PublicInvest Research

Author: PublicInvest   |   Latest post: Fri, 6 Dec 2019, 9:18 AM


D&O Green Technologies - Staying Strong Amid Challenging Outlook

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We recently came away with some positive developments from a meeting with D&O management amid tepid growth in China auto sales this year. The company is penetrating into the exterior LED lighting segment, which has more potential room for upsides due to the low penetration rate, especially for the front lighting. Despite the negative sentiment surrounding global auto markets following poor sales data recently, we still expect to see double-digit earnings growth this year on the back of more new car launches by BMW and penetration into the exterior LED. Nevertheless, we now shift to a more conservative approach given the hiccups in the global auto markets by lowering our PE multiples from 30x to 28x and cutting our earnings forecasts for FY18-20 by 9%-13%, which consequently sees a lower TP of RM0.86. Our Outperform call is retained, however.

  • New car models coming up. The next two years will be busy times for BMW, who is one of the D&O’s end product key customers, as they plan to launch around 20 new models into the market. This includes 8-Series, X5, X1 Facelift, X5 M, X6, X7, 1-Series, X3M, X4M, X5M amongst others.
  • Setting sights on improving market share. Management aims to ramp up its global market share from 6% to 15% by penetrating into front lamps, which has the lowest LED penetration rate in the China market (refer to figure 3). The segment also has one of the most promising growth prospects over the next four years (refer to figure 1). It targets to double its LED sales within the next 5 years. Its current plant utilization rate is running at a high 80% with existing orders up to 2023. Management has allocated a similar capex of RM50m for 2019 to build capacity, improve machine efficiencies, quality control processes as well as strengthen in-house test capabilities. Management is unperturbed by the recent weakening of the US dollar due to slower pace of interest rate increases in the US this year as it is in a natural hedge position, given that 60% of its operating cost is in USD, mainly for chip products.
  • Flagging caution in global auto markets. China auto sales were down 2.8% YoY to 28.08m last year, the first decline since 1990 due to the i) effects of US-China trade war, ii) weakened consumer spending amid restrictive domestic policies and iii) a high base for sales in the previous years. Geely Automotive, one of the most high profile of China’s car makers, reported a 39% tumble in December vehicle sales and missed its 2018 car sales target by 5%. Both Geely and China Association of Automobile Manufacturers have set flattish sales growth targets for 2019. Meanwhile, Ford Motor is launching an overhaul of its loss-making European business that is expected to include thousands of job cuts, plant closures and the scrapping of low-profit models. Separately, Jaguar Land Rover, Britain’s biggest carmaker, said it would cut 4,500 jobs world-wide as it has been struggling with weaker demand in China and a dramatic decline in diesel vehicle sales in Europe following the VW emissions scandal.

Source: PublicInvest Research - 16 Jan 2019

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