This article first appeared in The Edge Malaysia Weekly on September 27, 2021 - October 3, 2021

AS one of the world’s top two automotive smart LED players, D&O Green Technologies Bhd is ramping up the business to garner higher margins.

“We integrate the semiconductor integrated circuit (IC) and LED as a single component, which can cut down on the wiring and simplify the design. It helps make the cars more attractive and create a value proposition for our customers,” its group managing director Tay Kheng Chiong tells The Edge in a recent interview.

“By 2025, the smart LED segment [is expected to] contribute 10% to 15% to our sales revenue from less than 1% currently. The margins will be a lot better than current levels. This is a niche segment and we have to continue running on high-speed mode.” Tay notes that smart LEDs are more applicable to high-end car models.

The booming electric vehicle (EV) segment is another catalyst for the automotive LED maker. While revenue contribution from the segment is just about 5%, Tay believes the commitment from both automotive players and their respective governments will prompt a faster shift to EVs. An EV model will adopt more LEDs than a conventional one.

“US President Joe Biden wants to have 50% of EVs manufactured by 2030. So, you hear from BMW that it will have at least 12 EV models by 2023. Tesla wants to achieve 10 million EVs by 2025. Also, Volkswagen wants 50% of its car models to be EVs by 2030,” he observes.

Tay sees more upside in the automotive LED market when the majority of EVs are purely battery EVs, by 2025, as opposed to the 70% hybrid EVs currently. The company also expects to manufacture more innovative products to cater for car manufacturers’ need for a better brand identity.

“We can see our customers working on many new ideas. We have a Chinese customer’s model that has a total of 4,000 LEDs per car, with many applications,” he says.

In total, D&O has 110 customers, with the top 25 contributing 75% to its revenue. China is a key market for the company, accounting for 40% of its total revenue; the remainder is from Europe, the US, South Korea, Japan, India and Southeast Asia.

For the first half of 2021, the company’s net profit surged more than 11-fold to RM53.29 million from RM4.6 million in the previous corresponding period. Its gross margin has also been on the rise, from 29.8% in 1Q to 30.6% in 2Q. Last year, its net earnings came in at RM49.65 million, up 42.4% y-o-y from RM34.87 million.

Tay expects strong double-digit growth for 2021 and 2022, underpinned by the orders in hand, which will keep the company busy until February next year.

As it has multiple suppliers for its main materials — chips and leadframes — the company has not been affected by the global chip shortage. Tay believes chip supply constraints can be solved by end-2022, as global semiconductor players have been expanding their production capacity.

Asked about the recent termination of its plan to acquire precision electroplating services firm Syntronixs Asia Sdn Bhd for RM55 million, he says the impact is insignificant, as it is just part of the supply chain it can tap. “We want to manage the supply source in the long run. When we find a suitable candidate, we will go for another acquisition. If not, we will do so on our own.”

The deal lapsed because of the non-satisfaction of certain conditions that D&O required according to the terms of the offer. Electroplating is a key manufacturing process for smart LEDs.

To meet orders from 2025, D&O — which has two plants in Melaka — has just finalised the master plan for a third plant, which will have a total floor space of 30,000 sq m. The estimated cost is RM200 million to RM300 million.

The company does not rule out the possibility of raising capital in the market to fund its expansion. As at end-June, it had gross borrowings of RM108 million and net debt of RM47.6 million.

“Our gearing is quite healthy at less than 10%. Besides internal funds, we have another option for fundraising,” says Tay.

Its second plant, which was completed last year, is scheduled to begin operation early next year and will be fully utilised within the first half of 2022. The utilisation rate of the first plant stands at 95%.

D&O has budgeted 8% to 10% of its annual revenue for capital expenditure, as well as 4% to 5% for R&D.

Low-profile businessman Goh Nan Kioh, who has a 31.99% stake, is the largest shareholder of D&O.

The share price of D&O hit another record high last week, with a gain of 2.4% in the first four days of the week. The stock surged to an intraday high of RM6.15 last Thursday before closing at RM6.03, giving the company a market capitalisation of RM7.23 billion. Year to date, the counter has gained 164.5%.

Affin Hwang Capital initiated coverage on D&O on Sept 13, with a high target price of RM8.40, in view of its net profit seeing a compound annual growth rate of 68% and exciting earnings prospects.

In a Sept 10 report, PublicInvest Research maintained an “outperform” call on the company, with a higher target price of RM6.31, premised on growing market share in the global automotive LED market and its leading position in smart LED development.

Valuation-wise, D&O is trading at a trailing 12-month price-earnings ratio (PER) of about 72  times — considered high compared with other stocks in the tech sector. In terms of forward PER, the counter is trading at 53 times.  

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