LED – implications of SemiLED’s results on Taiwanese names ::Macquarie Research,

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LED – implications of SemiLED’s
results on Taiwanese names
Event
 SemiLED (-17% DoD) posted weak FY2Q11 results on 5th Apr, on the back of
Cree’s guidance cut on 23rd Mar, which has negative implications for Taiwan
chip makers like Epistar. While we think LED lighting (especially commercial)
is likely to see increased adoption in 2011, the market’s expectations for LED
lighting and overall margins could be too high, as foreign brands like Cree and
SemiLED may be forced to potentially lower ASP tactics to protect market
share, leading to intensified ASP/margin pressure in the higher-margin LED
lighting segment, in our view. We retain our non-consensus UP on Epistar.

Impact
 Weak SemiLED, CREE results. SemiLED posted weak FY2Q11 (Dec-10 to
Feb-11) results, with sales -24% QoQ and GPM/OPM falling to 23%/-6% (vs
51%/38% in FY1Q11), missing GPM guidance of 44-46%. According to
management, the margin fall is primarily due to strong ASP pressure
(-20 to -30% QoQ ASP), which they believe could last until CY4Q11. Similarly,
Cree also guided for lower 1Q sales/margin on March 23rd, attributable to high
inventory and increased price pressure. Both Cree (single digit %) and
SemiLED (none) have relatively low exposure to LED TV chips and higher
exposure to high power LED lighting.
 Market share versus margins. We believe it is likely that Asian suppliers like
Epistar are gaining some market share in IP-free regions like China due to
their cost advantage (10-20% lower), and SemiLED and Cree both alluded to
a competitive pricing climate during their earnings calls. We flag that,
according to LEDinside, high power LED lighting ASP declined ~-20% QoQ in
1Q11. However, we note that SemiLED stated its intention to defend its
market share via aggressive pricing, and we think Cree could adopt a similar
approach. Should SemiLED and Cree start to lower ASPs to protect their
market share, this is likely to lead to increased cost and margin pressure for
the entire LED lighting segment, which means 2010 peak margins would be
difficult to achieve again and is a medium-term risk in our view.
 Product mix the key in 2011. 2010 was a good year for LED chipmakers as
LED lighting saw 50%+ GPM while LED TV saw no ASP pressure until 4Q10.
For Epistar, LED lighting is likely to be ~25-30% of mix in 2011 (20-25% in
2010), while LED backlighting (which we see as increasingly commoditized) is
>50% of mix. While bulls likely hope that lighting (which enjoyed >50+% GPM
in 3Q10) can help offset the potential margin shortfall from LED TV chips in
2011, Cree and SemiLED’s strategy to defend market share could lead to
more intensified pricing and margin compression for the high-end lighting
segment in our view.
Outlook
 While we are positive on LED lighting (especially commercial) adoption this
year, we believe that market expectations for LED lighting and overall margins
are too high. For Epistar, at 1.9x PBV/16x PE, we remain fundamentally
cautious due to medium-term concerns over LED TV chip commoditization,
overall higher exposure to backlighting LED (50%+ of sales) in 2011E, and
potential risk of lighting margins being pressured by foreign brands defending
market share. Reiterate Underperform.