A number of global trends are changing the way people use light. Thanks to the use of nano-structured semiconductors or organic polymers, inorganic and organic light emitting diodes (also known as LED and OLED) are disruptive technologies, likely to change the lighting landscape of this century.
New LED lighting also paves the way for new applications in electronic products. This technology makes many products lighter, better, smarter and more user- and ecologically friendly, with new and / or enhanced functionalities that use much less energy.
Many countries and regions have introduced legislative measures to address energy consumption and the emission of greenhouse gases, which are linked to climate change. In particular, 2010 saw further legislation to phase out old, incandescent lighting and other energy-inefficient forms of electric lighting.
The lighting industry as a whole has been recovering in 2010 from the global economic developments in 2009, though recovery is unevenly spread with demand picking up in emerging markets in particular. For example, the Chinese authorities project that average annual GDP growth will be 7.0% (12th Five-Year Plan 2011-15).
Driven by government subsidies and soaring demand from new applications such as LCD-TV backlighting and general illumination, China’s LED market is set to more than double from 2009 to 2014, according to iSuppli Corp. LED revenues in China will reach $7.1 billion by 2014, up from $3.4 billion in 2009, for a CAGR of 12.8 percent. Ultra-High Brightness (UHB) LEDs will increase particularly rapidly, rising to $1.8 billion by 2014, up from $686 million in 2010.
The figure presents iSuppli’s forecast for LED revenue in China for the period of 2009 through 2014.
Source: iSuppli, USA.
Chinese companies receive extensive funding from government sources, which will allow them to capture a major share of soaring domestic demand. Local governments in China subsidize at least 70 percent of the cost, or $1.5 million on average, for each purchase of a machine that performs Metal-Organic Chemical Vapor Deposition (MOCVD), a process used in the manufacturing of LEDs. Furthermore, local authorities offer tax and utility payment benefits to Chinese LED suppliers.
Such support from the government will spur $3.5 billion in spending for each year from 2010 to 2012 on LED-related manufacturing equipment among Chinese LED suppliers, according to an optimistic forecast from iSuppli. In turn, the spending will allow Chinese suppliers to overcome their current technological shortcomings, including their lack of Intellectual Property (IP), manufacturing equipment and LED wafers.
The domestic Chinese LED market covers numerous applications, including LED displays, street lighting, general illumination, traffic signals, flash lighting for handset key pads and digital still cameras and the backlighting of large-sized LCD panels in LCD-TVs, laptops and other displays.
The LCD backlighting market in China will enjoy robust growth to reach $1.2 billion in 2014, up from $468 million in 2010.
Companies like Philips Electronics, Samsung and other major players can benefit from this trend. But also a small player like U.S. listed company China Intelligent Lighting and Electronics is expanding its business.
China Intelligent Lighting and Electronics, Inc. (NYSE Amex: CIL) is a China-based company that went public on 2010-06-18 (IPO Price $3). Through Hyundai Light, the company provides a full range of lighting solutions, including the design, manufacture, sales and marketing of high-quality LED and other lighting products for the household, commercial and outdoor lighting industries in China and internationally.
In July 2010, CIL renewed the license agreement with its licensor, Hyundai Corporation, and the term of the new agreement is from August 1,2010 to July 31, 2013. Additionally, Hyundai Corporation has signed a non-binding memorandum of cooperation effective January 1, 2009 that indicates that Hyundai Corporation intends to renew CIL's license agreement until December 31, 2018. Because the trademark license agreement prohibits the company from selling its Hyundai™ branded products outside of the PRC, the international expansion efforts will primarily be executed through its Original Equipment Manufacturer (OEM) products, which are not directly affected by the Hyundai Corporation trademark license agreement.
The company currently offers over 1,000 products that include LEDs, long life fluorescent lights, ceiling lights, metal halide lights, super electric transformers, grille spot lights, down lights, and recessed and framed lighting.
On Feb. 2 the company announced that it signed contracts with distributors to open more than 300 exclusive distribution outlets in China this year. The agreements are part of CIL's strategic promotional marketing campaign, whereby distributors agree to two-year contracts that grant them the right to sell CIL's Hyundai and CINLE lighting products exclusively in outlets branded with the Hyundai and CINLE names. The company will invest RMB50,000 (approximately US$7,600) in each store, RMB15 million (approximately US$2.3 million) in total, to assist the distributors to furnish the outlets according to the company's branding awareness objectives and guidelines; the decoration standards will remain consistent throughout the network of outlets. With the addition of these 300 distribution outlets, CIL will have 2,500 distribution outlets across 30 provinces and cities in China.
The stock is trading below book value and with a projected EPS FY 2010 of $0.62 is has a P/E below 4. My EPS projection for FY 2011 is $0.75.
From a fundamental perspective this company is a bargain, but what makes it more interesting is the main transitions that will affect the lighting industry in the years to come, which also could be beneficial for China Intelligent Lighting.
The first is a move towards energy-efficient light sources, in response to rising energy prices and increased awareness of climate change.
The second transition is the move from traditional vacuum-based technologies to solid state lighting technology (LED). LED lighting is the most significant development since the invention of electric light well over a century ago.
The third transition is from bulbs and components as the point of value creation to end-user-driven applications and solutions.
This all makes it worthy to take a position in China Intelligent Lighting.
Disclosure: I am long CIL.