1QFY21 CNP came in largely in line with expectations at RM26.5m (-13% QoQ; +577% YoY), representing 20%/25% of our/consensus full-year estimates. Revenue remained robust at RM205.7m (-1.9% QoQ) despite being the seasonally weakest quarter for the group. We anticipate subsequent quarter earnings to see an upwards trajectory on the back of surging car sales in China and encouraging recovery in Europe as Covid-19 cases in the region decline. Maintain OUTPERFORM with an unchanged Target Price of RM5.50.

Within expectations. 1QFY21 CNP came in largely in line with expectations at RM26.5m (-13% QoQ; +577% YoY), representing 20% and 25% of our and consensus full-year estimates, respectively.

YoY, revenue for 1QFY21 surged 74% to RM205.7m on strong recovery in global automotive sales, especially in China. This led to a 577% jump in 1QFY21 CNP to RM26.5m thanks to well optimised plant utilisation rate and better cost control which are reflected in its gross profit (+4.2ppt) and net profit margins (+9.6ppt). QoQ, despite typical seasonality resulting from shorter working days during the period, 1QFY21 revenue only inched 1.9% lower (vs. typical declines of 15-20%) while CNP dipped 12.6%. Note that D&O’s gross profit margin even improved 0.1ppt QoQ to 29.8% despite 1Q being the weakest period for the group, attributable to improved efficiencies and tighter cost control.

Winning pick in the automotive space. With the weakest quarter behind us, we expect upcoming 2QFY21 to see QoQ earnings growth trend, in line with our anticipation of a solid growth throughout FY21 as the order pipeline remains robust. Despite persistent chip shortage, D&O continues to deliver customer’s orders without hiccups due to proper inventory planning. This is one of the many reasons that help D&O remain a winner in the automotive LED space given its niche expertise to not just compete on the global stage but also to continuously generate business wins as it gains more traction among tier-1 automotive customers.

China car sales continue to surge. China’s car sales have fully recovered and even exceeded pre-Covid-19 levels as Jan-Apr car sales growth saw a 53% jump YoY according to the China Association of Automobiles Manufacturers (CAAM). Similarly, Europe car sales grew 24.4% for Jan-Apr with the month of April alone recording a staggering 219% surge as consumers took advantage of government subsidies. The encouraging growth figures were achievable as Covid-19 cases in the European region saw steep declines.

Maintain FY21E/FY22E CNP forecast of RM131.4m/RM145.8m, representing 165%/11% growth, respectively.

Maintain OUTPERFORM with an unchanged Target Price of RM5.50 based on 48x FY21E PER at +2SD to its 3-year mean to reflect improving prospects ahead. Being a renowned brand name in full range automotive LED, we believe D&O is a prime proxy to the on-going boom in the automotive market.

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

Source: Kenanga Research - 25 May 2021