Veeco Instruments Inc.


Expect EnRay decides on a supplier soon

Another Chinese LED customer’s MOCVD equipment orders up for grabs Our own checks found EnRay Tek has begun construction of its new LED chip factory in Shanghai which is 1 quarter earlier than we had expected. We believe EnRay is an important new LED fab as it is the first in China to focus specifically on backlighting chips in LED TV’s. While we are not sure if Veeco will win this order, we believe this factory ramp LED chip production in 2H11 which means equipment orders likely start in 4Q10 or 1Q11, also 1 quarter earlier than expected.

EnRay’s recent $44M fund raising is viewed positively Our checks found EnRay recently received additional funds to support its LED factory from local Chinese firms including $23M from Konca Electronics (China’s 5th largest TV maker) and $21M from Jade Bird (Chinese semiconductor company). We also note one of EnRay’s senior managers will be Richard Chang, who is the former CEO of SMIC (semiconductor foundry company in China).

Estimate Veeco has $0.40 in EPS upside if it can win EnRay’s business Our checks find EnRay’s total phase 1 investment of its LED chip factory will be $150M which we estimate means 35 MOCVD reactors are needed. We believe EnRay will invest an additional $250M to expand this factory over the next 5 years. We estimate Veeco could generate an additional $88M in sales (35 units at $2.5M average selling price) if it wins EnRay’s entire MOCVD equipment orders and $0.40 in EPS based on a 30% operating margin, 35% tax rate and 43M shares.

Valuation: Reiterate Buy rating and $54 price target Our PT is based on applying a 12x P/E multiple to our 2011 EPS estimate of $4.5


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