In recent 10 years, Chinese Government subsidies have fueled domestic investment in LED chips and caused serious overcapacity. Faced with the decline in LED CHIP prices and LED chip companies performance, our government’s subsidy for LED chip production equipment is decreasing in these several years. For LED chip makers, whether it can smoothly switch from the "policy engine" to the "market engine" has become the biggest test.
Large scale LED chip makers nearly double its revenue this year, but its net profit decreased by 10%. The led chip companies have been closely watched by the government in recent years and it was not accidental last year.
Over the past few years, local government subsidized Sanan Optoelectronics with many names, up to 24 at a time. Among them, the two largest projects are: government subsidies for MOCVD equipment procurement subsidy projects amounted to 911 million yuan, and equipment procurement subsidy funds for Suncom Solar PV Technology Co., Ltd. was 480 million yuan. In addition, there are various subsidy items such as new products and industrialization of LED chips.
Another listed company in the LED industry, BDO Runda, is similar to its case. Its 2012 revenue was 2.824 billion yuan, a year-on-year decrease of 7.89%; net profit was 168 million yuan, a year-on-year drop of 57.14%. For the declining performance, BDO Runda stated that an important reason is that the government subsidies that were credited to profit or loss for one-off in the fourth quarter of last year did not arrive as expected.
BDO Runda predicts that net profit will fall by 30% to 60% in the first half of this year compared with the same period of last year, which is mainly due to the combined effect of the government subsidies received in January-June 2013 and the significant decrease in the previous year and the year-on-year improvement of the main business.
BDO Runda admitted in the first quarter of this year that local governments gradually suspended or cancelled subsidies for new equipment, and government subsidies weakened. At present, the company already owns 80 sets of equipment. The remaining equipment is still in procurement. If the government cancels equipment subsidies, it will significantly increase the company's input costs for the equipment. This will cause uncertainty for the company's continued expansion of production capacity, which will affect the company’s performance and the LED industry. The overall strategy of the layout.
Many companies that received more government subsidies because they had been “frying” upstream in the past two years. Local governments used subsidies to attract foreign investment in order to attract investment lever. if the government subsidy of Sanan Optoelectronics and BDO Runda is taken away, these two LED chip listed companies will basically lose money in 2011 and 2012.
Government subsidies have accelerated the rise of the LED industry in mainland China. Zhang Hongbiao analyzed that LED companies in mainland China could not compete with enterprises in Taiwan and other countries. With subsidies, scale, and technology development, LED companies in mainland China have a competitive edge. Last year, Sanan Optoelectronics also acquired Taiwan's Zhenyuan Optoelectronics.
However, government subsidies also caused serious overcapacity of domestic LED chips. In the three years of 2009, 2010, and 2011, the average annual number of new LED chip projects was more than 20, and at most, there were more than 80 domestic chip companies. More than 50, and more than 20 were withdrawn in 2012. Many of the pre-investments in the project have been “flooded” and wereted. Overcapacity also caused the price of LED chips to plummet, and many LED listed companies in 2012 and 2013 continued the trend of “increasing income without increasing profits”.
“The government used to waste more investment in the past, and it also contributed to the support of the industry.” Zhang Hongbiao said.
