Deeply develop COB technology and welcome new opportunities of Mini/Micro LED development
Sinolink Electronic Research
●Traditional LED display & packaging enterprises focus on technical R&D, internal management and business expansion and actively improve profitability. The ratio of revenue from LED display increased from 40.50% in 2018 to 58.33% in 2020 and LED display gradually became a core business of the company. As the epidemic turned to be stable, the need for LED display recovered with the organization of sports events and commercial performances. In the first half of 2021, the estimated profit of the company was 18-23 million Yuan with a year-on-year growth rate of 217.6%-305.8%, of which the profit in Q2 was 14.1-19.1 million Yuan, relative to profit of 650,000 Yuan in Q2 of 2020. Profitability has been greatly improved and is expected to further improve in the future.
● 8K+5G brings new opportunities and the demand for small-pitch LED ushers in a new round of rapid growth. Despite the epidemic in 2020, sales amount of small-pitch LED reached 11.8 billion Yuan with a year-on-year growth rate of 14.0%. TrendForce predicted a compound annual growth rate of small-pitch LED of 27% during 2020 to 2024, of which the compound annual growth rate of P1.6, P1.2 and below P1.1 small-pitch products, especially products below P1.1, will reach up to 50％. 8K+5G will bring new development opportunities and promote a new round of rapid growth of small-pitch LED.
●Ledman deeply develops COB technology and welcomes new opportunities of Mini/Micro LED development. The company has deeply developed COB packaging technology for years and independently developed and engaged in mass production of 1.9-0.6mm and other Mini/Micro LED UHD display series products using COB integrated packaging technology and SuperCOB, including LEDHUB intelligent conference system, intelligent lighting and LED creative display, which have been extensively applied to such fields as security and protection, monitoring, education, command, broadcast performance, commerce, conference, exhibition and data center. COB packaging technology has obvious advantages at below.P1.0mm The company is expected to benefit from rapid development of Mini/Micro LED. In the first half of 2020, market share of small-pitch COB product reached 30.56% with overwhelming market superiority. In 2020, operating revenue from COB Mini/Micro LED UHD display had a year-on-year growth rate of 47% and that in the domestic market had a year-on-year growth rate of 62%. In Q1 of 2021, it had a high growth trend and a year-on-year growth rate of 130%, and 187% in the domestic market. The domestic market share increased significantly and export order was saturated.
Profit forecast and estimate
●Net profit belonging to the parent company is predicted to be 85/185/313 million Yuan during 2021 to 2023 and EPS is 0.24/0.53/0.89 Yuan, corresponding to 37/17/10 times of PE. The company will have 30 times of estimated value in 2022, a target price of 15.96 Yuan and “buy” rating.
●Risk of Mini/Micro LED popularization failure; risk of oversupply due to the epidemic; risk of operating cost increase arising from a rise in prices of raw materials; risk of desterilization of non-tradable shares;
I. LED HD Display Expert, Focus on LED Business Development
1. The Company is Deeply Engaged in the LED Industry and Grows Steadily
●The company focuses on LED business development. LEDMAN has mainly engaged in LED packaging since its establishment. For more than ten years, the company has produced LED display, LED lighting product and LEDHUB HD intelligent conference system, and so on. As the first high-tech listed company engaged in LED display business, the company has devoted itself to R&D of middle and high-end UHD LED display products.
Source: Official website of the company, prospectus, company announcement and Sinolink Securities Research Institute
● The epidemic had a great impact on the company in 2020. As the company continuously improved the productstructure and actively expanded downstream customers, revenue has grown steadily for decades. Sales revenue increased from 107 million Yuan in 2007 to 967 million Yuan in 2019 and CAGR was 22.17%. Due to great influence of the epidemic, provision for impairment of assets was 2.25 million Yuan in 2020, including inventory falling price loss, goodwill impairments, long-term equity investment and receivables, and losses were 315 million Yuan in total.
Sinolink Electronic Research
2. The Company Had a Good Business Trend and a High Growth Rate in the First Half of 2021
●In Q1 of 2020, the epidemic had great influence worldwide and company income decreased. However, company business started to recover gradually with enhanced control of the epidemic. Revenue had a year-on-year growth rate of 35% in Q1 of 2021 and a growth rate of 39% compared with that in Q4. The company is predicted to achieve operating revenue of 550-590 million Yuan in the first half of 2021 with a year-on-year growth rate of 40.0%-50.18% compared with 2020 and 26.4%-35.6% compared with 2019, which showed a good business trend.
