LED – 1Q results regionally highlights margin pressure :: Macquarie Research,

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LED – 1Q results regionally highlights
margin pressure
Event
 Following the lead of global peers Cree/SemiLEDs, regional LED companies
such as Seoul Semi, Toyoda Gosei and Epistar are also posting disappointing
1Q11 results with soft 2Q outlook, underscoring our concerns over TV chip
commoditization and potential margin pressure in LED lighting in 2011. While
street has begun to revise forecasts for 2011 (mainly for 1H), we think its view
that 2H GPM can return to peak 2010 levels (i.e. 37-40% for Epistar) is not
realistic. We expect YoY decline in earnings and downwards revision to come.
 While lighting (especially commercial) could see greater adoption in 2011, our
concern for LED chipmakers like Epistar/LGI is over TV chip commoditization
amidst higher exposure to backlight LED (50%+ of sales) in 2011E, while the
potential risk of LED lighting margin facing pressure from suppliers such as
Cree/SemiLEDs/SSC who are being forced to price down to defend market
share persists. Regionally, we are non-consensus UP on Epistar and LGI and
Neutral on Seoul Semi (just downgraded), SEMCO and Toyoda Gosei.
Impact
 Weak results regionally. Overall, LED companies (Epistar, Seoul Semi,
Cree, Toyoda Gosei, SemiLEDs) posted 1Q11 results below expectation and
gave weaker 2Q outlook due to greater ASP pressure, lower order visibility
into lighting (versus very bullish expectations), and TV commoditization risk in
our view. The only companies to beat in 1Q so far (albeit from a low base) are
Samsung LED (1Q +0.4% OPM vs -2.0% in 4Q, sales +50% QoQ) and LG
Innotek LED (~-12% OPM vs -17% in 4Q, sales -10% QoQ), which could be
due to more in-sourcing.
 LED TV chip becoming commodity. LED TV chips are likely to increasingly
face pressure and are unlikely to return to peak 2010 GPM levels (40+%) in
our view. In 1H11, Taiwan chip makers are coming under margin pressure as
TWN/KR panel customers are requesting stringent specs for new chips,
resulting in lower yields and margins. While TV margins could improve from
2Q11 onwards as LED chip makers improve their own yields, it is unlikely to
return to peak levels as TV chips become increasingly commoditized going
forward in our view. In addition, competition from panel makers’ in-house LED
subsidiaries (which have large MOCVD capacity) is likely to cause increased
ASP/margin pressure for independent vendors like Epistar, in our view.
 Bulls are too optimistic on lighting margins. We are positive on long-term
LED lighting and agree commercial is seeing early adoption, but believe street
needs to revise down expectations for lighting margins. While LED lighting
enjoyed >50+% GPM in 2H10, Cree/SemiLEDs’ recent struggles highlight the
strategic decision to defend their market share via aggressive pricing, which
could lead to a more intensified ASP and margin pressure landscape for highend
LED lighting in 2011, in our view.
 Unrealistic 2H11 margin assumptions. Street has begun to revise down
forecasts for 2011 (mainly for 1H), but remains overly optimistic in hopes for
2H GPM to return to peak 2010 levels (i.e. 37-40% for Epistar) in our view.
This is unrealistic as both TV and lighting see greater ASP/margin pressure.
For Epistar, while LED lighting mix will rise in 2011 (25-30% vs 20-25% in
2010), still more >50%+ will be geared to lower-margin LED TV and NB/MTR.
We expect YoY decline in earnings and see downwards revision risk from
street, driven by both weakness in 1Q11 and overly optimistic 2H assumption.
We reiterate our non-consensus UP on Epistar, and remain negative on LGI.