brief corporate overview - latest...

Brief corporate overview

The Success Group Hernandez, Leopoldo Jr.

Houston, Janelle

Ibarra, Jose

Lioznyansky, Daniel

Lovelace, Michael

Lueders, Dave

The Success Group 4/28/2009

Longcheer Holdings

The Success Group

Table of Contents Table of Contents ............................................................................................................................ 2 Executive Summary ........................................................................................................................ 3 Industry and Environment............................................................................................................... 3 Corporate History............................................................................................................................ 5 Corporate Strategy .......................................................................................................................... 7

Financial Analysis ........................................................................................................................... 8 Additional Information and Analysis............................................................................................ 11 Questions for the Company .......................................................................................................... 12 Appendix ....................................................................................................................................... 13

Glossary of Technical Terms ........................................................................................................ 15 Works Cited .................................................................................................................................. 16

Longcheer Holdings

The Success Group

Executive Summary

Longcheer Holdings was founded in 2002 by three young Chinese entrepreneurs

headquartered in Shanghai, People’s Republic of China. Longcheer Holdings is a holding

company for various business arms of the business, is a publicly traded company listed on

various exchanges worldwide including the Singapore Exchange and United States OTC Pink

Sheet Exchange. The core of Longcheer’s business is mobile handset design, manufacturing and

project management of mobile devices. They are one of the large Chinese mobile handset

designers. The company has a market capitalization of over S$300 million (Singapore dollars)

(Hoovers Online, 2009) with over 1,300 employees.

In 2006, Longcheer was named 10th in Technology Fast 50 in China by Deloitte and

Technology Fast 500 in Asia Pacific rankings. The core mission of the company is: “…to

provide more consumers with better products and services in the communication device industry.

We aim to a respected international company.” With “Honorable, Progressive, Professional”

being the core values of the company (Longcheer Holdings, 2009).

Industry and Environment

People’s Republic of China (China) is the world’s largest mobile telephone market in the

world. By the end of February 2009, China had 659.78 million cellular telephone subscribers.

This means 50.5% of the overall population in China has a cell phone in their possession; by

comparison, China only had 437 million landline telephone users at the end of the same period.

The government invested 1.4 billion RMB from the network access fees to support the

development of domestic mobile phones in 2000, and another 5% has also been drawn from the

installation fees of fixed line as the research fee of domestic mobile phone for other five

successive years. Gui Gai, an analyst with Guosen Securities, said China’s cell phone market is

still in the stage of rapid popularity and growth is not likely to slow down before reaching 800

million units. Within China, mobile communication is the most profitable sub-sector of the

telecommunications market, which is dominated by two domestic service providers: China

Mobile and China Unicom. China Mobile has taken 71.34 % of the market share and registered

6.751 million new mobile phone users in February 2009, including 6.709 million GSM

Longcheer Holdings

The Success Group

Figure 1: Revenues by services in China, 2005

(Wikipedia, Wikipedia - GSM, 2009) users and

42,000 TD-SCDMA (Wikipedia, Wikipedia - TD-

SCDMA, 2009) users. This was an increase of

1.2% month on month (Pulse, 2009).

The 2005 Annual Report published by the

Ministry of Information Industries showed that of

the total telecommunications industry revenue of

$70 billion in 2005, over 45% was generated from

mobile communication sales.

One reason for the dominance of cellular telephones over landlines is the lack of

telephone density infrastructure in China at the time cellular systems began maturing. Rather

than running telephone wires to every house, it

became cheaper to connect individuals by installing a

single cellular base station in a quadrant of town. As

digital cellular technology superseded older analog

cellular technology, existing Chinese cellular carriers

began to pack more subscribers onto existing networks,

without requiring any additional spectrum allocation

or major cellular system development. China Mobile

operates the largest GSM network in the world and China Unicom operates both a GSM and a

CDMA network.

With technological advancement, mobile phone sizes and functions have dramatically

improved; new and advanced features are being added everyday as a result of Moore’s Law. As

a consequence, manufacturers continue to introduce additional high-end features and services in

their mobile handsets. Longcheer recognizes consumers have rapidly evolving needs and is very

concerned about their satisfaction.