In 2020, company income decreased sharply due to the epidemic and substantial provision. In this period, provision for assets impairment mainly includes inventory, long-term equity investment and goodwill; provision for credit impairment mainly includes receivables, other receivables and notes receivable. The total amount of depreciation was 225 million Yuan in 2020. The risk in provision for impairment will decrease after repayment of debts.
Company revenue is predicted to be 550-590 million Yuan in the first half of 2021 with a year-on-year growth rate of 40.0%-50.18% and profit is predicted to be 18-23 million Yuan with a year-on-year growth rate of 217.60%-305.82%, 14.1-19.1 million Yuan in the second quarter, relative to 650,000 Yuan in Q2 of 2020 and 6.62 million Yuan in Q2 of 2019. Profitability has been greatly improved and is expected to further improve in the future.
3. LED Display Product Will Promote Future Development of the Company
●Domestic and overseas sales status of company businesses: COB display products are mainly sold in the domestic market and the company opens the market by region + industry layout, forms a strategic alliance with high-quality customers and implements major account strategy. Meanwhile, the company develops the international market with COB display products. Conventional LED displays are mainly exported and focus on expanding the international market; LED lighting products are mainly exported and focus on expanding domestic rail transit lighting, educational lighting and landscape lighting markets; LED packaging products are mainly sold in the domestic market.
Regional revenue shows that company income mainly consists of foreign revenue. Due to the epidemic, revenue decreased by about 15% and net profit rate decreased sharply in 2020. Particularly, the ratio of foreign revenue in total revenue decreased from 74.73% in 2019 to 64.87% in 2020. LED lighting and display products were mainly exported. Therefore, revenue from LED lighting and display products was predicted to recover as the epidemic was gradually under control. Meanwhile, revenue of domestic businesses rose year by year since the Company returned to the domestic market in 2017, and it is predicted that domestic and international business scale will expand obviously and domestic operating revenue will further increase in 2021.
From the point of revenue ratio, revenue from LED display accounted for 40.50%, 55.35% and 58.33% of total revenue in 2018, 2019 and 2020 respectively without a year-by-year rising trend; while LED lighting operating revenue accounted for 51.32%, 41.97% and 40.32% in 2018, 2019 and 2020 respectively with a declining trend.
From the point of product R&D, all R&D projects in 2020 were related to LED display products, including Mini/Micro LED display, P1.9, P1.58, P1.26, P0.93 and P0.62 small-pitch technologies and other LED display. Mini/Micro LED display will become a main driving force of company development in future.
In general, the company is a domestic excellent LED display manufacture that develops steadily and continuously improves the product structure. The company will benefit from increase in penetration of Mini/Micro LED display.
II. The Need for LED Display Recovered and Small-pitch and Mini/Micro LED Displays Were Put into Commercial Use
1. The Extent of Industry Prosperity Improved in the Short Rum
● Recession in demand due to the epidemic is eased
Due to the epidemic, large-scale sports events such as 2020 European Cup and Tokyo 2020 Olympic Games were postponed, commercial performance was delayed or canceled and demand for large displays fell to the bottom. As the epidemic was gradually under control in the self half of 2020 in China, domestic demand for large display recovered. After America and other western countries started vaccination in 2021, overseas demand for display recovered slowly. TrendForce data showed a decrease rate of 13.59% in global demand for LED large display in 2019. As the epidemic improved, the market space is predicted to increase by 12% to USB 6.132 billion in 2021.
●The ratio of small and fine-pitch products improve and high value quantity elevates industry space
The smaller the pixel pitch is, the more pixel points are on the display and the clearer images are. Thus, small and fine-pitch displays have a better 4K and 8K effect. Whereas small display cannot show 8K image quality completely, 100 inches. or above small and fine-pitch LED displays will become a carrier of 8K. To achieve 8K effect of 100 inches. or above displays, LED chip pitch decreased from P1.2 (1.2mm) to P0.9 (0.9mm and P0.6 (0.6mm). In 2020, global shipment of LED small and fine-pitch displays had a year-on-year growth rate of 10.4％ and market share accounted for 15%. Shipment of LED small and fine-pitch displays is expected to increase by 59% in 2021.
