The pent-up demand for automobiles being witnessed now is consistent with our bullish stance and we expect the momentum to remain elevated throughout 2021. The group is primed to ride the wave of growing LED content per vehicle, particularly electric vehicles which is taking the centre stage as one of the key themes for the technology sector this year. Demand growth is driven by higher adoption of infotainment systems as well as exterior lighting. Maintain OUTPERFORM with a higher TP of RM3.40.

Automotive experiencing surging demand. The pent-up demand for cars that we are witnessing now is consistent with our bullish stance as we have been highlighting the return of automotive demand since 3QCY20. Momentum is expected to remain elevated throughout 2021, with electric vehicles (EV) taking the centre stage as one of the key themes for the technology sector this year. China’s car sales have logged seven months of consecutive growth from May till November 2020, thanks to the easing of purchase quota, and subsidies provided by the Chinese government. Interestingly, we noticed a growing preference towards EV as China’s EV sales growth scored a triple-digit growth for the month of October (+113% YoY) and November (+137% YoY).

Capacity in place for growth towards 2025. D&O’s proven capability and quality products have enabled the group to continue securing more business wins despite the pandemic. Customer’s order forecasts have exceeded 2-3x beyond current capacity due to surge in demand. The group is in the midst of increasing its equipment capacity to meet customer’s demand that is mainly driven by the increased implementation of infotainment systems even in entry level car models as well as a growing demand for its exterior LED, notably the rear combination lamps (RCL). In line with the automotive industry practice which has long road maps for new and facelift models, D&O has order forecasts from key customers that extend until 2025. To ride the wave of higher LED content growth per vehicle, the group has recently completed its second plant (c. 270k sq ft) to take on more orders.

Stellar earnings ahead. As per our check, D&O is running at full capacity, defying the typical seasonality. Barring any unforeseen circumstances, we believe the group is capable of delivering YoY increase for the next five quarters ahead. This will be driven by the increasing LED content per vehicle as well as the adoption of the group’s proprietary smart LED in EVs and autonomous vehicles which are still at their infancies, indicating much room for growth.

Raise FY20E/FY21E core PATAMI by 11%/29% to RM41.5m/RM82.0m in anticipation of heightened demand for automotive LED.

Maintain OUTPERFORM with a higher Target Price of RM3.40 (previously RM2.00) based on FY21E PER of 48x (previously 35x), at +2SD to its 3-year mean.

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

Source: Kenanga Research - 8 Feb 2021