Against backdrop of poor global car sales due to i) increasing dominance of Tesla and BYD in the EV space, ii) shift of EV car strategy in the US, iii) ongoing discussion over the import tariff on China's car imports in Europe and potential phasing out of EV tax credit under the new US presidency, D&O is expected to be adversely impacted, given its high dependency on the automotive exposure in China. Coupled with the long holiday break during the Lunar New Year, we expect the weak momentum to persist until mid-2025. To cushion the impact of weak automotive LED sales, the group has ventured into module business by tapping into the opportunities arising from heightening trade tensions. Although we think the current share price has priced in the weakness in automotive market, near-term positive catalyst is not visible either. Neutral with an unchanged TP of RM1.99 based on 30x FY25 EPS.

• The global car market is in the doldrums. For the first 9 months, global car sales saw a marginal growth of 0.4% to 63.4m units while China's passenger car sales grew 2.1% YoY to 21.5m units compared to D&O's sales growth of 15% YoY. Meanwhile, our channel checks revealed that China's car sales are likely to see a steep pullback in the 4Q, which is usually the strongest quarter of the year, due to a severe inventory overhang situation. Meanwhile, European automakers who have production facilities in China are also scaling back their production due to uncertainties over the ongoing discussions between China and the EU on alternative plans to European tariffs on China's electric vehicles, including minimum prices capped on China car imports. In the US, automakers are also putting their EV expansion on hold as the new administration under Donald Trump might phase out the electric vehicle tax credit worth USD7,500 and the potential import tariff of 20% imposed on Mexico and Canada on all imports.
• Still eyeing growth in 2025. Despite the challenging landscape, management has expected a better sales growth target of 10% for FY25 compared to FY24's 5%. The key growth drivers are i) smart RGB LED (+10% YoY), ii) Rear Combination Light SpicePlus 2520 (+60% YoY), iii) Headlamp NagaJo (+70% YoY) and maiden contribution from BLU Direct Lit BeveLED. Given the various challenges, we expect the situation to gradually improve by mid-2025.
• New module business gaining traction. Currently, 3 projects are in mass production, namely, the i) electric vehicle control unit, ii) enhanced remote power module and iii) door pod and RKE. Another 3 projects, namely i) exterior lighting switch, ii) wireless charges and iii) electric vehicle control unit generation 2, are set to see mass production by 1H 2025. There are another 6 projects currently under request for quotation stage, and they are likely to enter mass production in 2025. To prepare for more new automotive projects that are going to relocate to Malaysia in 2026/27, the group has recently acquired a parcel of 21 acres land (925,000 sq ft) and the construction is expected to kick start in 2026.

Source: PublicInvest Research - 6 Dec 2024