thoughts &



5 Takeaways from D&O Green Technologies Berhad Site Visit

Recently our team made a trip to Batu Berendam, Malacca to pay a visit to D&O Green Technologies Berhad (formerly known as D&O Ventures Bhd). D&O Green Technologies Berhad (D&O) is listed on the Kuala Lumpur Stock Exchange (KLSE) since 2004 and currently have more than 2400 employees worldwide.

D&O has a unique position in the industry as one of the world’s leading independent packaging houses for the automotive Light Emitting Diode (LED) segment. D&O offers packaging solutions for LED and other customer specific packages for a diverse range of optoelectronic applications under the “DOMINANT” brand.

We were hosted by the Investor Relations Manager Mr Shawn for on site tour of their production lines followed by a 1- hour session with the company’s managing director and founder Mr Tay Kheng Chiong.

We summarise our takeaways of our visit into 5 key points as below:

1. Strong relationship with suppliers

Epistar Corporations (Epistar), Taiwan’s No.1 LED chipmaker, has a 10% stake in Dominant. D&O gets its supply of chips and wafer from Epistar.

This move enables D&O to leverage on strong LED packaging and chip technology of Epistar via integrating key material component into equity structure to ensure sustainable supply.

2. Well positioned global footprint with solid customer base

D&O products are sold around the world through a network of sales and after sales offices enjoys close proximity to customers in the key automotive markets like Germany, South Korea, India, the US and China. Asia contributed 69% of revenue to D&O and served as the largest contributor.

D&O has 110 tier 1 customers worldwide in terms of automotive interior and exterior LED applications. D&O LED products has a presence in most major car brands such as BMW, Rolls Royce, KIA, Ford, Nissan, Honda, Haval, Mazda, Hyundai, etc. According to Mr Tay, D&O products are used in both interior and exterior LED lighting applications in the automotive segment.

Some of the applications includes head up display, infotainments system, ambient lighting, heating, ventilation and air conditioning system, etc., whereas the exterior applications covers headlamp, day time running lights and turn signals, etc.

Interior & Exterior LED illumination

3. Shift in business strategy for higher margins

D&O was previously involved in the contract manufacturing of light bulbs prior to LED boom in 2009. There was a boom in the application of LED technology in televisions as well as general lighting segment. Despite D&O being first move in the television lighting segment, steep price erosion, low barriers of entry, and competitive market dominated by the Chinese and Taiwanese manufacturers led D&O into loss making in FY2010.

D&O decided to shift its focus from the highly competitive consumer electronic and general lighting segment into the automotive LED segment in 2013. The non-automotive segment contributed 50% of group revenue at its peak has declined to a mere 13% in FY2016. The non- automotive segment usually operates at a thin margin approximately 5% and requires high capital expenditure.

In contrast, the automotive LED segment can offer up to 25% in gross margins depending on product complexity. The decision to change its business focus and strategy has resulted in improvement of revenue, net income and margins over the last 3 years.

Financial results of last 5 years

4. Growth drivers and Expansion plans

D&O managing director Mr Tay shared with us the company’s 10 years expansion plans involves the acquisition of 2.41 hectare land cum factory building besides its current facility in Batu Berendam, Malacca for RM 11 million. It is expected to commence renovation in 2Q 2018 and expected to be completed by 2nd quarter 2019. The new facility will be utilised as D&O new HQ, support office and production floor while the existing facility will be converted entirely to production floor.

Aerial view of D&O existing facility (left) & newly acquired land (right) in Batu Berendam, Malacca

In terms of new product development, D&O unveiled the latest digital LED concept for automotive application – SMARTRGB LED. The SmartRGB LED is to be based on entirely new in car LED lighting concept that drives down costs and weight, simplifies control, as well as expands the functionality of LED lighting and display solutions.

Mr Tay sees SmartRGB LED as a new boom in the automotive LED segment as there will be a strong demand for higher integration of optical parts, electronics and connectivity. The first engineering prototype of SmartRGB LED was made available in Q1 FY2017 and actual product recently launched in Q1 2018.

5. Product quality and reliability are of utmost importance

During the site visit to the production floor, we were shown the 3 generations of in-house designed production lines that were operational. The first-generation machine has only 1 production line, the 2nd generation has 2 lines and the latest model had 4 production lines stacked vertically. This proves that with the same area space D&O is able to double its production capacity and each production lines are able to operate independently producing different types of customised LED.

D&O integrates automation into every element of manufacturing to achieve high efficiency and high productivity. All processes from assembly to electroplating and test are carried out in -house for better quality control.

Mr Tay stated the barriers to entry for the automotive LED segment are high due to lengthy qualifications and gestation periods.

D&O has to be subjected to multiple rounds of quality audits and certifications before it could produce its order.

Furthermore, D&O currently has achieved 0.02 failure part per million (PPM) based on an award from their customer.

We opined that D&O has started to show positive results from the transitioning into higher margin automotive segment. Its earnings and margins should continue to improve as D&O should see its customer sales order to flow in. However, investors should also be aware of the consistent R&D efforts the company has to commit to keep up with customer’s demand and quality control.

Disclaimer: All facts and opinions presented are for educational purposes only. This is not a recommendation to buy or to sell. The author involved in the writing of this message has no vested interest in the companies. Please consult a professional for expert financial or other assistance or legal advice.