AIXTRON: Still Waiting For Recover In LED Market

Aixtron’s (AIXG) dominant share of the MOCVD market is a double-edged sword. Currently the LED market is weak and the recovery slower than expected, necessitating a major write-down of inventory. Once LEDs are widely adopted for residential lighting, AIXTRON will be a major beneficiary. This shift in consumer behaviour is dependent on the availability of high-quality LED bulbs at acceptable price points. AIXTRON’s share price is very vulnerable to any delays in this market transition.

Still waiting for recovery in LED market
Following major strategic investment in LED production capacity during 2010, investment in faltered in H211. Orders picked up by 15% sequentially in Q312, indicating that the nadir has passed, but at €34.5m were lower than expected. Although MOCVD utilisation rates are high, customers are hesitant about adding new LED production capacity. Noting the slower-than-expected recovery in demand, management wrote-down inventories by €51.5m.

Inventory write-down magnifies losses
Q3 revenues grew by 35% sequentially to €62.2m, but September YTD revenues were 68% lower at €150.3m y-o-y. Including the write-down, YTD operating losses were €113.0m compared with €129.8m profit for the same period 2011. G&A expenses were cut but investment in R&D was maintained at higher levels than FY11, underpinning new products for memory, power electronics for mobile devices and OLEDs.

Valuation predicated on FY13 market recovery
Noting the slower-than-expected recovery in demand, management now expect to achieve full-year revenues of around €220m and an EBIT loss of around €125m, with a return to profitability in 2013. Although sales in non-LED segments, particularly sub 30nm DRAM power electronics, are encouraging, these are not sufficient to compensate for sluggish LED sales. The balance sheet is strong with net cash of €209.0m at end-Q312, so with cash-burn at €26.0m in Q312, AIXTRON will be resilient to delays in market recovery. However, the share price assumes that profits will begin to recover in FY13, achieving P/E parity with Veeco in FY14. The price is therefore vulnerable to any delays in the widespread adoption of LEDs for lighting, particularly commercial and residential lighting.

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