PUBLIC INVESTMENT BANK

PublicInvest Research Company Initiation Thursday, October 04, 2018

KDN PP17686/03/2013(032117)

D&O Green Technologies Outperform

DESCRIPTION Prospects Lighting Up
One of the world‟s leading automotive LED makers
for module suppliers
We started looking into D&O Green Technologies (D&O) in late 2015 (refer to
our 15 Jan 2016 report), when the company was in the midst of turning around
after suffering consecutive losses over three straight years. The company made
12-month Target Price RM1.03 a timely and bold move of getting into the automotive LED business at that time,
Current Price RM0.98
Expected Return +5.1% when the application of LEDs was still at an early stage. Today, the group has
successfully established a strong footprint in the global automotive LED market,
ranking itself number 4 worldwide. We believe the bullish prospect on the
Market Main
extensive use of automotive LED is likely to bring in stronger earnings growth for
Sector Manufacturing the group over the next few years. Hence, we initiate coverage on D&O with an
Bursa Code 7204 Outperform call and fully-diluted TP of RM1.03 based on 30x FY19E PER.
Bloomberg Ticker DOGT MK Given that the share price has performed admirably in recent weeks, we are
Shariah-compliant Yes
more inclined toward suggesting an accumulation on weakness though the
emergence of a new significant shareholder may also serve to bolster
KEY STOCK DATA confidence and drive prices even higher.
1.10  Background. D&O is principally involved in research & development, design
1.00 and manufacturing of Light Emitting Diodes (LED) for i) automobiles, ii)
0.90
general lighting and iii) televisions. The automotive LED segment makes up
0.80
more than 95% of D&O‟s sales.
0.70  In expansion mode for new orders. The group has allocated RM40m for a
0.60 new manufacturing facility next to the existing plant in Melaka. Renovation
0.50
works at the new factory building started two months ago and will be carried
0.40
out in three phases over a 6-year period till 2023. Under phase 1 of the
May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 renovation plan, the new office building is expected to be completed by
2QFY19 at a cost of RM29m. Completion of the new office building will free
52 Week Range (RM) 0.53-0.98 32,303.0
up space in the existing plant for production capacity expansion, which could
3-Month Average Vol („000) 3,629.1 6,800.0
potentially double the current production capacity.
 High barriers to entry. In contrast to the general lighting and television LED
SHARE PRICE PERFORMANCE market, there is an ultra-high standard for the automotive LED segment as
prospective suppliers will need to spend few years to go through pre-
1M 3M 6M qualifying tests before being nominated for inclusion into the supply chain for
Absolute Returns 23.6 28.9 51.1
Relative Returns 40.3 26.4 66.9
module makers. Stringent requirements are necessary as any defects could
pose damage to the automakers‟ reputations and/or image. Under its
“Dominant‟ brand name, it possesses the AEC-Q101 certification, a world
KEY STOCK DATA class automotive quality standard.
Market Capitalisation (RMm) 1,019.0  Looking at 15%-23% earnings growth for FY18-20. This comes as a
No. of Shares (m) 1,040.8
result of the gradual exit from the LED market for general lighting and
MAJOR SHAREHOLDERS television in 2014, while also channeling its resources into the automotive
LED market segment which is more stable and has higher margins. Since
% then, the company has seen a successful turnaround with the revenue loss
Goh‟s Family 42.4 from the non-auto segment taken over by rapidly-improving automotive LED
Dato‟ Mohammed Azlan Hashim 10.5
Lim Thiam Cheok 6.1 sales. Core earnings also grew from a paltry RM0.7m to FY17‟s RM13.9m.
Kumpulan Wang Persaraan 5.3 We expect earnings growth of 15%-23% with a consistent gross margin of
27% over the next 2 years. As it takes at least 1-2 years to be a pre-qualified
auto LED supplier, we see earnings visibility over the next few years.
KEY FINANCIAL SUMMARY
FYE Dec (RM m) 2016A 2017A 2018F 2019F 2020F CAGR
Revenue 430.1 463.3 549.5 664.3 759.6 12.0%
Gross Profit 32.0 47.9 57.9 73.0 87.3 22.2%
Pre-tax Profit 29.7 45.8 55.8 70.6 84.9 23.4%
Core Net Profit 11.2 13.9 39.7 52.0 62.5 41.0%
EPS (Sen) 0.7 0.9 2.6 3.4 4.1 41.0%
Chong Hoe Leong P/E (x) 132.0 106.4 37.2 28.5 23.7
T 603 2268 3015 DPS (Sen) 0.0 0.5 0.5 0.5 0.5
F 603 2268 3014 Dividend Yield (%) 0.0 0.5 0.5 0.5 0.5
E chonghoeleong@publicinvestbank.com.my Source: Company, PublicInvest Research estimates

