TCL Cellphones: History Repeats Itself TCL手机业务历史重演

By newsdoug on April 16, 2012

After pronouncing last year that TCL Communication (HKEx: 2618) had successfully completed a turnaround for its cellphone business that nearly bankrupted the company 6 years ago, it seems I need to update my view on this cyclical firm where history is now repeating itself. The cellphone making sister company of leading Chinese TV maker TCL Multimedia (HKEx: 1070) issued an ominous warning late last week, saying its first-quarter profit would be “significantly lower” that the previous year. (company announcement) That announcement prompted the company’s China-listed parent, TCL Corp (Shenzhen: 000100) to issue a similar warning saying its first quarter profit would also tumble 75-85 percent. (Chinese article) What a difference a year makes. At this time last year, TCL Communication was showing all the signs of a successful turnaround from a disastrous purchases of the handset business of France’s Alcatel (Paris: ALUA) in 2004-5 that nearly bankrupted the company. TCL eventually managed to stabilize the business, presumably by moving most of its manufacturing to China, and saw its fortunes soar on strong sales of Alcatel phones in Europe where the brand is well known and respected. Unfortunately, TCL failed to build much of a name for itself in its home China market, where it originally rose to prominence as a maker of cheap cellphones a decade ago but later largely disappeared due to failure to innovate. In this latest profit warning, the company said its core European market is being hard hit by the continent’s ongoing debt crisis, which has dampened sales. But perhaps just as important, TCL also said it is also to blame for failing to develop more products for the booming smartphone segment, which has become dominated by names like Apple (Nasdaq: AAPL), Samsung (Seoul: 005930) and HTC (Taipei: 2498). That failure to keep up with the latest market trends looks strikingly familiar to TCL’s previous downfall in its home China market, showing this company hasn’t learned enough from its past mistakes. Investors have punished TCL Communications stock as a result of these latest missteps,with its shares tumbling more than 50 percent over the last 12 months. The company appears to finally be waking up to the new reality, saying it has signed new deals with China’s top 2 wireless carriers to tap its home market where it enjoys some natural advantages. It said it is also developing more smartphones, in a bid to catch up with Apple and the other leaders in that space. I personally have a lot of respect for TCL’s Chairman Thomson Li and his management teams, and think they could quite possibly engineer another turnaround for this struggling cellphone unit, providing an interesting investment opportunity. But I would also warn that such a turnaround is far from guaranteed, and only strong believers with some extra cash might consider taking that risk right now.

Bottom line: TCL’s cellphone unit is experiencing a sharp decline due to lack of forward-thinking, but is taking steps that could give it a good chance to rebound next year.

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