Demand Stagnation China's LED Giant's Future Is Slim

- Feb 12, 2019-

January 28 morning news, China's largest manufacturer of LED lighting Sanan Photoelectric Co., Ltd. seems to be not optimistic about the future development, at least for the moment.

As demand for light-emitting diodes in domestic real estate and automotive industries declines, Sanan Optoelectronics shares have fallen by more than half in the past year and their market value has fallen to an all-time low. A report on social media questioned the financial transactions of Sanan Optoelectronics Holding Shareholders and triggered panic among investors. Sanan Optoelectronics also issued a statement rejecting these comments.

"China's LED industry is unlikely to recover in the next two years due to the stagnation of production process and demand." Lu Haolu, fund manager of Taipei Securities Investment Trust Fund, said. He also added that media reports had raised public concerns about the financial situation of Sanan's parent company and made him take the initiative to avoid the stock.

In response to bloomberg's doubts about the social media report, San'an optoelectronics said in an e-mail Thursday that its operations were "completely independent" of controlling shareholders. The company also reiterated a statement it issued last week, referring to a framework agreement signed by major shareholders earlier this month. Under the agreement, the company will receive 6 billion yuan of strategic investment and operating capital from new investors.

Many enterprises have benefited from China's increased investment in LED to promote green energy measures, Sanan Optoelectronics is no exception. LED is a semiconductor that converts electrical energy directly into light energy. Compared with the traditional incandescent lamp, this technology is more energy-saving.

According to the report of National Semiconductor Lighting Engineering Research and Development and Industry Alliance (CSA), LED occupied 70% of China's general lighting market in 2018. It also reflects its global development trend - LED lighting has grown from less than 5% of the global lighting market to more than 40% in the past six years.

After Sanan Optoelectronics, which manufactures LED crystals, went public in 2008, the company's revenue and profits have witnessed tremendous growth. In 2016, Sanan Optoelectronics also negotiated a takeover with Osram Licht AG of Germany, which made international headlines.

Sanan's share price peaked in 2017 as the heat of China's LED industry declined. CSA said the slowdown in domestic demand for real estate, automobiles and consumer electronics coincided with the launch of new capacity last year.

In 2018, the total output value of China's LED industry increased by 12.8%, which was 12.5% lower than that of last year. CSA said the decline was due to increased costs and inventories, as well as declining market demand and government subsidies. The report also said that if domestic and foreign market instability continues, then the industry will continue to be affected, because half of the sales of LED are dependent on exports.

Not everyone is totally short on Sanan Optoelectronics. In mainland China, there are more than 30 listed LED manufacturers. As an industry leader, Sanan expects to regain its market share in some time, William Yang, a florescence analyst, said in a January 16 report. According to CSA, Sanan's domestic market share is likely to increase to 31% by 2020.

However, due to the slowdown in demand and profit growth this year, Citigroup adjusted Sanan's target stock price to 12 yuan earlier this month. Sanan, with a market value of $6.1 billion, closed at $10.27 on Friday.

Sanan's earnings per share rose 10.8% in 2018, down from 47% last year, according to 11 Bloomberg analysts.

In a customer report at the end of last year, analysts at Morgan Stanley and China International Finance Limited expressed concern about Sanan's inventory. According to Bloomberg, Sanan's inventory days, a measure of the number of times a company's inventory was emptied and replaced over a period of time, rose to 160 days in the third quarter of 2018, compared with 100 days in the same period last year.

Sanan responded in an e-mail that the increase in inventory was the result of expanding production capacity to meet growing demand in recent years.

Sanan's market value is very low now, but there are still many problems in the short run. Zhu Jixiang, an analyst at Capital Securities Corp., said it was unclear when the LED industry would bottom out.