Presently, P1.5-1.99 product is the mainstream of small and fine-pitch LED displays, but penetration of P0.9-1.5 and below P0.9 products with high value quantity will increase and they will be a growth impetus of the small and fine-pitch LED display market. More and more manufacturers start to value R&D of small and fine-pitch products.
● 4K/8K+5G brings new opportunities and demand for small-pitch Led is expected to maintain rapid growth.
As UHD new businesses such as medical care and health, movie entertainment, security and protection monitoring, industrial visualization and intelligent transportation stimulated the demand for 8K HD display, market demand for 8K will have substantial growth in future.
Featuring high speed, low delay and high reliability, 5G network lays an important foundation for the development direction of a new generation information technology and digital economy. 5G provides high-speed access for real-time transmission of 8G videos and 8K provides 5G ultra high-speed bandwidth with a barrier and a display platform for huge data traffic. 5G+8K are complementary and will become a strong power promoting the development of the display industry.
TrendForce predicts that global LED display will maintain a compound annual rate of growth of 16% during 2020 to 2024 and small-pitch display will be the greatest power of market growth. The compound annual rate of growth of small-pitch display is predicted to be 27％ during 2020 to 2024, of which the compound annual rate of growth of P1.6, P1.2 and below P1.1 small-pitch products, especially below P1.1 products, will reach 50％ during 2020 to 2024. 8K+5G will bring new development opportunities and maintain rapid growth of small-pitch LED display.
2. Commercial Large Display Market is Predicted to Increase by 22.2% in 2021
Influenced by the epidemic, China’s sales of large displays were 49.4 billion Yuan in 2020 with a year-on-year decrease rate of 4.0%. However, small and fine-pitch products still maintained a good growth trend with sales of 11.8 billion Yuan and a year-on-year growth rate of 14.0%.
For the commercial large display market, challenge and opportunity coexisted in 2020. Although the epidemic reduced the need, it accelerated social intelligent and digital transformation. In 2021, the commercial display market launches numerous intelligent and immersive display solutions, and driven by new technologies such as 5G, AI and IoT, commercial display devices not only are limited to single-direction dissemination, but also will become the core of man-data interaction. IDC predicts that sales of commercial large displays will reach 60.4 billion Yuan in 2021 with a year-on-year growth rate of 22.2%.
●Smart city brings growth against trend of the LED small-pitch market. In the commercial screen market, small and fine-pitch LED has a strong growth momentum due to the followings:
Sustained government investment drives growth: Due to the epidemic, government highly values city emergency, public security and medical informatization and strengthens input in information construction such as smart security and protection and smart medical care, and above 50% of LED small and fine-pitch products have been applied to government sectors. With improvement of digital transformation of government sectors, the large screen display market will continue to decline and become increasingly decentralized.
Key industries accelerate intelligent transformation: Intelligent park, intelligent water conservation, intelligent agriculture and intelligent environmental protection need plenty of data monitoring centers and LED small and fine-pitch products, as a terminal display device, have been widely used for man-machine interaction in intelligent solutions.
Professional display markets such as security and protection and medical care: Security and protection has strict requirements for monitoring definition and should ensure accuracy under adverse conditions such as low light, bad weather and large scope. Thus, video surveillance and other professional fields have rigid needs for HD LED display.
Professional display markets such as security and protection and medical care: Security and protection has strict requirements for monitoring definition and should ensure accuracy under adverse conditions such as low light, bad weather and large scope. Thus, video surveillance and other professional fields have rigid needs for HD LED display.
Commercial display: As the epidemic improved, large-scale sports events and commercial activities were held again and demand for commercial display started to recover.
● “Contactless economy” promotes demand growth of advertising machine. Developing contactless transaction service and prompting integrative development of online and offline consumption become a new guideline for the retail industry. IDC data shows sales of advertising machine of 770,000 in 2020 with a good growth trend.
