Fury of IPOs Continues in 2012 for China's LED Lighting Sector

Raising capital is not tantamount to guaranteed success in LED sector

Shenzhen Mason Technologies Co., Ltd. (SMT) share price spiked 43.33%, to RMB17.2, right out the starting gate on the Shenzhen Stock Exchange on Feb. 17, the day of the LED-lighting startup's initial public offering, making the 27-year-old Li Chi, Mason chairman Li Zhijiang's only daughter, worth around RMB 137 million (US$21 million) based on her eight million shares.

SMT was founded in 2002 to develop and make LED devices for lighting and floated 22 million shares in the IPO to raise RMB264 million (US$40 million) after reportedly seeing net income rise an annual 52.1% in 2011 to RMB54.95 million (US$8.4 million) on revenue of RMB370 million (US$56.9 million).

The LED devices maker was the first of 16 LED manufacturers in China having signed up before Feb. 9 with the China Securities Regulatory Commission to go public this year, including MLS Co., Ltd., MOSO Switching Co., Ltd., Ningbo Hualong Electronics Co., Ltd., Click Technology Ltd., Kennede Electronic Mfg. Co., Ltd., Ocean's King Lighting Co., Ltd., Shenzhen Chang Fang Semiconductor Light Co., Ltd., and Shenzhen Jufei Optoelectronic Co., Ltd.

Theses are only a handful among the thousands of LED-product manufacturers in China vying to raise capital to boost tens-of-millions RMB business to billions to maximize efficiency, capacity to better tap the LED business in China where revenue grew at annual rate of 22% to RMB154 billion (US$23.6 billion) and volume rose 50% in 2011.

IPO Rush
In recent years, China's LED industry has taken off, underscored by throngs of manufacturers rushing to go public, with Ledman Optoelectronics Co., Ltd., Hongli Tronic Co., Ltd., Aoto Electronics Co., Ltd., Unilumin Group Co., Ltd., Liantronics Co., Ltd. and Kingsun Optoelectronics Co., Ltd. having launched IPOs last year alone on the Shenzhen Stock Exchange.

China Illumination Engineering Society (CIES) Director General Hsu Huai says: “Many LED manufacturers, such as power-control device makers, also plan to go public in light of sizzling investments, but most are small and midsized enterprises (SMEs) according to the publicized lists.”

Zhou Jun, an analyst with Orient Securities Co., Ltd. in Shenzhen, points out that the frenzy of investments are creating thousands of LED manufacturers. “Over 80% of traditional lighting manufacturers in Foshan [in Guangdong], for instance, have migrated to the LED industry over the past five years, raising the number of LED manufacturers in the lighting city to over 300, up from less than 100,” he estimates.

Most of the manufacturers have annual revenue between RMB300-100 million (US$46-15 million). “Some manufacturers generate revenue range of RMB500 million-RMB1 billion (US$76-153 million) but not more,” he says. His studies show no LED operator was in the billion-RMB club in China up to the end of 2010.

“For SMEs, going public to raise capital funds is critical for branding, R&D and corporate governance, paving the way for future expansion and growth,” says Li Montieh, chairman and president of Ledman. In 2011, many of China's LED companies wend under mainly due to excessive expansion built on scant capital in spite of the reality of an overcrowded market, lack of economy of scale and obsolete technologies.

“The successful IPOs of Nationstar Optoelectronics Co., Ltd. and Changelight Co., Ltd. in 2010 and of Ledman in 2011 set encouraging examples for Chinese LED makers, who had been diffident of the viability of floating shares,” says Orient Securities's Zhou, who says that most of the listed companies have spent raised capital on new equipment and production lines.

Pros & Cons
However, there are pros and cons for manufacturers to launch IPO. Zhou says that the price paid for raising capital via share issue is that manufacturers are obliged to abide by rules governing public companies, including making transparent management, operational details, with securities regulators also scrutinizing listed companies to motivate them to live up to their social responsibilities. “Such publicized information enables the public to better understand if the firms are hyping technology and quality. Having more knowledge about this industry also enables them to be more cautious when investing in stocks,” he says.

But IPOs are only a means to an end. Last year, several LED manufacturers, including JDL Enterprise Group and Bolunte Optoelectronics Technology Co., Ltd. of Shenzhen, went bankrupt, showing weakness of the SMEs' technologies to be more serious than their finance. “Even a huge amount of money raised will be lost due to substandard quality and technologies,” Zhou notes. “Only solid technological strength can buoy listed companies' share prices and popularity.”

The IPO price of RMB12 per share for SMT also reflects the shortage of investor confidence in the company's technology as the price offer was far below market organizations' estimate; while industry executives point out that the company has to convince investors that its technology has potential and bright prospects to be able to arrange easy bank financing in the future.

SMT provides packaging service, an LED segment in which most of China's LED manufacturers operate due to low threshold; while China's LED industry is technologically behind competitors in developed economies in epi-wafer and chip sectors.

Less Crowded
A few years ago, China's industry executives said that the nation's LED packaging industry offered greater opportunity than risk to investors for being less crowded with fewer listed makers than the other sectors, as well as having lower intellectual property barrier, an advantage for manufacturers to move into upstream or downstream sectors.

But such rosy trend does not last: over the past two years a rush of listed packagers has resulted in oversupply, the culprit behind the 2011 market collapse, which continues to worsen with ever more manufacturers launching IPOs, sparking suggestions that they need more than financial strength but technological muscle to effectively compete.

Regardless of oversupply, Ledman's Li remains optimistic about the future of China's LED industry. “Opportunities are still everywhere, but come only to manufacturers with clear market positioning, technological advantage and healthy management in addition to sufficient capital,” he stresses.

Orient's Zhou urges manufacturers to target spending raised capital on sharpening advantages and reinforcing weakness instead of aimless expansions.