Value Fund Manager: China Techfaith Priced 'At Dung'

China Techfaith Wireless, a mobile solutions provider for the global mobile handsets market, has received an outsized share of the spotlight given its small-cap valuation.

Activist investor John Romero and Patrick Small wrote an open letter to China Techfaith's management, stating that investors have "suffered enormously (emphasis deleted) under your leadership as is evidenced by the fact that the share price has declined 95 percent while the company's net assets have increased substantially."

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The letter further pointed out that the company's net assets have grown from $137 million in 2005 to $351.4 million in 2014. By the end of the second quarter of this year, the company reported $348 million in net assets.

"Simply put, shareholders want management to become engaged, run the business in order to maximize all shareholder value, proactively communicate and become the shareholders [sic] advocate (emphases deleted)," the letter continued. "If management were outside investors, not personally connected to the company, would you be a shareholder? We highly doubt it."

Value Fund Manager: Stock Priced ‘At Dung'

According to "jkvaluefund,"China Techfaith's stock is priced "at dung," as it trades at a $27 million market capitalization with over $350 million ($6.50 per share) in assets – which some investors value at over $400 million ($7.50 per share). Image Credit: Public Domain

The blog post continued that the stock's current price of $0.63 "makes this opportunity either stink to the high heavens, or an unimaginable disconnect that could bring immediate positive returns." The post added that the company's founder, Defu Dong, has brought this discounted given his "arrogant, unsupportive and unfriendly" attitude toward investors. Nevertheless, the executive is "a long term visionary" and his public comments back up his pledge to diversify into a real estate portfolio.

"I do not believe that he has been lying to investors," jkvaluefund wrote. However, he added, "Some of the moves that Dong has made of late smell like dung."

Jkvaluefund singled out an accounting maneuver in which $139.1 million in cash was moved to non-current assets without a detailed explanation as to why this was done.

"I do not doubt his intentions and motives, but his handling of US investors throughout his tenure has been odd, and I believe that this has frightened off big investors," jkvaluefund claimed. "However, with CNTF selling at such a deep discount I believe it will only be a matter of time before we see the big value investors taking positions running shares back to $3.00 per share."

Jkvaluefund went on to quote several of management's comments that support their initiatives to increase shareholder value through its real estate portfolio. This is one sample taken from the company's fourth quarter 2014 conference call:

"Our results for 2014 reflect the continued competition and volatility we face in the mobile phone market, but do not reflect our progress in the development of our real estate portfolio."

"We are now at an important juncture for the Company. I am pleased to report that we have now completed the construction of 16 buildings in Beijing and two in Shenyang. We have established a credible track record by executing projects on schedule and within budget.

"We are moving ahead with the next phase in developing our real estate portfolio, which is securing tenants for our available spaces, and will update investors as we progress through 2015. We believe our real estate portfolio represents a highly compelling asset and important opportunity for Techfaith, which is not yet reflected in the Company's valuation."

Bottom line, jkvaluefund concluded that management's comments and actions support a transition away from its "weak" handset business and into a "growing" real estate portfolio "turning into a growing cash flow."