Investment conclusion: We upgrade Epistar and
Everlight to Overweight to reflect the faster LED lighting
adoption, which helps mitigate our prior concerns of
intense competition in the display backlight space
hurting profitability. We believe the market is
underestimating the speed of LED lighting take-off and
the meaningful contribution in 2010 onward. Of the two
stocks, we prefer Everlight – more product offerings
from components (packaged LEDs) to light
module/engine should bring ample revenue upside in
the long term, 2010-12e ROE should recover to the
previous peak of 20-22%, market expectations are low
and the stock is attractively valued at 12x 2010e P/E.
What's changed: 1) Rapid LED lighting take-off: We
estimate LED lighting penetration to reach 4.6-8.5% in
2010-11 on greater light efficacy improvements and cost
reductions, as well as the government’s promotion
program. Together with the increasing popularity of
LED-backlight TVs and reviving demand for traditional
handset/CE applications, we expect LED chip supply to
remain tight in the industry in 2010.