Guoxing Optoelectronics: SMD LED leader grows steadily, and its performance will rise sharply in 2012

Abstract: In view of the above analysis of the SMD LED industry, the author believes that the industry leader contains huge potential for development. Guoxing Optoelectronics is the first well-known domestic SMD LED, and its development potential is worth studying. This paper first analyzes the status quo and income structure, profit structure and product structure of Guoxing Optoelectronics, and then gradually screens the external factors and internal factors that affect the company's profitability, and analyzes the main factors among them. It is concluded that the company's performance will increase significantly in 2012. in conclusion. Finally, on this basis, the value of the company is evaluated.

Keywords: Guoxing Optoelectronics, SMD LED, industry surplus, product structure, fundraising projects, Taiwan counterparts
NationStar: SMD LED leader grows steadily, will gain brilliant achievement in2012

1. Guoxing Optoelectronics: SMD LED faucet benefits from rapid development of the industry
In 2008, the top seven LED market sales in China were occupied by Taiwanese manufacturers, Cree of the United States, and Nichia of Japan, and Guoxingguang potential ranked eighth (Ceddy consultant). Guoxing Optoelectronics has experienced rapid growth in recent years, from 440 million yuan in 2007 to 630 million yuan in 2009 and 407 million yuan in mid-2010. It is the largest SMD LED packaging company in China. In the first half of 2010, operating income increased by 39.89% year-on-year, and the net profit attributable to the parent company was 71.87 million yuan, a year-on-year increase of 45.46%, corresponding to an earnings per share of 0.45 yuan. The domestic market share increased from 72% in the full year of 2009 to 80% in the first half of 2010.

Table 1: 2007-2010 Interim National Star Optoelectronics revenue by business share

	2007	2008	2009	Mid 2010
SMD LED (%)	70.89	69.86	74.99	82.11
Lamp LED (%)	5.10	11.74	9.29	6.26
machining(%)	13.70	18.02	15.19	11.29
Other business(%)	0.31	0.39	0.53	0.35
total(%)	100.00	100.00	100.00	100.00

Source: Guoxing Optoelectronics Prospectus, 2010 Semi-annual Report

The proportion of SMD LED devices and components in operating revenues has steadily increased from 70.89% in 2007 to 82.11% in mid-2010. The ratio of Lamp LED and processing revenue to operating income showed a downward trend. The proportion of operating income in the middle of 2010 has dropped to 6.26% and 11.29%.

Table 2: 2007-2010 National Star Optoelectronics SMD LED business revenue and growth rate

	2007	2008	2009	2010 (E)
SMD LED operating income (ten thousand yuan)	31,464.73	39,589.13	47,089.40	33407.51
SMD LED operating income growth rate (%)	86.04	25.82	18.95	42

Source: Guoxing Optoelectronics Prospectus, 2010 Semi-annual Report

In 2007, SMD LED revenue increased by 86.04%, mainly due to a large amount of investment. In 2010, due to factors such as the industry boom and the gradual release of previous investment capacity, the growth rate is expected to reach 42% in 2010, highlighting the company's position in doing. The effectiveness of the SMD LED faucet strategy. The TOP LED in SMD LED devices grew rapidly. In the first half of the year, the operating income was 146,669,700 yuan, an increase of 193.33% over the same period of the previous year. It became the main contributor to the operating income and the profit growth point.

Table 3: Gross profit ratio of Guoxing Optoelectronics by business in 2007-2010

	2007	2008	2009	Mid 2010
SMD LED	74.27	69.99	72.52	80.35
Lamp LED	9.64	5.81	4.47	3.13
machining	15.69	23.84	22.36	16.31
Other business	0.41	0.36	0.64	0.21
total	100.00	100.00	100.00	100.00

Source: Guoxing Optoelectronics Prospectus, 2010 Semi-annual Report

The gross profit ratio of SMD LEDs is on the rise. In the first half of 2010, the profit of SMD LED package reached 106,848,200, which accounted for 80.35% of the operating profit, while the profit of LAMP LED packaging business decreased to 3.13%. The processing business, which is processed into a tuner and LIB power manager, is the second largest contributor to the company's gross profit, which is relatively stable.

