Output Value Report: 2014 LED Lighting to Reach USD 35-40 Billion

　　LED lighting product prices are declining rapidly, and combined with their durability and energy-saving features, the cost-performance ratio of LED bulbs has significantly surpassed that of energy-saving lamps. With the implementation of national policies to phase out incandescent bulbs, the LED lighting market is taking off. International giants such as Philips and Osram are increasing their efforts to promote and sell LED lighting products. According to Digitimes forecasts, the global LED lighting output value will reach USD 35-40 billion in 2014. China has obvious local advantages in downstream applications and channels, midstream packaging capacity has also shifted to China, and while the proportion of upstream chips is not high, technological and scale barriers are being broken. We are optimistic about the approximately 3-year rapid growth brought by the explosion of the LED lighting market, with domestic chips, packaging, and application channels benefiting comprehensively.

Rapid Increase in Lighting Penetration Rate, Market Explosion

　　LED lighting product prices continue to decline. Currently, LED products from international brand manufacturers replacing 40W bulbs have dropped below the USD 10 "sweet spot", while products from domestic manufacturers have also fallen to around 30 RMB. Ordinary brand LED bulbs have already dropped to 12-20 RMB, essentially in line with energy-saving lamps. Combined with their durability and energy-saving features, the cost-performance ratio of LED bulbs has significantly surpassed that of energy-saving lamps.

At the beginning of this year, the United States began implementing its incandescent light bulb phase-out plan, triggering an explosion in the LED lighting market. International giants such as Philips and Osram have all increased their efforts to promote and sell LED lighting products. According to Digitimes forecasts, the global LED lighting output value will reach 35-40 billion US dollars in 2014. The domestic LED chip, packaging, and downstream application industry chain has also been driven by the lighting market, showing significant growth compared to last year.

Chart: Rapid growth in global LED lighting market scale

Chart: Continuous growth of domestic LED industry chains

Since 2014, industry data has continued to recover, the manufacturer leading index shows sufficient confidence in the market outlook, while existing production capacity is more cautious than in the previous period and inventory is in the process of being reduced. We believe that although the growth rate has slowed compared to last year, the trend of slow recovery in the industry remains unchanged. Looking ahead to the second half of 2014, new consumer electronics product launches, continuous micro-innovations in smart terminals, and the popularization of wearable devices will bring investment opportunities; the explosion of the LED lighting market, with full orders across the entire industry chain, and performance improvement are also worth attention.

　　Driven by continuous technological advancements, LED production costs have been declining. Combined with the wider adoption of medium-power chips and market promotional activities, the prices of LED lighting products have been falling rapidly. LED products from international manufacturers that replace 40W bulbs have already dropped below the "sweet spot" of 10 USD. Products from major domestic manufacturers have also fallen to around 30 RMB, while LED bulbs from ordinary brands have dropped to 12-20 RMB, essentially matching energy-saving lamps. Coupled with their durability and energy-saving features, LED bulbs have significantly outperformed energy-saving lamps in cost-effectiveness. With the implementation of the national policy to phase out incandescent bulbs, the LED lighting market is now taking off.

Chart: Prices of LED lighting products are falling rapidly

Chart: China gradually phases out incandescent bulbs

　　Earlier this year, the United States began implementing an incandescent bulb phase-out plan, triggering an explosion in the global LED lighting market. International giants such as Philips and Osram

　　have all stepped up efforts to promote and sell LED lighting products. According to Digitimes forecasts, the global LED lighting output value will reach 35-40 billion USD in 2014.

Chart: Shipment scale of lighting products grows rapidly

Chart: The share of the lighting market in the LED application market is expanding

　　LED chips, packaging, and applications benefit across the entire industry chain

　　LED substrates, epitaxial wafers, and chips are upstream LED products. Their quality directly determines the quality of midstream and downstream products. They belong to technology- and capital-intensive industries with the highest entry barriers. The number of enterprises capable of operating in this field is the smallest, and therefore they command higher profit margins. The LED packaging industry sits in the middle of the industry chain, while lighting applications are downstream and face consumers directly. Generally speaking, midstream packaging and downstream lighting applications have relatively lower entry barriers. As LED application areas continue to expand, their market scale continues to grow, but at the same time the largest number of enterprises participate, and competition is the most intense.

　　The competitive landscape of the LED chip industry is becoming increasingly stable. With the industry downturn of the past two years fading, gaps in technology and scale between manufacturers have widened, and a stable landscape led by Sanan Optoelectronics, Elec-Tech International, HC SemiTek, and Tsinghua Tongfang has basically taken shape. Taiwanese manufacturers also lack advantages in technology and scale, while expenses and costs have become a drag on operations, even seeking cooperation opportunities with mainland manufacturers. The revenue growth and profitability of domestic chip manufacturers continue to improve.

Chart: Revenue of LED chip manufacturers bottoms out and rebounds

Chart: Gross margin of LED chip companies rebounds

　　The consolidation effect among packaging enterprises is equally evident. As packaging enterprises sit in the middle of the industry chain, large enterprises upstream and downstream have stable requirements for the scale and technology of customers or suppliers, prompting packaging manufacturers to continuously consolidate. Benefiting from the launch of the lighting market and Taiwanese manufacturers' exit from the TV backlight market, packaging enterprises' revenue scale and profitability are also bottoming out and rebounding.

Chart: LED packaging companies' revenue continues to grow

Chart: LED packaging companies' gross margin recovers from the bottom

　　Application channel companies, all attracted by the booming LED lighting market, are entering the downstream product industry in large numbers, resulting in fierce competition. Industry leaders can still benefit from industry development and achieve better growth.

Chart: LED downstream application revenue grows with fluctuations

Chart: LED downstream application gross margin shows signs of recovery

　　Domestic manufacturers' competitiveness improvement brings investment opportunities

　　In the upstream, midstream, and downstream of the LED industry, downstream applications and channels have obvious local advantages. Midstream packaging has also largely shifted to China. The share of upstream chips is not high, but technological and scale barriers are being broken. From what is known about packaging and downstream, domestic chip manufacturers have a smaller gap with international giants in small and medium-power chips, and indoor lighting tends to use small and medium-power chips. Therefore, in the LED lighting market, domestic chip manufacturers, supported by government policies, are challenging international manufacturers.

We are optimistic about the approximately 3-year period of rapid growth brought about by the boom in the LED lighting market. Domestic chips, packaging, and application channels will benefit comprehensively. However, industry valuations are relatively high, and we focus on outstanding companies that demonstrate technological progress, scale improvement, and effective management.