SMARTPHONES: Profits, Revenue Tumble at Ailing Coolpad

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Bottom line: Coolpad’s sliding revenue and profits last year reflect intense competition in China’s smartphone market, and the company could become one of the first major victims of an upcoming shake-out for the sector.

Coolpad logs tough year in 2015

Fading smartphone maker Coolpad (HKEx: 2369) has just released financial results that show just how bloody China’s market was last year, with operating profits and revenue both tumbling by nearly half. The outlook certainly doesn’t look too promising for Coolpad, which was once an up-and-comer in the market but more recently has been overwhelmed by the non-stop competition. It also didn’t help that Coolpad lost an important backer last year, following a high-profile dispute with joint venture partner Qihoo 360 (NYSE: QIHU).

The year 2015 wasn’t a pretty one for Coolpad. The company benefited from its relatively early arrival to China’s smartphone market to become a leading local player, but by the end of last year had fallen out of the nation’s top 5 brands. It tried to bolster its position by signing up strategic partners that could ensure its future. But that plan backfired when one of those partners, Qihoo, became enraged after Coolpad formed another separate alliance with online video giant LeEco (Shenzhen: 300104), formerly known as LeTV.

All that said, let’s delve into Coolpad’s results, which are worth a closer look since the company is one of China’s few pure smartphone plays that is publicly traded. Both revenue and gross profit fell by more than 40 percent, dropping to HK$14.7 billion and HK$1.6 billion, respectively. (company announcement; Chinese article) The company posted a huge jump in its actual net profit, which was the result of a massive HK$2.6 billion one-time gain from the loss of control of its Qihoo joint venture after the spat between the 2 companies.

The one bright spot in Coolpad’s report was its exports, which rose nearly 40 percent to HK$2.2 billion. But foreign sales account for just 15 percent of Coolpad’s total, and it’s far from clear that the company will be able to keep expanding overseas at such a quick rate. That’s because most of China’s other major smartphone makers are also looking to overseas markets for relief, as they try to escape their overcrowded home market.

China’s smartphone market is still growing, but at a far slower pace than it did in previous years when many players piled into the market. What’s more, a group of players led by Apple (Nasdaq: AAPL), Huawei and Xiaomi are showing signs of consolidating their places at market leaders, leaving little room for the field of others like Coolpad whose products mostly look and perform similarly.

Crowded Market

The Chinese smartphone market expanded 8 percent in last year’s fourth quarter, with Huawei, Apple and Xiaomi finishing in the top 3 positions, according to market research firm IDC. (previous post) Even global titan powerhouse Samsung (Seoul: 005930) felt the heat of competition, falling out of the top 5 in the world’s largest smartphone market.

All that said, let’s return our attention to Coolpad, which could become the first major victim of China’s looming smartphone shake-out if its situation continues to deteriorate. The company didn’t say much of interest in the outlook section of its results, though one insider said in a Chinese media report said that Coolpad was in the midst of a transformation that would cause some short-term pain.

There weren’t any more specifics on what exactly that transformation is, though based on the company’s report and the media report it looks like the main components of that drive are simply new product development and increased brand awareness. That hardly looks like a radical plan to reverse the company’s rapid downward slide. Coolpad is also in the midst of trying to raise more funds through a new rights issue plan, though I doubt there will be much interest from most of its current investors. (previous post)

At the end of the day I do expect that Coolpad does stand a very strong chance of ending up as one of the big losers in China’s looming smartphone shakedown. The most likely outcome could be a buyout by LeEco, which bought 18 percent of Coolpad’s shares last year. But it’s also possible Coolpad could simply become insolvent and sell off its various assets to LeEco, Qihoo and other creditors.

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