Are you really optimistic about Sanan Optoelectronics?

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It is also difficult to insist on saying something different, especially for a company like Sanan Optoelectronics. This article can be divided into two parts: advantages and problems.

Recently, Sanan Optoelectronics, a leading LED company and a pioneer in compound semiconductors, has seen its share price rebound seriously lagging behind the sector . I will try to sort out the logic, trying to be brief and in-depth.

The absolute market leader

Sanan Optoelectronics is mainly engaged in the research, development, production and sales of full-color ultra-high brightness LED epitaxial wafers, chips, III-V compound semiconductor materials, microwave communication integrated circuits and power devices, optical communication components, etc. Its product performance indicators are at the international advanced level.

Sanan’s Chinese LED market share is 29%;

Sanan has large-scale LED chip production capacity, accounting for about 19.72% of the global chip production capacity;

With more than 1,400 patents, it continues to maintain a 5% brightness higher than competitors with the same chip area;

Provided the first 6-inch gallium nitride production line in China.

Establish a domestic vertical supply chain strategic alliance layout from mobile phone chip factory → PA factory → SAW factory to replace imports and stabilize the RF original parts market.

Based on III-V compound semiconductor materials, we strive to become an internationally competitive RF and filter integrated circuit manufacturer!

The country absolutely supports

In 2014, the Big Fund was established.

Sanan Optoelectronics 2015 semi-annual report, the Big Fund invested 217 million shares;

In the 2015 annual report, the Big Fund increased its holdings to 288 million shares;

In the 2016 annual report, the Big Fund increased its holdings to 460 million shares.

Management Letter of Submission

The share purchase plan released between August and September 2018 shows that the management has purchased a total of 750,000 shares in 18 years, worth more than 11.78 million yuan, which is a token of investment in the company's development!

Competitive advantages in the industry

1. Large scale and high scale effect!

This is easy to understand. Equipment depreciation, R&D amortization, and upstream and downstream bargaining all take the initiative. It can also be seen from the financial report that the gross profit margin is leading in the industry.

There is no need for comparison. Few manufacturing companies can achieve such a high rate of return.

2. The self-sufficiency rate of raw materials is relatively high

The main equipment, MOCVD, is purchased from outside;

The main raw material, sapphire substrate, is imported raw material processing, and the self-sufficiency rate is as high as 80%.

I also make my own gas;

Therefore, the advantages in raw materials and finished products are also obvious, ensuring profitability and competitiveness.

3. Technical advantages

There is no need to emphasize this point. Sanan itself has a doctoral program, 863, 973, Torch, and National 02 Plans, and is a major enterprise.

4. Future industry extension

According to the announced investment plan, it is to build a 6-inch GaAs production line (gallium arsenide, semiconductor material) with an annual output of 300,000 pieces and a 6-inch GaN production line (gallium nitride, semiconductor material) with an annual output of 60,000 pieces. At the same time, a joint venture company will be established with GCS (San'an holds a 51% stake).

A research report states:

Sanan has been very forward-looking in this field as early as 2014. As 5G is getting closer, the scarcity of Sanan's GaAs/GaN/SiC manufacturing capabilities will gradually become more prominent, and revenue and profits will also gradually be reflected. We have clearly seen this trend in the second half of 2018. The growth of compound semiconductor business will be the biggest highlight of the company in the next few years.

For such a good company, why does its stock price not soar but stagnate during the bull market?

The trend of this domestic No. 1 leader is as follows. Although the rebound from the lowest point is 50%+, it is still far from the high point.

It is even inferior to Changdian Technology, a semiconductor packaging and testing company whose industry status is far inferior to itss.

What is the market waiting for?

In fact, some of the reasons are also stated in the announcement.

1. Financial crisis of major shareholders

There is a response in the announcement, which should be resolved. The announcement stated that Xingye International Trust Co., Ltd. , Quanzhou Financial Holding Group Co., Ltd. , Fujian Anxin Industrial Investment Fund Partnership ( Limited Partnership ) and Sanan Group signed a " Strategic Cooperation Framework Agreement ". The three parties plan to increase the capital of Sanan Group by no less than 5.4 billion yuan , and Quanzhou Financial Holding will provide Sanan Group with 600 million yuan of liquidity support .

This shows that financial problems are not the key concern of the market! Moreover, according to the market positioning, such a company is unlikely to have such disgusting results as bankruptcy, closure, and suspension of production. Moreover, the financial problems of the major shareholder have no impact on the assets of Sanan Optoelectronics listed company and do not affect the normal operation of the listed company.

The key point is the superposition of two other major problems.

2. Declining profits

The financial data shows that revenue growth has slowed down (1.76% in the first three quarters), gross profit margin has declined (Q151.13%→Q3 44.46%), and inventory is high (Q3 2.578 billion).

Declining profits are a problem for the entire optoelectronics industry. According to LEDinsight statistics, global lighting bulb prices continue to decline, dragging down the entire industry.

The downward trend has been smoothed, and there are indeed signs of bottoming out, but the reversal signal has not yet appeared! In other words, for the entire industry, 2019 may be a low point, but maybe it will not decline again? It's really uncertain!

