We hosted a virtual meeting for D&O Green Technologies (D&O) last week, with several positive takeaways. Management has turned positive and set a target of at least 10% sales growth in 2024, led by more new design wins materializing as global automakers step up on more car launches especially in the electric vehicle (EV) segment. New contributions from i) headlamp, ii) smart LED and iii) PCBA are also expected. Inventories are expected to ease from the current 6-month levels given the strong sales pick-up in the final quarter. Inshort, we expect to significant margin recovery next year on the back of higher average selling prices (ASP) from new products and higher capacity utilization. We reiterate our Outperform call with unchanged TP of RM4.37.

• Expecting best ever quarterly sales in 4QFY23. In view of the seasonal pick-up in car sales orders, the Group sees an increase in capacity utilization from 3QFY23’s 80%-85% to about 90%. Based on our back-ofenvelope calculation, fourth quarter sales could be the best ever quarterly sales for the Group. Meanwhile, order visibility remains strong until Jan 2024 before seeing a dip in February due to the Lunar New Year celebration and shorter working month.

• Margins are recovering. Management has set an automotive LED sales growth target of 10% for 2024, driven by i) maiden contribution from module segment (PCBA) and headlamp, ii) bigger smart LED sales and iii) increasing automotive LED adoption for new EV car launches. We believe gross margins should normalize to the 27%-28% range next year compared to an estimated 21% this year, underpinned by i) an improvement in capacity utilization, ii) better margins from smart LED and head lamps and iii) higher productivity with more automation in place. The potential downward revision in electricity tariff as a result of normalization in coal prices would serve as an additional bonus to the company’s operating costs.

• Plant 2 scaling up. The module project on the top floor of the plant for the electric vehicle control unit for Beijing Jingwei Hirain Technologies Co, has seen 3 production lines installed with plans to double to the maximum of six lines next year. Meanwhile, the second floor is currently undergoing the final stage of reliability testing for smart LED and is expected to kick start small scale production of smart LED by 1Q 2024. Management expects the Plant 2 floor space capacity utilization to grow at a CAGR of 15%-16% for 2024-2026. Upon full capacity, Plant 2 could potentially generate annual revenue of up to RM1.5bn.

• Update on Plant 3. Plant 3 is currently undergoing the final stage of discussion with the authorities. Construction of the 10-storey building, which costs about RM170m, is expected to be ready by 2026-2027. Under the plan, the 1st and 2nd floors are for the warehouse and canteen, 3rd and 4th floors for parking and 5th to 10th floors for production space. Upon full capacity utilization, it could potentially generate up to RM1.2bn in annual sales.

• Modest car sales outlook. Global car sales are projected to grow by 2%- 3% to 89.5m units in 2024 compared to 8% this year. China car sales are expected to increase from 27m to 28m (including car exports volume), accounting for about 31% global car sales. Meanwhile, there are signs of a slowdown in electric vehicle sales due to a higher base and policy changes, though intensified competition and lower relative prices due to decreasing EV battery prices will continue to support EV as a key growth driver for the overall automotive market. TrendForce projects a 32% growth for 2024, with total global EVs expected to reach 17m units.

Source: PublicInvest Research - 5 Dec 2023