D&O is experiencing overwhelming orders for its automotive LED with demand surge expected to continue for the foreseeable future. In preparation for a multi-year growth, D&O is: (i) expanding its Plant 1 capacity by 25% in 2HCY21, (ii) prepping its Plant A for Smart LED production in 2022, and (iii) planning a new Plant B for other cuttingedge exterior products, to be ready in 2023. BUY with a TP of RM5.50 based on FY21E PER of 48x.

As evident by the growth streak in China which extended its car sales growth to 10 consecutive months since the rebound from Covid-19 in May 2020. Recent figure in Feb 2021 recorded a staggering 410% YoY growth with 1.156m units sold. While the bullish numbers are partly due to a low-base effect in Feb 2020, it still recorded a positive growth of 2.7% YoY when compared to Feb 2019. Demand for automotive continues to be driven by the premium segment, largely centred on sport utility (SUV) and crossovers vehicles.

D&O’s continuous efforts in product innovation, and to expand its global presence are starting to bear fruits as the group managed to maintain a healthy level of design-wins despite the pandemic. In addition, being one of the only two vendors in the world capable of offering full automotive LED solutions has made the group a go-to-source among Tier 1 customers. To accommodate higher orders, 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 forecast 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.

D&O is running at maximum capacity, defying the typical seasonality. Barring any unforeseen circumstances, we believe the group is capable of delivering exceptional earnings for FY21 with each quarter posting strong YoY growth. 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 the introduction stage of their lifecycles, indicating ample room for growth.

Source: Rakuten Research - 7 Apr 2021