D&O posted a cumulative 9MFY23 core net profit of RM25.2m, down 75% YoY as automotive LED sales were badly hit by the slow car sales momentum in China for the first half of this year, amid various cost pressures. The results made up only 33% and 44% of our and consensus full-year expectations, respectively. On a positive note, 3QFY23 results surged 10-fold QoQ, leading to expect stronger results in the final quarter on the back of encouraging global car sales, driven by introduction of more new electric vehicle (EV) car models and various price cuts and rebates. In view of exceptionally higher costs this year particularly, in i) finance, ii) electricity and iii) labour, we cut our FY23F earnings forecast by 24%. We leave forward estimates unchanged for the years ahead as we expect these pressures to dissipate. Maintain Outperform with an unchanged TP of RM4.37 based on 35X FY24 EPS. No dividend was declared for the quarter.

• 3QFY23 topline grew 23.6% QoQ. 3QFY23 group sales climbed from RM219.9m to RM271.9m, driven by all key operating countries except the US. The Asian market, which accounted for 70% of group sales, jumped 34.3% QoQ to RM190.2m. The European market, its 2nd largest sales contributor, rose 11.2% YoY to RM62.6m. The US market contracted 18.3% QoQ to RM15.2m meanwhile.

• 3QFY23 core profit jumped 10-fold. The Group saw its core profit surge from RM2.6m to RM20.8m, attributed to stronger automotive LED sales and lower operating costs. Meanwhile, 3QFY23 gross margin increased from 16.2% to 24.0% as plant utilization rebounded from 65% to an estimated level of 76%.

• China auto sales continued to rise in Oct. Passenger car sales in the world’s biggest auto market rose 10% YoY and 0.7% MoM to 2.03m vehicles in Oct, marking the third consecutive month of growth, boosted by a series of auto shows and promotion activities amid recent new model launches. Total New Energy Vehicle (NEV) sales rose 37.5% YoY to 767,000 in Oct, accounting for 37.4% of total passenger car sales. It also marked the highest monthly NEV sales in 2023. For Jan-Oct, passenger car sales rose 3% YoY to 17.46m units. Meanwhile, the China Passenger Car Association expects car sales to jump by more than 20% in Nov.

• Top floor of Plant 2 fully occupied for PCBA business. According to Hirain Technologies, one of the D&O’s automotive module clients, has set up a new automation production line at the top floor of Plant 2 (refer to Figure 1). The production lines integrate mechanical arm, three-axis module, optical detection, RFID, online monitoring and other automation technologies and comes with MES system, which can have full automation of product process, production information traceability, process parameter control, system error prevention and other functions. It aims to have a total production capacity of 5m units’ automotive electronic controllers to be used for the NEV electronics to meet growing overseas demand.

Source: PublicInvest Research - 27 Nov 2023