A recent meeting with management of D&O reaffirmed our conviction that the company is gearing up on its expansionary mode with at least 20%-30% annual capacity growth rate over the next 5 years. Besides the capacity growth, margins would also significantly improve significantly on the back of stronger average selling prices from the new LED products, which could potentially fetch 5-10x more than the current products. We suggest investors re-look at the prospects of the company following recent share price weakness, with current valuations relatively attractive based on our TP of RM5.09. Maintain Outperform based on 45x FY22 EPS.

• Riding on industry boom. The company is expected to see another round of capacity expansion in April following the last expansion in Aug 2020, which is already fully utilized. It normally takes up to 2.5 months to set up new production lines. To further improve productivity and space utilization, the company has undertaken the initiative to enhance its production lines by developing the new “triple deck encapsulation, which generates 6 production lines, a significant improvement from the “single deck, single production line’ during the early days. A new “double deck test and tape’ mechanism is also being developed to follow the production pace. Based on the current projection, capacity is expected to double up by 2025 or an estimated staggering growth of more than 160% compared to 2020 levels. Meanwhile, capex spending (% of revenue) is expected to be elevated from 8-9% to 12% this year.

• Continuously pursuing innovation. The Group has been actively engaging new products to be at the forefront of market trends. It is believed the recent strong quarterly results were attributed to the large orders for its newly developed TFT backlight, an interior LED application, which is touted to be the brightest production in the automotive market. It can help improve the contract for backlight, which make the screen clearer even under sunlight. To be better prepared for future autonomous car markets, various R&D studies are being carried out on the infrared sensors (LEDs that incorporate sensor), which can be applied on i) gesture recognition control, ii) driver monitoring system, iii) active night vision system and other more advanced features. Meanwhile, more smart LED automotive products will be launched soon after the commercialization of two smart LED products. The smart LED product is projected to make up at least 10% of group production by 2025.

• EV transition will push up the adoption of LED content. Accredited to its innovative and high-quality automotive LED products, most of the notable electric vehicle (EV) players are already its end-users. The EV shift will see automotive LEDs leaping to the next phase called matrix lighting (infrared sensor), which could potentially bump up the adoption of LED content by more than 6-fold (refer to Figure 1). The smart LEDs (combination of chip & LEDs) and infrared would definitely play a key role in the EV space, which is touted to be the next generation car.

Source: PublicInvest Research - 8 Mar 2021