华灿光电(300323)

Key points

HC SemiTek is the second-largest LED chip supplier in China, next only toSanan, mainly in blue / green light LED chips (62% / 9% of 1H18 revenues).

Private placement announced in Oct, for: 1) white light LED, Mini/Micro LED(US$362m), 2) IR VCSEL (US$101m), 3) Mems sensors (US$91m).

The private placement will fund SemiTek’s move to semiconductors, likeSanan’s, echoing our positive view on the semiconductor business.

Event

HC SemiTek is the second-largest LED chip supplier in China, next onlyto Sanan, according to the company. HC SemiTek supplies blue light LEDchips (62% of 1H18 revenues), LED substrate (17%) and green light LEDchips (9%). It announced a private placement in Oct, to fund investment in 1)white light LED, Mini / Micro LED (estimated investment Rmb2.5bn, orUS$362m), 2) VCSEL (Rmb700m, or US$101m), and 3) Mems sensors(Rmb625m, or US$91m).

HC SemiTek, like Sanan, plans to move to semiconductors, targeting IRVCSEL and Mems sensors, while Sanan is targeting III-V compoundsemiconductors for RF modules, high-power laser transmitters, power discrete(MOSFET, IGBT), power IC, etc. The move echoes our positive view onsemiconductors and cautious view on LED. Read-across: Sanan – softmarket likely to continue, DG to Neutral, link, Oct 17.Key takeaways

IR VCSEL, targeting smartphones, VR/AR, optic transceiver, surveillance,LiDAR: HC SemiTek’s Infrared VCSEL will focus on 850nm VCSEL and940nm VCSEL, providing both chips and epi-wafers. Management highlightsthat the technology in Infrared VCSEL is similar to Infrared LED as they havethe same wavelength, and the substrate of VCSEL is GaAs, also the same asred / yellow-light LED. Management highlights that the company’s red-lightLED chips’ quality is comparable to that of global-tier peers, and its infraredLED chips are in mass production. HC SemiTek plans to completeconstruction in three years, with payback expected in 6 years.

MEMS sensors (Geomagnetic sensor and Gyroscope) for smartphones:Main suppliers of MEMS sensors are non-Chinese companies, among themAKM (JP), MEMSIC (US), Yamaha (JP), Alps (JP), ST (EU), InvenSense (US),Bosch (US), etc. HC SemiTek acquired MEMSIC in 2Q18, penetrated MEMSsensors, providing Geomagnetic sensors to smartphones. The privateplacement will focus on Geomagnetic sensors and Gyroscope for smartphones,targeting construction in 3 years, with payback targeted in 6 years.

We maintain our cautious view on LED: The LED market remainscompetitive. Global LED bulb prices remain low, with average price of 60WLEDs down 1.5% MoM in Nov to US$7.2. LED chips suppliers’ inventory dayscontinued to rise in 3Q18, with Sanan’s up to 159 days (vs 101 days in 3Q17),HC SemiTek’s up to 167 days (vs 124 days in 3Q17), and Epistar’s up to 102days (vs 83 days in 3Q17). HC SemiTek also targets to build new capacity in 3years, adding 7.2m 2-inch white-light LED epi-wafer per year.Financials

The stock is trading at 1.6x 2019E PB with a 16% ROE in 2019E, based onBloomberg consensus estimates.