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A world-leading surface mount LED
manufacturer for the global automotive
industry.
Major shareholders of the company are
the Goh family, who own a 42.4% stake.
The Goh family is also the largest
shareholder in another Malaysian public
listed company, Mega First Corporation.
Currently shifting its office to a new
factory next to its existing plant to free up
space, which could potentially double its
production capacity.
Automotive LED segment makes up
almost 95% of D&O sales
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Company Background
Bearing fruits of transformation. Listed on the Main Market of Bursa Malaysia
in Dec 2004, D&O Green Technologies through Dominant Opto Technologies
S/B (Dominant), is a world-leading surface mount LED manufacturer for the
global automotive industry. It offers a comprehensive range of LED packaging
solutions under its own “DOMINANT” brand name catering to both the interior
and exterior automotive lightings. Its automotive LED products are widely sold to
markets in China, US, EU, Japan Korea and India. Besides that, it also produces
LED for the general lighting and television markets. In 2015, it made a bold
strategic decision to shift away from the highly competitive general lighting and
LED television markets to focus on the more stable and higher margin
automotive industry.
In Aug 2017, D&O offered to increase its stake in Dominant Opto Technologies
S/B by 27.95% to 89.79% for RM275m via the issuance of 451m irredeemable
convertible preference shares (ICPS) at an issue price of RM0.61/share or an
estimated 18x FY18E PER. Each ICPS is convertible to 1 D&O share, which will
also increase D&O‟s share base by 45.2% to 1.5bn (including ESOS of 49.6m).
The deal was perceived as EPS neutral as it was expected to bump up the
earnings by similar growth.
The major shareholders of the company are the Goh family, who own a 42.4%
stake followed by the chairman, Dato‟ Mohammed Azlan Hashim with 10.7%.
The Goh family is also the largest shareholder in another Malaysian public listed
company, Mega First Corporation. The D&O group is led by Mr. Tay Kheng
Chiong, who has been the group managing director since 2004.
Business Overview
Figure 1: Corp Structure
Source: Company, PublicInvest Research
In expansion mode. D&O operates from two factories located in the Batu
Berendam Free Trade Zone, Melaka, which has a daily production capacity of 8-
10m pieces. The facilities are running at 80% utilization rate. The company is
currently shifting its office to a new factory next to its existing plant to free up
space, which could potentially double its production capacity.
After suffering severe losses in 2010 to 2013 due to i) restructuring of business
strategy within the group, ii) withdrawal from its Laotian operations and iii) exiting
the loss-making „molded discrete packaging business”, the Group has
successfully turned around its prospects to register consecutive positive
earnings over the last five years.
Business-wise, the automotive LED segment makes up almost 95% of D&O
sales while the remainder is made up by the general lighting LED and backlight
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LED for televisions. The company has slowly phased itself out from the latter
segments given the stiff competition from Chinese and Taiwanese players amid
subdued margins for both markets.

D&O currently has about 4% global
market share in the automotive LED
market
i) Automotive: D&O currently has about 4% global market share in the
automotive LED market. Its LEDs can be found in marques such as
Volkswagen, Mercedes Benz, Hyundai, Kia and Chinese car makers.
Going forward, management expects LED sales from the automotive
segment to improve on the back of the strong US Dollar and more variety
of car models.

