LED industry reshuffle will ease the long-term supply pressure

: short-term inventory scale record highs, the first quarter of this year will continue to face pressure

The whole industry chain of production in 2011 on the release, the steady demand caused the emergence of a large number of manufacturers inventory, currently in Taiwan, South Korea, mainland stock levels are at historic highs, inventory turnover rate at historic lows, close to the level of the 2008 financial crisis period. We expect the stock to digest at least two quarters, the first quarter of 2012, the industry will face short-term pressure brought about by inventory, when the product price, gross margin, income risk of decline.

Figure 1: Taiwan mainstream LED inventory turnover

Source: company announcement, CITIC Securities Research Department finishing

Figure 2: Taiwan chip, packaging leading enterprises inventory

Source: company announcement, CITIC Securities Research Department finishing

Medium: the peak has been expanded production capacity will remain stable

The first round of concentration of production has been released. 2011 overcapacity mainly from Taiwan, South Korea, mainland China, the three major expansion led to strong growth in TV backlight to Taiwan, South Korean manufacturers continued rapid expansion. Taiwan, South Korea mainly concentrated in the three quarter of 2009 ~2010 year period, taking into account the equipment debugging, running in need of a period of 6 months, the production capacity of the two Koreas have been fully released in the first half of 2011. Expansion of the mainland to produce later, the equipment arrived in 2011, the main manufacturers of equipment have been arrived, due to a serious shortage of demand and not out.

Figure 3: cumulative number of MOCVD devices in Asia

Source: IEK, CITIC Securities Research Department finishing

Figure 4: single quarter MOCVD growth rate of three units

Source: IEK, industry research information, CITIC Securities Research Department finishing forecast

Medium (half a year) to maintain stable production capacity, supply pressure slowed. Upstream capacity, generally under orders from the device to the place to 2~6 months after arrival, from commissioning to stable production needs 4~6 months; Taiwan, Taiwan business factory of Korea basically no reserve, the mainland manufacturers inventory equipment more comprehensive view if the three into the new machine will need about 6 months before the time of production. Packaging capacity, equipment from procurement to production needs 3~6 months, three manufacturers have no inventory equipment, such as investment in new capacity will take at least 3 months before mass production. On the whole, the medium-term (about half a year) the new production line input probability is small, production capacity will remain stable, the supply of the industry, the profit pressure is expected to ease.

Figure 5:Aixtron (EPI) quarterly revenue

Source: company announcement, CITIC Securities Research Department finishing

Figure 6:ASM quarterly revenue of packaged devices

Source: company announcement, CITIC Securities Research Department finishing

Long term: industry or will reshuffle, supply reduction as an important catalyst

Revenue, gross profit margin fell sharply, the deterioration of the financial situation of the industry. In the long run, excess production capacity of the industry continued to slump, the new production line of high depreciation cost continued to rise, the deterioration of the financial situation of the whole industry. Taiwan 4 mainstream enterprises, for example, the upstream epitaxial, chip companies have been lost, the level of net profit margins have been close to the level of the financial crisis in 2008.

Figure 7: crystal electric (chip) gross margin, net profit margin

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