D: Smart LED Segment Poised for Strong Growth, Analysts Maintain Neutral Stance

A recent research report from Public Investment Bank indicates that the outlook for the company shows signs of recovery, particularly driven by its Smart LED segment. Despite the positive operational developments, analysts have downgraded the stock to a “Neutral” rating from “Outperform”, citing limited upside potential and the belief that near-term positives have already been priced into the current valuation.

Performance Review and Growth Drivers

Management highlighted a recovery supported by increasing demand for SmartRGB, SpicePlus 2520 (RCL), SpicePlus 3014 (infotainment), and Nagajo headlamp products. Early signs of a rebound in global auto sales, following two years of contraction, along with growing design wins in the interior lighting segment, are contributing factors. The company projects a substantial 70% growth in Smart RGB LED sales for FY26, which is expected to contribute over 10% of the group’s total revenue. Production loading is anticipated to rise progressively from 74% in 2QFY25 to 81% in 3QFY25, eventually reaching 85% by 4QFY25.

The Smart LED segment, in particular, is experiencing accelerated growth, fueled by robust orders from leading automakers in Germany and South Korea. The company also secured a new order from another South Korean automaker, capitalising on a competitor’s quality issues. The company retains its market leadership in the smart LED space, attributed to its technological advancements. Furthermore, a significant project for panoramic roof ambient-lighting from a major German automaker, requiring 100 smart RGB LEDs per roof, translates into an annual demand of 48 million units.

Strategic Initiatives and Operational Turnaround

In a strategic move to reduce its heavy reliance on a German IC-chip supplier and to lower Smart LED production costs, the company has initiated its own IC chip development. This open-protocol collaboration with Osram has resulted in a patented design, scheduled for release in 4Q 2026. This new IC chip is expected to bolster the company’s Smart LED product expansion in the China market with a more competitive price point, mitigate government scrutiny risks, and allow for multiple IC designs suitable for local foundry production.

The module/PCBA business, previously impacted by tariff headwinds and operating at low utilisation, is also on track for a turnaround. HiRain Beijing, a Chinese partner, has transferred new projects for door pad and sunroof modules for Ford from its Nantong plant to the company’s Plant 2. Management anticipates Plant 2 to achieve profitability by 4QFY25, with utilisation rates projected to exceed 79%. Following recent US tariff announcements, four automakers have confirmed plans to transfer module production to Plant 2, with an additional three transfers pending confirmation.

Capital Expenditure and Outlook

Reflecting a cautious approach, the company has reduced its capital expenditure (capex) to RM20 million for the current year. However, capex is slated to surge to RM50-60 million next year to support the planned Smart LED capacity expansion at Plant 2, which still has capacity room for ramp-up until 2027. Despite the positive operational developments and recovery signs, Public Investment Bank has maintained its unchanged target price of RM1.27, reflecting a valuation that appears stretched and a “Neutral” recommendation due to the limited upside.