LED - Negative implications of SemiLEDs results ::Macquarie Research,

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LED - Negative implications of
SemiLEDs results
Event
 SemiLEDs posted poor CY2Q11 results on 7th July (following Philips’ 2Q
profit warning on 22nd June) and gave weak 3Q guidance, with negative
implications for regional LED players. We remain cautious on LED
chipmakers. We recently lowered our TP for UP-rated Epistar and
downgraded Seoul Semi to UP. We are concerned about LED TV chip ASP
pressure in 2H, slower China street lighting demand and intensifying
competition in the LED lighting area. We remain underweight LED chip names
at this point in the cycle and prefer component plays like TSMT (LED light bar,
LED lighting OEM) as better ways to leverage.
Impact
 Weak 2Q results. SemiLEDs’ 2Q was poor (-14% in after-hours trading) with
sales down -44% QoQ and a sharp GPM fall to 9% (1Q11 23%) due to weak
lighting demand and ASPs. For 3Q, mgmt guided for ASP pressure in the
“single digit” range and for GPM to turn negative as China street lighting
demand is lower. Notably, inv days ballooned to 299 in 2Q (170 in 1Q), which
implies a period of de-stocking needs to occur. The results are a negative
read-through on regional LED names such as UP-rated Epistar and Seoul
Semi in our view.
 LED lighting demand remains low. SemiLEDs stated that despite earlier
expectations, China street lighting demand remains low, which is consistent
with our recent checks with Epistar. This also follows Philips’ profit warning on
22nd June, due to a miss in the LED lighting segment. Slower demand
coupled with LED players shifting focus from backlight to LED lighting could
lead to greater ASP/margin pressure for the lighting segment than the market
expects, in our view.
 LED TV chip ASP faces more pressure. Despite earlier hopes of stable LED
TV chip ASP in 2H11, we see high-single digit pressure on ASPs in 3Q due to
a) panel makers’ own poor margin means they are squeezing TV chip ASP as
much as possible, and b) we are seeing more aggressive moves from Korean
chip makers (LG Innotek, SSC) to cut ASP to gain share from Taiwan panel
makers. The combination of the above two factors will lead to further pressure
on LED TV chip ASPs in 2H in our view, which is bad for chipmakers’ margin.
 S-LED bears watching. We view S-LED as a mid-term threat given recent
plans to restart capacity expansion. This implies that strategically S-LED
could turn more aggressive on LED lighting chip ASP in order to gain share,
which means a short-term sacrifice of ASP/margin, which will create/intensify
competition for LED chipmakers. In the long term, China’s LED chip industry
is still an overhang as well.
Outlook
 While street expectations remain high, SemiLEDs’ results show that LED
lighting demand in China is lower than hoped for, while we see continued
pressure on LED TV chip ASPs into 2H11. Thus, now is not the right time in
the cycle to be long LED chip names, in our view, and we would remain UP
on Epistar/Seoul Semi and prefer component plays such as TSMT (LED light
bar, LED general lighting OEM) as better ways to leverage to the cycle.