December 11, 2012 - Taiwan makers of light-emitting diode (LED) products are unlikely to see a recovery in 2013 LED equipment spending due to a lack of investments and an alarming sector-wide cash crunch, warns one industry analyst.

Maxim analyst Aaron Chew, in a recent research note, lowered his outlook for MOCVD tools in 2013 to 240 tools, down from previous expectations of 300 tools. Despite investments drying up due to LED chip overcapacity and underutilization, Taiwan had been seen as "a beacon of hope for a recovery in MOCVD spending," but widespread losses and rising debt are choking off the money needed to support those reinvestments, he cautions.

The top eight Taiwan LED chip producers (Epistar, Lextar Electronics, Formosa Epitaxy, Genesis Photonics, Huga Optatech, Tekcore, Epileds, Arima Optoelelectronics) have generated around $67M in operating losses through almost all of 2012 YTD despite "burning through $1 billion in cash since 1Q10," and they are "burdened by $1B in debt with cash down (21%) YTD to $900M" -- meaning they don't have the financial muscle to support a market rebound, he writes. Taiwan's flagship LED maker Epistar -- which represents over half of the total $2.5B market cap of Taiwan's top eight LED chipmakers -- is still generating 14% gross margins and eking out 3% operating margins, but even it has generated massive losses in free cash flow ($236M) over the past two years.

Swimming beneath these murky financial waters is the shadow of consolidation, threatening to undo the LED "arms race" that blossomed in 2010-2011, Chew says. Epistar has acquired smaller competitor Huga Optatech and taken stakes in Tekcore and Na Ya Photonics, but also making inroads is China's Sanan Optoelectronics, with a 20% stake in Taiwan's ForEpi. As capacity continues to concentrate with consolidation, look for capital spending to rationalize, Chew says.

Taiwan LED makers have an installed base of roughly 1000 MOCVD tools, representing more than a third (35%-40%) of all MOCVD investments since 2010, Chew notes. But with total capex down (61%) to $273M, and the only ones really spending are Epistar and ForEpi, Chew sees MOCVD spending holding flat in 2013. With overcapacity/underutilization rampant among China and Korea LED makers, and Taiwan unable to float a LED recovery by itself, 2013 doesn't look as rosy for LED equipment demand.

Capex at the Top 8 Taiwan LED chipmakers. Applies average quarterly NT$ / US$ exchange rates ranging from NT$29 to NT$30 for each period. (Source: Maxim Group, citing company data)