3. LED Display Develops Towards Mini/Micro
Mini/Micro LED will be the mainstream of 4K and 8K large screens. Presently, Mini/Micro LED is mainly used in public displays. However, it is expected to be used in mass consumption electronic fields such as household TV display and AR/VR product with cost reduction and technology upgrade.
●Many companies make a layout in Mini/Micro LED and accelerate commercialization of Mini/Micro display.
In 2020, many manufacturers invested in such projects as Micro LED technical research and product development in succession: BOE and Rohinni established a joint venture for Micro LED transfer technology development and production; San’an invested 12 billion Yuan in the construction of Mini/Micro LED chip project and established Micro LED joint laboratory together with Huawei; TCL launched 132 in. 4K Micro LED display; Leyard, Taiwan Epistar Corporation and Leadstar established a third-party Micro LED research institute, and so on.
Since Sony launched Micro LED TV sample in 2012, many manufacturers have carried out R&D and made layout of Mini/Micro LED product. Apple 12.9 in. iPad Pro was furnished with Mini LED backlight display, Samsung launched 110 in. Micro LED television in 2020, LEDMAN launched 110 in., 135 in. and 165 in. commercial Micro LED UHD smart conference AIO and will launch a series of Micro LED over-large screen UHD household television products. Despite high selling prices, Mini/Micro LED displays with lower cost and higher cost performance will be gradually favored by the market.
● 4K/8K HD display has broad prospects. In March, 2019, the Ministry of Industry and Information Technology, the National Radio and Television Administration and the Central Radio And Television Station printed and distributed UHD Video Industry Development Action Plan (2019-2022), clearly proposing to energetically promote the development of the UHD video industry and application in related fields according to the general technical route of “implementing 4K first and giving consideration to 8K”.
The company actively explores the 8K HD display market and implements outdoor HD display projects such as Shenzhen 8K trial broadcast-Outdoor 8K UHD LED display and Guangzhou 8K trail broadcast-Outdoor 8K UHD LED display, and so on.
4. LEDHUB Intelligent Conference System Emerges
● The company takes the lead in launching COB Micro LED UHD display LEDHUB intelligent conference system, which has the advantage of touch control and man-machine interaction relative to intelligent conference AIO in the market. LEDHUB intelligent conference system can integrate super projector, video conference, electronic whiteboard, HD Theater, computer and mobile phone and adapt to the new ecological development tendency of intelligent conference. 110 in., 138 in. and 165 in. LEDHUB intelligent conference systems are a good choice for medium and large-sized conference rooms in the 5G+ HD age.
● Presently, the company is actively promoting LEDHUB intelligent conference system. The company has established exhibition halls across the country and initiated LEDHUB intelligent conference system urban partner recruitment plan. With scale expansion, price of the intelligent conference system is expected to further decline, which is conducive to rapid extension of domestic and overseas markets.
● The commercial market grows against trend, the education market has a huge potential and interactive LED display has broad prospects
Commercial interactive electronic whiteboard grew against trend due to the epidemic. IDC data shows that shipment of commercial interactive electronic whiteboard was 343,000 in 2020 with a year-on-year growth rate of 30.3%. Due to the epidemic, telecommuting became normal and accelerated popularization of domestic video conference. Featuring bidirectional operation, larger screen and higher definition, commercial interactive electronic whiteboard satisfied the need for intelligent office, replaced projection products substantially and drove rapid growth of interactive electronic whiteboard.
Educational interactive electronic whiteboard had a large market space. IDC data shows that shipment of educational interactive electronic whiteboard was 756,000 in 2020, the education market had a great potential, and sustained government investment, demand updating and new demand for intelligent classroom created broad prospects. Mini LED display is expected to enter the education industry with cost reduction.
III. LED Lighting Product Suffer a Setback in the Short Run and is Expected to Recover as the Epidemic Improved
1. LED Lighting is Still the Largest Downstream Application of the LED Industry
● In 2019, China’s LED industry size reached 638.8 billion Yuan, of which general lighting accounted for 42.4% and was about 270.9 billion Yuan. Through continuous development, LED lighting kept rapid technology upgrade and continuously expanded downstream application. LED light source developed from about 40-60lm/W in 2005 to 190lm/W. Except traditional lighting applications, LED lighting has kept expanding such fields as plant lighting and UVLED and the LED lighting market will still keep growing.
