.

Nokia's year-over-year unit growth in China for the fourth quarter 2007 was a stellar 38%. So if China Mobile and Nokia had great fourth quarters in China, how can we explain this string of China-specific warnings from MediaTek, RFMD and National Semi?

One possibility is that the weakness is simply limited to domestic vendors of China -- that was the market consensus after the MediaTek and RFMD warnings. We know that there is surprising drama in the domestic handset scene in this country. Lenovo just announced astonishingly weak phone unit performance for the fourth quarter of 2007 and curtly stated it has sold its handset division. This was particularly surprising, because domestic brands had been gaining share in China in the first half of 2007, and Lenovo was on the brink of hitting 10% domestic share in 2008.

However, the NSM warning is relatively large in revenue terms and seems to indict foreign brands as well as Chinese ones. NSM counts all the leading global phone brands as its clients. It is possible that Motorola (MOT) has had another down leg in China, but it's not a huge client of NSM after its yearlong market-share tumble.

My theory remains that Chinese upgrade sales started weakening around November/December while subscriber growth still remained strong. This hit the weakest brands first, as Nokia reacted to softening market by grabbing more share. We saw the knock-on effect on MediaTek and Lenovo already in the fourth quarter of 2007; in the first quarter this year, we are starting to get component warnings implying that the order flow from foreign brands is starting to weaken as well. This is just one theory, and we'll see how things pan out in coming months.

All eyes are now on China Mobile's January mobile subscriber addition report, due in two weeks. It should reflect a sales boost from the pre-Lunar New Year period, but also the devastating series of blizzards that paralyzed large swaths of the most affluent parts of China in late January. That's a tough equation.

At time of publication, Kuittinen had no positions in the stocks mentioned, although holdings can change at any time.

Tero Kuittinen is managing director and senior analyst for Avian Securities, a brokerage firm specializing in technology companies. Although Kuittinen is an employee of Avian Securities the statements above are being made in Kuittinen's personal capacity and are in no way are the statements of Avian Securities, nor attributable to the company. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Kuittinen appreciates your feedback; click here to send an email.

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