After stripping out loss on foreign exchange (FX) amounting to RM1.9m and customer compensation related to the new smart LED products (RM9.4m), D&O ended FY23 with a core net profit of RM55.4m, making up 96% and 104% of our and consensus full-year forecasts, respectively. Maintain Outperform with an unchanged TP of RM4.37 based on 35X FY24 EPS. A first interim DPS of 0.3sen was declared for the final quarter.

• 4QFY23 topline rose 25% YoY. 4QFY23 group sales improved from RM240.8m last year to RM301.4m, driven by all key operating countries. Asia, which accounted for 71% of group sales, jumped 22.1% YoY to RM221.3m. The European market, its 2nd largest sales contributor, surged 41.6% YoY to RM70.5m. The US market rose 17.7% YoY to RM15.3m.

• 4QFY23 core profit surged 65%. Excluding the i) gain on FX (RM3.1m), ii) loss on derivatives (RM2.2m) and iii) customer compensation (RM3.3m), the group saw its core net profit leap from RM16.1m to RM26.6m, attributed to stronger automotive LED sales. Meanwhile, 4QFY23 gross margin increased from 23.5% to 26.9% as plant utilization was above 90%.

• Decent start in China’s car sales. Several of China’s automakers, including FAW Group, Dongfeng Motor Corp, BYD and Geely, continued to see strong growth in vehicles sales in January, propelling the domestic auto industry to a promising start for 2024. FAW Group’s auto sales exceeded 296,800 units last month, up 54.2% YoY. Its car brand, Hongqi sales soared 82.9% YoY. Data showed that car sales of Dongfeng Motor Corp hit 274,000 units, up 120.2% YoY, while Geely sold 213,487 vehicles, representing an annual growth of 110%. The new energy vehicle sales of BYD jumped 33.1% YoY to 201,493 units, maintaining its position as a frontrunner in China’s NEV market. Some major Chinese automakers also achieved a large increase in overseas sales in January compared with the same month last year. FAW Group sold 11,529 vehicles overseas, a massive growth of 186% YoY while BYD exported 36,174 vehicles, up 247.5% YoY. Despite the strong start, China Association of Automobile Manufacturers has set a modest target of 3% growth for 2024.

• Upbeat outlook. We project another record sales for FY24 on the back of i) a significant growth in smart LED sales (makes up 10% of group sales), ii) new contribution from head lamp, iii) materialization of business win for tail lamp LEDs coming from the Huawei SUV, which has garnered strong monthly sales of more than 50,000 units in China. Meanwhile, management also guided capex of RM150m for the capacity expansion at Plant 2, which will kick in 2HFY24 The installed capacity from the plant could generate an annual revenue of RM240m-RM360m under the Phase 1 expansion. On the module business, it is expected to breakeven this year and we understand that the group has bagged more projects from Hirain Beijing. Lastly, the construction of the 10-storey Plant 3 is expected to kick start in the 2H. The group is in the midst of finalizing the design after securing necessary approvals from the various authorities.

Source: PublicInvest Research - 27 Feb 2024