Heading into second half of the year, D&O continues to witness strong orders for its range of automotive LED products, from most regional markets. The company is sitting in a good position to capture market share amid structural changes in the global auto industry. We have also been made to understand that upcoming orders are significantly stronger than earlier expected, indicating that there could be earnings surprise for this unprecedented growth year. We reiterate our Outperform call with an unchanged TP of RM5.91.

• Robust enquiries. Most of its regional offices have seen double-digit increases in the design-in participation for the first 4 months of this year as more new car models are being rolled out especially coming from the electric vehicle (EV) segment. The encouraging design-in numbers also reflect the positive sentiment for the sales outlook in the next 3 years. According to TrendForce, the global automotive LED market is projected to grow 13.7% YoY to USD2.9bn (RM11.9bn) in 2021, led by increasing demand for i) automotive headlights, ii) ambient lighting and iii) display panels. As automakers continue to adopt LED lighting solutions into new car models, the penetration rate of automotive LED will continue to see uptrend.

• Well-positioned for industry growth. The existing production plant, literally known as Plant 1, is expected to be fully utilized by end of the year. The capacity volumes will double this year after three rounds of capacity expansion with the final round coming in the 2H. The second plant (Plant A), which has a bigger build-up of 25k sq meter, is currently undergoing renovation works to cater for Dominant’s module manufacturing facility. The machine installation will take place next year and the capacity is expected to take 3 years to be fully filled up. As it is mainly catered for smart RGB LED production, it will take up more space for machineries as each product has 4 chips and more wiring connected. Meanwhile, management is currently planning for a third plant. The construction of the 8-storey building, which is located in between Plant 1 and Plant A, is expected to begin end-1Q 2022 and will be ready by end-2024.

• Booming EV changes the industry landscape. According to International Energy Agency, global sales of EV is expected to register CAGR of 26.8% for 2021-2030 (refer to Figure 3) after charting an impressive growth of 41% in 2020 despite a pandemic-hit worldwide downturn in car sales, in which global car sales dropped 6%. Around 3m EV cars were sold globally (a 4.6% sales share). During the first quarter of 2021, global EV sales surged 140% YoY, bolstered by sales in China of around 500k vehicles and in Europe of around 450k. The resilience of EV sales in the face of the pandemic rests on three pillars, namely, i) supportive regulatory frameworks, ii) additional incentives to safeguard EV sales from the economic downturn, iii) an extensive roll-out of new EV models and iv) battery cost continuing to fall. Europe has vowed to completely phase out petrol and diesel cars by 2030. Our channel checks reveal that there will be more than 15 new EV car models going to be launched by each global automaker in the next 2 years. The shift from the combustion engine to electric engine has shortened the manufacturing process as the number of spare parts involved has significantly reduced by more than 80%-90%. Compared to conventional cars, the modern EV is more stylish in design, shape and lighting and they are equipped with bigger touchscreen dashboards. Notably, Mercedes is going to unveil the Hyperscreen, a massive 56-inch, curved touchscreen infotainment display that will debut in the company’s EQS all-electric model. This will greatly increase the adoption of LEDs.
• High expectation for smart RGB LED. Smart RGB LED, which is a bundle of integrated circuit and LEDs, has been applied to the interior application for top-end car models as it mainly suits the stylish design. Though the smart RGB LED volume is relatively small, the margins are more lucrative as the average selling price (ASP) is significantly higher compared to conventional automotive LEDs. The potential for smart LED is tremendous as new car models are slowly shifting into the “personalized” concept, which will see the vital roles of smart LEDs in the lighting application for i) surface touch sensing, ii) AI, speech recognition and iii) motion therapy. The gradual technology switch from the traditional cable to Ethernet will also drive the usage of smart LED going forward. We understand that one of the leading German automakers has decided to adopt Dominant’s smart LED products in the interior application for all its upcoming models under the group. Meanwhile, it is currently working on a pilot project involving projection lighting, which is made up of smart LEDs.
• Strong demand far outweighs the impact of chip shortage. The severe chip shortage has forced some global automakers to halt production or delay new car launches. However, the issue does not pose a negative impact to D&O, thanks to i) its extensive customer base, ii) increasing number of LED usage per car and iii) more aggressive rollout of new car models as global automakers are rushing into the EV market.

• Expecting equal contribution from interior and exterior LEDs. Going forward, the group is expecting at least half of the group automotive LED sales coming from exterior, pushed by the head lightings while the increasing smart LED application will drive for interior LED sales. Management expects the smart LED to contribute at least 10% of the group automotive LED sales volume by 2025. On a more positive note, 80% of the manufacturing platform can run on a common platform for both exterior and interior LEDs.

• Exciting growth phase for the next 3 years. We see unprecedented earnings growth for the company in 2021, sparked by the continuous capacity expansion and improved margins on higher productivity coupled with the structural change in the global auto industry. We believe there will be multiple years of encouraging growth for D&O given its sizeable global market share and its leading position in smart LEDs. Maintain Outperform call with an unchanged TP of RM5.91 based on a 45x FY22 EPS

Source: PublicInvest Research - 28 Jun 2021