PublicInvest Research

Author: PublicInvest   |   Latest post: Tue, 19 Nov 2019, 9:18 AM


D&O Green Technologies - Slower Auto Sales Hampering Growth

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D&O Green Technologies’ (D&O) churned out earnings of RM14.4m (+13.4% YoY) in 1HFY19 on the back of steady automotive LED sales. Nevertheless, the results made up only 37% and 34% of our and street expectations respectively. The weaker-than-expected results were mainly a result of a slowdown in China’s car sales, which had fallen for 13 straight months since July 2018, exacerbated by the roll-out of stricter emission standards in tier-1 provinces since last month. On the positive side, the auto sales decline in China has bottomed out and we see a gradual recovery towards this year-end. We are lowering our FY19-21 earnings forecasts by about 14% to conservatively account for weakness in global car sales volume. Hence, we maintain our Outperform call with a lower TP from RM0.85 to RM0.73 based on 25x FY20 EPS.

  • Steady 2QFY19 sales. Compared to 2QFY18, group sales were slightly higher at RM115m as improved automotive LED sales were offset by a decline in non-automotive LED sales. Though 1H 2019 car sales remained lacklustre in most major markets, namely, China (-14.0%), European Union (-3.1%), United States (-1.9%) and Japan (-0.3%), D&O’s automotive LED sales continued to show steady growth thanks to increasing market share due to its competitive price strategy as well as robust demand especially for the ambient lighting and infotainment systems. To-date, the existing plant is running at 70% utilization rate. The Asian market, which accounted for 62% of group sales, remained steady while sales in the EU climbed 5.2% as growth in the US was flattish.
  • 2QFY19 core profit (QoQ: +29.3%, YoY: +70.5%). D&O registered a stronger core profit of RM7.5m for 2QFY19, supported by solid gross profit margin of 27%, contributed by i) a decline in R&D spending (31.6% YoY), ii) higher production efficiency, led by the more automation adopted in the production lines as well as iii) lower effective tax rate (17.7%) due to capital allowance and reinvestment allowances.
  • Outlook. Renovation of the new factory is almost complete. The corporate office is scheduled to be moved to the new building towards the year-end, thus freeing up space for future production floor expansion. Management also recently guided that the demand for ambient lighting is growing fast as it increases the attractiveness of a car and helps create a stylish interior. Despite sluggish car sales performance in China during the 1H2019, we see gradual recovery in buying interest on the back of i) issuance of more new license car plates in major cities (Guangzhou and Shenzhen), ii) roll out of more new car models that comply with China’s new vehicle emission standards after 1st July 2019, and iii) seasonally higher auto sales in 4Q. On a more cheerful note, the declining trend in China’s auto sales has likely bottomed out in May (Figure 4), indicating a recovery is on the way.

Source: PublicInvest Research - 22 Aug 2019

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