Table 4: Gross profit margin of Guoxing Optoelectronics by business in 2007-2010

Product Category	2007	2008	2009	Mid 2010
Lamp LED device	17.18%	15.86%	12.73% 13.39%
Lamp LED assembly	23.47%	19.90%	21.24% 25.09%
SMD LED device	31.23%	33.01%	33.25% 32.72%
SMD LED components	29.13%	38.94%	30.25% 29.61%
machining	33.27%	46.06%	49.22% 47.04%
Comprehensive gross profit margin	29.06%	34.81%	33.43% 32.65%

Source: Guoxing Optoelectronics Prospectus, 2010 Semi-annual Report

The gross profit level of SMD LED is basically maintained at more than 30%, and the gross profit margin of processing is basically maintained at more than 45%. In the middle of 2010, due to the company's market share of expanding SMD LED, the product price is appropriately lowered to make the gross profit margin of the SMD LED device. Compared with other businesses, it still showed a high gross profit margin of 32.72%, which made the company's comprehensive gross profit margin still 32.65% in 2010, which was basically the same as that of the same period of last year. The comprehensive gross profit level is much higher than domestic. Packaging companies.

2. Analysis of the main internal factors affecting profitability
Factors affecting profitability include: company positioning, production, price, product structure, technology level, management capability, cost control capability, and personnel mobility. It is expected that the company's management capabilities, cost control capabilities, and personnel mobility will not change significantly during the reporting period; technological progress is reflected in product structure changes; prices are expected to be adjusted according to cost during the reporting period, and chips account for about 50% of product costs. The National Star optoelectronic chips are all outsourced, so they are analyzed in the external factors. Therefore, the internal part mainly analyzes the output, product structure and the company positioning related to this.

1) Positioning: Focus on SMD LED package, focusing on display and household appliances, suitable for the company's current development stage
In view of the fact that the current crazy purchase of MOCVD in the industry will cause a serious excess of the upper and middle reaches, it is not wise to enter the chip manufacturing field at a high level. The author is very concerned about whether Guoxing Optoelectronics has a huge investment plan in the middle and upper reaches.

In February 2010, Guoxing signed a capital increase agreement with the famous American chip company SemiLEDs and four other companies, holding 15% of the shares of Xu Rui Optoelectronics Co., Ltd. after the capital increase. Xurui produces LED epitaxial wafers and high-power, high-brightness LED chips. It has ordered MOCVD11 units, one of which is for R&D and 10 for production. It will be put into production in early 2011.

The project will be put into production and will realize the strategy of the company's curve to enter the upstream. However, the company is mainly committed to the development of LED packaging industry, focusing on the development of various high value-added SMD LED products (including power LED) to consolidate the company in mainland China. Leading position in the field of LED packaging, based on existing product areas, and continuously expanding other application areas. This is very suitable for the current situation of the company.

In terms of products, Guoxing Optoelectronics is positioned in the display screens and household appliances, avoiding the strong LCD screen backlights and mobile phone backlights. It is a wise move in the case that the technology scale is far behind Taiwanese counterparts.

2) Production: There will be no significant production growth in 2011 and 2012.
First, let's see if the company has the capacity to release new production lines.

In 2007, SMD LED capacity expansion and new equipment enabled the company's annual production capacity of SMD LED devices to grow rapidly in 2008, reaching 2.4 billion, of which Chip LED and PLCCLED have annual production capacity of 2.394 billion, and power LED annual production capacity is 6 million; 2009 In the year, the annual production capacity of the company's SMDLED devices has increased to 2.57 billion, of which the monthly capacity of power LEDs in the second half of 2009 has reached 3 million.

On July 16, 2010, the company successfully listed, IPO plans to raise funds of 514 million yuan, the actual raised funds of 1.48 billion yuan, over-raised 2.88 times. It is planned to invest in the following four projects:

Table 5: Projects to be invested in the 2010 listed funds, investment amount, official production time of the production line

project name	Total investment	Proposed use of raised funds	Production line official running time
New surface mount LED technology retrofit project	19,489,700 yuan, of which: Fixed assets investment of 164,150,700 yuan, Land investment of 3 million yuan, The initial working capital is 27.38 million yuan	19,189,700	October 2012
Power LED and LED light source module technical transformation project	17,781.11 million, of which: Fixed assets investment of 15,407,100 yuan, Land investment of 3 million yuan, The initial working capital is 20.74 million yuan	17,481,100	January 2013
LED backlight technology transformation project	7,666,300 yuan, of which: Fixed assets investment was 62,908,300 yuan. Land investment of 2 million yuan, The initial working capital is 12.57 million yuan	7,466,83	November 2012
Semiconductor lighting fixtures, key technologies and industrialization	6,496,500 yuan, of which: Investment in fixed assets investment was RMB 45,450,500. Land investment is 262.985 million yuan, Bottoming liquidity 8.32 million	6,296,500	December 2012
total	51,43.106 million yuan	50,433.06 million

Source: Guoxing Optoelectronics Prospectus

It can be seen from the table that after October 2012, four projects can gradually release production capacity, and there is no contribution to production in 2011, and the contribution to 2012 production is minimal. After the fund-raising investment project is completed in 2010, the annual production capacity of SMD LED devices will increase by 3 billion. The annual production capacity of Chip LED and PLCC LED will increase by 2.88 billion, and the annual production capacity of power LED will increase by 120 million, but only in 2013. Release capacity. Then, the increase in production will come from the release of idle capacity.