2. There Is Still an Export Space for LED Lighting in the Long Run
● Size and penetration of China’s LED lighting market keep improving
Featuring small volume, long life and environmental, LED lighting becomes the best choice among Chinese lighting products. Size of the global LED lighting market increased from 301.7 billion Yuan in 2016 to 526.9 billion Yuan in 2020 with a CAGR of 14.95%. Market size is predicted to reach 582.5 billion Yuan in 2021. China’s LED lighting penetration increased from 42% in 2016 to 78% in 2020.
● Penetration of the overseas LED lighting market remains low, but there is a growth space
In 2018, China’s LED lighting penetration reached 70% and global LED lighting penetration was 42.5% with a large growth space in overseas LED lighting penetration. Besides, LED penetration declined in 2020 due to the epidemic and there was a large room for improvement of the overseas LED market.
3. Landscape Lighting Gradually Recovered after Influenced by the Epidemic and Policy
Landscape lighting project is an embodiment of “night tour economy” and the industry grew fast before 2018. Nevertheless, landscape lighting was heavily influenced by government policies on deleveraging and government debt reduction, central government’s value over excess lighting project regulation and the epidemic during 2018 to 2020.
IV. Traditional LED Display Manufacturers Have Whole Series Products and Advanced Technologies
1. LEDMAN Has Been Deeply Engaged in LED Industry for Years and Built Complete Product Lines
● A wide range of products
From the point of material, LEDMAN product includes general LED, small-pitch and Mini/Micro LED; from the point of technology, the company produces P0.6-P20 displays; from the point of application scenarios, company products are available for such fields as household display, commercial display and specialized display. With a wide range of products, the company can meet various customer needs.
● Product technical level equals to top brands
Technically, COB Mini/Micro LED display products of LEDMAN are comparable to those of Samsung, Sony and other rivals. As to pixel pitch, the company has successfully developed and engaged in mass production of P0.6mm product of industry leading level. Moreover, the company has developed and delivered 8K LED display and passed the 8K certification for COB full-color display by China Electronics Standardization Institute (CESI) first, with 8K Mini/Micro LED display winning the gold award of the Ninth Electronic Manufacturer Exposition China. COB Mini/Micro LED display has obvious advantages and broad prospects.
2. The Company Makes a Layout of COB Packaging Technology First and Will Benefit a Lot from the Development of Mini/Micro LED
● In 2012, Sony launched COB Mini/Micro LED display product, which was not applied extensively due to difficulty in the implementation of COB technology, low yield and high cost. In 2018, LEDMAN launched COB packaging product and persisted in R&D even though COB technology had a dim future. Presently, the company is one of a few domestic companies that is capable of mass production of COB packaged display and diversified competition against other companies using SMD packaging.
With respect to SMD technology, bare chip is fixed on the support, connected to electrical appliances through gold wire and protected by epoxy resin. SMD packaged lamp bead undergoes reflow soldering in display manufacturer and modules are assembled through connecting solder joint to PCB. Increasingly higher requirements are raised for SMD bonding technology with pixel pitch reduction, so COB and other technologies emerge.
COB integrated packaging technology features high density: No bonding pad pin and higher pixel density; low cost: No support and simplified process; high reliability: Normal-temperature die bonding line and no secondary welding avoid thermal injury of chip; high stability and high environmental suitability: Integral protection, dampproof, anticollision and easy to clean; high fill factor: “Area” light source design eliminates Moire, reduces damage of retina caused by glare and hard light, fits short-distance long-term view and prevents visual fatigue.
● With P1.2 small-pitch product as an example, SMD packaging has above 2 million solder joints than COB, so its failure rate increases sharply. In addition, COB packaging has a good anti-static breakdown effect since weld leg is not exposed. On account of integral packaging, COB has excellent moisture and collision resistance and good accessibility. Despite brightness, color uniformity and blank screen color consistency inferior to SMD product, COB product creates diversified competition due to high degree of customization specific to various customer needs.
● COB packaging has obvious advantages when pixel pitch is below 1.0mm.
As LED display develops towards small-pitch product, COB packaging technology suddenly rises and starts to replace SMD technology. COB small-pitch LED replaces the SMD small pitch market so quickly mainly because COB perfectly solves the problems of fallen lamp, bad lamp and high maintenance cost of SMD product.
