Neo-Neo Group Poised to Be Fully-integrated LED Manufacturer

Moving to produce epitaxy wafers in September this year, the Neo-Neo Group will be the first Taiwan-based LED-lighting maker to be fully integrated-running manufacturing facilities to handle, from top to bottom, the entire production process in the LED industry.

Reportedly the world's No.1 supplier of LED decorative lamps and mini lamps, Neo-Neo turns out half of the mini lamps worldwide. It's also the largest supplier of stage lighting in Asia, employing nearly 20,000 workers in mainland China and having generated an estimated US$200 million in revenues for 2007.

"With the epitaxy wafer factory coming online, we will further reduce production cost, boost competitiveness and expand product lines," stresses group president B.H. Fan. The group also operates LED packaging and LED-lighting assembly lines.

Designed for an initial output of 12,500 wafers carrying some 400 million chips, the factory is constructed on 300 acres in Guangdong Province of mainland China, where the 28-year-old company is headquartered.

According to Fan, the company has spent around US$30 million on the first-phase production equipment in the factory. "Still in-house output remains far short of our needs," says Fan, noting the company will buy US$20 million contracted wafers yearly even after in-house production kicks off.

Neo-Neo has bought such chips from Epistar Corp., Formosa Epitaxy Inc. and Huga Optech Inc., all being Taiwan-based chipmakers, as well as Cree Inc. of the United States. And it has built Epistar chips into the 10,000 LED streetlights supplied to Dutch and mainland Chinese buyers.

In light of the technology-intensive investment, Guangdong provincial government has granted the group a 15% deduction on corporate income tax, equaling about 10% less tax burden than average lighting manufacturers in China.

"The investment," says Randy Cheng, general manager of Neo-Neo's Taipei branch "will allow us to cut costs of LED lights faster than projected." Chen touts that the group's LED productions will be much less expensive than its rivals'. "We streamline production processes," he explains, adding that the chips made will go into both the company's indoor and outdoor lighting.

Partner to Rival Overnight

However, Jimmy Chen, President and CEO of ColorStars Group, a LED-lighting manufacturer, is perturbed by the trend for manufacturers to become fully integrated-setting up to handle LED production from wafers and chips to packaging and assembly. "You find your partner morphing into competitor overnight. For instance, we've stopped buying chips from Cree since it has acquired a lighting manufacturer," he says.

In response, Cheng notes his company has no intention to sell its chips to lighting manufacturers besides its subsidiaries. "But we cannot be sure of their loyalty to us when rivals offer irresistible quotations," Cheng says.

To keep up with brisk demand for LED lamps, Neo-Neo this year will expand its LED factory in Guangdong by 150,000 square meters.

Fan points out that rising eco-awareness worldwide will help his group to meet the goal to double sales of LED lamps this year as compared with last year's volume. Meanwhile, he estimates the group will sell 30% less incandescent products this year, with such decorative lighting to fully vanish from markets in three years.

Sagging US Market Buffered

Although the sub-prime mortgage crisis and the credit crunch stateside are hurting the group's sales in the U.S., Fan is confident that brisk demands for LED lighting in other markets will help-expecting to see group sales to eventually rise around 30% by the end of this year, as well as projecting LED lighting to account for close to 70% of corporate revenue this year.

The chairman believes there remains ample room for growth in the global LED decorative lighting market considering that such lamps have so far replaced only 10% of traditional lamps, adding, "I believe considerable growth will likely happen for our business in the near future as long as we can secure more epitaxy-wafer supply."

Branching Into Streetlighting

Having achieved big-time success with LED decorative lights, Neo-Neo has begun applying LEDs to streetlights. Fan points out that decorative lights and streetlights will remain the major applications for LED lamps: because both typically carry limited-size lampshades that preclude using fluorescent lamps as an energy-efficient upgrade.

The group began shipping LED streetlights last year to mainland China and the Netherlands in small volumes, a success that Cheng at the Taiwan branch attributes to the group's unique thermal-dissipation solution for LED streetlight. Cheng foresees steady growth in demand for LED decorative lights and is optimistic about the LED streetlight market. "We've officially begun to tap the streetlight market this year," he says.

Future of LED Looks Bright

Marketing veteran Keith Lam, vice president of sales and marketing for Neo-Neo Holdings Ltd., is upbeat about the future of the LED lighting market: "LED lighting is everywhere now if you just look at Hong Kong at night. The EU plans to ban incandescent lamps in a few years, which gives energy-saving products like LED a big boost."

Lam notes luminous efficacy of LEDs has been improved significantly since his company entered into the segment around eight years ago. "At that time, LED could only be decorative lighting due to low lumens. But now, even one watt is a popular LED specification," he says.

Neo-Neo recently introduced many high-efficiency LED lamps for commercial purposes, including a 50-watt, 3,300 lumen model and a fourth-generation road light. The next-generation light reportedly will be equipped with a smart reflector, which is designed to enable a 60-watt light to conserve close to 50% electricity and yet be twice as bright compared with a 70-watt type with the same number of LEDs.

Cost continues to bother Lam, who thinks it is still the major obstacle preventing LEDs from becoming more popular as lighting product. "It will take at least five years before LED prices are pared down to more widely acceptable levels," Lam estimates.

Post-election Confidence Boost

The newly elected administration in Taiwan has warmed Neo-Neo's confidence in the economic outlook of the island. So much so that the world's No.1 decorative-lighting maker recently decided to step up building presence in Taiwan's lighting market. As part of its plan to tap the Taiwan market, the group recently bought an office building for NT$140 million (US$4.6 million at US$1:NT$30) in an upscale district in Taiwan's capital city of Taipei.

The group's Taiwan branch aims for a sales goal of NT$200 million (US$6.6 million) this year, with the GM stressing that the company feels such target to be well within reach thanks to its cost-competitive production and wide-ranging product lines.

Aiming for All Market Segments

According to Cheng, to achieve such sales goal, the company has started seeking energy-saving and quality performance certifications in Taiwan, noting that the company will tap all segments of the LED-lighting market, including Christmas, commercial, household and public-work lights. Cheng says his company has a strategy for the Taiwan market: tap household and commercial markets initially and outdoor lighting afterwards.

Industry watchers in Taiwan believes the Taipei branch will achieve the goal as expected thanks to the company's core competence in LED lighting sharpened by its integrated manufacturing capability. "Our other edge is being able to quickly commercialize LED products," Cheng stresses.

Also, the new administration in Taiwan allows the group to see floating its stocks on the local market a reality. Fan believes the Kuomintang-ruled government, which advocates closer economic ties with China, will substantially make it easier for China- and HK-listed Taiwanese manufacturers intending to go public on the island.

Listed on the Main Board of Hong Kong, Neo-Neo, however, has been encouraged to float the group's stocks on Taiwan's market due to having to spend HK$10 million (US$1.2 million at US$1:HK$7.8) a year to stay on the board in H.K. and the anemic interest of Hong Kong investors in manufacturing-industry stocks. Despite having made HK$332 million (US$42 million) in after-tax profit and gross margin of 38.5% last year, its price/earnings ratio was only about 10 folds, lower than the 20-fold average in Taiwan.

While developing high-value added products, the group is also working on plans for low-end products, which complement high-end ones in the group's lineup. The group recently acquired 1,200 acres in Vietnam to build a factory to produce incandescent lights and light strings.