In terms of idle capacity, it can be seen from the table below that at the time of the gradual deepening of the financial crisis in 2008 and 2009, the idle production capacity was less than 20%, and it was basically used in 2010. It is expected that this will not bring about a significant increase in production in 2011 and 2012.

Table 6: 2007-2009 National Star Optoelectronics Capacity, Production, Capacity Utilization

product	project	2007	2008	2009
Lamp LED device	Capacity (10,000)	36,000.00	36,000.00	36,000.00
	Production (10,000)	35,958.40	25,212.22	26,131.96
	Capacity utilization(%)	99.88	70.03	72.59
SMD LED device	Capacity (10,000)	180,000.00	240,000.00	257,000.00
	Production (10,000)	68,671.91	201,230.90	210,708.38
	Capacity utilization(%)	93.71	83.85	81.99

Source: Guoxing Optoelectronics Prospectus

3) Product: The structure is gradually upgraded, and the display advantages are highlighted.
First, the company is positioned to make SMD LED products bigger and stronger. Lamp LEDs are positioned to meet the needs of some customers when they purchase SMD LED components and other products. In view of the fact that Lamp LED has entered the Red Sea stage, this is very wise. .

Table 7: 2007-2008 National Star Optoelectronics SMD LED Product Structure

2007			2008
	Proportion of SMD LED component revenue	Gross profit margin	Proportion of SMD LED component revenue	Gross profit margin	Increase in gross profit margin
Display module	61.13%	30.12%	62.29%	45.85%	15.73%
Backlight	13.46%	44.70%	13.91%	51.19%	6.49%
Light source module	10.91%	18.39%	12.54%	6.23%	-12.16%

Source: Guoxing Optoelectronics Prospectus

Home appliances and display screens are the main downstream applications of the company. Guoxing Optoelectronics Technology lags behind foreign capital and Taiwan-funded giants. This market positioning avoids the strong LCD screen backlights and mobile phone backlights.

In terms of display screen, the gross profit margin of the LED display module with the highest revenue in 2008 increased significantly, mainly due to the increase in the proportion of high-end LED display modules. The LED display modules are all customized products. The finished products are difficult, and the requirements for the manufacturer's design ability, production process, and order completion time are high. Therefore, the company has a certain bargaining price for downstream customers. Ability to maintain a relatively high gross margin level for a long time.

3. Analysis of the main external factors affecting profitability
The external factors affecting profitability are mainly chip cost, product demand, and fierce competition in the industry. The chip purchase price is reduced, and the industry competition is fierce. "The LED industry will be surplus after 3Q in 2011, the general lighting market will be opened in 2011.6-2016, it is recommended to pay attention to 4 types of enterprises", "SMD LED package: Cinderella is ignored" Argumentation, this article will not repeat them.

1) Upstream: Chip surplus will improve the company's product profit and promote product upgrade before and after 2012
The decline in chip prices after the third quarter of 2011 will increase the gross profit margin of SMD LEDs, which will increase the gross profit. See the historical data of Guoxing Optoelectronics 2007 and 2008:

Table 8: The impact of the price change of Guoxing Optoelectronic LED chip on the gross profit of LED package products

LED chip average unit price decline	In 2007 LED package products gross profit increase	In 2008 LED package products gross profit increase
1%	1.09%	0.92%
5%	5.47%	4.58%
10%	10.95%	9.15%
18.28%	20.01%	16.73%

Source: Guoxing Optoelectronics Prospectus

It is worth mentioning that after the third quarter of 2011, the excess pressure will gradually appear. The chip price will be significantly reduced in 2012, and the company's product price will be lowered accordingly. At the same time, with the decline in chip production prices, SMD LED package price products will also be lowered, which will be more conducive to the promotion of outdoor display and the entry of the general lighting market.

In 2007-2009, although the unit price of the main raw material LED chips showed a significant downward trend, the proportion of the company's LED chip costs to raw material costs showed an upward trend, mainly due to the increase in the proportion of the company's independent products and the product structure to high-end, high value-added SMD LEDs. Products are being adjusted to increase purchases of GaN, high-end green light and high-end red LED chips.

In short, the decline in chip prices will not only increase the company's profits, but also promote the company's product upgrades.

