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Epistar and FOREPI Merger to Bring New Golden Era to Taiwan LED Industry

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Industry insiders have different views on the trend of large LED upstream manufacturers dominating the market. While foreign investment firms are optimistic the merger will create a win-win situation for Epistar and FOREPI, other market insiders are concerned it will have a negative impact on downstream manufacturers.

At a recent stockholder meeting, Epistar Chairman B.J. Lee noted the LED industry should make the most of the arriving golden three years. Epistar projected the LED lighting market sector will enter an explosive growth phase in the next two to three years, and estimated lighting penetration rates will reach 60 percent to 70 percent by 2017.Intensified market competition and large international market demands have set in motion restructuring and alliance forming trends in the LED industry. Epistar’s acquisition of FOREPI will integrate resources, expand production capacity, and assist the company in securing its market position. The industry is focused on whether the merger will allow Epistar to defeat major opponent San’an Optoelectronics (San’an Opto), and form an alliance with second largest rival FOREPI.

From another angle, the outcome of the merger between the two major Taiwanese LED chip manufacturers is beneficial to the country’s LED industry development. The merger provides an opportunity for Taiwan’s upstream LED industry to enter a leading position in terms of production capacity and technology. Moreover, the acquisition is creating new division of work, cooperation circumstances and concepts between LED manufacturers in Taiwan and China.

Japanese investor from Mitsui Co. urged Epistar’s absorption of FOREPI to bridge production capacity gap

Epistar has reached full production capacity fastest among Taiwanese LED manufacturers, said Epistar Spokesperson Rider Chang. The company has already manufactured 0.95 million LED chips in first half of 2014, but still faces supply shortage of 0.30 million. The ongoing production capacity shortage is expected to expand in second half of 2014. Expanding the company’s production capacity at this point will be too slow to solve the production shortage.

Moreover, with rising LED market growth, choosing FOREPI as a partner is the best option for Epistar. FOREPI is the second largest LED chip manufacturer in terms of production capacity, and also ranks second in LED technology. Furthermore, FOREPI’s 400 staff R&D team can strengthen Epistar’s R&D. FOREPI’s second largest stockholder and Chairman Suzuki Jiro, who is also the Manager of LED Business Office in Electronic Industry Business Unit of Main Information Industry Unit in Mitsui Co., was the key person behind the recent merge, said FOREPI Chairman Fen-ren Chien. The integration of the two largest LED chip manufacturers is a right decision for Taiwanese industry development.

For instance, after Epistar acquired Huga Optotech in 2009, the two companies were able to raise technology standards and product quality to similar levels within six to 12 months, and even integrate corporate cultures, said Chang. Epistar and FOREPI’s readjustment period to minimize differences will also be targeting six to 12 months and maybe even shorter. Based on FOREPI’s current production capacity plans of reaching 0.3 million LED chips, the company’s consolidated revenue is estimated to reach NT $7.5 billion (US $251 million) after the merge. The company is expected to lower operating ratio to below six percent, and if gross margin reaches 10 percent the company will be raking in NT $300 million net profit. FOREPI’s Earning Per Share (EPS) will surpass NT $2 if the company’s gross margin reaches a similar standard to Epistar’s 12 percent to 15 percent.

FOREPI to turnaround losses after balancing supply and demand

Supply and demand conditions often affect gross margin performances, gross margins can be improved by stabilizing supply and demand, said Epistar General Manager Chou Ming-chun. Although, lowered manufacturing costs has become the main driver behind the LED lighting industry’s rapid growth, it has also become a source of stress for manufacturers. Instead of haggling over prices when working with clients, it would be better to provide clients different value products to maintain Average Selling Price (ASP), explained Chou. Another solution is to offer higher priced products, for example developing co-activation services with clients to improve product features, or develop specially designed HV LED and flip chip products.

FOREPI can definitely turnaround long term losses after merging with Epistar. The main reason behind the losses included FOREPI’s higher manufacturing costs than Epistar and lower ASP, said Chien. FOREPI can lower manufacturing costs after integrating production capacity with Epistar. Initially, the two companies will cooperate under an OEM model. Epistar will be outsourcing 35 percent LED chip OEM orders to FOREPI at a rate higher than the later’s ASP, said Chien. FOREPI’s production capacity target is set at 0.4 million pcs. Moreover, due to significantly lowered equipment depreciated costs in 3Q14 and increased ASP, the company has a chance to becoming profitable.

San’an Opto will not be able to grab a seat on Epistar’s board

FOREPI’s largest shareholder San’an Opto, who has a 19.77 percent stake in the company did not recommend any board member candidates during FOREPI’s board election in June 2014. The company’s actions caused a lot of market speculations. Now that FOREPI sudden agreement to swap all stocks and become a wholly owned subsidy of Epistar. The merger between the top two Taiwanese LED chip manufacturers and San’an Opto’s future actions are all under the industry limelight. Both Epistar and FOREPI have declined to comment about competitor San’an Opto’s future strategy.

Epistar has prepared all necessary measures to protect San’an Opto’s rights, said Chang. San’an Opto can choose whether it wants to keep the 120 million stocks in FOREPI, or convert them for Epistar shares. If the Chinese LED chip manufacturer decides to swap shares, it will have a 3.1 percent stake in Epistar, but the investment will still need to acquire approval from Taiwan’s Investment Commission and related government agencies. Even with a 3.1 percent stake in Epistar, it will still be difficult for San’an Opto to win a seat on the Taiwanese company’s nine member board committee, pointed out Chang. It will depend on the company’s shareholder reelection meeting in the next two years to judge whether the Chinese rival will become a board member.

Epistar’s patent advantages establish trend of large upstream LED manufacturers dominating the market

In addition, Epistar is the first Taiwanese manufacturer to have signed patent license agreements with top international LED manufacturers including Toyoda Gosei and Philips. The agreements approves interchange and usage of the two companies LED patents, making Epistar the first Taiwanese company to break through the international LED chip patent barrier. Epistar has fully displayed its patent technology and market position through patent license agreements with international manufacturers. The company has also scaled up international competitiveness, and will have a total of 3,000 patents after absorbing FOREPI. Epistar will have more leverage in the industry with its extended patent collection.

Epistar and FOREPI’s merger is just the first step, and there is still a very long way ahead, said Chou. The companies will cooperate more closely from now on, and hopefully the partnership will aid Taiwan’s LED industry performance in the global market.