NanoFilm Technologies - DBS Research 2021-08-17: Take A Break


NanoFilm Technologies - Take A Break

  • Downgrade NanoFilm Technologies to HOLD. Target price for NanoFilm Technologies is lowered to S$4.18, on weak results and resignation of key executives denting investor confidence.
  • Weak 1H21 results due to higher expenses for new plant and new projects; change in product mix.
  • Expect a stronger 2H due to seasonality factor, but supply chain disruption remains a concern.
  • 27%/22% cut in FY21F/FY22F earnings forecast for NanoFilm Technologies.

Nanofilm's 1H21 Results Highlight

  • NanoFilm Technologies (SGX:MZH)'s 1H21 results miss on higher expenses relating to new plant and new projects; change in product mix. NanoFilm Technologies reported a 24% y-o-y increase in revenue to S$96.6m, led by the group’s Advanced Materials Business Unit (AMBU) and Industrial Equipment Business Unit (IEBU).
  • NanoFilm Technologies's 1H21 net profit of S$17.9m was 3% lower y-o-y, dragged by :
    • Increased expenses of S$2.6m related to the new Shanghai Plant 2 (utility, facility management, manpower additions and training costs) and equipment qualification costs to enable production. The handover of the plant was in February this year, but the power supply was not linked up. The group has to resort to rental of diesel power generator; hence, this is a one-off cost.
    • New Product Introduction (NPI) cost of S$2.8m involving new projects yet to reach mass production and contribute materially to the group. There is a mismatch of revenue and cost recognition. Expect some of the NPI to roll out in 2H21 and 1H22. The group is also exploring other NPIs in 2H21.
    • Product mix, where projects of lower average margins were executed in 1H21. The group did more smart phones as compared to tablets and wearables, which command higher margins. Its major customer has been allocating more resources to smart phone, which has greater demand, compared to tablets and wearables. Hence, overall margins for NanoFilm Technologies is lower as compared to last year.
  • Overall, 1H21 revenue and net profit only account for 31%/21% of our full year numbers, below expectations. 1H20 accounted for 36%/32% of revenue and net profit respectively.
  • A lower interim DPS of 1cents was declared, vs 1.9cents in 1H20.

Segmental Breakdown

  • Advanced Materials Business Unit (AMBU) – The 18% increase in revenue was mainly due to contributions from the 3C and Automotive product sub-segments. The adjusted EBITDA margin was lower y-o-y, attributable to changes in the product mix and incurred expenditures in relation to equipment qualification costs and new product introduction costs.
  • Industrial Equipment Business Unit (IEBU) – The 81% surge in revenue and 67% rise in EBITDA were attributable to higher sales of customised industrial equipment to the customers.
  • Nanofabrication (NFBU) – The negative EBITDA was due to end-of-life of projects that resulted in drop in revenue quicker than expenses reduction.
  • In 1H21, the AMBU saw an increase of 64 coating equipment to 186 units, in preparation for demand as the group’s business continues to scale. This resulted in a lower utilisation rate of 61% in 1H21 compared to 73% in 1H20. The utilisation rate at the NFBU dropped to 11% in 1H21 due to project end of life.

Resignation of Nanofilm's Key Executives

Two of Nanofilm's senior executives’ resignation within two months.

  • Chief Operating Officer, Mr Ricky Tan Chong Ho, who is involved in the management and control of NanoFilm Technologies’s international business operations has quit. His resignation is less than two months after the resignation of CEO Mr Lee Liang Huang due to health reasons. In the interim stage, NanoFilm Technologies has already appointed Dr Shi Xu, the founder and Executive Chairman, as the interim CEO.
  • NanoFilm Technologies has also removed the position of COO, after Mr Ricky Tan’s resignation. He has been on sabbatical leave in the past few months due to personal issues and NanoFilm Technologies has been functioning without the COO. The group has also highlighted that the organisation restructuring was already in place since last year. The resignation of the COO is part of the overall restructuring plan, to enable the various units to have full accountability and responsibility.

Need to restore market’s confidence first.

  • We opine that the management would have to put up a concrete plan with regards to management and strategies going forward in order to restore investor confidence.


Expect a stronger 2H, but supply chain disruption remains a concern.

  • Besides the seasonally strong 2H especially for 3C products, the new Shanghai Plant 2, which has been operational from February 2021and expected to be fully operational by end-2021, should also help to boost production. The production space of this new plant (66,406 sqm) is bigger than the group’s current space of ~44,000 sqm. Furthermore, NanoFilm Technologies is also working on a number of NPI projects, which should be in mass production soon.
  • However, with 3Q being the peak season especially for the 3C division, component shortage is expected to remain a key concern. Overall for the industry, we expect the shortage issues to only improve in 1H22 and should normalise in 2023.

Well positioned for multiple avenues of growth.

  • In the medium to longer term, NanoFilm Technologies is well positioned for multiple avenues of growth, supported by a strong balance sheet with net cash of S$189m as at end June 2021. Growth could come from existing products and industries and also penetration of new markets.
  • One of the latest initiatives is the entry into the hydrogen economy. The application of NanoFilm’s technology in the development of protective carbon coatings for metallic bipolar plates of fuel cells offer many advantages as compared to the conventional methods, which are costly and less effective. Promising areas of applications include passenger and commercial automotive, light powered mobility solutions and stationary power. Target markets include China, whereby the government policies strongly support the development of a hydrogen economy starting with fuel cell electric vehicles.

Nanofilm - Earnings Forecast & Recommendation

27%/22% cut in FY21F/FY22F earnings.

  • In view of the weak 1H21 results and the persistent supply chain disruption, we have cut our FY21F/FY22F earnings forecast for NanoFilm Technologies by 27%/22%.
  • Despite the cut, we are still expecting a strong y-o-y earnings growth of 39% for FY22F though FY21F is more muted at 5%.

Downgrade to HOLD with lower target price of S$4.18.

Lee Keng LING DBS Group Research | Wei Le CHUNG DBS Research | Woo Kim TOH DBS Research | https://www.dbsvickers.com/ 2021-08-17
SGX Stock Analyst Report HOLD DOWNGRADE BUY 4.18 DOWN 6.220