COB packaging has absolute technological superiorities when the pixel pitch is below 1.0mm. For lack of diameter of a single lamp, COB technology can not only reduce the diameter, but also lower the cost of support, simplify manufacturing process, reduce thermal resistance of chip and realize high-density packaging. As to collision and compression resistance, LED chip of COB product is directly packaged in the groove of PCB board and solidified using epoxy resin. The light surface is a smooth, hard, anti-collision and wearproof sphere. As to heat dissipation, COB lamp is packaged on the PCB board and heat of the lamp wick is transferred out quickly through copper foil on the PCB board. Strict technological requirements for thickness of copper foil and gold plating technology prevent serious light decay and LED damage and greatly extend the life of LED display. As to visual experience, COB product features wide view, broad color gamut, high contrast ratio, high refresh rate, better optical color diffusion and better visual experience.
It is just because of these obvious advantages that COB small-pitch LED is known as the next generation display technology of the industry and regarded as the prevailing trend and development direction of display technology. At present, giants such as Samsung, Sony and LG have launched COB Micro LED display products.
● Ledman has advanced COB packaging technology for small and fine-pitch products and high market share.
COB technology is hard to realize, especially control over production technology of equipment and production line, yield improvement and cost reduction require long-term technology accumulation.
With rich experience in COB packaging technology, Ledman launched COB flagship product-COB 324 in. 8K Micro LED display simultaneously with Samsung and Sony, which had the same technological level as Samsung and Sony. In February, 2021, Ledman first launched a new generation COB UHD 0.6mm Micro LED display in Amsterdam, which was another technological innovation based on 0.9mm 324 in. 8K Micro LED and maintained a leading position of Ledman in the large-screen Micro LED UHD display industry. In July, 2021, Ledman first launched Micro LED SuperCOB display technology and 0.79mm and 0.63mm mass-produced Micro LED UHD displays using the latest SuperCOB display technology.
Mini/Micro LED SuperCOB display technology developed and applied by Ledman just raised the cost slightly but it redoubled the definition, which can lower the cost of Micro LED product significantly and enlarge the application space of Micro LED product.
According to AVCRevo data, market share of COB small-pitch LED display product showed a rising trend in the first half of this year. Market share of LEDMAN, as a leading enterprise with absolute advantages, reached 30.56%, followed by Vtron, Dahua and Unilumin, and so on.
LEDMAN started to engage in mass production of original COB three years ago. Now, its production grows steadily, yield further improves, and original COB has high cost performance and obvious competitive edges.
3. The Company Actively Expands Sale of LED Lighting Product and Downstream Application
● Lighting product of the company mainly includes indoor general lighting, outdoor general lighting, educational lighting and traffic lighting. Improvement of overseas epidemic and continuous implementation of domestic construction project increase the need for lighting product and company income of LED lighting is expected to recover.
Improvement of the epidemic and economic recovery can promote consumption, revalue “night tour economy” and create a large growth space for landscape lighting. The company has started to arrange landscape lighting project. In 2019, LEDMAN landscape lighting project achieved revenue of 33 million Yuan, accounting for 3.45% of total revenue. Company layout of landscape lighting may become a business growth point.
Driven by such factors as food crisis, land resource shortage and gradually mature plant lighting technology arising from the global epidemic, the plant lighting industry booms. Torshare Technology, a wholly-owned subsidiary of the company, has developed several series of plant lighting products, which can accelerate growth and development of plants through specific spectrums that produce photosynthesis and are mainly sold to plant factory and other large farms. The company is expected to occupy the plant lighting market soon.
V. There is a Growth Space for Capacity Utilization Rate and LED Display Has Great Prospects
1. The Company Will Actively Expand Production and Welcome an Explosion of Mini/Micro LED Demand
Due to the epidemic in 2020, the company had a capacity of 2 million pcs. and utilization factor of 79.91% of lighting product, and a capacity of 69200m2 and utilization factor of 67.07% of LED display. From 2016 to 2020, the company had a CAGR of 18.92% of lighting capacity and that of 16.17% of LED display.
