NanoFilm Technologies International - CGS-CIMB Research 2020-12-11: Nano-Sized Powerhouse; Initiate Coverage With ADD


NanoFilm Technology International - Nano-Sized Powerhouse; Initiate Coverage With ADD

  • NanoFilm Technologies is the only company in the world that provides proprietary and environmentally-friendly FCVA coating technology at scale.
  • Our plant tour reaffirms our strong conviction of c.34% revenue/35% EPS CAGR for NanoFilm Technologies over FY19-22F.
  • Initiate coverage on NanoFilm Technologies with an ADD rating and P/E based target price of S$5.52.

Nanofilm Techonogies - Company background

  • NanoFilm Technologies International (SGX:MZH) is a provider of nanotechnology solutions in Asia and its products and services are integral to the smooth functioning of many technologies and tools that are essential to everyday life. See PDF report attached below for NanoFilm Technologies' corporate history and structure.
  • NanoFilm Technologies operates via 3 main business segments –
    • Advanced Materials Business Unit,
    • Nanofabrication Business Unit, and
    • Industrial Equipment Business Unit.
  • NanoFilm Technologies' advanced materials business unit (AMBU) is the largest contributor to the company’s revenue, at 77% of FY19 revenue. AMBU provides surface solutions and vacuum coating services which uses NanoFilm Technologies’ proprietary filtered cathodic vacuum arc (FCVA) technology (and FCVA-hybrid with PVD) and PVD coating equipment to deposit advanced materials on their customers’ end products.
  • NanoFilm Technologies' industrial equipment business unit (IEBU) accounted for 19% of FY19 revenue. Under this segment, Nano sells customised turnkey equipment systems as well as operating software that are integrated into the manufacturing lines of its customers.
  • NanoFilm Technologies' nanofabrication business unit (NFBU) was established in 2018 with the acquisition of a majority stake in ManGo Nanofab Group (renamed NFT) and accounted for 4% of FY19 revenue. This segment manufactures and supplies nanoproducts primarily to customers in the optical lens and sensors industry with its production facilities in Japan and Vietnam.
  • Further details on each of the business units are NanoFilm Technologies' key customers are available in the PDF report attached below.

Plant tour to Nanofilm reaffirms our high growth conviction

  • In total we had three meetings with NanoFilm Technologies' management which included a plant tour at their factory in Singapore on 9 Dec 2020. We were given an introduction of their in-house developed FCVA equipment and saw samples of products that were coated/manufactured with their technology. This included products of Customer Z, its biggest customer which accounted for c.51% of FY19’s revenue.
  • We witnessed the production process which uses ionized plasma beams and NanoFilm Technologies’ proprietary double band filter arc in action to coat customers’ products. Our conversations with factory supervisors and management leads us to infer that a capacity ramp up is underway driven by strong customer demand in the wearables and tablet segment. These are high volume markets and NanoFilm Technologies as the single source supplier to two of its key customers here is expected to see strong revenue growth as it ramps up production capacity over FY21F-22F, in our view.
  • See Figure1 in the PDF report attached below for photos of the sample of nanoproducts manufactured by NanoFilm Technologies as a single source supplier to some of its key customers. Figure2 shows a tunable lenses manufactured by NanoFilm Technologies for an eye ware company.

Smartwatches registered c.32% CAGR globally from 2017-2019

  • According to Statista, a market and consumer data company, global sales volume of top smartwatches brands have grown c.32% CAGR from 2017 to reach 30.7m units in 2019. According to Counterpoint Research, a global research firm specialising in technology products, the global smartwatch industry recorded a growth of 20% y-o-y in revenue in 1H20 due to it being a popular consumer device segment and Apple smartwatches was the market leader.
  • Apple (AAPL US), Huawei and Garmin (GRMN US) smartwatches posted strong growth in shipment volumes of 22-57% in the first half of 2020. Apple was the market share leader with a 51.4% (1H19: 43.2%) market share due to the strong demand for the Apple Watch Series 5 models.
  • We believe the high growth of the smartwatches market can be sustained from
    1. upgrading cycle of customers to newer and higher specifications models and
    2. first time buyers of smartwatches coming into the market as smartwatches offer value through greater functionalities.
  • In our view, the continued strong demand for smartwatches with greater sophistication and functional properties will sustain the high growth momentum of the wearables sub-segment of AMBU.

Replacement cycle to drive tablet sales

  • Sales of Microsoft Surface products have registered strong growth since initial release in FY13. According to the FY15 annual report of Microsoft Corporation (MSFT US), the first generation of Surface products released in Oct 2012 generated US$853m of revenue in FY13. Over FY13-FY20, Business Quant estimates that Microsoft’s Surface revenue grew at a CAGR of 32.7% to reach US$6.2bn in FY20.
  • The US is one of the world’s largest tablets market and it is estimated that the average replacement cycle length for tablets in the US is seven years according to Statista. In our view, given the large size of the tablet market in the US, we think the US is a good proxy for the global tablet replacement cycle. We estimate that surface tablet purchasers in 2013-15 (spend of US$0.8bn-3.9bn) may be due for a replacement cycle. The COVID-19 pandemic necessitating a work-from-home arrangement is an additional reason to consider upgrading to the latest Surface tablets, in our view. In addition, Microsoft also introduced a new series of Surface products in Oct 2020 to encourage such users to replace their older machines.
  • We believe NanoFilm Technologies will be a beneficiary of the replacement cycle given that it is the single source supplier for coating Microsoft Corporation’s Surface tablet logos.

