LED lighting to see the price of long-term brand

At present, the LED industry has entered the integration period. It is particularly important to grasp structural opportunities and select stocks.

The lighting market began to reshuffle, and the decisive factor was the scale, brand, and channel LED light source toward commodityization, which was favorable for large-scale manufacturers. The gross profit rate fell first and then scaled up. One of the means to promote the industry's reshuffle is to promote product standardization. Recent moves by major international companies such as Philips to promote the Zhaga Alliance reflect this trend. The LED light source includes a light bulb and a light tube, and the luminaire is based on a light source and includes a housing and the like. Zhaga aims to standardize the interface of light sources and enhance the compatibility of lamps and lanterns with different manufacturers' lighting products. We understand that most LED light source SMEs reject this attitude. The main reasons include: 1) Product standardization requires manufacturers to have a larger scale; 2) Brands and channels are more important when product differentiation is reduced. Under this trend, SMEs can only engage in low value-added processes such as OEM and product assembly.

In the traditional lighting field, the top four light source manufacturers account for nearly 50% of the total, while the top ten lighting manufacturers only account for about 1/3 of the total. At present, the LED industry is extremely fragmented. It is expected that the light source industry will move toward commodityization in the future and the industry concentration will increase significantly, while the lighting industry will still maintain a diversified market structure. Sunlight, NVC and Hongli will benefit from large-scale light source manufacturers.

The second means of large-scale companies to promote industry reshuffle: after the realization of cost advantages to take the initiative to cut prices, thus squeezing small and medium-sized manufacturers profit margins. As the industry has significantly expanded production and LED lighting is still relatively price sensitive, cost control has become the subject of the industry. Taking the rectangular lighting with the most aggressive pricing strategy as an example, the company has achieved significant cost advantages through vertical integration, improved chip utilization, and development of new drive technologies while substantially expanding production. The level is 25-40% lower.

With the fierce price competition, the overall gross profit margin of the LED lighting industry will decline in the short-to-medium term. Looking back at the history of fluorescent lamps, the industry actively expanded production during 2002-07, leading to a significant decline in the overall gross profit margin. Until the year of 2007, the fluorescent lamp industry was basically mature, with gross margins returning and stabilizing at 25-30%. We expect that the LED light source industry will replicate the history of fluorescent lamps, and the industry's gross profit margin will drop first and then increase. The final and reasonable gross profit margin of the brand-sized manufacturers will be 25-30%. At the same time, the survival space of small and medium-sized manufacturers is being squeezed, and the scale manufacturers with cost advantages will continue to increase their market share.

In addition, the increase in market share caused by the expansion of scale will also help improve the company's profitability. For example, after NVC won in the competition of traditional fluorescent lamps, its gross profit rate increased steadily with the appearance of scale effect. (Excluding the impact of the sharp increase in rare earth prices in 2011.)

Short-term sensitivity to price, long-term heavy brand short-term perspective, LED lighting is in the initial stage of penetration, the price is still the biggest constraint to promotion, so we must achieve price reduction to achieve penetration. The industry generally believes that it is not necessary to maximize the performance of lamp life, but to reduce the cost as much as possible on the premise of meeting the standards, because in the ever-changing technological stage, the average consumer temporarily does not need the lamp for 10 years.

In the long run, LED lighting consumption attributes determine the importance of lighting brands. Life expectancy significantly better than traditional products is one of the biggest advantages of LED lamps. With the continuous advancement of technology, the lifespan of LED lamps still has a large room for improvement. The theoretical value can reach 80,000 hours. We believe that under this trend, LED lighting will gradually reflect the consumption attributes of long-term products. The more mature the technology, the more significant this feature will be. The consumption of long-term products has higher requirements for brands and quality.

We judge that the current industry is in a stage of rapid technological advancement, LED lighting long-term product attributes are not obvious, so low-cost LED lamps will stimulate short-term applications. With falling prices, coupled with the prevalence of EMC and other business models that value long-term returns, consumers will inevitably choose quality LED lighting brands in the long run.

Quality channels enhance profitability, and channel construction costs are controllable. As lighting applications are generally directly oriented to users, it is a typical B2C model, which fundamentally determines the importance of channels. Internationally renowned manufacturers all have their own channel advantages.

1) Stores: Generally distributed in residential areas and commercial areas, divided into two types of direct-operated stores and franchised stores. Direct-operated stores are directly managed by the company. The specialty stores are essentially self-built channels for manufacturers, and they must first invest a lot in brand building.

2) Dealers: Generally distributed in the wholesale market of lamps and lanterns, and usually distribute multiple brands at the same time (except for exclusive agreements). Since the customer groups of distributors and specialty stores include decoration companies (engineering) and individual consumers (general households purchase), there is competition with each other.

3) Stores: including supermarkets, home stores, etc. Directly for individual consumers.

From the perspective of accounts receivable turnover rate, NVC and Foshan Lighting with high quality channels are significantly better than their peers, indicating that the channels have a positive positive effect on the company's profitability.

Among them, NVC's channel strategy is the most aggressive and uses the most expensive store model. As of the end of 2011, NVC had about 3,000 stores (mostly franchisees).

From the perspective of the costs in the process of channel construction, NVC has a relatively large investment in the initial period, and the marginal cost has decreased since the model was mature. In recent years, the company successfully controlled the operating expense ratio at a relatively stable level.