Capacity prediction: In general, with organization or construction of large-scale sports events such as Tokyo 2020 Olympic Games, commercial performance and construction project, demand for LED display and lighting product will increase sharply from H2 of 2021 and we think capacity and capacity utilization factor of the company will improve to meet the need. 1. Considering demand recovery due to improvement of overseas epidemic and popularization of plant lighting and other new LED lighting products, it is predicted that LED lighting capacity will increase by 5% year by year and reach 2.315 million PCS./year by 2023; 2. Considering improvement of overseas epidemic and commercial application of a new generation LED display technology, it is predicted that capacity of LED display will increase by 5%, 10% and 15% in 2021, 2022 and 2023 and reach 91915m2/year by 2023.
Capacity utilization rate prediction: With overseas demand recovery, we think capacity utilization rate of LED lighting product and LED display will increase to improve company capacity and meet market demand. Capacity utilization rate LED lighting product and LED display is predicted to reach the average of the past 5 years to 85.41% and 79.1% respectively.
2. LED Display is the Key of Company Future Development and Company Performance is Expected to Grow Rapidly
Company performance is predicted as follows:
● LED display
Revenue: Downstream enterprises are in great demand for a new generation Mini/Micro UHD LED display and recession in overseas demand for large display improves with stability of the epidemic.
In the overall market, shipment of small-pitch product is predicted to increase by 59% and market share will keep rising in 2021. Company performance will benefit from recovery of the LED display market.
COB Micro LED UHD display business increased by 47% in 2020 compared with 2019. The domestic market increased by 62% compared with last year and maintained a high growth trend in Q1 of 2021 with a year-on-year growth rate of 130%. The domestic market increased by 187% compared with last year and domestic market share improved obviously. As one of a few companies that engage in mass production of COB packaged LED products, the company can occupy the market by virtue of COB technological superiority soon after P1.0mm LED display was launched. We consider that sales of P0.6-P0.9 and P1.2-P1.5LED display products will soar with cost reduction and consequently revenue from LED display will increase rapidly in 2021.
It is predicted that operating revenue from LED display will reach 931 million Yuan, 1.49 billion Yuan and 2.384 billion Yuan in 2021, 2022 and 2023 with a growth rate of 95%, 60% and 60% respectively.
Gross profit rate: Mini/Micro product may be mass-produced in 2022 with a relatively high gross profit rate. However, size effect will result cost optimization and price will decline due to increase in market share of existing P0.6-P2 products. Meanwhile, company cost will rise due to a sharp rise in prices of raw materials such as LED chip in 2021. Therefore, we consider that gross profit rate of LED display in 2021 will be higher than that in 2020 and lower than that in 2019 and it will decline slightly due to mass production in 2022 and 2023. Suppose gross profit rate of LED display product is 34%, 33% and 33% in 2021, 2022 and 2023 respectively.
● LED Lighting
Revenue: LED lighting products of the company are mainly exported and its revenue deceased sharply in the first half of 2020 due to the epidemic. With improvement of the epidemic and product application in other LED lighting fields, we consider that revenue of LED lighting products will increase by 35% in 2021 compared with 2020. As the company continues to expand downstream application fields such as landscape lighting, rail transit lighting and plant lighting in 2022 and 2023, there is a room for improvement and the compound growth rate will reach 25%. Thus, revenue of LED lighting products is predicted to reach 446 million Yuan, 547 million Yuan and 697 million Yuan in 2021, 2022 and 2023 respectively.
Gross profit rate: Traditional LED lighting products are mature have a stable gross profit rate; while landscape lighting, rail transit lighting and plant lighting will have a high gross profit rate, but it will decrease in market competition. Suppose gross profit rate of LED display product is 6%, 15% and 15% in 2021, 2022 and 2023 respectively.
n Other businesses
Revenue: Other business included landscape lighting project in 2019, which will be included in LED lighting business as predicted during 2021 to 2023. Whereas other businesses adopt project system, future other operating revenue is predicted as per average revenue of other businesses than landscape lighting project.
Gross profit rate: Gross profit rate of other businesses is predicted to be 44% as per average revenue of other businesses than landscape lighting project.
●Period expense ratio:
Selling expense ratio: Selling expense increased sharply due to the epidemic and domestic market expansion in 2020. We consider that selling expense ratio will decrease to 8%, 7% and 6.7% in 2021, 2022 and 2023 due to improvement of the epidemic, business expansion and cost amortization.
