This article first appeared in The Edge Malaysia Weekly on October 26, 2020 - November 1, 2020

THE share price of D&O Green Technologies Bhd has rallied since March 25 as it benefits from a pickup in global car sales.

D&O, which produces light-emitting diodes (LED) and other semiconductors for the automotive industry, has seen its share price rise an impressive 168.89% at last Thursday’s close of RM1.21 — a new peak since its listing in December 2004, valuing the company at RM1.37 billion.

But, are D&O shares considered expensive? What is the potential for the company and can it outperform analysts’ expectations in the second half of 2020 and full-year 2021?

According to D&O managing director Tay Kheng Chiong, the industry still has a lot of growth potential, as automakers make the change from internal combustion engines (ICE) to hybrid, electric vehicles (EV) and, eventually, autonomous vehicles.

As cars get more technologically advanced and complex, more LEDs and sensors are required. This means more orders for D&O, which is already operating at full capacity.

“I always tell my shareholders that the car industry is actually at the beginning [of a growth cycle]. The technology is moving from combustion engine to EV and, in the next five years, autonomous cars will come.

“If you look at EV, I think by 2025 and 2026, there will be roughly 25 million EVs a year,” says Tay in an exclusive virtual interview.

He believes the global automotive market will grow to 90 million units by 2023 from a projected 72 million units this year.

The industry had bottomed in June but has been chalking strong growth since July.

In September, car sales in China continued to accelerate for the third consecutive month. According to China Passenger Car Association, sales of sedans, SUVs, minivans and multipurpose vehicles jumped 7.4% year on year (y-o-y) in September to 1.94 million units.

On Oct 16, the European Automobile Manufacturers’ Association (ACEA) announced that automotive sales in September grew for the first time on an annual basis this year, with registrations up 3.1% to 933,987 units.

Automotive sales in the US also saw a rebound, registering 1.35 million units in September for a 6.2% y-o-y increase — the first month in 2020 of an annual increase.

The numbers are encouraging for a company that sells 99% of its production to overseas markets. Owing to positive sales growth in the world’s largest automotive markets, Tay is confident that D&O will be able to chalk positive earnings growth this year.

“Even in 2019, despite the Sino-American trade war in the first half of the year, as a whole year, D&O performed better. Of course, in 2020, the first half was a turbulent time, but we very much believe that it will still be a positive year,” assures Tay.

Global automakers are now racing to produce cars with more advanced safety and driving features, and the technology that goes into producing these new models requires a lot more sensors, integrated circuits and semiconductors than models of yesteryear.

Last year, investments in EV and batteries hit €60 billion in Europe, 19 times more than the amount recorded in 2018, according to the European Federation for Transport and Environment (T&E).

In China, €19 billion (RM93.2 billion) of investments have been committed in the EV and battery segments, according to T&E.

The amount being poured into the US, where Tesla is based, is unclear. “Tesla has already announced that it wants to become the world’s largest EV manufacturer by 2023. That statement has woken up the big carmakers and charged them to come up with more EV cars,” says Tay.

On Oct 20, General Motors announced that it would invest US$2.2 billion in its manufacturing plant in the US, with most of the production geared towards EV. Since March 2019, the American giant has committed to investing more than US$4.5 billion in three US sites for EV.

As EVs require parts and components to consume less energy, more research and innovation has to be undertaken.

D&O spends around 5% of its revenue annually on R&D. “The primary R&D activities are based in Malaysia, and we have a team in Silicon Valley that focuses on researching integrated circuits. We have also set up a company in Taiwan, whose role is to engage with the wafer fabricators there,” says Tay.

Through R&D, D&O has been able to lower the weight of components, reducing load and, ultimately, battery consumption. In addition, the group has also embarked on the production of smart LED, which is an IC-integrated LED.

The smart LED, called “Intelligent Smart Embedded LED” ­(ISELED), is a technology standard produced through the cooperation of many global companies, including D&O, that produce LEDs and other semiconductors for the automotive industry.

Big semiconductor names Osram Opto Semiconductors and NXP as well as car interior specialist Dr. Schneider are also part of the ISELED alliance.

“So, the next five years, these [LEDs and semiconductors for EVs] will be the main growth. It is very clear that many of the advanced car manufacturing companies have either stopped or partially stopped the combustion engines. So, they push really hard to drive EV cars.”

Highlighting BMW as an example, Tay says that, in five years, the carmaker will have more than 20 EV models, providing “opportunities for our business”.

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