Leading automotive LED manufacturer. Through its principal operating subsidiary Dominant Opto Technologies Sdn Bhd, D&O is a world-leading surface mount LED manufacturer for the global automotive industry. It offers a comprehensive range of LED packaging solutions under the "DOMINANT" brand name catering to both the interior and exterior automotive lighting.

Improving car sales outlook in China. Being the world's largest automotive market, the China automobile industry association had downgraded China's 2022 automotive sales to 27m units (+3% YoY) from 27.5m as the stringent “zero covid-19” policy has caused lacklustre 1H22 automotive sales. That said, China's June automobile sales passenger car data rebounded strongly at 2.22 million (+41% YoY), and the momentum is expected to extend into 3Q22 with the help of government stimulus policy. This includes halving the purchases tax for <300k yuan gasoline cars to 5%, offering subsidies to consumers to trade-in gasoline vehicles for EVs, and some cities expanded quotas on car ownership.

Increasing usage of LEDs in vehicle. D&O's long-term growth will be supported by the increasing usage of LEDs in vehicles. This is reflected in newly launched vehicles, which now equips more LEDs content in the way of bigger screen and multi-screen, interior and exterior applications. This trend is more notable in EVs, where the design is more stylish and equipped with ambient lighting and a bigger screen to have a more futuristic look. For instance, the BMW ix all-electric SUV flagship model features a large 14.9-inch infotainment display combined with a 12.3-inch digital gauge cluster. We note that this trend also applies to the mid-range and mass market cars nowadays.

All in, market consensus is anticipating D&O's core PATAMI to register a strong FY21- 23 CARG of 26.9%, while the management is hopeful for a double-digit YoY revenue and earnings growth in the remaining quarters of 2022.

Pending double bottom breakout. Technically, D&O is pending for a double bottom breakout. A successful breakout above the RM4.15 neckline will indicate a downtrend reversal and spur the price toward RM4.46-4.75-5.04 level. Cut loss at RM3.63.

Source: Hong Leong Investment Bank Research - 9 Aug 2022