On the evening of July 11, San’an Optoelectronics announced its earnings guidance for the first half of 2023. Due to a decrease in selling prices of LED chips and increased accrued expenses, the chipmaker expects a year-on-year decline of over 75% in net profit for 1H23.

Earnings to Shrink with a 15.24% Decrease in LED Chip Revenue

Due to the slow demand recovery in 1H23, San’an posted a year-on-year drop in revenue to 6.469 billion yuan (4.33% YoY), with operating costs growing 4.42% to 5.592 billion yuan and gross margin being cut by 530 million yuan. Net income attributable to shareholders of the listed company ranged between 140 and 233 million yuan, down 75-85% compared to the year before. Net income excluding non-recurring items (attributable to shareholders of the listed company) was roughly -583 to -495 million yuan, which was 714.9835 to 802.9835 million yuan less from the same time a year ago.

According to the analysis provided by San’an, the slow recovery of demand in 1H23 squeezed total revenue. Specifically, its LED chip business performed poorly, whereas its IC business performed well. The overall performance showed a downward trend, indicating that San’an’s LED chip business may have had a greater impact on its revenue.

The LED manufacturer reported a 15.24% year-on-year decline in LED epi-wafer revenue due to factors such as a decrease in product prices. Additionally, the lower-than-expected adjustment of the LED product mix and insufficient equipment utilization during the reporting period caused operating costs to increase by about 7.5%, resulting in a gross profit reduction of 620 million yuan. Moreover, due to the falling price of conventional LED chip inventory and increasing provision, San’an expects an increase of approximately 180 million yuan in provision for inventory depreciation compared to the previous year.

Conversely, the IC business remained impressive, with product revenue jumping approximately 9.68% on-year in addition to a 9% increase in gross profit, which was equivalent to 120 million yuan. Specifically, sales revenue from the major SiC business of Hunan San'an skyrocketed by over 170% year-on-year.

Notably, the company also disclosed the draft of the fifth phase of the employee stock ownership plan (ESOP). The ESOP will consider 2023 and 2024 as performance assessment years, with a revenue target of no less than 14 billion yuan for 2023 and no less than 15 billion yuan for 2024. In 2022, San'an generated 13.222 billion yuan in revenue.

Mini/Micro LED Market Ready to Boom Despite Slow Growth of Demand in the Short Run

According to San’an’s earnings guidance for 1H23, the current growth momentum in the LED market is insufficiently strong, and the overall performance of the chip industry will be affected to some extent in the short run.

Regarding chip prices, costs are gradually decreasing with the continuous advancement of chip technology, leading to a reduction in product prices. On the other hand, consumer demand is recovering slowly, where chip manufacturers have taken corresponding measures to lower product prices in order to reduce inventory. According to LEDinside, the demand for LED chips has been weak since 2H22, affecting inventory and capacity utilization among suppliers. If end demand rises in the future, nevertheless, manufacturers are expected to improve their performance gradually through increased sales.

Concerning product mix, most LED chipmakers have been striving to adjust their product mix in recent years, including San’an. The companies have shifted to invest in Mini/Micro LED and high-efficacy, high-power LED products, aiming to differentiate themselves from competitors for greater competiveness and profitability. However, Mini/Micro LED, automotive lighting, and other mid- and high-end applications in the consumer market—despite having good potential—are developing slower than expected. Therefore, manufacturers are likely to encounter insufficient equipment utilization and undesirable product mix adjustment before the demand takes off.

In the mid-to-long term, market demand will eventually take off. Since last year, the Mini/Micro LED development has entered a new stage. Specifically, the cost of Mini LED has declined, offering a clearer prospect in terms of cost reduction and development trend. Micro LED is a highly promising candidate for the expansion of mid- and small-sized device applications, which has somewhat accelerated the commercialization of this cutting-edge technology.

At the industry level, investor enthusiasm has not diminished. For example, investments for Mini/Micro LED-related investment projects amounted to nearly hundreds of billions of yuan in 2022, and the enthusiasm has continued into this year.

At the policy level, 17 provinces in China, including Guangdong, Chongqing, Fujian, Beijing, Hunan, and Jiangsu have mentioned in the 14th Five-Year Plan their focus on developing Mini/Micro LED new display technologies. The Ministry of Industry and Information Technology and other departments, as well as the Ministry of Science and Technology, have emphasized the key layout of Mini/Micro LED new display technologies and strategic electronic materials in the “Plan for the Integration and Development of Virtual Reality and Industry Applications (2022-2026)” and the National Key Research and Development Program, respectively.

Mini/Micro LED has garnered wide attention in all aspects, showing a promising future. In fact, manufacturers including LED chipmakers have achieved several outcomes regarding product mix adjustment and capacity realization, demonstrating their hard efforts over the past two years. As market demand surges in the coming years, LED chipmakers like San’an as well as package, module, panel, and display manufacturers will see their revenues and profitability gradually bounce back thanks to breakthroughs in integrated LED technologies, realization of production capacity and enhancement of equipment utilization. (By Janice from LEDinside)

 

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