We anticipate a strong 2HFY20 with expectation of record high numbers in the subsequent quarters. The group is experiencing orders beyond its usual volume on the back of pent-up demand from China and Europe, thanks to government incentives and dealership rebates which are translating into higher car sales. Beyond the seasonally better 2H, we foresee the positive momentum to continue into FY21 as car manufacturers are starting to adopt smart RGB lighting which yields higher margin. Maintain OUTPERFORM with a higher TP of RM1.20.

Poised for a record 2H. We came away from a management meeting excited over D&O’s outlook. We anticipate YoY growth for 2H20 with expectation of record high numbers in the subsequent quarters to make up for losses during the movement control order (MCO) period. After resuming to full capacity since June, the group is experiencing orders beyond its usual volume on the back of pent-up demand from China which recorded 16% YoY growth in car sales for the month of July. This marks its fourth consecutive month of sales growth, following mid-teens growth in the month of May and June. Electric vehicle sales in China also rose 19% YoY in July.

Besides that, we also noticed very encouraging signs of recovery in the European region as car sales growth came off its low of -76% YoY in April to -22% YoY in June. We believe this is attributable to government incentives and dealership rebates coupled with consumer’s preference for private transportation due to hygiene purposes. In line with government policies to reduce carbon emission, we are also seeing demand shifting towards electric vehicles as market share of electric vehicles in Europe currently stands at 6.8% vs 2.5% a year ago.

In addition to rising car sales, LED per vehicle is also expected to continue rising, with electric vehicles and driverless cars in particular leading the way. Having the first-mover advantage in smart RGB, D&O is well positioned to reap the benefits as car makers are starting to adopt such technology. Smart RGB yields higher ASP and allows for local dimming which results in better contrast and lower power consumption. With battery as the main power source for electric vehicles, even marginal power saving from LED makes a difference in terms of driving range. Such savings become even more pronounced with the increase in LEDs per vehicle, in tandem with market trend to improve both safety and aesthetics.

Confident for FY21. Seasonally, 2H is usually the better half for the company as customers ramp up orders to prepare for the festive and year-end promotional season. With the order visibility at hand, we expect the positive momentum to continue towards FY21 thanks to the group’s continuous effort in R&D which consistently translates into designs-wins.

Raise FY20-21E core PATAMI by 14%-25% to RM34.2-RM53.5m respectively, to account for the strong 2H recovery and improving macro conditions.

Maintain OUTPERFORM with a higher Target Price of RM1.20 (previously RM0.965) based on an unchanged FY21E PER of 25.3x, in line with its 3-year mean. Being a renowned brand name for full range automotive LED, D&O is a prime proxy for the potential recovery in the automotive market, amplified by rising LED content in passenger vehicles and its augmenting market share.

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

Source: Kenanga Research - 27 Aug 2020