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Jan.17, 2012
Event: Threat of new entrants raises competition, accelerates lighting penetration (Positive.)
Primasia Comment
Intense price competition in LED lighting in South Korea is evidence that new entrants have a strong impact on the industry and accelerate price cuts for LED bulbs. These conditions are pushing first-tier lighting brands to be more aggressive in marketing and pricing their products. We believe price competition will be greater this year, thereby accelerating penetration rate growth, which we expect to reach 14% this year from 6% last year. Taiwan’s LED industry is expected to be a key beneficiary of this upward trend and Epistar (2448 TT/NR/NT$63.7) is best positioned to capture these benefits.
In South Korea average prices of 40W- and 60W-equivalent LED light bulbs dropped to US$11-$12 and US$18, respectively, as Samsung and LG (both KR) have initiated a price war, which has forced first-tier brands like Philips (NL) and Osram (DE) to cut prices there as well. In the US, second-tier brand Utilitech is selling its 60W-equivalent LED light bulb for US$22. While the business scale of the new entrants and second-tier players are small compared to first-tier brands, their aggressive pricing strategies have put pressure on the larger brands which has resulted in accelerating price declines for LED lighting. From June to December 2011, the global average price of a 60W-equivalent LED bulb dropped a total of 27%, with 15% of that decline coming in December alone, according to LEDInside.
We believe such price competition will migrate to a global level from a national or regional level this year. Some Japanese vendors, including Panasonic, Sharp, and NEC, have begun doing LED lighting business in China and Europe, and we believe Samsung and LG will soon begin developing overseas markets. These players have strong brand recognition around the world and their aggressive pricing strategies are expected to be very attractive to consumers. This will force first-tier brands to respond with aggressive pricing of their own. Philips has been widely advertising their LED lighting products in Taiwan, indicating that it is taking a much more aggressive attitude. LED chipmakers are also aggressively developing their LED lighting chip business as well. Weak sales in backlight LEDs drove the price of LED chips down by around 25%-30% in 2011 and forced LED players to shift focus to lighting LEDs. Rising competition and increasing scale of economy on the chipmaking side of the supply chain will reduce prices for lighting LEDs, which accounts for 30% of COGS for LED bulbs.
These changes are moving the LED lighting market toward the tipping point where falling prices yield higher sales volumes, which should in turn feed in to reducing manufacturers' costs. We expect the sweet spot of US$10 for a 40W-equivalent LED light bulb will be reached in 2H11, while that for 60W-equivalent LED bulbs will be reached in 2013.
These trends should benefit Taiwan's LED chipmakers which are generally known for stable quality and attractive prices - advantages that will attract more demand from international and Japanese brands. We believe these lighting vendors will increase their scales of outsourcing to accommodate falling costs and will choose Taiwan LED players over Korean peers, who have direct competition in the branded market, and over Chinese peers for concerns on quality and patents. Our top pick among Taiwanese LED players is Epistar because of its large scale, strong IP portfolio and close cooperation with leading lighting brands. Despite the lack of short-term catalysts, and where backlight LED demand will remain slow until March, its long-term prospects in lighting are strong. The counter now trades at 29.2x 2012E PE, in the lower half of its 4Q09 - 4Q11 range of 14.1x - 48.8x, and we hold a short-term neutral but long-term positive stance on the stock.
Jan.17, 2012
Event: Threat of new entrants raises competition, accelerates lighting penetration (Positive.)
Primasia Comment
Intense price competition in LED lighting in South Korea is evidence that new entrants have a strong impact on the industry and accelerate price cuts for LED bulbs. These conditions are pushing first-tier lighting brands to be more aggressive in marketing and pricing their products. We believe price competition will be greater this year, thereby accelerating penetration rate growth, which we expect to reach 14% this year from 6% last year. Taiwan’s LED industry is expected to be a key beneficiary of this upward trend and Epistar (2448 TT/NR/NT$63.7) is best positioned to capture these benefits.
In South Korea average prices of 40W- and 60W-equivalent LED light bulbs dropped to US$11-$12 and US$18, respectively, as Samsung and LG (both KR) have initiated a price war, which has forced first-tier brands like Philips (NL) and Osram (DE) to cut prices there as well. In the US, second-tier brand Utilitech is selling its 60W-equivalent LED light bulb for US$22. While the business scale of the new entrants and second-tier players are small compared to first-tier brands, their aggressive pricing strategies have put pressure on the larger brands which has resulted in accelerating price declines for LED lighting. From June to December 2011, the global average price of a 60W-equivalent LED bulb dropped a total of 27%, with 15% of that decline coming in December alone, according to LEDInside.
We believe such price competition will migrate to a global level from a national or regional level this year. Some Japanese vendors, including Panasonic, Sharp, and NEC, have begun doing LED lighting business in China and Europe, and we believe Samsung and LG will soon begin developing overseas markets. These players have strong brand recognition around the world and their aggressive pricing strategies are expected to be very attractive to consumers. This will force first-tier brands to respond with aggressive pricing of their own. Philips has been widely advertising their LED lighting products in Taiwan, indicating that it is taking a much more aggressive attitude. LED chipmakers are also aggressively developing their LED lighting chip business as well. Weak sales in backlight LEDs drove the price of LED chips down by around 25%-30% in 2011 and forced LED players to shift focus to lighting LEDs. Rising competition and increasing scale of economy on the chipmaking side of the supply chain will reduce prices for lighting LEDs, which accounts for 30% of COGS for LED bulbs.
These changes are moving the LED lighting market toward the tipping point where falling prices yield higher sales volumes, which should in turn feed in to reducing manufacturers' costs. We expect the sweet spot of US$10 for a 40W-equivalent LED light bulb will be reached in 2H11, while that for 60W-equivalent LED bulbs will be reached in 2013.
These trends should benefit Taiwan's LED chipmakers which are generally known for stable quality and attractive prices - advantages that will attract more demand from international and Japanese brands. We believe these lighting vendors will increase their scales of outsourcing to accommodate falling costs and will choose Taiwan LED players over Korean peers, who have direct competition in the branded market, and over Chinese peers for concerns on quality and patents. Our top pick among Taiwanese LED players is Epistar because of its large scale, strong IP portfolio and close cooperation with leading lighting brands. Despite the lack of short-term catalysts, and where backlight LED demand will remain slow until March, its long-term prospects in lighting are strong. The counter now trades at 29.2x 2012E PE, in the lower half of its 4Q09 - 4Q11 range of 14.1x - 48.8x, and we hold a short-term neutral but long-term positive stance on the stock.
Source: Primasia Investment Consultancy Co., Ltd.
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