Transsion CFO released from custody amid uncertainty

Transsion Holdings, the smartphone maker topping Africa’s mobile market, announced last week its Chief Financial Officer, Xiao Yonghui, has been freed from detention by Chinese authorities. Details about it remain scarce, raising more concerns about internal governance and broader challenges facing the business.

Xiao, who has served as CFO since 2014, was detained on September 6 in Dandong, near China’s border with North Koresiona. Transsion announced on September 7 but gave only a few specifics about the reasons. 

"The company received a "Notice of Release from Detention" issued by the Supervisory Commission of Zhen'an District, Dandong City, indicating that the detention measures imposed on Mr. Xiao Yonghui have been lifted. The company’s production, operations, and management are functioning normally, and Mr. Xiao Yonghui has resumed his duties as CFO," says its official statement.

The detention triggered uncertainty among investors. The company’s stock plunged nearly 8% when the news was first revealed. But following the announcement of his release last week, shares saw a slight recovery, closing 4.2% higher in Shanghai.

Regardless, the lack of transparency has investors wary. Such are not uncommon in China, especially among top execs suspected of wrongdoing or involved in investigations into others. Its digital industry has been particularly affected, with notable cases like DouYu and China Renaissance yet resonating. 

Transsion appears to have avoided a larger crisis with Xiao’s return to his duties.

Founded in 2006, Transsion has become a popular smartphone manufacturer capturing over 40% of Africa’s smartphone market with its Tecno, Itel, and Infinix brands. In the first half of 2024, it reported a 38% revenue rise to 34.6 billion yuan ($4.9 billion), with a 35.7% increase in net profit. 

Much of these positives was attributed to its growing presence in emerging markets beyond Africa, including South Asia, Latin America, and Southeast Asia.

Despite strong financials, Transsion grapples with several challenges. One of the biggest is its thin profit margins. Transsion sells affordable smartphones, typically priced between $100 and $200, which limits its ability to tap into higher-margin markets.

Though it has recently rolled out premium models like the Tecno Phantom V Fold, competition in that segment remains fierce, with Chinese rivals Xiaomi, Oppo, and Vivo putting things on a temple run.

Transsion also faces mounting legal pressures. In July, Qualcomm, the U.S.-based chip giant, filed patent infringement lawsuits against Transsion in multiple jurisdictions, including India and Germany. The chip giant has also filed claims in Europe and China over alleged patent infringement.

Similar disputes have disrupted the ops of other related firms in the past, especially Oppo, which had to withdraw from Germany in 2021 following a lawsuit from Nokia. Ongoing litigation with Qualcomm has sparked fears that Transsion could face similar setbacks.

Although Xiao’s release brings some relief, the company remains in a precarious position since investors are concerned not only about the recent legal battles but also about the company’s operational cash flow. 

Transsion reported a net profit of 2.85 billion yuan in the second quarter of 2024. But its operating cash flow remained negative, signaling potential liquidity issues. This combo of legal, financial, and governance concerns has contributed to a 30% decline in stock since mid-April.

Transsion's share price currently trades at a price-to-earnings ratio of 18, lower than rival Xiaomi’s 24 and quite below Apple’s 35. This disparity reflects investor caution towards Transsion’s business model, which depends on high-volume sales of low-cost phones to generate profit. 

As competition intensifies, particularly in Africa, where Xiaomi, realme, and Oppo have seen substantial market share growth, its dominance is being challenged.

As Transsion tackles these challenges, its leadership must work swiftly to restore investor confidence. While the company reassured the market that its operations remain unaffected by Xiao’s detention, the broader issues of legal disputes, thin profit margins, and competition continue to weigh heavily on the company’s future.