LED sales could sustain rapid growth in the next 2 years

Helped by the rapid growth of LED lighting demand and its first-mover advantage,Yankon's LED lighting sales came to 200m units in 2015 and grew at a CAGR of 187%over the last three years. The company is mainly engaged in LED lighting, whichcontributed 74% of its revenue in 2015. Although the global penetration rate of LEDlighting has risen from 1.5% in 2009 to 27.2% in 2015, we expect LED lighting sales tocontinue to grow strongly. We estimate the company's LED lighting sales will maintainrapid growth of 50%+ in the next two years in view of its strength in LED technologyand quality and effective customer development.

Decline in Yankon's average LED prices could narrow to 15% this year

The rapid growth of LED lighting sales was mainly driven by a fall in average prices. InFebruary this year, the price of LED bulbs for replacing 40W incandescent bulbs fell58% from two years ago to cRmb25, while the price of those for replacing 60Wincandescent bulbs fell 49% to cRmb60 in China. The average price of Yankon's LEDlighting products fell c30% annually in the past three years. Because the average priceof LED lighting products is already lower than that of energy-efficient lights (based onlumens/kW) and the YoY decline in the average price has significantly narrowed tobelow 20% year to date, we expect the average selling price of Yankon's LED lightingto fall c15% in 2016, a much slower decline than in the past few years.

Impact of declining energy-efficient lamp sales on total revenue could decrease

In the lighting industry, due to the upgrade of demand towards LED lighting, energyefficientbulbs are quickly being replaced, resulting in declining sales in successive years.

Yankon's energy-efficient bulb sales fell at the same rate as the industry in 2015, ie,34% YoY. We expect sales to continue declining rapidly in the coming years until theseproducts have been replaced completely. However, as the contribution of energyefficientlamps to the company's revenue had already decreased to 25% in 2015, theimpact of their declining revenue on the company should become increasingly smaller.

Despite the decline in revenue for this segment, we expect gross margin to remainstable due to milder competition.

Valuation: Lowering EPS estimates and PT; maintain Buy rating

We lower our 2016-18E EPS to Rmb0.34/0.44/0.52 (from Rmb0.37/0.48/0.56) on therise in administrative expense ratio. We lower our DCF-based PT to Rmb11.00 (fromRmb11.80), assuming 7.0% WACC. We maintain our Buy rating.