In China users can browse and keep updated with the latest information or they can send

and receive emails on the move due to high availability of mobile internet. For music lovers,

Walkman series phones and music phones are much in demand especially from the younger

generation. Music phones allow users to download their music tracks and listen to their music

on the go.

Figure 2: Rural China mobile users

Longcheer Holdings

The Success Group

On the other hand, business phones are also in much demand with features like office

tools. With the Smartphone features available, professionals can now manage their personal as

well as professional world on the move. The unfortunate issue is that Longcheer has not

developed any of these types of mobiles.

Longcheer has concentrated on the lower end of the mobile phone user population. The

users in these low end spectrum can be summarized into the three groups: the first group is made

up of low-income residents both in rural and urban areas and young students who are financially

supported by their families; the second group is composed of users who only need the phonetic

function and are incapable of or not interested in using the extended functions of advanced

mobile phones, mainly the elderly and children; users from the third group are those who need

higher phonetic quality or better roaming service with Personal Handyphone System(PHS).

Corporate History

Longcheer Holdings Ltd., headquartered in Shanghai, China, was established in 2002 and

has since been one of the fastest growing companies in China. Four other functioning

subsidiaries under the Longcheer Holdings Ltd are Longcheer Telecommunications Ltd,

Longcheer Technology Ltd, Sapphine Investment Ltd, and Mobell Technology Ltd. Similar to

other companies seeking a tax haven (Appendix: Figure 7), Longcheer was incorporated in

business friendly Bermuda. The company was then listed on the Singapore Exchange in May

2005. Longcheer is a company which has prided itself as a pioneer of the

independent mobile handset design industry. The company’s primary

business is in the development and sale of these mobile handsets. The

company is involved in many facets of the handset business, from handset

software, handset hardware, design, and project management in testing and

assembly. The company’s infrastructure has grown significantly to just over

1300 associates, 60% of which are dedicated to research and development.

Since the company’s incorporation, revenues have increased 652% and profit

has increased 311% (Longcheer Holdings, 2009). Ranked by Deloitte,

Figure 3: Longcheer mobile handset

Longcheer Holdings

The Success Group

Longcheer positioned itself 39th in the Technology Fast 500 and 10th in the Technology Fast 50

China Ranking.

Executive Team

Figure 4: Longcheer Executive Team (Longcheer Holdings, 2009)

Tao Qiang, Chairman and Non-Executive Director (39) – Co-founder of the Longcheer

Group and was appointed to the Board on 20 August 2004.

Dr. Du Junhong, Executive Director and Chief Executive Officer (35) – Co- founder of the

Longcheer Group. Dr. Du was appointed to the Board on 20 August 2004 and is responsible for

the overall operations, corporate policies, business development and investment strategy of the

Group.

Deng Hua, Executive Director and President (37) – Co-founder of the Longcheer Group. Mr.

Deng was appointed to the Board on 1 February 2005 and is responsible for the day-to-day

operations of the holding company. He recently completed his Executive MBA program from

China Europe International Business School.

Longcheer Holdings

The Success Group

David Hwang Soo Chin, Non-Executive and Independent Director (59) – Mr. Hwang joined

the Board on 22 October 2007.

See Yen Tarn, Non-Executive and Non-Independent Director – Mr. See joined the Board as a

Non-Executive Director on 22 October 2007

Dr. Ow Chin Hock, Independent Director (64) – Dr. Ow Chin Hock was appointed to our

board as an Independent Director on 1 February 2005. (Longcheer Holdings, 2009)

Corporate Strategy

Longcheer Holdings has been in the wireless device business long enough to know

technology’s margins eventually diminish as new technology is invented. This is the reason the

company’s strategy has always been to be an all encompassing provider of technology, design

and services to the newest technical innovations. In the FY 2008 Longcheer has seen an erosion

of margins for the existing technologies. In 2006, Longcheer aligned with Qualcomm to move

forward the company’s focus on the new 3G technology (Longcheer Holdings, 2009), which is

resulting in higher margins.

