D&O is gaining market share while its German competitor is still in the red. Being one of the only two in the world to supply 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. BUY with a TP of RM0.91. Our valuation is based on an unchanged FY20E PER of 22.6x. We believe that value has emerged following a knee-jerk sell-off due to the new coronavirus threat.

D&O’s outlook is bright with an expected stronger 4Q on a QoQ and YoY basis owing to more business wins for both interior and exterior automotive lightings. Seasonally, 4Q is also the strongest quarter for the company as customer ramp up orders to prepare for stronger festive and yearend promotional season.

In addition, the group has been gaining market share from its competitors in the automotive LED space, notably for rear combination lamps (RCL). Optimism is anticipated to continue into FY20 as the company has received very encouraging orders for January 2020. So far, the new coronavirus threat in China has not caused any delay or cancellation of orders. Note that circa 45% of D&O’s revenue is derived from China.

Macro outlook have also been showing very positive signs as Europe car sales jumped 21% YoY in December 2019 to mark the fourth consecutive month of growth, turning fullyear sales growth to a positive 1.2%. Meanwhile, car sales in China are seeing the decline narrowing. More importantly, D&O’s growth does not solely depend on the growth of car unit sales, but the LED content per vehicle which will continue to increase as car manufacturers move towards electric vehicles (EV) and autonomous cars.

Having the first-mover advantage in smart RGB, D&O is well positioned to reap the benefits as car makers are moving towards such technology. Smart RGB yield 10x higher ASP and allows for local dimming which results in better contrast and lower power consumption. With battery as the main power source for EVs, 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.

Source: Rakuten Research - 4 Feb 2020