UBS: LED Lighting Market Penetration to Reach 30% in 2015

Global LED chip demand and supply condition is gradually reaching an equilibrium, and easing the industry’s oversupply situation, according to a report that quoted an electronic component industry report by UBS. Lighting is becoming one of the major application sectors in the LED industry, and China’s LED supply chain is expected to benefit from these changes. LED chip manufacturers are expected to benefit the most in the future.

The global LED industry h impacted by oversupply situations since 2011, analyzed UBS. Chinese governments carbon emission reduction policies, along with local governments handsome financial subsidies to LED manufacturers triggered an oversupply situation. MOCVD subsidies issued to LED chip manufacturers ranged from RMB 8 million to RMB 10 million. LED TV backlight growing market demands also led to Taiwanese and Korean manufacturers massive production expansions, significantly raising global LED chip production capacity to exceed market demand growth.

LED chip production capacity exceeded demands by 30% in 2011, with LED chip production capacity peaking to 44.20 million square inch, but demands were only 33.95 million square meter. Due to LED chip manufacturers newly expanded production capacity, and continual demand growths, oversupply situation has declined from 30% to 4%, edging closer to a state of equilibrium, and benefiting the LED industry supply chain.

Global LED supply chain says goodbye to oversupply

UBS projected global LED lighting penetration rates will reach 30% in 2015, due to the global phase out of incandescent bulbs and lower LED lighting prices. Demands for LED chips in lighting applications is estimated to rise from 17% in 2011 to 54% in 2015. China is the world’s LED lighting manufacturing power house, and its production volume amounted to 80% of global production.

LED supply chain can be classified into upstream LED chip manufacturing, midstream LED packaging, and downstream LED applications. LED chip manufacturing has the highest entry level in the industry supply chain, requiring massive financing, and demands long term R&D plus accumulation of technology knowledge. LED chip manufacturing has plunged as a result, and only 10 Chinese manufacturers have the capacity to mass produce LED chips, reported UBS.

LED chip industry’s compound annual growth rate (CAGR) reached 32% from 2010 to 2014, and is far ahead of LED package and other industries. Following Chinese LED industry’s rapid developments, LED chip manufacturers have benefited the most from the LED chip supply chain, which has received the most backing from government agencies. This also resolves patent issues. Chinese LED chip manufacturers are making breakthroughs in LED patents through R&D or acquiring other companies. Companies have been able to improve their technology, while reducing material costs. Leading manufacturers on average have the highest gross margin and Return on Equity.

LED application supply chain and related markets is estimated to reach a price to earnings ratio (PE) of 40 and 28 respectively in 2015 and 2016. Much higher than LED package manufacturers PE of 35 and 25, and lower than LED chip manufacturers PE 54 and 39.

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