Sanan Optoelectronics discusses LED chip price fluctuations, production capacity, order volume, and future business priorities

On May 18, Sanan Optoelectronics (600703.SH) stated at the 2021 annual performance briefing:

Overview

1 The company's total revenue in 2021 was 12.572 billion yuan, coming from LED epitaxial chips, integrated circuit chips, LED application products, material waste sales, and rental income and other revenues, accounting for 51.99%, 12.20%, 12.66%, 20.99%, and 2.17% respectively.

2 The company's order value in 2022 was approximately 220 million USD per month (converted at an exchange rate of 6.5); Mini LED market demand is strong.

The Hunan Sanan project is currently under construction, and the existing production capacity aims to reach full capacity before July 2022.

4 Sanan Optoelectronics also pointed out that the prices of traditional LEDs have currently stabilized, with basically no room for further decline.

Sanan Optoelectronics is a leading domestic compound semiconductor integrated circuit

The enterprise with the most comprehensive and leading layout

Sanan Optoelectronics, as the leading LED chip manufacturer, has consistently increased R&D investment and deepened its expertise in Mini/Micro-LED technology. The company is primarily engaged in the research, development, production, and sales of compound semiconductor materials and devices, with epitaxial wafers and chips based on new compound semiconductor materials such as GaN, GaAs, SiC, InP, AlN, and sapphire as its core business.

According to the indicative orders obtained by Sanan Optoelectronics at the end of 2021, Company's order amount in 2022 is approximately 220 million USD/month (converted using an exchange rate of 6.5), indicating strong market demand . Given that Mini LED display technology has gained widespread recognition, terminal customers continue to launch new Mini LED products, accelerating industrialization and commercial implementation, while product market penetration continues to rise; with continuous market expansion, Company will continue to acquire more high-quality customers and order resources . As production capacity gradually increases, the unit cost of each product is effectively controlled, resulting in stronger product competitiveness.

At the same time, Sanan Optoelectronics is the most complete and leading enterprise in the layout of the domestic compound semiconductor integrated circuit industry/supply chain. The company mentioned at the performance briefing that various businesses in fields such as microwave RF, power electronics, and optical communications are advancing rapidly.

Quanzhou, Hubei, and Hunan new projects are advancing steadily

Three production lines gradually release

(1) Sanan Optoelectronics Semiconductor Technology Co., Ltd. in Quanzhou Semiconductor R&D and Industrialization Project (Phase I). The project mainly focuses on Gallium Nitride (GaN), Gallium Arsenide, and Specialty Packaging businesses. The planned total investment is approximately 13.8 billion CNY (including land use rights). Upon reaching full production capacity, the project will add an annual output of approximately 8.92 million wafers (equivalent to 4.46 million wafers/year for flip-chip and vertical products) and a specialty packaging capacity of 8.72KKK/year.

Due to the combined impact of the COVID-19 pandemic and supply-demand imbalances in the semiconductor equipment market, the delivery time for production equipment required by relevant production lines has been delayed. Additionally, some high-end production lines are being built according to customer-specific customization standards, which has affected the overall project progress. As a result, the realization of benefits has not yet met expectations. However, as the installation and commissioning of production lines advance, benefit realization will accelerate.

(2) Sanan Optoelectronics Hubei Co., Ltd. is mainly engaged in Mini/Micro LED epitaxial wafers and chips, chip deep processing, etc. The total investment is 12 billion yuan (including land use rights and working capital), with a total construction area of 477,700 square meters. After the project reaches full production capacity, it will add an annual chip production capacity of about 2.36 million pieces (equivalent to 4-inch wafers) and an annual packaging product production capacity of 84,000 units for 4K displays.

As of the end of fiscal year 2021, Hubei Sanan had completed a construction area of 250,000 square meters, with 230,000 square meters equipped; an additional 20,000 square meters remain under renovation. The project holds fixed assets of 858 million yuan and construction in progress of 412 million yuan, achieving a production capacity of 65,000 wafers per month with 806 employees. The project is currently in the construction phase, and initial production capacity will be gradually released.

(3) Hunan Sanan Semiconductor Co., Ltd. semiconductor industrialization project mainly focuses on the R&D and industrialization of third-generation compound semiconductors such as silicon carbide and silicon-based gallium nitride, covering the industry chain from crystal growth—substrate fabrication—epitaxy—chip fabrication—packaging. The total land area is approximately 1,000 mu, with a total construction area exceeding 500,000 square meters. Total investment amounts to 16 billion yuan (including land use rights and working capital). After reaching full production capacity, the project will support an annual production capacity of approximately 360,000 wafers.

