Thanks, Don. Yes, PE compression has been happening for some time now, reflecting both excessive uncertainty and skepticism about macro conditions as well as a maturing recovery and a belief that these higher earnings are closer to peak earnings. IMHO, the former is surely warranted and the latter is true for some companies but may not be true for those companies that are in the center of the mobile and LED revolutions. A lot of cross currents for sure!
Meanwhile, a note on the LED space:
New LED Policy in China, but Minimum Impact on MOCVD Demand
Industry Overview
Citi Asia LED Trip Preview
7 November 2011 ¦ 9 pages
citigroupgeo.com
Asia LED trip this week — We are leading our bi-annual investment trip to China and
Taiwan next week to visit companies. While in China, we are attending the 8th China
International Exhibition and Forum on Solid State Lighting (SSL 2011) in Guangzhou
where we will meet with key Chinese government officials, industry leaders, and
leading companies in the LED supply chain. In Taiwan, we plan to visit several leading
LED companies, including Epistar and Lextar.
New LED policy for China’s 12 5-year plan will be the highlight — Based on our
discussion with conference organizers, the Chinese government is likely to this week
officially introduce its LED policies for the 12th 5-year plan. We expect the new policy to
cover three new incentive programs to jump start China’s LED industry: 1) a direct
demand subsidy/rebate program for consumers totaling 8B RMB (~US$1.3B); 2) R&D
grant and subsidy for domestic LED equipment makers, with focus on home-grown
MOCVD suppliers; and 3) a policy to promote new business models and partnerships
with focus on innovation and IP generation/protection.
This is a much bigger deal for fixture/chip suppliers than MOCVD companies —
While the new policies will provide great headlines this week – and stocks may
continue to react positively – we see limited impact on MOCVD demand in the near
term. We estimate a subsidy totaling 8B RMB would drive ~125M 6W-equivalent LED
bulbs, which would require anywhere from 25-60 new MOCVD reactors (see our note:
Boom Go The Orders, But More Cancels Still Loom; Maintain Neutral). This is ~5-10%
of what has shipped into China over the past few years meaning that it just helps soak
up some of this capacity rather than drives new tool demand. Such a subsidy is more
meaningful for fixture and chip suppliers.
Latest checks indicate more pain in MOCVD space — Our latest checks also
indicate incremental weakness in the LED space: 1) LED pricing decline continues, and
utilization rate at Korea/Taiwan remains at ~50% level; 2) intensifying credit crunch in
China with several high-profile LED companies having gone bankrupt in just the last
several weeks; 3) MOCVD orders likely to decline for another 2-3 quarters; and 4)
higher risk of cancellation of existing MOCVD orders as LED chip makers slowing
down expansion pace, and starting to at capacity expansion through consolidation.
Still too early to get back into VECO/AIXG — While we will update our stock view
post trip, at this point we do not see any near-term catalysts beyond this subsidy
announcement. In terms of stocks, given several more quarters of uncertainty and
downside risks, we remain cautious on the sector, and maintain our Neutral rating
VECO (data storage upside after Thai flood, big market share gain) and Sell rating on
AIXG (big share loss and likely to lose money in 2012). |
