Strategies in Light takeaways: LED expectations for the short- and long-term

UPDATE February 13, 2012 — Analysts from Jefferies & Company Inc., Jefferies Hong Kong Limited, and Barclays Capital attended the Strategy in Light conference, last week in Long Beach, CA, and report on a challenging light emitting diode (LED) market with near-term positive boosts.

End market demand for LEDs remains lackluster, with total LED component revenue expected to decline from $12.5 billion in 2011 to $12.3 billion in 2016. Industry expert Ms. Shum projected continued market declines, while Ms. Ella forecasted growth in LED lighting and auto headlamp but declines in all other end markets, said Jeffries attendees. Barclays does not anticipate a substantial snap-back in LED demand in China following Chinese New Year.

Presentations at Strategies in Light forecasted flat revenues for LED makers in 2012, though Barclays remains more optimistic. While revenues stagnate, total lumens generated by LED components will grow significantly, thanks to higher efficacy and lower cost manufacturing, Jeffries reports. This trend enables new applications while cannibalizing legacy applications. LED industry players are designing lighting products to eliminate components and make systems smarter and more user friendly.

China’s announcement of an LED approval list could be a near-term positive catalyst: Ms. Wu Ling, the head of China SSL Alliance, anticipated 125 plan details this year. Similar to the path of China’s solar PV "Golden Sun" program, the government will qualify vendors for the LED subsidies. Jeffries analysts expect the approval list to be announced in 2 months, with an LED subsidy announced shortly after. LED makers with meaningful China exposure, such as Cree and SemiLEDS, stand to benefit. The magnitude of the China LED subsidy is still uncertain and may come in below some more elevated expectations, Barclays warns. "The China market opportunity for LED lighting continues to be substantial, with the pace of adoption potentially overtaking other regions assuming both attractive price points and other supportive government efforts," noted Barclays Capital after Strategies in Light.

The LED industry is dealing with overcapacity, driven by overly optimistic flat panel display (FPD) penetration expectations and short-lived local government support of street light programs and LED manufacturing in China. LED TV demand led to significant investment by Samsung and LG in the supply chain. Both Korean and Taiwanese companies built up capacities in anticipation of strong LED TV demand. Reduction of LED chip counts in backlighting and lighting contributed to weak volume growth. This is a consequence of tremendous lumen improvement, allowing more efficient designs using fewer chips.

"Utilization levels for most LED makers remain below 50%, suggesting that the current pace of LED demand growth is unlikely to absorb the overcapacity," Barclays reports With no company failures or consolidation yet in China, this inevitability is still in our future.

While Barclays continue to estimate the 2012 MOCVD market at ~400 tools, with Veeco’s 2012 guidance implying a market size closer to the 300 tool level, we could see Aixtron following suit and setting this low bar as well.
 
Jeffries authors:
Jesse Pichel, Equity Analyst, (212) 323-3987, jpichel@jefferies.com
Min Xu, Equity Associate, (212) 336-7370, mxu@jefferies.com
Elaine Kwei, CFA, Equity Analyst, (212) 284-2187, ekwei@jefferies.com
Joseph Fong, CFA, Equity Analyst, +852 3743 8074, jfong@jefferies.com

Barclays authors:

Olga Levinzon, (212) 526-9134, olga.levinzon@barcap.com
Amir Rozwadowski, (212) 526-4043, amir.rozwadowski@barcap.com

 

Check out more reports from Strategies in Light 2012:

 

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