As of the end of fiscal year 2021, Hunan Sanan has put into operation a factory building with a total area of 297,000 square meters. The project currently holds fixed assets of 1.209 billion yuan and construction in progress of 847 million yuan, with SiC production capacity of 3,000 wafers per month and GaN-on-Si production capacity of 1,000 wafers per month. The number of employees exceeds 1,100, and production capacity is gradually being released. The project is still under construction, and the existing capacity aims to reach full production before July 2022.

Sanan Optoelectronics stated that the company's new projects will undergo a sustained ramp-up period. During this period, due to factors such as new depreciation arising from the transfer of construction in progress to fixed assets and continued investment in prior-related expenses, the profitability of the new projects has not yet been fully reflected. As production capacity utilization increases in the later stages, profitability will be significantly enhanced.

Traditional LED prices have basically no room for further decline

Increase the proportion of high-end product structures such as Mini/Micro LED and Horticultural lighting

It is worth noting that Sanan Optoelectronics' Q1 report shows the company's revenue for 2022 was 3.107 billion yuan, a year-on-year increase of 14.35%, but net profit attributable to shareholders of the listed company was 429 million yuan, a year-on-year decrease of 22.94%, resulting in a phenomenon of increased revenue without increased profits. In response, Sanan Optoelectronics stated that due to significant new fixed asset depreciation and amortization expenses from additional production line construction, and since project capacity release and revenue realization require time, this led to a substantial short-term loss. Subsequently, as capacity continues to be released and sales revenue is continuously realized, operating performance will continue to improve.

Regarding the guidance on this year's LED chip price fluctuations, Sanan Optoelectronics stated that traditional LED prices have stabilized and there is basically no room for further decline. Technological convergence brings new opportunities for industry development. Coupled with the gradual control of the global pandemic and the recovery of supply chains, innovative LED technologies and applications represented by Mini/Micro LED, automotive LED, horticultural lighting LED, and UV/IR LED have become the driving force for a new round of industry growth.

Sanan Optoelectronics also pointed out that fluctuations in raw material prices will have a certain impact on the company's product costs. However, the company has already pre-stocked some raw materials within its forecastable orders to mitigate the impact of market price fluctuations on production capacity and costs. The company continues to conduct business around its strategic development plan, steadily increasing its market share in the traditional LED sector, optimizing production processes, reducing production costs, and stabilizing and improving gross margins; actively promoting the upgrade of high-end product structure ratios, accelerating shipment volumes in niche segments, increasing market penetration, rapidly boosting the company's gross margin, and enhancing Sanan Optoelectronics' core competitiveness in the LED industry.

Next, while stabilizing its traditional LED business, the company will一方面 adjust and increase the proportion of high-end product structures to improve gross margins;另一方面 vigorously develop RF front-end, power electronics, optical communication, filter compound semiconductor integrated businesses . Currently, the company's collaboration with key customers in the new energy vehicle sector for automotive-grade SiC MOSFETs has achieved major breakthroughs. The new energy vehicle market is the core application market and an important growth driver for the power electronics product line, and will be a prominent revenue growth point for the company in the coming years .

Sanan Optoelectronics Chairman Lin Zhiqiang stated that the company will continue to develop its core business around its strategic plan, dedicating itself to the research, production, and application of new semiconductor materials and devices such as GaN, GaAs, SiC, InP, AlN, and sapphire, actively promoting product structure upgrades and transformation, continuously consolidating its leading position in compound semiconductors, and striving to build a semiconductor manufacturer with international competitiveness.

In 2022, the company will steadfastly carry out operations around its strategic goals. On one hand, it will increase R&D investment, optimize production processes, and actively adjust product structure upgrades , raising the proportion of high-end products such as Mini/Micro LED, automotive products, horticultural lighting, infrared/ultraviolet, etc., to continuously consolidate its leading position in the LED industry. On the other hand, aligning with the national integrated circuit development strategy, leveraging its technical R&D experience and advantages in the compound semiconductor field, it will vigorously expand compound semiconductor integrated circuit business, rapidly increasing the company's market share. The next 2-3 years are a critical period for the company's development; the company will focus on the rapid expansion of integrated circuit business and the continuous improvement of the proportion of high-end LED product structures. To this end, the company has made all necessary preparations; early customer acquisition is gradually being perfected, and planned capacity layout is already underway.