Transsion Dodges Bullet With CFO's Release After Two-Week Detention

Key Takeaways:

• Transsion’s CFO was detained early this month and later released, though investors remain wary due to the company’s thin profit margins and ongoing legal disputes
• The smartphone maker’s revenue rose 38% to 34.6 billion yuan in the first half of this year, with 35.7% profit growth, mostly on its expansion into new markets

By Hugh Chen

It’s known as the “King of Africa” for its status as the continent’s leading smartphone maker. But a recent drama involving Transsion Holdings (688036.SH) has move the spotlight back to the company’s home base in China.

The tense times began around two weeks ago, when CFO Xiao Yonghui was detained on suspicion of unspecified illegal activity, the company said in a statement dated Sept. 7. But the drama abruptly ended last week when Transsion provided an update saying Xiao had been released and resumed his duties as CFO.

Such disappearances aren’t unheard of in China, and usually occur when company officials are suspected of wrongdoing or are assisting in investigations of other people suspected of crimes. Gaming company DouYu DOYU and private equity firm China Renaissance (1911.HK) have each lost their top executives to such circumstances over the last two years, with devastating consequences for their stocks.

While both executives remain out of sight, and DouYu’s has been charged with a crime, Transsion appears to have dodged a bullet with Xiao’s release. Still, the crisis has taken some of the momentum away from company’s rapid rise that saw it break into the top five global smartphone makers last year as it expanded beyond its African base.

There’s always the potential for future investigations, and Transsion is facing separate headaches from other legal disputes over intellectual property rights and intensifying competition. Both Chinese and international rivals are now vying for market share not only in Transsion’s African stronghold, but also in new markets like Latin America, where the company has been expanding.

In its Sept. 7 statement, when Transsion first disclosed Xiao’s detention, the company assured investors that “current production, operations, and management remain normal,” a position it reiterated in last week’s announcement. Xiao was detained on Sept. 6 in Dandong, a city in Northeast China’s Liaoning province on the border with North Korea. The company has not provided any details about the nature of his suspected illegal activity that led to the detention.

Unlike CFOs at many young Chinese tech companies that often jump from firm to firm after just a few years at a company, Xiao, 55, has been with Transsion for a decade after joining in 2014. He and Transsion founder Zhu Zhaojiang previously worked at Ningbo Bird, one of China’s early smartphone leaders. Beyond this basic information, details about Xiao’s role in Transsion are scarce.

Despite Transsion’s reassurances, investors were unsettled by the developments involving Xiao. When his detention was first announced, Transsion’s stock plunged 8% when the market opened on Sept. 9 and later closed down 5%. The stock recovered following Xiao’s release, but investor confidence towards the company remains fragile.

Transsion’s shares have been on a downward trajectory since mid-April. Last Friday’s closing price of 84 yuan is down more than 30% from the 120 yuan recorded in mid-April. While the stock trades on China’s domestic A-shares market, it is also accessible to international investors through a program linking the Shanghai and Hong Kong stock exchanges.

Transsion currently trades at a price-to-earnings (P/E) ratio of 18, which is below the 24 for rival Xiaomi (1810.HK), which is also expanding into markets where Transsion operates. Both figures are significantly lower than Apple’s AAPL P/E ratio of 35, reflecting investors’ willingness to award higher valuations to premium market leaders with higher profit margins.

Mounting Challenges

Founded in 2006, Transsion started selling its smartphones in Africa, where it quickly gained prominence. Its Tecno, Itel, and Infinix brands have become household names across the continent. However, as market saturation and competition intensify there, Transsion has started expanding into other developing markets as well.

The company’s revenue rose by 38% to 34.6 billion yuan ($4.9 billion) in the first half of this year, while its net profit increased by a similar 35.7% to 2.85 billion yuan, its latest financial results showed. The company attributed the strong performance to “continuous expansion into emerging markets and advancement of product upgrades.”

The highly competitive India market has been one of Transsion’s recent focuses. Despite gradual gains since its relatively early entry there in 2015, the company is still trying to break into the top five vendors. Transsion has also been rapidly expanding into Southeast Asia, Eastern Europe, and Latin America. In Southeast Asia alone, it shipped 4.2 million smartphones in the first quart of 2024, triple its shipments a year earlier, according to Canalys..

Given those gains and its strong double-digit revenue and profit growth, why aren’t investors more enthusiastic about this company? Two main reasons appear to underpin their concern. First, Transsion’s low-end models typically have thin profit margins and rely on high-volume sales to boost profits. Its focus on such cheaper models has confined the company mostly to emerging markets, and kept it away from higher margin markets like Europe.

Transsion has also ventured into the relatively premium segment with models like the Tecno Phantom V Flip and Phantom V Fold, priced significantly higher than its traditional $100-$200 offerings. But that segment is also fiercely competitive, with rivals such as Xiaomi, Oppo, and Vivo already dominating markets like Southeast Asia and Latin America for such models.

The second, and perhaps more critical, reason for investor wariness is ongoing litigation against Transsion outside China. In July, U.S. chip giant Qualcomm filed lawsuits alleging patent infringement against the company and its subsidiaries in India, Germany, and other locations. All these cases are still pending.

A similar case involving Oppo highlights the negative impact such disputes can have on a company. In 2021, a Nokia lawsuit forced Oppo to withdraw from Germany entirely. Though Oppo later returned in 2023 after settling the lawsuit, its absence from one of Europe’s largest markets cost it dearly in sales and market presence.

Transsion can hardly afford such setbacks and must continue proving it can gain market share in new regions to keep investors happy. At the same time, it can’t neglect its African stronghold, especially as competitors like Xiaomi actively expand there. Its shipments in Africa grew by just 1% in the second quarter, while Xiaomi, realme, and Oppo grew by 45%, 137%, and 39%, respectively, according to Canalys.

The CFO crisis appears to be resolved by now, though it could still point to future legal issues for Transsion. At the same time, the ongoing patent lawsuits remain a major issue dogging the company. Addressing those concerns will be crucial for Transsion to keep up its momentum, as rivals like Xiaomi and Oppo nip at its heels in Africa and try to slow its rise in other emerging markets.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.