Apple, Sony Adopt LED Lights, Lift Producers' Shares

Light-emitting diodes started as the little red indicators on clock radios and are backlights in most cell phones. Now the LEDs are helping Apple Inc. (AAPL) and Sony Corp. (6758) slim down computers and televisions and cut power usage.

They're also enriching investors. Shares of manufacturers Citizen Holdings Co. (7762), Toyoda Gosei Co. (7282) and Stanley Electric Co. (6923) of Japan, and Epistar Corp. (2448) and Everlight Electronics Co. (2393) in Taiwan have beaten global electronics stocks and their national stock indexes this year.

Apple said last month it would replace fluorescent tubes with LEDs in its laptop computers. The Taiwan government plans to swap traditional bulbs with LEDs in each of the country's 770,000 traffic lights within three years to save power costs, while Sony released a TV with an LED backlight in 2005.

``Apple is the trendsetter; now that they're using LEDs everyone else will follow,'' said Jordan Chen, who holds shares of Everlight, Epistar and Opto Tech Corp. (2340) among the $200 million he manages as chief investment officer at Invesco Taiwan Ltd. in Taipei. ``LED stocks are benefiting from power efficiency and environment protection, and the trend will continue.''

The cost of LED backlights for televisions has halved in two years, according to research firm iSuppli Corp., boosting demand. The global market will grow by 70 percent to $10.6 billion in the next five years, iSuppli said.

Citizen's share price has climbed 23 percent this year to 1,116 yen and Toyoda Gosei 28 percent to 3,540 yen. Epistar has gained 74 percent to NT$171 and Everlight 58 percent to NT$146. The Morgan Stanley Capital International World/Information Technology Index (MXWO0IT) has added 14 percent, while Japan's Topix index is up 5.2 percent and Taiwan's Taiex index 21 percent.

Overvalued?

LEDs are semiconductors that emit light whose color varies according to the component chemicals. Current backlights, which sit behind a liquid-crystal display, use fluorescent tubes, which burn more power and provide less color spectrum.

While more power efficient, LEDs are as much as 50 percent more expensive than fluorescent lights, limiting them at present to high-end notebooks where price is less of an issue, said Tony Chang, a spokesman at Taiwan's Wellypower Optronics Corp. (3080) The company is phasing out production of some fluorescent tubes.

The Hsinchu, Taiwan-based company will increase its capacity to produce LEDs 12-fold to 12 million pieces per month this year because of customer demand, Chang said. LEDs will account for as much as 20 percent of sales next year, from between 5 percent and 10 percent this year, he said.

Widespread Litigation

There is also widespread litigation. On May 9, the U.S. International Trade Commission found Epistar infringed two patents owned by Lumileds Lighting International BV, a unit of Royal Philips Electronics (PHIA) NV. The commission banned imports into the U.S. of some of the Taiwanese company's chips, said Epistar in a press release.

Closely held Nichia Corp. in April 2006 settled out of court a lawsuit filed a year earlier against Epistar and Everlight in Tokyo District Court to stop the Taiwanese companies from selling some of its products in Japan.

Despite the hurdles, shares of LED makers have become more expensive than those of peers. The stocks of seven LED companies are valued, on average, at 36.1 times estimated earnings. That compares with 27 times for the MSCI World technology index, 23 times for the Topix and 22 times for the Taiex.

``In the short term, investors may see LED stocks as overvalued and could reduce holdings,'' said Kevin Yang, who manages NT$200 million at Paradigm Asset Management in Taipei, including Epistar and Everlight. ``In the long term, the industry has growth momentum. First it's notebooks, then it will be TVs.''

Apple's MacBooks

Apple's MacBooks, released last month, are the first of the company's laptops to use LEDs, part of a goal to eliminate mercury from Apple products and become more power-efficient. Everlight says LEDs consume half the power of fluorescent lamps.

Epistar said last month sales and production capacity of its LEDs used in flat-panel displays grew 50 percent in the first half and will continue to expand. Sharp Corp. and Fujitsu Ltd. also make notebooks that use LEDs.

Net income at the Hsinchu, Taiwan-based company climbed 51 percent to NT$344 million ($10 million) in the three months ended March 31 from the same period a year earlier. Profit at Tokyo-based Stanley Electric in the fiscal year ended March 31 climbed 28 percent to 26 billion yen ($213 million).

The cost of an LED backlight for a TV has fallen to 1 1/2 times that of tubes, from more than three times two years ago, according to iSuppli. The backlight accounts for about 30 percent of the component cost of a flat-panel display, the largest share, said iSuppli.

Taiwanese and Japanese companies claim about two-thirds of the global market for LEDs, said Deutsche Bank AG. Closely held Nichia is the leader, along with Toyoda Gosei, minority-owned by Toyota Motor Corp., and Durham, North Carolina-based Cree Inc. (CREE)

Traffic Lights

Shipments of LEDs used as backlights in screens larger than 10 inches will almost triple next year compared with 12.8 percent growth for fluorescent tubes, according to a report last quarter by Austin, Texas-based market researcher Display Search.

``Current P/E ratios don't yet reflect next year's revenue growth,'' said Eric Wei, who helps manage NT$7 billion at Fubon Securities Investment Trust Corp. in Taipei, including LED makers.

Taiwan's economic ministry said in April it would spend NT$2.1 billion to replace all of the country's traffic lights, which use traditional bulbs, with LEDs, and will also convert 1.35 million street lamps.

``Share prices have risen a lot, but this year is just the start,'' said Fubon's Wei. Fubon plans to hold onto its Epistar and Everlight shares and is looking for more LED investments, Wei said.

To contact the reporter on this story: Tim Culpan in Taipei at tculpan1@bloomberg.net.

To contact the editor responsible for this story: Teo Chian Wei at cwteo@bloomberg.net.

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