Handling expense ratio: Handling expense increased sharply due to counsel fee paid for “US UltraVision” case in 2020. It is predicted that counsel fee will decrease in 2021 and revenue will increase sharply and consequently handling expense ratio will decrease to 7%, 5.3% and 5% of 2019 in 2021, 2022 and 2023 respectively.
R&D expense ratio: Considering massive COB product R&D in future, the company may maintain high R&D expense of 2020, but R&D expense ratio will decrease to 7.2%, 6.1% and 6.1% in 2021, 2022 and 2023 due to sharp increase of revenue.
Financial expense ratio: Financial expense ratio will remain normal at 0.32%, 0.52 and 0.55% in 2021, 2022 and 2023 respectively.
Ratio of other revenue in total revenue: Considering investment income and other revenue, it is predicted that other revenue will account for 0.94%, 0.73% and 0.52% of total revenue in 2021, 2022 and 2023 respectively.
Income tax rate: Due to great losses in 2020, tax expenditure may be reduced through covering the deficit in five years. It is predicted that income tax rate will remain stable at 4.64% during 2021 to 2023.
In general, revenue is predicted to reach 1.42 billion Yuan, 2.09 billion Yuan and 3.12 billion Yuan in 2021, 2022 and 2023 with a year-on-year growth rate of 73%, 47% and 49%, and net profit belonging to the parent company will reach 850 million Yuan, 186 million Yuan and 311 million Yuan with a growth rate of 118% and 67% in 2022 and 2023.
VI. Profit Forecast and Estimate
● In general, company revenue is predicted to reach 1.42 billion Yuan, 2.09 billion Yuan and 3.12 billion Yuan in 2021, 2022 and 2023 with a year-on-year growth rate of 73%, 47% and 49% respectively, and net profit belonging to the parent company will reach 850 million Yuan, 186 million Yuan and 311 million Yuan in 2021, 2022 and 2023 with a year-on-year growth rate of 118% and 67% in 2022 and 2023 respectively.
● Adopt PE valuation, compare LED display R&D to Leyard, Unilumin Technology and Aoto Electronics and suppose 30 times of PE value in 2022. With market value of 5.58 billion Yuan and target price of 15.96 Yuan, the company should adopt “buy” investment rating.
Ⅶ. Risk Prompt
● Product promotion does not reach the expected effect
Mini/Mirco LED COB small-pitch display, a future main business of the company, has high cost and remains to be mass-produced. Product promotion may be affected by slow cost optimization. Besides, company income may be affected by delay in technical R&D of LED display and product promotion and consequently business performance will not reach the expected effect.
● Demand does not reach the expectation due to slow improvement of the epidemic
In 2020, sports events and large commercial activities decreased sharply, construction projects were closed and LED display and lighting market demands declined due to the epidemic. Company income may be influenced by aggravation or slow improvement of the epidemic and failure in LED demand recovery.
● Rise in operating cost due to a rise in prices of raw materials
Due to a rise in prices of raw materials, the price of LED chip has kept rising since 2021. The company needs to purchase LED chip for daily production. If price of LED chip continues to rise, operating cost will keep rising as well and consequently profit will be affected.
● Risk in high pledge ratio of stock rights of top three shareholders
Pledged stock rights of top three shareholders Mr. Martin Lee, Lishan Wang and Urumchi Jiede Equity Investment Partnership account for 4.68%, 8.55% and 10.26% of total stock respectively, so the risk in high pledge ratio of stock rights should be noted.
● Risk in RMB exchange fluctuations
● Risk in price and gross profit rate of LED display and lighting product
Considering COB Minin/Micro LED display and plant lighting product are new products, product price and gross profit rate may fluctuate and consequently company income and gross profit rate may not reach the expectation.
Description of investment ratings:
Buy: The growth rate is predicted to be above 15% in the coming 6-12 months;
Overweight: The growth rate is predicted to be above 5%-15% in the coming 6-12 months;
Neutral: The fluctuation rate is predicted to be -5%-5% in the coming 6-12 months;
Underweight: The decrease rate is predicted to be above 5% in the coming 6-12 months.