China’s smartphone maker Coolpad Group Ltd. (02369.HK) remains one of the hottest stocks in the market as investors bet on its fast-growing shipments of relatively cheaper models.
Its share price has tumbled more than 17 percent since it announced its 2013 results on March 21. Prior to that, however, the counter had doubled from its level at the start of the year.
Net profit last year rose 7.4 percent to HK$348 million (US$44.85 million) on a 36.4 percent growth in revenue to HK$19.6 billion.
For the second half, net profit was HK$135 million, down from HK$212 million in the first six months of 2013. During the period, the company received government subsidies amounting to HK$218 million, of which HK$49 million was received in the first half. This means that without the government aid, Coolpad would have been in the red in the second half.
For the whole year, more than 96 percent of the revenue came from 3G smartphone sales; 4G only accounted for only 2.6 percent. The company relied on the domestic market for growth. Amid escalating competition, Coolpad increased its sales and marketing expenses by 49 percent last year to HK$1.3 billion, or 6.6 percent of the group’s sales.
Coolpad is now the nation’s third largest smartphone player and ranks seventh in the world. But with a 12.9 percent profit margin, it trails behind many competitors. TCL Communications Technology Holdings Ltd. (02618.HK) recorded a 19 percent gross profit margin last year, while HTC Corp. (02498.TW) had around 20 percent.
One of the reasons for Coolpad’s weak margin is its heavy reliance on mobile operators as sales channels, which currently account for more than 70 percent of its revenue.
Considering that mobile operators are subsidizing users to upgrade their mobile phones, handset makers like Coolpad could be under intense pressure to lower the prices of units sold to operators in exchange for procurement contracts. This means phone makers are sacrificing much of their profit in order to secure a huge user base.
With the rise of e-commerce, Coolpad tapped JD.com Inc. early this year as its exclusive online sales channel. It aims to generate 30 percent of sales from online channels this year.
The direct sales business model is expected to help the company widen its margin while strengthening its ties with end-users.
JD.com has committed to buy 10 billion yuan worth of handsets from Coolpad, or some 10 million units of its flagship devices. That should offer a new growth momentum for Coolpad.
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