A peek into LED industry capital flows in 2015 from M&A data

It is becoming increasingly clear that the LED lighting industry is quietly undergoing profound changes. The extensive competition in the first stage is gradually transforming into the capital and technology competition in the second stage. This is mainly reflected in the increasing concentration of the industry. Medium and low-level companies are gradually withdrawing from the market, and large companies are gradually beginning to dominate the market. We analyzed the 2014 corporate merger and acquisition data to gain a glimpse of the industry capital flow phenomena and trends in 2015.

Unlike the LED chip industry, there are a large number of companies in the LED packaging, LED lighting and LED display industries in mainland my country, with low industry concentration and fierce market competition. In the HHI index of my country's LED industry in 2014, except for the chip industry, which exceeded 1,500, the packaging, lighting and display HHI indexes were all below 1,000. According to the definition of the HHI index by the U.S. Department of Justice, an HHI index of more than 1,500 falls into the category of oligopoly, while an HHI index below 1,000 falls into the category of competition. It can be seen that the market share of enterprises in my country's LED packaging, lighting and display industries is still low. There are not many leading companies that have the ability to have a significant impact on the industry, and market concentration needs to be further improved.

Previously, due to high product homogeneity and low industry entry barriers, it was difficult to achieve rapid expansion through differentiated development. Therefore, extensional growth based on mergers and acquisitions will become the development trend of this type of industry. Enterprises with capital, technology and resource advantages can achieve complementary advantages through strong alliances. While enhancing its own competitiveness, it also further expands its market share to achieve a win-win situation. The merger boom that occurred in 2014 is a reflection of this. According to incomplete statistics, there were 33 major mergers and acquisitions in the global LED industry in 2014, including 5 foreign and 28 domestic. In terms of the amount of mergers and acquisitions, foreign mergers and acquisitions cases involved funds of 3.826 billion yuan, accounting for 39%, and domestic mergers and acquisitions cases involved funds of 5.965 billion yuan, accounting for 61%, reflecting the faster domestic capital concentration trend compared with foreign countries.

Proportion of domestic and foreign LED M&A funds in 2014

Although the number and total amount of foreign mergers and acquisitions are less than domestic ones, it has set the largest single merger and acquisition transaction in the LED industry of the year - Investindustrial invested 400 million euros to acquire 80% of the transferred equity of Italian lighting brand Flos. Except for this merger, the other four mergers and acquisitions involved relatively small amounts, ranging from 90 million to 240 million yuan. It is generally believed that the development of the overseas LED industry is relatively mature, and high-quality industry resources such as lighting product brands and channels have been basically divided up, resulting in relatively small M&A amounts. At the same time, these companies have transferred the fiercely competitive and low-profit mid-to-low-end LED packaging and lamp manufacturing to mainland China, which has relatively low labor costs. This has effectively avoided the price pressure brought by industry competition and created a relatively stable competition pattern in the overseas LED industry.

Foreign M&A cases and amounts in 2014

Judging from the domestic M&A situation, M&A with a capital scale of less than 100 million yuan accounted for at most 43%, and M&A with a capital scale of more than 1 billion yuan accounted for at least 4%. The phenomenon of the majority of small-scale mergers and acquisitions is also consistent with the current situation of my country's LED industry. That is, the number of enterprises with a scale of over 1 billion in my country's LED packaging and application industry is relatively small. Therefore, the lack of enterprise scale also limits the emergence of large-scale mergers and acquisitions. However, as industry concentration continues to increase, the sales and profit scale of industry leaders will continue to rise, which will also lay a good foundation for more large-scale M&A transactions in our country in the future.

Distribution of Domestic M&A Case Funds in 2014

From the perspective of the scale of M&A funds in various industrial chain links, the total funds involving terminal applications such as downstream LED lighting and display screens accounted for 82% of all M&A funds. This includes the cross-industry mergers and acquisitions of Feilo Audio and Tongfang Co., Ltd. and the extension of LED manufacturers such as Changfang Lighting to the downstream of the industry chain. The scale of M&A in the LED packaging industry is relatively low, only 6%.

The proportion of merger and acquisition funds in various domestic industrial chains in 2014

This phenomenon is also reflected in the chart, that is, unless it is to obtain some cutting-edge technologies or patents, horizontal mergers and acquisitions in the LED packaging field will rarely occur, because pure horizontal mergers and acquisitions will only increase the company's production capacity, but the synergy effect is poor and will not bring substantial improvement to the company's future development. Similar vertical mergers and acquisitions from the midstream packaging link to the downstream terminal link and cross-border mergers and acquisitions initiated by non-LED companies in the LED terminal field will continue to take place.

Unlike chip and packaging manufacturers, many LED terminal application companies have their own sales channels. These channels are crucial to upstream companies, especially highly competitive packaging companies. By combining with application companies that have high-quality channel resources, both packaging companies and cross-border companies can sell their products through this channel, thereby maximizing benefits through the coordination effect generated by mergers and acquisitions. Therefore, it is expected that mergers and acquisitions in the LED application field will continue to be the protagonist of the LED industry in the future.

Summary: As the price of LED products further bottoms out, the profitability and risk resistance of small companies will face great challenges, and large companies will further control the market through technology and production capacity advantages. The industry mergers and acquisitions in 2014 are just the beginning. As the competition in the industry becomes increasingly fierce, the demand for strong alliances among high-quality enterprises will also increase in 2015. The number and amount of mergers and acquisitions will also increase compared with 2014. The market concentration of the LED packaging, lighting and display industry will gradually increase. We will keep looking forward to when the second phase of industrial competition will arrive.