The curtain of the recovery of the LED industry is slowly opening, and today it is vomiting blood to sort out the framework and investment opportunities of the whole LED industry chain.

First, the characteristics of the whole industry

The general characteristics of the LED industry and the IT manufacturing industry are affected by Moore's law and Hytz's law, the industry presents heavy assets, fast technology update, large fixed asset investment and high renewal requirements, in order to survive and develop in the industry, there must be enough gross profit margin, net profit margin and free cash flow to support the increasing demand for fixed asset investment, and the product is constantly depreciating rapidly over time.

This requires companies in this sector to have adequate management capabilities, especially inventory management capabilities.

On the whole, this is a glamorous appearance of the actual very hard industry, must improve the management ability on the one hand, race against time, to ensure the smooth flow of goods, on the other hand, to continue to invest the current profit in order to gain future competitive advantage.

In the process of accelerating the development of the industry, those enterprises that fail to earn enough cash flow to support the company's industrial upgrading will be eliminated, and the industry will continue to concentrate, and the top few in the industry occupy most of the market and a larger share of profits, and eventually form an oligopoly situation.

In addition to the above characteristics, the LED industry has its own characteristics. From the perspective of historical logic, the growth of each round of subdivided application fields has given rise to the development of the industry.

From 2009 to 2010, the demand growth in the downstream LED backlight field drove the profit growth of the LED industry and caused an investment boom in the industry, and then in 2011-2012, overcapacity, the profitability of the whole industry declined, small and weak enterprises gradually withdrew from the market, and the industry capacity was cleared;

From 2013 to 2014, the backlight application market was saturated, and the demand for lighting grew, which drove the profit growth of the LED industry and caused an investment boom in the industry again, and then in 2015-2016Q2, overcapacity and the industry was cleared;

2016 Q3 - 2018 Q2, small spacing demand exploded, lighting market penetration increased, short-term supply and demand mismatch to guide the industry upward, 2018Q3 - so far, the global economy has declined, the Sino-US sweater war, demand has declined, the industry has been overstocked, and the industry has been cleared.

In the process of industry development, the cyclical nature is obvious, basically a four-year cycle. Each round of industry upward movement is driven by the demand of new downstream subdivision application fields, first LED backlight, then lighting, and then small spacing; Each round of industry clearance is accompanied by an increase in industry concentration.

At present, the traditional LED backlight and lighting industry is basically saturated (in addition to high-end automotive lighting still maintains rapid growth, but there are no competitive companies in this field), the high-end market of small spacing direct display is gradually saturated, and the low-end (such as home TV) is rapidly penetrating) MINI backlight, MICRO LED on the eve of commercialization, it is expected that with the cost falling, the penetration rate in this field will rise rapidly, driving the industry upward. The ultimate form of LED is the application of MICRO direct display in consumer electronics, once the application is formed and reaches a certain penetration rate, with the blessing of Moore's law and Heitz's law, it will completely subvert the traditional display field.

Second, industry segmentation and sub-industry competition pattern

The industry is divided into: upstream chips, midstream packaging and downstream lighting applications and downstream display applications.

Upstream chips: the highest technical content, the most cyclical, the highest overall historical average profit margin, high industry concentration, the most fierce patent competition, the greatest business risk, and the most obvious characteristics of high technology and high investment.

In 2018, the output value was 20 billion, and the top five chip manufacturers accounted for more than 70% of the market share, belonging to the pattern of "small market and high concentration", with 40-50 LED chip companies in the country, including 10 listed companies, in 2018, China's chip output value accounted for 60% of the world, the domestic market share of the global leader San'an Optoelectronics was 30%, and the domestic market share of HC Semitek Optoelectronics was about 15-20%.

From the perspective of global competition, San'an Optoelectronics and Taiwan Jingyuan Optoelectronics belong to the first echelon of LED chips, the performance of the chips of the two companies in other fields is not much different, and Epistar Optoelectronics has an advantage in quality on high-power chips, and there are chips that can be used for MICRO (at present, San'an does not have them, but there are chips for MINI), but the price is high. San'an Optoelectronics has grown up with the largest market in China (a lot of technicians have been dug from Wafer), and it has a price advantage in the case of similar quality. It is also a matter of the near future to catch up with and surpass Wafer Optoelectronics.

Midstream packaging: There were more than 1,000 companies in 2018, and it is currently estimated that there are 700-800 companies, with low profit margins and low concentration in the industry. In 2018, China's LED packaging market accounted for 38%, ranking first. Japan is followed by 17%. Packaging companies are accelerating the phase-out, and investment opportunities come from industry concentration. The domestic leaders are: Mulinsen, Guoxing Optoelectronics and Hongli Huizhi, and the leaders in high-end application fields are: Dongshan Precision and Zhaochi Co., Ltd., from 2011 to 2017, the concentration of the top five domestic industries has increased from 11% to 16%.

Downstream lighting applications: the largest market size (267.9 billion in 2018), the top five domestic market share of 9.24% (Japan and the United States CR4 up to 60%+), the industry concentration is low and with the intensification of competition is more and more fragmented, still in a state of complete competition, the penetration rate has been as high as 60%, and the sub-industry has dropped from high growth rate to ultra-low growth rate or 0 growth rate. The only medium-speed growth area is the automobile headlights, and the domestic leader is Xingyu shares. Investment opportunities come from opportunities in industry concentration, but there is still no visible trend of industry concentration. The home lighting faucet is: Opple Lighting.

Downstream LED display: gross profit, net profit is medium (second only to LED chips), the industry concentration is high, and the development pattern in low-end applications is basically determined. In 2019, in the mid-to-high-end field, the domestic market size of small-pitch LED reached 10.3 billion, and the penetration rate in the LED display field was about 18%.

MINI backlight and MICRO LED have broad prospects on the eve of commercialization. According to media reports, in 2021, Apple will launch the MINI LED backlit iPad Pro (progress unknown); SAMSUNG PUSHES MINI LED BACKLIGHT TV (SAMSUNG HAS MADE THE BEST PROGRESS AMONG FOREIGN GIANTS, BUYING A LOT OF COMPANIES WITH GIANT TURN TECHNOLOGY); GOOGLE IS DOING IT, BUT IT'S NOT MAKING PROGRESS; SONY hyped a lot some time ago, and it was said that the project was stopped; Domestic TCL、Hisense and a large number of manufacturers have also launched related backlight TVs,The future development prospects are huge。