D&O guided for just a mild QoQ dip in performance in the coming seasonally low 1QFY24 on sustained restocking by its customers in China. We are more inclined to stay cautious until we see the return of more sustained orders from its customers. We maintain our forecasts, TP of RM3.60 and MARKET PERFORM call.

We came away from D&O’s post-4QFY23 results briefing feeling neutral. The key takeaways are as follows:

1. Contrary to the seasonal low cycle in the first quarter of the year due to the Chinese New Year break, D&O anticipates just a mild QoQ dip in its 1QFY24, supported by restocking by its customers in China which typically account for c.50% of the group’s total revenue. This is in line with the reports from China Association of Automobile Manufacturers (CAAM) where passenger cars increased 11.4%, 25.3% and 23.3% in the last three months of 2023 and is likely to sustain into early-2024.

2. D&O is strengthening its regional sales teams by focusing on more design-in projects for which there is a growing market in India.

Meanwhile, the group will continue with machinery optimisation to further improve yield rates and output based on the same floor space. This will enable the group to gradually revert to the targeted gross profit margin in the high 20s compared to 21.2% reported in FY23.

3. To boost its margins over the longer term, D&O has begun developing its proprietary Single Footprint (i.e. SpicePlus 2520) LED platform to cater to four power categories, with five colours selection for rear combination lamps. This unified platform will help to minimize retooling, which will boost efficiency. In addition, the adoption of a single footprint strategy also reduces package size and enhances thermal control.

Forecasts. Maintained Valuations. We keep our TP of RM3.60 based on an unchanged 30x FY25F PER, in line with peers’ forward average such as VITROX, INARI and PENTA. There is no adjustment to our TP based ESG given a 3-star rating as appraised by us (see Page 4).

Investment case. We like D&O for: (i) its unique exposure in the automotive LED business, (ii) its penetration into the electric vehicle market, and (iii) venture into next-generation smart LEDs which yield higher margins. However, we are more inclined to stay cautious until we see the return of more sustained orders from its customers. Maintain MARKET PERFORM.

Risks to our call include: (i) sharp increase in automotive demand, (ii) faster-than-expected ramp up in its smart LED segment, and (iii) quicker-than-expected recovery in the global economy.

Source: Kenanga Research - 28 Feb 2024