LED lighting industry enters rapid growth phase

Recently, the prices of LED lighting products have dropped significantly. LED prices are approximately twice those of fluorescent lamps with equivalent brightness, but the additional cost can be recovered within 2–3 years. Considering that LED lamp prices continue to decline and the 2016 phase-out roadmap for incandescent lamps in China, the trend of LED lighting replacing fluorescent and traditional incandescent lamps has become clear. The penetration speed of LED lighting will be significantly faster than that of fluorescent lamps in their day, entering a sales explosion phase with the penetration rate rising rapidly. This is also the main reason why the global market has been favoring LED recently.

Upstream chips: "integration" is the priority

Currently, the global LED market requires approximately 1,000 MOCVD units to achieve supply-demand balance, and there is a relatively obvious oversupply. However, if the lighting penetration rate reaches 30%, supply and demand will essentially be balanced. If the global lighting market penetration rate reaches 100%, there is still a gap of 2,500 MOCVD units at present. However, the main reasons that previously constrained capacity utilization rates were, beyond demand, more importantly the insufficient mastery of epitaxial wafer production technology and processes by domestic companies. As some companies' technologies gradually mature, they are expected to begin integrating the upstream industry.

Midstream packaging: 'scale' comes first

The most important task for the midstream packaging industry at the current stage should be to gain scale advantages through expansion, thereby achieving profit levels above the industry average. Such companies are expected to replicate the rapid development path that leading companies in the optical fiber and cable industry walked from 2004 to 2010, when these companies' market value grew more than 10-fold in five years.

Downstream applications: 'channel' is king

As the growth focus of LED lighting shifts toward commercial and residential lighting. Traditional lighting sales channels are becoming increasingly important to LED companies.

We favor companies that are able to form alliances with traditional lighting channel companies.

　　Medium-term development (3-5 years): Optimistic about the industry chain integration model.

　　Although upstream capacity is somewhat excessive, in the medium term, since chip costs still account for the bulk of expenses, upstream R&D enterprises in mature industries should be able to gain pricing initiative, thereby obtaining 70% of profits, with the midstream at around 20%. We remain optimistic about the development model of enterprises capable of integrating upstream and downstream.

　　Long-term development (over 5 years): Guidance from the flying-geese model.

　　Currently, LED product exports are subject to patent restrictions, but as core LED patents have been expiring over the past 2-3 years, leading LED companies with technical reserves are expected to open up international markets in the near future.

　　Conclusion:

In the short term (1-2 years), we are optimistic about the overall industry opportunities brought by the continuous increase in LED lighting penetration. In the medium term (3-5 years), we favor enterprises capable of integrating the upstream and downstream industry chains. In the long term (over 5 years), leading companies with certain technical reserves will have tremendous opportunities to venture overseas and explore international markets.