We affirm a few positive takeaways to reiterate our upbeat view on D&O Green Technologies’ (D&O) prospects following its 4QFY21 post-results virtual briefing. Since early-2022, the company’s share price has taken a beating (YTD: -19%) in tandem with the global sell-off across the technology sector due to heightening geopolitical concerns and pressures from multiple US rate hikes. Valuation has become more appealing, with the stock now trading at a forward PER of only 29x. D&O remains one of our top picks for exposure to the technology sector given robust growth in the automotive LED industry. Maintain Outperform call with an unchanged TP of RM6.36 based on 40x FY23 EPS.
Robust enquiries. The Group saw a strong +43% YoY growth of the design-in segment (an initial success, where customers consider designs of Dominant’s parts) last year. It normally takes 1-3 years before conversion into business wins (purchase orders). As every automaker is rushing into the electric vehicle (EV) space and aiming to be ahead of the curve, we think the duration for contract deliveries could accelerate in the coming years. German automaker, BMW, recently guided that it intends to more than double EV sales to 200,000 this year and reach 2m fully-electric sales by 2025. BMW also guided that it expects 15 fully-electric models to be in production this year. Our channel checks reveal that there will be more than 22 new EV car models to be unveiled this year.
No single source dependency on raw material suppliers. To mitigate the supply disruption issue ahead of increasing new capacity production, the Group has stocked up more input materials over the last three months. Management reassured that raw materials are currently well managed as they have sufficient supply that can last for 1.5 to 3 months with 5 to 10 suppliers for each material, namely, wafer, leadframe, phosphor, silicone gel, resin and hardener. In terms of material costs, there is little change as they have more suppliers with competitive pricing.
Forecasting capacity growth of 20%-30% in 2022. Management has allocated capex of RM150m for FY22, mainly to cater for new production lines at Plant 2. It is in the process of installing new machineries with commencement of LED production taking place in 2QFY22. Given the increased capacity, we expect to see strong earnings momentum to persist in 1H 2022. We are confident of seeing another double-digit earnings growth for FY22. Based on the timeline, the 25k sqm Plant 2, which can potentially generate at least RM1bn annual revenue, is expected to be fully utilized by 2025. It has a capacity of producing at least 400m pieces of LED per month. Meanwhile, construction for the 10-storey 35k sqm manufacturing Plant 3, which costs about RM200m, is set to kick-start in 4Q 2022 and ready for commercial operation by end-2024.
A wide range of new LED products to be released. This year, the Group plans to release a range of new exterior (5 new) products and interior LED products (7 new) that are still going through the design-in process. Car body lightings such as the day-time running lamp, front grill lamp and rear combination lamp for exterior application and infra-red (IR LED), photo detector and ambient light sensing for interior application are the long-term targets for the Group. We understand that IR LED, which is designed for interior automotive applications, provides features such as gesture controls for convenience and monitoring of interior cabin activity, particularly driver and passenger conditions. Meanwhile, sales contribution of smart LED is still relatively small (<3%) but is expected to see tremendous growth in the next 4 years, led by the aggressive roll-out of more new EV car models by global automakers. We gather that more automakers from Germany, Korea, Japan, China and US have started showing interest in applying Dominant’s smart LED solution (have bagged some design-win orders).
BEV (Battery EV) revolution pushes higher LED adoption. Despite global auto sales registering only 4.7% growth in 2021, global EV car sales surged 108% YoY to 6.75m units. This year, EV sales are expected to see another impressive growth of 41% to 9.5m units or even higher depending on how soon the chip shortage and logistics issues can be resolved. Meanwhile, the global shares of EV (battery electric vehicles+ plug-in hybrids) nearly doubled to 8.3%. Battery electric vehicles made up 71% of total EV sales while the remainder was contributed by plug-in hybrids. In terms of EV car sales by car brand name, Tesla topped the list with 936,000 deliveries, 436,000 more than 2020. Volkswagen stayed in 2nd spot while BYD climbed to third spot after seeing a 3-fold jump to 600,000 units. China led the global EV sales growth as it registered a steep growth of 155% or up by 2m units, (more than the combined volume increase of all other regions) to 3.39m units. EU region recorded the second largest EV sales with an encouraging growth of 66% to 2.33m units. EV sales in Northern America region nearly doubled to 735,000.
Moving into bigger display screens. Car display screens have evolved from the earliest 2.7 inches to 12 inches and then to 17 inches, with an amazing 56 inches in the works. This has come in the form of monochrome screens to large LCD screens, from straight screens to curved screens, from a single screen to double screens and then to multi-screens. Development of car display screens have moved towards large and multiple directions, as the application of car-mounted large screens have become an inevitable trend. About 90% of new car models on the market are now equipped with 12 inches or even larger screens, meaning that large screens have become the key selling point. The emergence of backlight unit (BLU) display technology has led to the development of in-car entertainment systems in a more diversified and intelligent direction, literally known as infotainment. The infotainment systems of modern cars integrate connectivity, entertainment, navigation and vehicle control, and provide more entertainment functions, such as audio-visual, information and in-car karaoke. Notably, BMW iX all-electric SUV flagship model features a large 14.9-inch infotainment display combined with a 12.3-inch digital gauge cluster. Mercedes is going to unveil the Hyperscreen, a massive 56-inch, curved touchscreen infotainment display, that will debut in the company’s EQS all-electric model next month.
Ambient lighting synchronized with infotainment. The shift from the internal combustion engine to electric engine has cut short the manufacturing process as the number of spare parts involved has significantly reduced by more than 80%-90%. Compared to conventional car models, the modern EVs are more stylish in design, shape and emphasizes more on ambient lighting and are equipped with bigger embedded display screens. The function of ambient lighting is playing a vital role as part of the car infotainment system as it utilizes interior lights mounted around the cabin to enhance the design and may even be soothing drivers and passengers. With the smart LED application, the infotainment system not only provides the option to tailor the colour of the ambient lighting, it even allows the lighting to pulsate in time with the audio system for added customizability.
