Cree seems to be faring well in the tough LED market, crossing the $1 billion revenues for the first time in fiscal 2012. Though the overall profit margins remain under pressure and the company thinks that the macroeconomic headwinds could impact its short-term outlook, we believe that Cree's focus on new product development and initiatives to drive product sales will help it tap long-term growth opportunities in the LED market.
Continuous innovation has enabled Cree to transcend cost barriers to LED adoption, at the same time exceeding the industry's highest standards for performance, color quality and ease of use. Cree remains committed to drive LED adoption by optimizing performance and lowering costs to close the gap with conventional lighting.
Though the LED market is currently plagued by an excess supply situation, we believe it to be temporary and expect the growth potential in LED lighting to drive demand for LED products in the coming years. As China is expected to make a significant contribution to the global LED demand, we believe that Cree's growing presence in the country will augur well for its valuation.
Improving Demand-Supply Gap in the LED Market
The increase in LED supply led by the Chinese manufacturers has resulted in the LED surplus rising from a relatively low 7% in 2010 to 45% in 2011. With the demand from the backlight market nearing saturation and the general lighting market yet to take off, the growth in demand has been slow, resulting in a huge demand-supply gap, which has put downward pressure on the average LED selling price.
However, with growing stability on the supply side and a demand push from an accelerating lighting market, we hope to see a revival this year onward. As manufacturers develop and improve LED technology and the market continues to focus on energy efficiency, the potential market for LED lighting will continue to expand. We expect the growth in demand in LED lighting to offset the slowdown in backlight market demand.
Growth Potential in the Chinese LED Market
With the world's largest population and as one of the fastest growing economies, China is expected to have rapid infrastructure expansion as the government focuses on increasing industrial and commercial development. Witnessing rapid expansion and registering the fastest economic growth rate, China is expected to further establish its rural infrastructure facilities and step up construction projects such as railways, roads and airports.
With the Chinese government's focus on promoting energy conservation and carbon emission reduction, China is regarded as one of the fastest growing LED markets in the world. According to LEDinside, while the Chinese lighting market constituted close to 15% of the global market share in 2010, it predicts the market to reach around $20 billion, constituting 18.3% of the global market by 2015.
Cree derives approximately 36% of its revenues from China, and it's focused on expanding its presence in the Chinese LED market. Having opened new technology centers in China recently, Cree specifically caters to the unique requirements of Chinese lighting manufacturers. It provides manufacturers in the country with a complete set of evaluation services for LED luminaires to design and market quality LED products.
That Cree was part of China's largest municipal lighting control project with its LEDs lighting up over 20,000 street lights in China's Beibei district is reminiscent of the company's dominance in the fast-growing Chinese LED market.