General lighting LED faces stiff ii) General Lighting: Given that LED has longer product life-span, this would
competition from Taiwan, China and cushion the demand for general lighting applications as the demand for
Korean players replacement market is poor. In addition, general lighting LED also faces
stiff competition from Taiwan, China and Korean players.

iii) Backlight Unit: The backlight unit, which caters to consumer-centric

The backlight unit has the lowest margin
amongst all the three segments
products such as televisions, mobile phone, tablet and other electronic
devices, has the lowest margin amongst all the three segments and is a
volume-driven business. It used to be the main growth driver for the Group
in the past, with intense price competition from Chinese producers being
the biggest challenge, which subsequently led to margin erosions.

Figure 2: Breakdown of Sales In FY17 (by segment)

Non-
automotive
5%

Automotive
95%

Source: Company, PublicInvest Research

Figure 3: Revenue Breakdown (By region)

Other countries
3%
US
9%

Europe
21%

Asia
67%

Source: Company, PublicInvest Research

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Global auto industry has been recording
encouraging sales growth every year
thanks to evolving car technologies and
improving car designs
Leading players are focusing on
developing innovative systems with cost
effective solutions
Presence of LEDs are evident in every
car model, with roughly 80% of the
automotive LEDs on the exterior
Has about 110 Tier-1 customers
worldwide
Epistar, one of the leading Taiwanese
LED epi-wafer and chip makers,
emerged as a shareholder of Dominant
with a 10% stake
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Overview of Automotive LED
Use of LED on the rise. Despite the emergence of car sharing services and
increased accessibilities via a number of public transportation modes, the global
auto industry has been recording encouraging sales growth every year thanks to
evolving car technologies and improving car designs. Traditionally utilized as
back lights in the vehicles, automotive LED are now being adopted for
headlights, replacing xenon and halogen lights, attributed to better lighting
system and higher power efficiency.
Our studies show that LED lighting systems are gaining preference in passenger
cars, coupled with rising production of hybrid and electric cars integrated with
high quality LEDs. In order for auto makers to effectively differentiate themselves
in the global market, leading players are focusing on developing innovative
systems with cost effective solutions which require extensive use of LED and
improvements in LED modules. Meanwhile, the longevity of a car is also on a
declining trend as governments put more emphasis on car safety measures by
shortening the car‟s life span.
A leading player in ambient LED. The presence of LEDs are evident in every
car model, with roughly 80% of the automotive LEDs on the exterior, namely
head lamps, rear lights, dash lights, mirror lights, daytime running lamp, central
high-mounted stop lamps and remote central locking. The remaining 10% goes
into interior applications such as reading lights, ambient lighting, head-up
display, switches, infotainment system, instrument clusters, dome & map
lighting, heating ventilation and air conditioning. Based on the automotive lighting
sales in China, exterior lighting made up 94.5% of sales in 2017 A single lighting
part (refer to figure 5) uses up about 60 LEDs.
According to management, ambient LED is the next phase of growth owing to its
more lucrative margins due to the unique and sporting designs. The group is
currently the market leader for ambient LED segment in the global automotive
market.
One of the world’s leading automotive LED suppliers. D&O‟s LED, which is
sold under the “DOMINANT” brand name, is AEC-QIO1 certified (a world class
automotive quality standard), and has about 110 Tier-1 customers worldwide for
the exterior and interior segments. Its LED products are applied in most of global
car brands.
Strong strategic partner. Epistar (market cap: USD1.2bn), one of the leading
Taiwanese LED epi-wafer and chip makers, emerged as a shareholder of
Dominant with a 10% stake in Nov 2015 for RM65m or a FY15 PER of 65x.
Epistar is the key LED wafer supplier to Dominant with about 80%-90% of total
wafer requirement sourced from this strategic partner. We view this strong tie-up
with Epistar a plus point for Dominant in its competition against global players.
Figure 4: LEDs In The Car
Source: Various, PublicInvest Research
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Figure 5: Number of LEDs needed in a car light

22 LEDs

13 LEDs 16 LEDs

8 LEDs
2 LEDs
Source: Various, PublicInvest Research

Figure 6: Interior Illumination

Source: Company, PublicInvest Research

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Figure 7: Exterior Illumination

Source: Company, PublicInvest Research

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Clientele
Figure 8: Dominant has about 110 Tier-1 Customers Worldwide
Exterior Applications

Interior Applications

Source: Company, PublicInvest Research

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Figure 9: Global Automotive LED Market Shares (2017)

