China-based LED industry leader Sanan Optoelectronics has been accused of falsifying financial reports, according to China-based media. This has sparked a debate concerning what critics say is the China government's excessive support for the country's LED industry. Some reports from China-based media claim that half of Sanan's profits have come from government projects, and it has concealed related-party transactions. Sanan has denied the accusations.
Odd numbers
Sanan has obtained LED street lamp projects worth a total CNY2.65 billion (US$427 million) from municipal governments in Wuhu, Huainan, and Quanzhou. However, Sanan's LED street lamp prices were three times higher than the market price. Sanan admitted that the firm procured LED street lamps from Xiamen Xindeco Optoelectronics and the contract did not go through the open bid procedure. However, the firm claimed that it had superior high-power LED technologies, and hence the price difference was normal. The firm further stated its product outsourcing was compliant with the law.
Nevertheless, the contract between Xindeco Optoelectronics and Sanan has come under scrutiny because of the shareholding relationships between the two sides. Sanan recently noted that Xiamen Xindeco, the parent company of Xindeco Optoelectronics, owns a 10% stake in Sanan's parent company, Xiamen Sanan Electronics, and hence indirectly owns 3.5% of Sanan Optoelectronics. Due to the low share ownership, according to Sanan, Xiamen Xindeco does not have influence over corporate decisions in Sanan, and hence should not be considered as related enterprises. The explanation has failed to dispel allegations arising from the cooperation between Xindeco Optoelectronics and Sanan Optoelectronics.
Since 2009, Xindeco Optoelectronics has been the biggest LED chip customer of Sanan Optoelectronics. The complexity of the relationship has fueled allegations of related-party transactions between the two firms.
Subsidy, mother of oversupply
Sanan Optoelectronics began listing on China's stock market in July 2007. Although the firm's profits grew 15 fold from 2008-2012 and has become the industry leader in the country, sources noted that Sanan has obtained close to CNY3 billion in subsidies from the government. Recently, Sanan obtained CNY5 billion of loans on favorable terms from China-based banks. Sanan has sufficient financial capital and has been using low prices to engage in pricing competition against Taiwan-based firms. This has been marginalizing smaller firms with lower capacity and driving the LED chip market into oversupply.
Taiwan-based LED firms believe the controversy over Sanan's financial reports is just the tip of an iceberg of the unfair industrial competition in China. Sanan reported 2012 revenues of CNY3.3 billion, accounting for nearly 40% of China's entire LED chip output value. If China is to achieve the goal of more than 80% of LED chips being made domestically by 2015, then Sanan is a very important player, said Taiwan-based firms. However, the recent allegations against Sanan might curb the over-subsidization by the local governments in China, added the firms.
Seize the opportunity
The financial and creditability problems of Sanan may also affect Taiwan-based firms. On November 13, 2012, Taiwan-based LED chipmaker Formosa Epitaxy announced that Sanan would acquire its shares through private placements. The total investment amount would not exceed NT$2.352 billion (US$78 million) because of Taiwan regulations. The deal is currently under government review.
The rapid rise of Sanan and China-based LED chipmakers caused Taiwan-based peers to report net losses in 2012. Some market observers noted that Taiwan-based LED firms may regain foothold thanks to the Sanan scandal.