2) Downstream: There is pressure on home appliance companies to lower prices and extend payment terms
In 2007-2009, the sales amount of household electrical appliance enterprises accounted for 34.69%, 28.32%, and 29.88% of the company's operating income. Most of the cooperative customers were Gree Electric Appliances, Midea Electric Appliances, and Chigo Air Conditioning. The relationship was relatively stable, but due to increasingly fierce market competition, In order to alleviate the pressure of falling profit margins, home appliance companies are constantly asking for price cuts from suppliers. At the same time, home appliance customers often require suppliers in terms of payment terms due to increased operating pressure. Provide a more relaxed credit policy.

However, the company will also benefit from the favorable policies of home appliances to the countryside.

With the expansion of the company's production capacity, the ability to develop new customers in a timely manner will affect the continuity and stability of the company's profitability. SMD LED has a wide range of applications and has a lot of profit growth. At present, the company has expanded its customers in new fields, such as IBM, Sandisk (the world's largest supplier of flash data storage card products), Huawei Technologies Co., Ltd., and BOE (using For the production of LED backlight LCD TVs, and Nanjing Luopu Co., Ltd., Shanghai Sansi Technology Development Co., Ltd. and other well-known domestic LED display manufacturers.

Due to the high gross profit margin of the company and the certain bargaining power, the author believes that the company's gross profit margin will not drop significantly due to downstream pressure.

4. Factors affecting profitability and corporate valuation
According to the above discussion, the author sorts out the importance of its impact on profitability in 2011 and 2012 as follows:

Table 9: Main Influencing Factors and Impact Degree of Guoxing Optoelectronics' Profitability

importance	Influence direction	the main factor of influence	Expected impact on 2011 and 2012 profitability
1	positive	The industry is expected to maintain a prosperous state before the third quarter of 2010 and 2011	Profitability benefits from the industry boom and steadily improves
2	positive	After the third quarter of 2011, the chip is overcapacity and the price is expected to drop sharply.	It is expected that the price of chips will fall around 2012, which will be calculated according to the price of 20%, which will increase the gross profit level of the company by at least 15%.
3	Negative	There is no plan for the industry giant to significantly expand production in China, but it is worth tracking, especially the industrial chain integration model. Although the increase in output is not large, the control of the channel is very strong.	Has little effect
4	positive	Product structure is gradually upgraded	Affect the front, but subject to production capacity
5	Negative	Downstream customers focus on home appliance companies	On the one hand, it is subject to the price reduction of home appliance enterprises, on the one hand, it benefits from the home appliances to the countryside and a stable cooperative relationship.
6	Negative	High-end chips rely on imports and export white light products have patent risks	Depending on the attitude of foreign countries, it is expected that the reporting period will not change much.
7	positive	Management is more professional	It is expected that the management report will not change much during the reporting period, and the impact will be more neutral.
8	Negative	Personnel loss	It is expected that the reporting period will not change much, and the impact will be more neutral.
9	positive	Raising funds will increase capacity of large companies	Production capacity was released in 2013, and it is expected to have little impact on the current two years.

Data source: The author sorts out the analysis

Based on the above analysis, we make the following conservative assumptions:

1. 2010-2012 benefited from industry boom and product upgrades, with a compound revenue growth rate of 25%.
2. In 2011, the gross profit margin of the company's gross profit margin LED business maintained 33%.
3. In view of the fact that the midstream midstream manufacturers are slower than the planned speed, it is assumed that the chip price will drop by 20% in 2012, resulting in a 15% increase in the company's gross profit, reaching 48%.
4. According to the company's 2007-2009 experience, the gross profit margin is higher than the net interest rate by 15%, assuming that the cost control has not changed much, and so is 2011 and 2012. 5. In 2011 and 2012, the company will not issue additional shares, convert shares, send shares, and allot share. Etc., the total share capital remains unchanged. 6. Based on the closing price of 31.2 yuan on October 18, 2010, it is concluded that:

	2009	2010E	2011E	2012E
Operating income (ten thousand yuan)	62791.09	81365	101706.25	127132.81
Net profit (ten thousand yuan)	11804.3	14560.44	18,307.12	41953.82
Basic earnings per share (yuan)	0.72	0.68	0.85	1.95
P/E	——	46.07	36.64	15.99

Data source: 2009 annual report, 2010 mid-year report, author's analysis

Based on the diluted total share capital after the issuance, we predict that National Star Optoelectronics will have an EPS of 0.68 yuan, 0.85 yuan and 1.95 yuan respectively from 2010 to 2012, corresponding to P/E of 46.07, 36.64 and 15.99, given the current high valuation of the company. , giving the company a "neutral" investment rating.