|China's LED policy announcement will be a boon to LEDs ... in 2014.|
NEW YORK ( TheStreet) -- If you missed the chance to buy into LED stocks on Friday before the big pop on news from China that the government would phase out incandescent light bulbs in favor of LEDs, don't kick yourself: You're probably lucky unless you planned on flipping the gains in less than 24 hours or holding the stocks until 2015. An official with China's National Development and Reform Commission announced in China Daily that importation and sales of incandescent light bulbs of 100 watts and higher will be banned as of Oct. 1, 2012, while bulbs of 60 watts and above will be phased out by Oct. 1, 2014. The sell side followed with encouraging commentary -- Piper Jaffray saying that the news was a positive for LED maker Cree ( CREE) and Deutsche Bank putting out word that the Chinese plan was going to be a boon to equipment makers in the LED space, like Veeco Instrument ( VECO) and Aixtron ( AIXG). Cree is up 8%, while the equipment makers Veeco and Aixtron are up 10% on Friday. SemiLEDs ( LEDS), one of the worst IPOs in recent market history -- thank you underwriters Bank of America Merrill Lynch, Barclays Capital and Jefferies -- skyrocketed by 33% on Friday, up to $3.94(!) -- this stock was trading at $30 shortly after its IPO in December 2010.
Here is the biggest reason why these stocks popped: They have been obliterated this year on dire market conditions and massive overcapacity, and the shorts have been having a field day. The LED sector has been shorted to the hilt, so when China puts out a headline about a major policy initiative supporting LEDs, plenty of shorts will call it a day and take their huge gains and cover. Here is the bigger reason why this headline from China should not get you excited about LEDs (more encouraging reports from the sell side are sure to follow next week): One prime reason why the LED sector has been destroyed in recent quarters is because China has massively subsidized the build out of its domestic LED industry. The only way China can possibly justify this massive LED program is by ultimately creating a massive demand subsidy to deal with all the overcapacity. This is effectively what they have done, and so the news wasn't a surprise to anyone who follows LEDs. Ross Young, senior vice president at IMS Research, who closely monitors the capacity and demand levels in the LED market, told TheStreet "there is a large surplus of LED capacity in China today. We currently show the surplus at 40%+ from 2011-2013." According to Young, who expressed surprise at the level of the market reaction, the news won't make a difference until 2014 at the earliest. He explained that the 100W bulb market is quite small and 100W LEDs aren't even on the market today due to heat dissipation and cost issues. The 60W-75W ban doesn't occur until the fourth quarter of 2014.