Money can still be made: Despite the significant run in some of the LED
stocks, we believe that growth-oriented investors should continue to
selectively buy this sector. The rapid increase in LED penetration in the TFT
chain is driving application-specific shortages that are likely to last well into
late 2010, and longer if penetration proceeds faster. While all standard risks
with any emerging technology sector, including high valuations, are very
much present in LED as well, we believe that the winners are going to be
companies with no patent issues and strong customer relationships.
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Demand-supply model: We provide a very up-to-date demand-supply
model for (HB) LEDs that we have developed working along with our
German and Japanese colleagues. We believe that our model provides a
good and realistic reference framework to track this sector. Given several
moving parts, we have also provided sensitivities around key assumptions
and have highlighted the key risks associated with investing in this sector. It
also lists out how the key Asian LED companies score on our screening test
and a two-pager on each of the stocks involved.
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Key ideas: Epistar is the largest standalone LED upstream player in the
world and is expected to benefit from the ongoing LED chip shortages. Seoul
Semiconductor is the only pure LED play among Korean companies in our
coverage and is positioned strongly among its customers. We initiate
coverage of Kumho Electric (Outperform, target 68,000) and view it as a
rerating play as it is in a transition from CCFL backlight to LED business. In
addition to these top Outperform ideas, we also see a healthy growth
potential for LG Innotek (rated Neutral) given its low-base effect in LED,
although the uncertainty around its potential rights issue is a concern.