We believe the current retracement in its share price provides a good accumulation opportunity as D&O is poised to hit a new earnings record in FY21 on the back of strong automotive demand. China automotive sales logged 53% YoY gain in Apr to cement its 12-month growth streak, while EV sales grew 180% YoY in Apr. D&O is ready to capture the demand for LED from the EV market with its industry-leading smart LED, expanding capacity to take on more orders. Reiterate OUTPERFORM with unchanged TP of RM5.50.

China automotive sales exceeded pre-pandemic levels. With prevailing low interest rates and attractive rebates from their government, China’s automotive sales have fully recovered and even exceeded pre-Covid-19 levels, recording YTD sales growth of 53% for Jan-Apr 2021. The China Association of Automobiles Manufacturer (CAAM) reported growth of 75.1% YoY (for March 2021) and 53.1% YoY (for April 2021) for passenger car sales, cementing its 12-month growth streak since the rebound in May 2020.

EV demand continues to pile on. In addition to pent-up demand from existing car owners looking to take advantage of the incentives provided by car dealerships, there are 8.39m Chinese citizens who recently received their new driving license for the first time in 1Q 2021, according to the China Passenger Car Association (CPCA). Furthermore, we see the demand trend for electric vehicles (EV) to continue rising tremendously on the back of the government’s push for lowering carbon emission. Sales of EV in China rose 180% YoY in April and 249% YTD.

Expanding both horizontally and vertically. To ride the structural shift towards EV, D&O has its arsenal ready to cater for this market. Powered by the group’s proprietary technology, its industry-leading smart LED is capable of local dimming and colour changing of individual LEDs. This will allow for more flexible configuration for better interior aesthetics as well as lower power consumption which is crucial for EVs. With strong orders in the pipeline, the group is in the midst of increasing its capacity by 25% in Plant 1 by 2HCY21. The group recently completed its Plant A (c.250k sq ft) which will cater for smart LED production in 2022. Given the bullish 5-year forecasts from customers, the group is already planning for Plant B (c.330k sq ft) which will house the production of other cutting-edge exterior LED products in the pipeline, expected to be completed in 2023. In addition to all these horizontal expansions, the group has also developed its own decking mechanism which allows its in-house equipment to be stacked up to 3 levels, allowing the same floor space to process 3x the amount of LEDs.

Maintain FY21E/FY22E core PATAMI of RM131.4m/RM145.8m. We expect to see another record-breaking performance in FY21 on the back of overwhelming automotive demand.

Maintain OUTPERFORM and Target Price of RM5.50 based on FY21E PER of 48x, 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 - 18 May 2021