Kenanga Research & Investment

Author: kiasutrader   |   Latest post: Fri, 6 Dec 2019, 5:41 PM


D&O Green Technologies - Short-term Pain

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We came away from a management meeting remaining cautious on its near-term outlook as WLTP and trade war alongside seasonality discourage 1Q19 vehicle sales. However, long-term prospects remain bright with smart LED promising substantial ASP growth while a stronger focus on exterior lightings bodes well for GP margins. Trim our earlier bullish FY19-20E NPs by 7-12% to RM48.7-61.3m. Maintain MP with a lower TP of RM0.700 given stretched valuations.

1Q still plagued by weak EU and China car sales. Aside from seasonal weakness, we believe car sales will remain soft in 1Q19 in the EU due to the Worldwide Harmonised Light Vehicle Test Procedure (WLTP) regulation as well as in China owing to the US-China trade war. In light of this, management has insinuated that 1Q19 earnings could be flattish YoY (and also weaker QoQ) despite rising LED content in vehicles and market share gains.

Smart LED to boost ASP substantially but only in 2020. D&O has started developing smart LED (since 2016) that enables dynamic RGB colour alterations based on commands/ambience. This is an exciting development for the group as smart LED contrasts with generic individual LED in that it is a system-in-package (SiP) which integrates multiple individual LEDs with integrated circuits, justifying substantially higher dollar content per unit (as high as 10x). Thus far, the group has already secured several design ins (initial acceptance by customers) and 2-3 design wins (advanced stage with customers) in China. Some of these are likely to be translated into business wins (purchase orders) in 2020. Capitalising on its first-mover advantage, the group is also likely to enjoy favourable GP margins in the initial stage (possibly higher than its FY18’s 28%). Note that we have yet to factor in revenue/earnings contributions from smart LED pending more concrete guidance.

Aiming for better product mix. In terms of product mix, the highermargin exterior lightings only constituted c.30% of total Automotive revenue in FY18. The contribution is expected to progressively increase to 50% in 2-3 years, anchored by new supply wins from Tier 1 Automotive LED customers, especially in the headlamps space, alongside existing orders for Day Running Lights, Side Signals, Position Lamps, and Rear Combination Lamps, which are still seeing rapid deployment into new vehicles.

Trim FY19-20E NPs by 7-12% to RM48.7-61.3m in spite of the positives, as we tone down our earlier bullish automotive LED growth assumption to 16-16% from 28-26%.

Maintain MARKET PERFORM with a lower TP of RM0.700 (from RM0.750) based on an unchanged FY19E PER of 18.0x, in line with the valuation of its German competitor – OSRAM. While D&O offers exciting growth prospects, we believe valuation is stretched at current price levels.

Risks to our call include: (i) disruption of wafer supply, (ii) replacement/obsolescence of LED technology, (iii) sharp currency fluctuations, and (iv) adverse foreign labour policy.

Source: Kenanga Research - 6 Mar 2019

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