Despite the successful strategy of allying with the chip designer companies, Longcheer

was not able to align itself with a mobile OS provider as their global competitor HTC has done

with Google Android platform or Apple iPhone OS. Though the Longcheer’s service arm does

develop applications for these devices, it is still not as profitable as being aligned with exclusive

rights to the OS.

With Longcheer’s access to the chip manufacturers such as Qualcomm, pushing

proprietary designs of the modem and mobile phone solutions is essential to stay on the cutting

edge of the business. There are very few things that can differentiate one company from the

other in the cell phone business. Services will be the main factor with the highest margin

potentials with lowest per unit costs.

Longcheer Holdings

The Success Group

Financial Analysis

Overview

Longcheer Holdings Ltd. has performed well in recent years, growing revenue and profits

despite the increasingly competitive environment. They rely on their robust R&D department to

anticipate and deliver the ever-changing customer desires in mobile handsets. This forward

thinking has led to an increase in total product shipments to the Chinese market. Expanding into

Latin America, Europe, India and Southeast Asia, Longcheer also strengthened their overseas

markets, up to 18% of total revenue in FY2008, where they earn higher margins. In a move that

signals further product superiority, Longcheer expanded its R&D department by 50% in FY2008.

Longcheer plans to increase its global market share, especially in areas where the mobile

penetration rate is below the average for developed countries. Longcheer’s 12.9 million units

shipped in FY 2008 represents 2% of the total mobile handsets manufactured in China. Despite

the low market share, Longcheer’s gain was 45% over the previous year, while the total units

manufactured in China only grew by 7.6%. Chief Executive Dr. Du says, “Besides geographic

diversification, we are also increasing our share of the mobile value chain by delivering more

complete handsets and other new technology high value-added high-margin businesses.”

(Longcheer Holdings, 2009)

Revenue Break Down:

Longcheer has various sources of revenue that comes from its handset research,

development and design in China. The following chart is the 4Q FY2008 revenue break-down

from Longcheer’s company website:

Longcheer Holdings

The Success Group

Figure 5: Longcheer revenues by business sections

The majority of Longcheer’s revenue comes from GSM China, which represents 87% of total

revenue; the next largest component is Component Trading, which is 4% of Revenue.

(Longcheer Holdings, 2009)

Also, revenues have steadily increased since the company was founded. In 2005 the

revenues were 670 million RMB. The following year, the revenues more than doubled, reaching

1,984 million RMB. In 2007, the revenues increased by approximately 26% to reach 2435

million RMB. In 2008, revenues reached 3,292 million RMB, as seen in the below chart.

Figure 6: Longcheer revenues from 2005 to 2008

Even though revenues have gone up year after year, net profit has not steadily increased due to

increased cost of goods sold and expenses.

Key Financial Ratios

Longcheer Holdings

The Success Group

The key financial ratios can offer insight into the success of Longcheer’s financial

strategy. Profitability is best measured by Return on Equity (ROE) and Return on Assets (ROA).

The average ROE has fallen since 2004, but is still envious at 34% for FY 2008 (Appendix:

Figure 8). Other telecommunication companies typically see ROE ratios at 18%. The

Longcheer ROA ratio meets the industry average of 8.47%. The solvency of Longcheer can be

ascertained by analyzing the Current and Quick Ratios. Longcheer’s Current ratio is 2.05 with

an industry average of 1.69. Their Quick Ratio is 0.88 with an industry average of 1.00. Both

indicate a better than average access to liquid funds, should the need arise. The Leverage of

Longcheer is shown in its Debt to Equity ratio. The Longcheer Debt to Equity ratio is 0.78

while other similar firms see Debt to Equity ratios at 1.13. In this ratio, a lower number is

desired as firms seek to have more equity than liabilities. Overall, these ratios indicate

Longcheer is a stronger than average firm when compared to other companies in the same

industry.

