D&O’s run rate has remained stable at c.70% recorded in 1QFY24 since Apr and but should gradually pick up from Jun onwards on increased orders from China. There is no urgent need for D&O to invest in Plant 3 as new technology and improved processes have freed up space at its existing plants. We maintain our forecasts, TP of RM3.60 and MARKET PERFORM call.

We came away from D&O’s post-1QFY23 results briefing feeling neutral. The key takeaways are as follows:

1. D&O indicated it was operating at c.70% utilisation rate of Plant 1 in the reported 1QFY24 and the run rate has remained steady since Apr but should gradually pick up from Jun onwards on increased orders from China which typically account for c.50% of the group’s total revenue. This is in line with the reports from China Association of Automobile Manufacturers (CAAM) where sales of passenger cars increased 10.7% in 1QCY24. Meanwhile the European Automobile Manufacturers' Association recorded a 4.4% increase in car sales during the same period.

2. With regards to its machinery optimisation plan, the group has adopted flip-chip technology (vs. traditional two-step die bond and wire bond), a single LED assembly process, which in turn increased throughput by 2.7x to 32,000 pcs/hr (up from 12,000 pcs/hr). Additionally, it has introduced a new LED encapsulation process, compression moulding, which boosted throughput by 3.6x to 43,000 pcs/hr (from 12,000 pcs/hr). These improvements coupled with space saving from its in-house double-decker machines have resulted in 35% space saving. Consequently, D&O has deferred plans for Plant 3 by another three years. Plant 1 (with a revenue capacity of RM1.0-1.2b/year) will be sufficient for 2024, while Plant 2 will accommodate growth until 2026-27.

3. D&O continues to see good traction for its proprietary Single Footprint (i.e. SpicePlus 2520) LED platform to cater to four power categories, with five colours selection for rear combination lamps. This unified platform will help to minimize retooling, which will boost efficiency. In addition, the adoption of a single footprint strategy also reduces package size and enhances thermal control. Meanwhile, headlamp products (i.e. NagaJo 1519) are anticipated to grow further with more significant uptick in 2HCY24.

Forecasts. Maintained.

Valuations. We keep our TP of RM3.60 based on an unchanged 30x FY25F PER, in line with peers’ forward average. There is no adjustment to our TP based ESG given a 3-star rating as appraised by us (see Page 4).

Investment case. We like D&O for: (i) its unique exposure in the automotive LED business, (ii) its penetration into the electric vehicle market, and (iii) venture into next-generation smart LEDs which yield higher margins. However, we are more inclined to stay cautious until we see the return of more sustained orders from its customers. Maintain MARKET PERFORM.

Risks to our call include: (i) sharp increase in automotive demand, (ii) faster-than-expected ramp up in its smart LED segment, and (iii) quicker-than-expected recovery in the global economy.

Source: Kenanga Research - 29 May 2024