Seoul Semiconductor,
Others, 21%
3%

Samsung, OSRAM, 40%

2%

Lumileds, 10%

Dominant, 4% Nichia, 20%

Source: LEDinside, PublicInvest Research

OSRAM, Nichia and Lumileds make up th

70% of global market share
Dominant Opto Technologies S/B is
ranked no.4 in the global market
4 largest global automotive LED supplier. There are more than 10
automotive LED suppliers in the global market. OSRAM, Nichia and Lumileds
make up 70% of global market share, according to market surveys. D&O‟s
89.79%-owned subsidiary, Dominant Opto Technologies S/B is ranked no.4 in
the global market. According to management, break into the global automotive
LED market will need strong footprints in the top four global car producing
countries, namely, China, EU, Japan and US.

According to the European Automobile Manufacturer Association, more than

80m passenger cars were produced around the world in 2017. China saw a
4.4% growth in 2017, producing 23.5m passenger cars, which is also the highest
volume in the world. EU climbed 0.2% YoY to 16.9m followed by Japan (+5.8%)
while US saw a decline of 11.5% YoY. In 2017, China made up 29.3% of global
passenger car production.

Figure 10: Top 10 Passenger Car Producing Countries (2017)

(m)
25

20

15

10

0
China EU Japan US India South Mexico Brazil Canada Iran
Korea
2016 2017
Source: European Automobile Manufacturers Association, PublicInvest Research

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Figure 11: China Automotive LED Sales In 2017 (By types)

CNY bn
10.0
9.0
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
Front lighting Direction Auto lighting Rear lighting Interior lighting
lighting
Source: Various, PublicInvest Research

China will continue to be the leading
market for automotive LEDs in the next 5
years given its steady economic growth
with 1.4bn-strong population
Projected to see a massive growth of
71% in its automotive LED market sales
this year
Industry Outlook
China remains the leading market in auto industry. Undoubtedly, we foresee
China continuing to be the leading market for automotive LEDs in the next 5
years given its steady economic growth with a 1.4bn-strong population. China
produced 23.5m passenger cars in 2017, which is a distant 38.9% higher than
the second largest passenger car-producing country. Healthy economic growth
has pushed up the purchasing power of its citizens, which explains why almost
all the world‟s leading car manufacturers have a footprint in China to reap the
gains of the visibly huge potential in the auto market. China is projected to see a
massive growth of 71% in its automotive LED market sales this year,
underpinned by i) the growing demand for passenger cars ii) more new car
launches in the pipeline and iii) new interior lighting applications such as display
panels and ambient lighting which is also expected to see a strong annual
growth of 33%-35% for the next 2 years, reaching CNY45bn sales by 2020. This
represents a staggering compounded annual growth rate of 40.4%.

In the global automotive lighting market meanwhile, sales are projected to

achieve slightly below USD30bn for a 7.6% YoY growth, and has the potential of
churning USD35bn of sales by 2020.

Figure 12: China’s Annual Automotive LED Market Sales

CNY bn
50
45
40
35
30
25
20
15
10
5
0
2016 2017 2018F 2019F 2020F
Source: Various, PublicInvest Research

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Figure 13: Global Automotive Lighting Market

USDbn
40

35
34.8
30 32.2
29.8
25 27.7
25.8
24.2
20 22.8

15

10

0
2014 2015 2016 2017 2018F 2019F 2020F
Source: Technavo Global Automotive Lighting Market 2016-2020, PublicInvest Research

Financials
Figure 14: Earnings Trend
RMm (%)
800 12

700 10
600
8
500
6
400
4
300
2
200
0
100

0 -2
2011 2012 2013 2014 2015 2016 2017 2018F 2019F 2020F
-100 -4
Revenue Pre-tax profit Pre-tax margin (%)
Source: Company, PublicInvest Research

