Wed, Dec 03, 2008 - Page 11 News List

Citigroup downgrades shares of Epistar to ‘sell’

LOW VISIBILITY, WEAK MOMENTUM: Merrill Lynch retained an ‘underperform’ rating for the chip maker, whose shares have plummeted 79 percent this year

By Kevin Chen  /  STAFF REPORTER

Epistar Corp (晶元光電), the nation’s largest maker of chips that run light-emitting diodes (LEDs) in mobile phones, saw its shares downgraded from “buy” to “sell” by Citigroup yesterday after the stock had shown a technical rebound of almost 14 percent since Nov. 18.

The brokerage slashed its target price on Epistar to NT$24 from its previous estimate of NT$85 and revised its risk rating on the stock from “medium” to “high,” citing no sign of business improvement at the local firm until the second quarter.

“We expect the company to incur losses in the fourth quarter due to declining utilization and a sharp ASP [average selling price] decline amid overcapacity,” Citigroup Global Markets analyst Eve Jung (戎宜蘋) wrote in a research note.


Launched in 1996 with a paid-in capital of NT$6.3 billion (US$188.2 million), Epistar had a market value of NT$186.8 billion based on its closing price of NT$29.5 yesterday.

The company posted revenues of NT$8.3 billion and a net profit of NT$595.7 million in the first nine months of this year, or NT$0.94 per share, with a gross margin of 20.28 percent.

Hsinchu-based Epistar has expanded its capacity by about 40 percent this year to cope with rising demand for various mobile phone applications and emerging needs in laptop and small and medium backlights.

But with high fixed production costs following capacity expansion and with declining utilization and slowing end demand amid an industry downturn, Epistar was likely to see its gross margin decline to 8 percent in the first quarter, from 21.4 percent a year earlier, Jung said in the research note.

“We do not expect growth in this [notebook LED business] operation to offset the weakness from handset and consumer electronics in 2009,” Jung wrote, referring to the slowdown in the global computer industry.

Looking ahead, Epistar could see more negative developments in its gross margin prospects over the next two to three quarters.

As a result, company earnings for next year could decline by 97 percent on a drop of 17 percent in revenue, the analyst said.

Citigroup’s warning on Epistar’s profitability echoed a pessimistic outlook by Merrill Lynch last week.


Jeffrey Su (蘇志凱), a Taipei-based analyst at Merrill Lynch, said in a client note last Tuesday that a substantial market demand for LED would have to wait for the industry’s recovery.

It also came after LED packager Everlight Electronics Co (億光) announced it would start trimming its workforce on Monday by an unspecified number to weather the downturn.

“Don’t expect much improvement in fourth-quarter fundamentals as momentum is weak and visibility is low after October,” Su wrote.

He retained a “underperform” recommendation on the stock, which has dropped 79 percent so far this year.

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