Longcheer Stock

According to Yahoo Finance and Google Finance, the stock began trading on the

Singapore exchange on May 13, 2005 under symbol L28.SI. It also trades in the Pink OTC

market, Berlin Stock Exchange, Xetra Level 1 and the Frankfurt Stock exchanges. Since its

inception, Longcheer has outperformed the NASDAQ as seen in the chart below (Appendix:

Figure 9 and 10). At its peak in December 2006 it had a 260% appreciation at $1.28 SGD.

Since this time the stock has a downward trend. Between Oct 2008 and present the stock has

traded at steady range of $0.23 and $0.32 SGD. Currently, Longcheer stock price as of April

24th 2009 is trading at $0.32 SGD with a volume of 28,000 shares. The company also declared a

dividend last June and currently the dividend is $0.03 SGD and the dividend yield is 9.38%. On

March 27th 2009 there was a significant volume being traded of 9,028,000 shares. Its

outstanding shares are 372.9 million with a market capitalization of 119.3 million. Still for the

year, the stock has appreciated approximately 24%.

Last year, according to Business week, Longcheer’s Board of Directors announced a

share buyback program. They could have purchased up to 10% of the issued ordinary shares.

This action reflects the company’s belief in its stock’s appreciation and increased revenues. One

can deduce the stock has fallen do to the global crisis but it still has outperformed the NASDAQ.

Longcheer Holdings

The Success Group

Additional Information and Analysis

Mobile phone technology has transformed communication and interaction across the

world; however the prevalence of this technology has a vast impact on Chinese markets,

primarily in urbanized areas. As Chinese mobile phone manufacturers participate in

international markets to expand exports, there must be consideration for the various ways mobile

phones are used from country to country. Longcheer has been able to penetrate new global

markets such as India, Japan, South East Asia, Europe, and Latin America through focused

marketing initiatives and their commitment to create advanced products and technology.

When emerging into international markets, companies like Longcheer must consider

cross-cultural barriers that could impact their marketing strategies. In geographic areas that

embrace westernized cultures, key factors help determine how mobile users respond to

marketing techniques. Mobile phone consumption indicates the differences in economic

priorities within Chinese and Western consumer culture. When buying a mobile phone, a

Westerner considers its value for money in terms of core technology, and the number of

functions it performs. Traditional Chinese mobile users, on the other hand, are guided solely by

comparisons with other mobile users as to the latest, flashiest models (China Today, 2003).

They give negligible consideration to the benefits of the mobile device as a business accessory,

mainly using them to send and receive short text messages and play games. In Shanghai, where

Longcheer is headquartered, people are considered to embrace more Westernized behaviors. This

would suggest a consumer in Shanghai would respond differently to new mobile phone

technology than someone from Beijing, even though they are both Chinese.

The rapid growth in Chinese demand for mobile phones originated from the country's

major cities, Beijing and Shanghai. After years of fast-paced economic growth and rising

salaries, reduced sales led to slower growth since primary markets were already saturated. To

maintain rapid growth, companies were forced to look to China's smaller cities and rural areas,

which are typically less developed and poorer than the country's major urban areas. Companies

such as China Mobile started implementing features within the ringtone and music download

services that appealed to rural users. These services consist of the internet, weather, news, advice

for raising crops and animals (through China Mobile’s Agriculture Information Services), and

http://www.pcworld.com/tags/Beijing.html

http://www.pcworld.com/tags/Shanghai.html

Longcheer Holdings

The Success Group

daily market information, which incentivized mobile phone purchases. Longcheer must also

consider the need for these types of services and demographic appeal when designing mobile

devices for telecommunications companies.

China has become an increasingly competitive market for mobile phone manufacturers.

In February 2009, the South Korea based company LG Electronics Inc announced they will

invest 1 billion RMB in China to expand distribution channels and promotions. LG Electronics

Inc is the world’s 3rd largest phone manufacturer with 2 percent of the market in China. During

2009, LG plans to introduce 60 new phone models in China to increase their market share.