High entry barrier – patented FCVA technology

  • Globally, only three other companies have been identified by F&S to be involved in FCVA technology. According to NanoFilm Technologies (quoting an independent study that it commissioned Frost & Sullivan (F&S) to undertake), it is the number one provider of surface solutions based on its patented FVCA and FCVA-hybrid vacuum technologies.
  • NanoFilm Technologies’s key patents (refer to Figure 56 in the PDF report attached below) expiry dates range from 7 Feb 2025 to 30 July 2039. Compared to conventional vacuum coating techniques such as Physical Vapor Deposition (PVD) by sputtering and Chemical Vapor Deposition (CVD), NanoFilm Technologies believes its FCVA technology is superior in terms of density, surface adhesion, hardness, strength and repeatability.
  • Another unique feature of NanoFilm Technologies’s FCVA technology lies in its ability to enable vacuum coating to be performed at room temperature across substrates such as ceramic and plastics. NanoFilm Technologies’s FCVA technology allows it to penetrate new markets as conventional coating technologies have made it uneconomical to perform vacuum coating on such substrates at room temperature.
  • We think that NanoFilm Technologies’s FCVA technology can be used in multiple industries to create new applications for coating of advanced materials, expanding the total addressable market (TAM) for its products and solutions. In our view, NanoFilm Technologies’s FCVA technology creates a barrier to entry, allowing the company to derive potential long-term profitability and gain market share.
  • Further details on NanoFilm Technologies’ proprietary coating materials can be found in the Appendix of PDF report attached below.

Value Add – Enables critical applications

  • Due to the superior properties provided by NanoFilm Technologies’s coating solutions and products, the company is an enabler of many highly critical applications in its customers’ end-products at lower costs where no other suitable materials exist.
  • Once customers’ products are coated with NanoFilm Technologies’ advanced materials, they offer functional properties such as reduced heat generation caused by internal moving parts, product miniturisation, improved wear and corrosion resistance which could not be achieved with conventional coating and nanofabrication technologies.
  • Furthermore, NanoFilm Technologies’ advanced materials also enhance the aesthetic appeal of customers’ end products to raise their attractiveness and saleability.
  • In our view, NanoFilm Technologies provides an attractive value-add to its customers, helping them to differentiate their products by providing superior functional and aesthetic properties, as well as enabling new markets and applications. We believe that this allows NanoFilm Technologies to benefit from customer stickiness as it entrenches its position to become an essential part of the manufacturing processes of its customers.

Large addresssable total addressable market – from components to sub-assembly

  • NanoFilm Technologies’ products and solutions are highly scalable across several end industries as they mainly raise a product’s functional and aesthetic properties. This opens up a large untapped total addressable market (TAM). The market opportunity for advanced materials globally is expected to grow at a CAGR of 7.6% to reach US$24.3bn by 2023F from US$21.1bn in 2020F, according to F&S. Over the same period, NanoFilm Technologies’ TAM for nanoproducts could grow at an 11% CAGR to reach US$7.8bn.
  • We believe if NanoFilm Technologies enters into the verticals of component manufacturing in the computer, communications and consumer electronics (3C), automotive and personal grooming sectors, this could create a potential market opportunity of US$423bn by 2023F for them.
  • Combined together, we think the TAM across these three segments totaled US$24.0bn in 2019 and could grow c.19x to reach US$455.1bn by 2023F based on data provided by F&S. Given the large TAM potential for NanoFilm Technologies, we believe the company with its unique value proposition has significant room to run for market share in its existing markets as well as achieve first mover advantages in newer established end markets.
  • Additionally, NanoFilm Technologies’ strategy of pursuing value chain integration across its existing end markets will open up new market opportunities for its advance materials in smartphone enclosures, wearables and accessories, automotive components and piston rings end markets. We estimate that this would add c.US$370bn -423bn of TAM for NanoFilm Technologies between 2020F and 2023F.
  • Another secular driver is 5G adoption which requires advanced materials to manage heat efficiently, an area where NanoFilm Technologies is strong. We believe NanoFilm Technologies’ integration strategy will position the company to become a one-stop solutions provider for customers, leading to potentially new revenue streams. Any additional gain in wallet share of TAM will impact NanoFilm Technologies’ financial performance positively, in our view.

Nanofilm Techonogies - Financial Analysis

  • The AMBU segment has historically been the key revenue driver for NanoFilm Technologies accounting for 71-77% of FY17-19 revenue. We estimate AMBU to grow 38.4% CAGR from S$161m in FY20F to reach S$307m in FY22F.
  • We forecast NanoFilm Technologies’ total revenue to be S$196m-347m for FY20-22F, representing a growth of c.33.1% CAGR, additionally supported by stable growth from IEBU and NFBU.
  • We forecast NanoFilm Technologies to incur higher operating expenses and estimate it to grow c.17-45% in FY20F-22F as we expect heighted production from greater demand for AMBU’s products and services.
  • Net proceeds of S$191m raised from NanoFilm Technologies' initial public offering (IPO) as at 23 Oct 2020 will add to balance sheet strength.
  • See PDF report attached below for complete analysis on NanoFilm Technologies' financial details.

Nanofilm Techonogies - Valuation & Recommendation

William TNG CFA CGS-CIMB Research | Darren ONG CGS-CIMB Research | https://www.cgs-cimb.com 2020-12-11
SGX Stock Analyst Report ADD INITIATE ADD 5.52 SAME 5.52