PETALING JAYA: Public Investment Bank Research (PublicInvest Research) has placed an “outperform” call on automotive light emitting diode (LED) maker D&O Green Technologies Bhd
(D&O) with an unchanged target price of RM4.37 a share as it expects a better performance from an uptick in sales for the company in 2024.
The research house said a target of at least 10% in sales growth next year has been set, led by more new design-wins materialising as global automakers step up car launches especially in the electric vehicle (EV) segment.
“We expect this growth to be driven by maiden contribution from module printed circuit board (PCBA) and headlamp segment, bigger smart LED sales and increasing automotive LED adoption for new EV launches,” the research house said.
According to PublicInvest Research, the automotive LED market has been expanding on the back of higher automotive LED consumption per car as display panels get bigger with more LEDs also being used for interior and exterior lighting.
The research house said D&O has an upper hand because of the high barriers to entry and intensive capital expenditure (capex) requirements that have put off any new competitors and constrained new product development as there are only two global players that produce non-white automotive LED-grade products.
“On top of that, new automakers like Huawei, Xiaomi and Baidu are bound to create new demand for automotive LEDs. D&O’s dominance has seen gradual improvement in its global market share from 4.5% in 2019 with a global ranking of sixth to the current ranking of fourth with a global market share of 7%.
“This is mainly attributed to continuous research and development efforts in new products and stronger relationships with tier-one module makers and carmakers,” it noted.
The research house added sales of smart LEDs are also expected to surge more than 140% year-on-year to 85 million units in 2024.
“The orders are mostly from one German automaker. Additionally, D&O’s smart LEDs have been successfully qualified by another German automaker,” it said.The research house also noted the company’s plans for electric vehicle control units has seen three production lines installed with plans to double to the maximum of six lines next year.
Meanwhile,the second floor of one of the company’s plants is currently undergoing the final stage of reliability testing for smart LEDs and is expected to kick start small scale production of smart LEDs by the first quarter of 2024.
“Management expects the Plant two floor space capacity utilisation to grow at a compound annual growth rate of 15% to 16% for 2024 to 2026. Upon full capacity, Plant two could potentially generate an annual revenue of up to RM1.5bil,” the research house said.
Plant three which consists of a 10-storey building worth RM170mil is expected to be completed by 2026 or 2027, and upon full capacity utilisation, it could potentially generate up to RM1.2bil in annual sales.
PublicInvest Research said overall, gross margins for the group should normalise at the 27% to 28% range next year compared with an estimated 21% this year.
The research house added the company’s inventories are expected to ease from the current six-month levels given the strong sales pick-up in the final quarter.
The research house said some of the risks D&O faces include cautious spending by consumers in China due to uncertainties over tax incentives, intensifying price wars in the auto market, and a slowdown in new car launches.