China's mobile phone industry has been developing rapidly, but it has not occurred

without intermittent problems. Some companies have only sought to expand their production

scale, and placed less emphasis on product R&D. There are also companies that do not own the

intellectual property rights to the core technology, so their development potential is limited. Core

technology and product upgrading constitute the largest disparities between Chinese and foreign

brand names. The quality of Chinese-made cell phones is also inconsistent. According to China

International Finance Company, 6 percent of Chinese-made cell phones are sent back for repair,

double the percentage of foreign brands (China Today, 2003). In order for Longcheer to

maintain their leadership as a mobile communications developer, they must ensure sustainable

quality when releasing new products.

Questions for the Company

1. Why isn’t Longcheer developing more advanced phones to compete with RIM’s

Blackberry and Apple’s iPhone?

2. What are Longcheer’s plans to generate revenue outside of hardware, e.g. Web

2.0 services?

3. Why did Longcheer choose to go public in Singapore?

4. Besides tax issues, what benefits are there with incorporating in Bermuda?

5. What advice would any of you give to aspiring Chinese entrepreneurs?

Longcheer Holdings

The Success Group

Appendix

Figure 7: Corporate Structure

Communications equipment

Corp Average Financial Ratios 2005

Return on Sales (%)

Return on Assets (%)

Return on Net Worth (%)

Quick Ratio

Current Ratio

Inventory Turnover (x)

Assets:Sales (%)

Tot Liabilities:Net Worth (x)

9.09

8.47

18.00

1.00

1.69

15.16

1.07

1.13

Longcheer Holdings

The Success Group

Figure 8: Longcheer business Statistics (BizStats, 2005)

Figure 9: Yahoo Finance Chart Longcheer (Blue) vs. NASDAQ Index (Red)

Longcheer Holdings

The Success Group

Figure 10: Yahoo Finance Chart Longcheer vs. NASDAQ

Glossary of Technical Terms

CDMA - Code Division Multiple Access;

GPRS - General Packet Radio Service

GSM - Global System for Mobile Communication

TACS - Total Access Communication System

TD-SCDMA - Time Division-Synchronous Code Division Multiple Access

WCDMA - Wideband Code Division Multiple Access

Longcheer Holdings

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Works Cited

BizStats. (2005). BizStats Industry Reports. Retrieved April 2009, from BizStats:

http://www.bizstats.com/reports/corp.asp?industry=Communications+equipment&profType=rati

os&var=&coding=33.4.200

China Today. (2003, September). A Brief History of Chinese Communications . Retrieved April

2009, from China Today: http://www.chinatoday.com.cn/English/e2003/e20039/9p1202.htm

China Today. (2003, September). China's Burgeoning Mobile Phone Industry. Retrieved April

2009, from China Today: http://www.chinatoday.com.cn/English/e2003/e20039/9p12.htm

Hoovers Online. (2009). Hoovers Online. Retrieved April 2009, from Hoovers Online:

http://www.hooversonline.com

Longcheer Holdings. (2009, April). Longcheer Financial Statement. Retrieved April 2009, from

Longcheer Financial Statement :

http://www.longcheertel.com/pdf/reports/LC_Q2FY2009_Results.pdf

Longcheer Holdings. (2009, April). Longcheer Holding Executive Team. Retrieved April 2009,

from Longcheer Holdings: http://www.longcheertel.com

Longcheer Holdings. (2009). Longcheer Tel. Retrieved April 2009, from Longcheer Holdings:

http://www.longcheertel.com

Pulse, A. (2009, March 26). CHINA MOBILE TAKES UP TWO THIRDS OF NEW MOBILE

PHONE USERS IN CHINA. Retrieved April 2009, from Zibb:

http://www.zibb.com/article/5126072/CHINA+MOBILE+TAKES+UP+TWO+THIRDS+OF+N

EW+MOBILE+PHONE+USERS+IN+CHINA

Wikipedia. (2009). Wikipedia - GSM. Retrieved April 2009, from Wikipedia, The Free

Encyclopedia: http://en.wikipedia.org/wiki/GSM

Longcheer Holdings

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Wikipedia. (2009). Wikipedia - TD-SCDMA. Retrieved April 2009, from Wikipedia, The Free

Encyclopedia: http://en.wikipedia.org/wiki/TD-SCDMA

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