Nanofilm Technologies - UOB Kay Hian 2022-11-04: 9M22 Below Expectations Due To COVID-19 Restrictions; Setting 2025 Targets


Nanofilm Technologies - 9M22 Below Expectations Due To COVID-19 Restrictions; Setting 2025 Targets

  • NanoFilm Technologies International (SGX:MZH)'s 9M22 revenue growth of 10% y-o-y is below our expectation of around 20% y-o-y growth for 2022 due to lingering COVID-19 restrictions in Shanghai. Near-term performance is expected to remain lacklustre due to ongoing COVID-19 restrictions in China.
  • NanoFilm has revealed its 2025 revenue and profit targets of S$500m and S$100m respectively, which imply a near-doubling of revenue and 60% increase in net profit from 2021.

Nanofilm's 9M22 results below expectations.

  • See NanoFilm's announcement dated 02 Nov 2022 – NanoFilm’s 9M22 revenue growth of 10% y-o-y is below our expectation of around 20% y-o-y revenue growth for 2022. Based on 1H22 revenue growth of 15% y-o-y, we can infer that 3Q22 revenue growth was flat to marginal. This was due to the ongoing impact of Shanghai’s COVID-19 restrictions in 2Q22, which affected 3Q22 business momentum. Also, the sporadic lockdowns in China hampered supply chain flow and customers' capex.
  • 9M22 revenue growth led by Advanced Materials Business Unit (AMBU) and Nanofabrication Business Unit (NFBU).
    • AMBU is facing headwinds from some customers due to supply chain disruptions caused by COVID-19 restrictions in China, while
    • NFBU enjoyed continued growth momentum from mass production of camera lenses products.
    • The Industrial Equipment Business Unit (IEBU) is seeing delays and cuts in customers' capex amid increasing macro uncertainties.

Setting 2025 revenue and earnings targets.

  • NanoFilm has revealed its 2025 revenue and profit target of S$500m and S$100m respectively. This implies an almost doubling of 2021 revenue and 60% growth from 2021’s net profit of S$62m.
  • Key drivers of the targets include:
    1. expansion of production facilities in new strategic locations - NanoFilm has plan to set up a second production facility in Vietnam,
    2. expansion of its business into green energy through the recently set-up JV with Shenzhen Everwin, and
    3. gaining momentum in the hydrogen energy business, Sydrogen, which has started production of bipolar plates coatings, and is also on track to developing fuel cell system demonstrators.

Expansion of production facilities in strategic locations.

  • NanoFilm’s plan to establish a second production facility on land with an approximate 40,000sqm in Hanoi, in the vicinity of its existing production facility in Tan Truong Industrial Zone, is on schedule. Subject to due diligence and the execution of definitive agreements, the acquisition of the land use rights is expected to conclude in 1Q23.
  • The mega site is intended to serve as an additional production base for NanoFilm’s business activities.

Expansion of business into green energy.

  • NanoFilm recently announced that it will be providing its “Green Plating” vacuum coating solutions to the new energy advanced batteries industry in China through the establishment of its JV, Sichuan Apex Technologies with its JV partner Shenzhen Everwin

Growth drivers.

  • NanoFilm’s differentiated solutions are backed by its deep tech platform and operational excellence. It is expected to deliver growth in three key end-markets - Consumer, Industrial, and New Energy.
  • NanoFilm is expected to deliver its offerings through multiple business models such as Equipment, Coating as a Service, Components, and Value Chain Integration.

NanoFilm - Earnings forecast revision and recommendation

  • We have reduced our earnings forecasts for NanoFilm in 2022/23/24 by 11%/18%/20% after reducing our revenue forecasts by 11%/15%/15% to factor in potential disruptions in customers’ orders due to the sporadic lockdowns in China. Our earnings estimates indicate y-o-y earnings growths of 3%/15%/17% for 2022/23/24.
  • Downgrade NanoFilm to HOLD with a 34% lower target price.
    • We value NanoFilm based on an unchanged PEG of 1.0x (growth based on 3-year EPS CAGR of 16% from 2022- 25, down from 20% after our downward earnings revision and the new S$100m earnings target revealed by NanoFilm for 2025).
    • Our target P/E multiple of 16x 2023F P/E is at a slight discount vs NanoFilm’s peers’ 18x 2023F P/E.
  • See
  • Catalysts:
    • Better-than-expected ramp-up of the nanofabrication business.
    • New application in the advanced material segment such as automobile (bi-polar plate electrodes in fuel cells) and fast-moving consumer goods.

John Cheong UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-11-04
SGX Stock Analyst Report HOLD DOWNGRADE BUY 1.79 DOWN 2.720