ENNOSTAR‘s performance in the second quarter of 2023 showed a notable improvement. In his first public statement since assuming office, Chairman Shuang-Lang (Paul) Peng noted that the company experienced its lowest operational point in the first quarter. Since then, there has been steady quarterly growth, with expectations that the second half of the year will outperform the first. However, the recovery has been slow, and anticipated growth for the latter half remains modest. Declines in high-end products and changes in the product mix have limited profit gains, even as revenues rise. The decline in demand has also increased the burden of idle capacity, which now accounts for nearly 80% of operating expenses. Securing additional orders and addressing idle capacity remains a top priority.
Financial Performance in Q2
ENNOSTAR reported consolidated revenues of $189 million in the second quarter, a 23.6% increase from the previous quarter, but a 24.9% decline year-over-year. The gross margin improved to 4.8%, up 6.9 percentage points from the prior quarter, though it remained 18 percentage points below the same period last year. The increase in gross margin was mainly due to higher revenue and better capacity utilization. The operating profit margin was -17.9%, up 11 percentage points from the last quarter but down 21.6 percentage points year-over-year. The net loss attributable to the parent company was $29.5 million, resulting in a net loss of $1.22 per share. EBITDA improved from -2.9% in the previous quarter to 2.7%.
Market Outlook for Q3
Looking ahead, Peng highlighted potential growth areas such as panel-related applications, plant lighting, and specialized lighting segments, with a steady rise in automotive lighting demand. The company is actively integrating various client applications, including display backlighting, lighting fixtures, interior lighting, and sensors. There is growing interest and collaboration in automotive Micro LED projects, with demand expected to rise in the second half. The group is also preparing for Micro LED mass production, while the semiconductor segment’s performance continues to grow steadily. Although optoelectronic products led the first half, significant growth in microelectronics revenue is anticipated in the latter half.
Industry-Wide Trends and Developments
Chairman Fan Jinyong of Epistar noted that the third quarter has not shown signs of a strong market recovery. Epistar’s operations this quarter are expected to be on par or slightly weaker than the previous quarter. The increasing market share of OLEDs and price pressures have impacted traditional TV and mobile phone backlights. Additionally, global inflation and economic slowdowns in mainland China have affected the growth of architectural lighting. However, Epistar has seen a recovery among key display clients and expects steady growth in indoor displays after the pandemic in China.
While the MiniLED supply chain for IT applications actively controls inventory, stock levels are low, and a slight demand rebound is expected in the third and fourth quarters. Automotive MiniLED backlights and RGB taillights are being integrated widely, with expectations that these will significantly contribute to revenue in 2-3 years. The timeline for new Micro LED production capacity has been delayed, with substantial capacity planning and mass production anticipated around 2026-2027.
Previously, Epistar had expected a peak season for wearable sensing and plant lighting in the second and third quarters. This view remains unchanged, with the third quarter expected to show growth over the previous quarter. Automotive growth, which was not significant last quarter, is expected to be noticeable this quarter. The company is monitoring whether this growth trend can continue into the fourth quarter or next year. High-end automotive, wearable sensing, and plant lighting revenues are expected to account for about 40% in the third quarter, with the second half outperforming the first.
Impact of Global Economic Conditions
The global economic downturn has led to delays in mass production projects initially expected in the third quarter, now postponed to the fourth. Displays and TV backlights are projected to experience substantial growth in Q4, potentially offsetting the usual seasonal slowdown.
Starting in August, China began regulating the export of materials like gallium and germanium. Epistar’s red and yellow light substrate material is gallium arsenide. Following discussions with material suppliers, Fan Jinyong stated that they increased their stock of gallium arsenide substrates in July and applied for export certificates, significantly reducing operational pressure. The inventory is expected to last until the end of the year, but the actual impact will depend on China’s regulatory stance.
Automotive and High-Tech Market Developments
Chairman Tang Xiumu of Lextar stated that this quarter’s revenue is comparable to the previous quarter. The typical third-quarter backlight peak season is not pronounced, with revenue mainly coming from automotive backlights, MiniLED TV backlights, wearable sensing, and security demands. Automotive backlighting is progressing as expected, with revenue growing quarterly. This segment, along with lighting and sensing, now accounts for about 10% of total revenue. The company is actively working with Tier 1 clients in Europe and America, and it is expected that by 2024, revenue from these segments could reach between 15% to 20%.
Meanwhile, Chairman Shi Wei of Jingcheng noted that VCSEL demand for mobile applications, which was weak in the first half, has begun to rebound in the third quarter. Jingcheng is collaborating with key clients on Micro LED projects, which have recently seen significant growth. They are preparing for mass production reviews, expecting Micro LED to contribute a portion of revenue in the second half. Collaborations with VR/AR manufacturers continue, with expectations set for 2024-2025.
Financial Health and Strategic Focus
Shuang-Lang (Paul) Peng emphasized that ENNOSTAR’s net cash position reached $561 million, significantly exceeding its liabilities. Inventory turnover days have also decreased by 15 days compared to the first quarter, indicating relatively healthy financials. Peng highlighted plans to leverage group synergies to prepare for Micro LED mass production, strictly control capital expenditure costs, and enhance profitability. The progress of Micro LED is based on medium to long-term planning, with initial production capacity expected to grow gradually.
Source: Compiled from Economic Daily and other sources.
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