This is a common problem in the industry. Compared with Qianzhao Optoelectronics, its performance has also declined.

On February 28, Qianzhao Optoelectronics released its 2018 performance report. In 2018, the company achieved operating income of 1.03 billion yuan, a year-on-year decline of 8.91%; the net profit attributable to shareholders of listed companies was 182 million yuan, a year-on-year decline of 13.77%.

The industry outlook is disrupted by two major issues:

1. The overall industrial environment has deteriorated

In 2018, due to the reduction of overcapacity and leverage, the overall industry growth slowed down, and even showed signs of overcapacity. The growth rate of LED downstream has become unpredictable, especially lighting, including televisions and mobile phones, which are directly related to consumption. How fast will the downstream recover? It is still unverified, so it has also led to the downturn of the entire industry.

2. The rise of domestic MOCVD

Domestic MOCVD led to the accelerated expansion of the industry in 2017. On the one hand, it is cheap, with prices 20-30% lower. On the other hand, delivery is fast. In the past, it might take two years from placing an order for imported MOCVD to actually releasing production capacity, but now domestic equipment can compress this time to one year, or even shorter in some cases.

Therefore, since 2017, many LED companies have expanded rapidly, resulting in the gradual emergence of overcapacity.

According to LEDinsight data, China's mainland has expanded very quickly in the past two years, accounting for 47% of the market share in 2016, but by 2018, China's production capacity had reached nearly 70%, which also led to a surge in global production capacity. For example, from 2016 to 2017, the YOY share reached 58%, and in 2018 it increased by 28% compared to 2017.

Under these conditions, it is only natural that global prices will go down. China is good at making the world's high-profit industries cheap!

3. The upstream is still expanding!

On April 22, 2018, the Nanchang Municipal People's Government and Advanced Micro-Semiconductor Equipment (Shanghai) Co., Ltd. signed a strategic cooperation framework agreement at the Qianhu Guest House in Nanchang.

According to the cooperation agreement, AMEC will give full play to its advantages in management, technology, talents and its position in nano-etching equipment and technology, MOCVD and other thin film equipment and technology to build a high-end MOCVD equipment manufacturing base in Nanchang High-tech Zone. The Nanchang Municipal Government will regard AMEC as an important partner, provide policy support and high-quality services, and fully support the development of AMEC.

At the signing ceremony, AMEC also signed bulk MOCVD equipment sales contracts with Shenzhen MTC Semiconductor, Qianzhao Optoelectronics, Jucan Optoelectronics, Elec-Tech, and Silan Mingxin.

That is to say, cheap Chinese equipment is continuously being imported into Sanan Optoelectronics’ competitors!

As the newly expanded chip factory MOCVD gradually comes into place in 2018, GGII expects to add more than 300 MOCVD units in 2018 , with an additional production capacity of 1.45 million pieces per month. A large amount of MOCVD production capacity will be released in 2019, and the additional production capacity in 2019 will reach 3.45 million pieces per month.

You do have to worry about the price!

3. Trade war threat

The threat of a trade war manifested itself in the second phase. The foreign trade data for September had already shown a serious decline. The main reason was that the 200 billion included relatively more LED projects. Adding together the related projects, 5 billion were strongly affected and about 8 billion were weakly related. If calculated broadly, these 8 billion U.S. dollars of products would all be subject to tariffs.

So after the trade war ends, will this part return? The problem is that the content of the trade agreement is still unclear, and the key lies in subsidies. If subsidies are reduced, the profitability of domestic companies will decline, and their competitiveness will also decline relatively.

Even if there is a tax cut, it is difficult to estimate whether it can offset the decline in subsidies. And it is possible that growth will be hampered.

According to LEDinsight data, prices in the U.S. LED lighting market rose in the second half of the year, clearly affected by the trade war.

It was not until after the G20 in Argentina that news of a ceasefire was announced and prices began to decline significantly.

According to the investment route, Sanan Optoelectronics, after expanding the industrialization scale of LED epitaxial chip R&D and manufacturing in 2014, and investing in the integrated circuit industry, and building gallium arsenide high-speed semiconductor and gallium nitride high-power semiconductor projects;

In 2018, Sanan Optoelectronics invested 33.3 billion yuan in the Nan'an High-tech Industrial Park in Quanzhou, Fujian, in the fields of III-V compound semiconductor materials, LED epitaxy, chips, microwave integrated circuits, optical communications, RF filters, power electronics, SIC materials and devices, and special packaging.

After the project is completed in 2022 , Sanan Optoelectronics will realize the layout of the entire industrial chain in the high-end field of semiconductor compounds, and the company's high-tech and production scale will enter the ranks of international leaders.

What will 2022 look like?

Investors' concerns about long-term uncertainty are probably the main reason for the recent weak willingness to invest in the long term!

Will the LED industry experience a fierce competition in 2019? The industry may turn around only after all backward production capacity and overseas competitors are eliminated, and the industry concentration is improved.

When the LED industry hits bottom and compounds become the main force of new growth, it will be the time for Sanan Optoelectronics to transform into a true dragon.

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