1. Describe Nanofilm’s recent financial performance.
Nanofilm Technologies International (Nanofilm) is a provider of nano technology solutions in Asia, leveraging its proprietary technologies, core competencies in R&D, engineering and production, to provide technology-based solutions across industries such as computer, communications and consumer electronics [3C], automotive, precision engineering, and printing and imaging. Nanofilm offers surface solutions based on vacuum deposition, including using its patented Filtered Cathodic Vacuum Arc (FCVA) technology. The firm is founded by former academic Shi Xu, who is also its executive chairman.
Nanofilm achieved a record set of results for FY2020 with a strong y-o-y revenue growth of 52.8% and high adjusted Ebitda margins of 44.4%.
The group’s advanced materials business unit achieved revenue growth of 66.4% to $182.5 million, mainly attributable to the 3C and automotive sub-segments. The nanofabrication business unit also recorded a 90.3% surge in revenue to $11.3 million,
mainly due to new mass-production projects to produce Fresnel lenses for smartphone applications. The industrial equipment business unit recorded a 10.1% decline in revenue to $24.6 million, as the group remains selective on equipment sales to external clients. The majority of coating equipment manufactured in FY2020 were retained in the group to support the advanced materials business unit.
As a result, Nanofilm achieved a higher profit after tax of $58.1 million in FY2020, an increase of 68.1% y-o-y. This is notwithstanding the incurrence of a one-off net listing ex penses and restricted shares award costs of $5.4 million, partially offset by the receipt of Covid-19-related government grants of $1.2 million in FY2020.
2. Describe Nanofilm’s business model. Why is it unique and how does it support the group’s growth outlook?
Nanofilm’s products and services are integral to the smooth functioning of many of the technologies and tools which are essential to modern daily life. Our proprietary differentiated nanotechnology solutions have enabled customers to achieve greater functional and aesthetic improvements in their end-products compared to what would be possible with conventional coating and nanofabrication technologies.
Our three core competencies in in-house R&D, engineering and production capabilities form an integral part of Nanofilm’s technology ecosystem. Specifically, we design, manufacture and assemble our proprietary coating equipment, and develop and provide surface solutions and advanced materials in-house. Nanofilm’s engineering capabilities support the group’s R&D functions, in particular, our joint collaboration programmes with customers.
As at Dec 21, 2020, our production facilities are able to process more than five million parts daily, while providing the flexibility to handle approximately 300 product types.
3. What are the key drivers of Nanofilm’s growth over the medium to longer term?
Looking ahead, Nanofilm continues to be well-positioned for multiple avenues of growth in existing and recently established end-industries, underpinned by our deep-tech environmentally sustainable nano technology solutions.
We intend to achieve greater share in our existing markets by leveraging our relationships with customers and capitalising on synergies across our business segments to offer our customers integrated solutions.
Nanofilm’s long-term strategic objective is to maximise our core technologies in mission-critical applications in new end-markets that are in secular growth trends. We have plans to expand into new end-industries such as fast-moving consumer goods (FMCG), personal grooming, new energy, medical lens, biomedical and IoT optics.
We will seek opportunities for synergistic M&As or strategic partnerships, focusing on integration across the product value chain to drive sustainable growth.
4. Can you provide a breakdown of your current customer mix? What is your strategy to expand market share with existing customers and capture new customers?
Over the past two decades, we have grown and developed alongside customers, through continuous focus on R&D and innovation. The group’s relationships with our customers is strengthened over time as Nanofilm is typically engaged from the early stage of their development and design process, to mass production and continuous product enhancement.
As at Dec 31, 2020, Nanofilm has over 300 customers across different industries. We believe that the likelihood of our key customers switching to alternative solutions providers is relatively low as we benefit from high barriers to entry. Nanofilm is the single source supplier to nine of our top 10 major customers.
5. What are Nanofilm’s competitive strengths in the industry?
Through our three business units — advanced materials, nanofabrication and industrial equipment —the basis of our sustainable competitive advantage is formed through the group’s combination of:
• differentiated customer-centric technology offerings;
• full-service in-house equipment and surface solutions capabilities;
• ability to redraw market boundaries by broadening end-markets exposure; and
• scalable and reliable operational capabilities
6. How does Nanofilm intend to maintain its technology leadership through R&D?
To stay ahead, we will continue to invest and build on our three core competencies. We will also continue to adopt an early stage, customer-centric co-development model.
The group will also work on other areas including:
• strengthening our in-house proprietary research platform to develop next-generation technologies;
• building sustainable competitive advantage by maintaining our intellectual property rights and having multiple innovative products in the pipeline;
• advancing our FCVA technology platform;
• continuing innovation on existing technology (e.g. copper plasma) to expand the scope of their application and into new end-markets;
• further developing our nanofabrication technology.
7. What are the key segments of Nanofilm’s total addressable market (TAM)? How are these key segments expected to perform in the short to medium term?
Our competitive strengths expand multiple avenues for us to grow our business. Frost & Sullivan has estimated that the global market size for advanced materials was US$19.1 billion in 2019. Frost & Sullivan has further forecasted the market size for advanced materials to grow at a CAGR of 7.5% between 2020 and 2023 to reach US$24.3 billion ($32.7 billion) by 2023.
Based on Frost & Sullivan’s estimates, we believe that we have strong growth potential in capturing more of our customers’ value chain. For example, with respect to the components market for smartphone enclosures, wearable components, personal grooming components and automotive engine parts, Frost & Sullivan has forecasted the expected combined TAM to be approximately US$423.0 billion by the end of 2023.
8. What are some of the key trends you foresee in the technology sector and how will they hinder/drive the group’s growth prospects?
We anticipate new expansion opportunities in technologies such as 5G networks, IoT optical sensors, medical lens and new renewable energy. We believe that we are able to enter such new markets by leveraging the adaptable nature of our technology. We intend to identify and capture opportunities in new end-industries such as biomedical, aerospace and IoT optics industries.
9. What are some of the key ESG factors that are material to the group? How do you address these factors?
As a global citizen, where our nanotechnology is proliferated worldwide, Nanofilm is committed to incorporating ESG factors into our strategy and operations, to ensure a robust ESG framework that creates stakeholder value in a sustainable and responsible manner.
10. What is Nanofilm’s value proposition to its shareholders and potential investors?
Nanofilm’s value proposition to shareholders is the exposure to a technology company, where our technology-based solutions are utilised in a wide range of industries. Our proprietary technology serves as key catalysts in enabling our customers to achieve high value-add advancements to their end-products, in an environmentally sustainable manner.
Candace Li is a research analyst with Singapore Exchange