Bold decision of moving into automotive
LED in 2015 has been proven right as
evolution in the auto industry has seen
the application of more LEDs, as interior
and exterior lights become integral parts
of the design in today’s cars
We project that the company will
continue recording double-digit growth
until 2020 in the range of 15%-23% p.a.
Strong balance sheet provides the
company ammunition to expand its
production capacity
Proving a right decision for the bold move. The company had suffered three
straight years of stagnant sales growth in 2014-2016 as it shifted its LED focus
from general lighting and backlights for TV to the automotive segment due to stiff
competition from regional players, resulting in paltry margins for both
businesses. The bold decision of moving into automotive LED in 2015 has been
proven right however as the evolution in the auto industry has seen the
application of more LEDs, as interior and exterior lights become integral parts of
the design in today‟s cars. Since then, the automotive LED segment has
recorded encouraging annual sales growth of 16% p.a. while the non-automotive
LED segment dipped 83% over the last 4 years. At the group level, gross margin
also started improving significantly, up from 15% to 25% in 2017. Earnings-wise,
it has also shot up from only RM0.7m in FY14 to RM13.9m last year, a
staggering 18-fold jump over three years.
15%-23% earnings growth. Going forward, we project that the company will
continue recording double-digit growth until 2020 in the range of 15%-23% p.a.
The company posted 1HFY18 core earnings of RM14m (+9% YoY) and we
expect to see a big catch-up in the 2H as 1HFY18 earnings has only made up
35.9% of our full-year forecasts. The strong gains will likely attribute to stronger
US dollar movements, and also from the increased stake in its sole operating
subsidiary company, Dominant Opto Technologies Sdn Bhd..
Solid balance sheet. The company is sitting in a net cash position of RM5.7m
as of FY17. The strong balance sheet provides the company ammunition to
expand its production capacity, which is currently running at 80%.

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Has no dividend payout policy in place Dividend payout policy. D&O has no dividend payout policy in place due to its
struggles in previous years. In addition, the company is also currently in an
expansion mode. There was no dividend payout in the past until last year as the
company declared 0.5sen/share or dividend payout of 36.8%.

Valuations
Figure 15: Peer Comparison
Company Mkt Cap EPS (sen) P/E (x) ROE (%) Dividend Yield (%)
(USDm) 2018F 2019F 2018F 2019F 2018F 2019F 2018F 2019F
JHM Consolidated 180.0 11.0 12.0 12.1 11.1 37.5 32.0 3.8 3.0

Osram 4.6 171.2 240.1 22.0 15.7 6.0 9.0 2.5 2.8
Seoul Semi 1.0 89,500.0 107,300.0 22.4 18.7 8.4 9.9 1.0 1.7
Average 18.8 15.2 17.3 17.0 2.4 2.5

D&O 250.0 2.6 3.4 37.2 28.5 11.0 12.4 0.5 0.5
Source: Bloomberg, PublicInvest Research

Initiate coverage with an Outperform call and fully-diluted target price of

RM1.03. We are valuing D&O based on 30x FY19 PER, which we believe is
Valuing D&O based on 30x FY19 PER, justifiable given the i) double-digit earnings growth until 2020, ii) solid presence
which we believe is justifiable in the global automotive LED market, iii) growing demand for automotive LED in
the exterior and interior applications and iv) high barrier to entry.

Investment Risks
i) Sensitive to foreign exchange (FX) exposure. The US Dollar and the
Sensitive to foreign exchange (FX) Chinese Yuan in combination made up 89% of its group sales while 60% of
exposure COGS is denominated in USD, making earnings highly exposed to FX
movements. Every 5% change in US Dollar will affect the Group‟s bottom-line
by RM1.1m. Nevertheless, as a majority of its operating costs are
denominated in Malaysian Ringgit, we see little impact from the FX exposure
on the company‟s margins.

ii) Intense competition. D&O‟s main competitors are mainly from China,
Intense competition Taiwan, Japan, and European countries, which have far bigger capacity and
cost advantages compared to D&O. According to market reports, the top three
largest automotive LED makers made up 70% of global market share.

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KEY FINANCIAL DATA

INCOME STATEMENT DATA
FYE Dec (RMm) 2016A 2017A 2018F 2019F 2020F
Revenue 430.1 463.3 549.5 664.3 759.6
Gross Profit 98.9 116.6 151.1 184.7 212.7
EBITDA 32.0 47.9 57.9 73.0 87.3
Net Finance Income/ (cost) -26.9 -27.6 -28.7 -32.9 -35.7
Others -2.3 -2.1 -2.165 -2.415 -2.415
Pre-tax Profit 29.7 45.8 55.8 70.6 84.9

Income Tax -8.5 -9.4 -10.0 -12.7 -15.3

Effective Tax Rate (%) 28.6 20.5 18.0 18.0 18.0
Core Net Profit 11.2 13.9 39.7 52.0 62.5

Growth
Revenue -0.7 7.7 18.6 20.9 14.3
Gross Profit 36.2 49.7 21.0 26.0 19.6
Core Net Profit 9.8 24.1 185.6 30.9 20.3
Source: Company Prospectus, PublicInvest Research estimates

BALANCE SHEET DATA

FYE Dec (RMm) 2016A 2017A 2018F 2019F 2020F
Fixed Assets 153.6 166.1 197.4 224.5 228.8

Other Long-term Assets 53.2 51.0 51.0 51.0 51.0

Cash At Bank 43.7 44.4 41.3 46.5 86.5
Other Current Assets 216.5 225.4 261.1 312.6 355.4
Total Assets 467.0 486.9 550.8 634.7 721.7
ST Borrowings 42.9 27.3 27.3 27.3 27.3
LT Borrowings 5.9 11.0 16.0 21.0 21.0
Trade payables 99.7 91.9 105.6 127.1 145.0

Other Liabilities 30.4 39.6 39.6 39.6 39.6

Total Liabilities 178.9 169.8 188.5 215.0 232.9

Shareholders‟ Equity & Minority 288.1 317.1 362.3 419.7 488.8

Total Equity and Liabilities 467.0 486.9 550.8 634.7 721.7

Source: Company Prospectus, PublicInvest Research estimates

PER SHARE DATA & RATIOS

FYE Dec (RMm) 2016A 2017A 2018F 2019F 2020F
Book Value Per Share 0.2 0.2 0.2 0.3 0.3
NTA Per Share 0.2 0.2 0.2 0.3 0.3
EPS (Sen) 0.7 0.9 2.6 3.4 4.1
DPS (Sen) 0.0 0.5 0.5 0.5 0.5
Payout Ratio (%) 0.0 54.3 19.0 14.5 12.1
ROA (%) 2.4 2.9 7.2 8.2 8.7
ROE (%) 3.9 4.4 11.0 12.4 12.8
Source: Company Prospectus, PublicInvest Research estimates

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RATING CLASSIFICATION
STOCKS

OUTPERFORM The stock return is expected to exceed a relevant benchmark‟s total of 10% or higher over the next 12months.

NEUTRAL The stock return is expected to be within +/- 10% of a relevant benchmark‟s return over the next 12 months.

UNDERPERFORM The stock return is expected to be below a relevant benchmark‟s return by -10% over the next 12 months.

TRADING BUY The stock return is expected to exceed a relevant benchmark‟s return by 5% or higher over the next 3 months but the
underlying fundamentals are not strong enough to warrant an Outperform call.

TRADING SELL The stock return is expected to be below a relevant benchmark‟s return by -5% or more over the next 3 months.

NOT RATED The stock is not within regular research coverage.

SECTOR

OVERWEIGHT The sector is expected to outperform a relevant benchmark over the next 12 months.

NEUTRAL The sector is expected to perform in line with a relevant benchmark over the next 12 months.

UNDERWEIGHT The sector is expected to underperform a relevant benchmark over the next 12 months.

DISCLAIMER
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permitted by applicable law. The information contained herein is prepared from data and sources believed to be reliable at the time of issue of
this document. The views/opinions expressed herein are subject to change without notice and solely reflects the personal views of the analyst(s)
acting in his/her capacity as employee of Public Investment Bank Berhad (“PIVB”). PIVB does not make any guarantee, representations or
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foregoing, amongst others, may give rise to real or potential conflicts of interest.

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PUBLIC INVESTMENT BANK BERHAD (20027-W)
9th Floor, Bangunan Public Bank
6, Jalan Sultan Sulaiman
50000 Kuala Lumpur
T 603 2268 3000
F 603 2268 3014
Dealing Line 603 2268 3129

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