Nanofilm Technologies - DBS Research 2022-11-04: Weaker-Than-Expected Revenue Growth For 9M22; Growth Strategies In Place

Nanofilm Technologies - Weaker-Than-Expected Revenue Growth For 9M22

  • NanoFilm (SGX:MZH) posted revenue growth of 10% y-o-y for 9M22, weaker than the 15% growth in 1H22. Growth was led by the Advanced Materials Business Unit (AMBU) and Nanofabrication Business Unit (NFBU), offsetting the negative growth from the Industrial Equipment Business Unit (IEBU). See NanoFilm's Announcement dated 02 Nov 2022.
  • No other financial details were provided in the 9M22 business update.
  • The 10% growth in revenue for the 9-month period is lower than the 15% growth registered in 1H22, despite a typically stronger 2H vs 1H. In the last two years, 1H accounted for close to 40% of total revenue.

AMBU mainly dragged by non-customer Z.

  • The AMBU saw a lower contribution of 78% to total group revenue for 9M22 as compared to the 83% contribution in 9M21, as other customers (besides customer Z) in the 3C segments were more affected by the weak demand and supply chain challenges. Customer Z is expected to contribute ~60% to total group revenue.
  • The NFBU saw continued growth momentum from mass production, contributing 9% to total revenue, vs 2% last year. The balance 13% (14% in 9M21) is from the IEBU.

Affected by lockdowns and cuts in customers’ capital expenditure.

  • The weaker-than-expected revenue growth was mainly due to the COVID-19 impact and also customers cutting back on capital expenditure.
  • Lingering effects from the 2Q Shanghai COVID-19 restrictions impacted the business momentum and growth pace in 3Q. The lockdowns have affected the supply chain flow. Some customers are also opting for capital conservation and have delayed and/or cut their capital expenditure amid the increasing macro uncertainties.

Macro headwinds affecting demand and operations of certain suppliers.

  • The macro headwinds, including geopolitical tensions, inflationary pressures, rising interest rates, and recession risk, have led to softer consumer demand and business operations. Certain FATarget price (Final Assembly, Test, and Packaging) and component suppliers in the 3C supply chain have shut down their operations.

Expansion of production facilities in Vietnam to mega size, similar to China facilities.

  • NanoFilm plans to establish a second production facility on a plot of land spanning approximately 40,000 square metres in Hanoi, in the vicinity of the group’s existing production facility in the Tan Truong Industrial Zone. The acquisition of the land use rights is expected to conclude in 1Q23.
  • The mega site, which is similar in size to NanoFilm’s China site, is intended to serve as an additional production base for the group.

Sydrogen signed MOU for off-grid fuel cell solutions.

  • In the new energy hydrogen fuel cell space, Sydrogen has started producing bipolar plate coatings and is on course to developing fuel cell system demonstrators. Sydrogen also signed a Memorandum of Understanding with City Energy Pte Ltd on 27 October 2022 to study the Proof of Concept (PoC) of generating an end-to-end hydrogen fuel cell solution for off-grid power supply in Singapore, utilising high-purity hydrogen extracted from the town gas produced by City Energy.

NanoFilm targets S$500m revenue and S$100m net profit by 2025, mainly from organic growth.

  • NanoFilm targets to deliver growth in three key end markets – consumer, industrial, and new energy. The group is expected to deliver its offerings through multiple business models such as equipment, coating as a service, components, and value chain integration. These growth efforts are expected to drive the group’s revenue and net profit to S$500m and S$100m, respectively, by 2025. This implies a 2021-2025 CAGR of 19% for revenue and 13% for net profit.
  • NanoFilm is also committed to invest more than 5% of its total revenue on research & development.
  • The 2025 targets imply a lower net margin of 20% vs 25.2% for FY21. This can be attributed to the start-up costs for the new energy segment, and also the new manufacturing site in Vietnam. The ramp-up for the new energy segment, which includes hydrogen fuel cells, advanced batteries, and solar cells, is expected to be slower in the initial stage, but this should gather speed once the adoption rate accelerates.

Cut FY22F/FY23F earnings estimates for NanoFilm by 7%/13%.

  • The weaker-than-expected revenue growth for 9M22 and also the macro headwinds have led us to cut FY22F/FY23F earnings estimates for NanoFilm by 7%/13%.
  • We have reduced our revenue growth assumption and net margin assumption, given the higher opex anticipated for the new energy division and new Vietnam site. There is no change to our net margin assumption of 23.6% for FY22F, which is already lower than the 25.2% in FY21.
  • Our target price for NanoFilm is lowered to S$2.22 (previously S$2.54), which is pegged to 20x FY23F earnings. We already lowered our valuation peg last month from 30x to 20x, given the increasing macro headwinds. See report: Singapore Technology Stocks - DBS Research 2022-10-18: Semiconductor Outlook Turning Negative Near Term.
  • Despite the near-term headwinds, NanoFilm is still well positioned to capture a higher market share in its existing domains and new segments, leveraging on its nanotechnology solutions, which are adaptable for use across a wide range of industries.

Above is the excerpt from report by DBS Group Research.
Clients of DBS may access the full report in PDF @

Lee Keng LING DBS Group Research | 2022-11-04
SGX Stock Analyst Report BUY MAINTAIN BUY 2.22 DOWN 2.540

Read also DBS Research's most recent report:
2022-11-18 Nanofilm Technologies - Downgrade To HOLD As Outlook Worsens

Target prices by 2 other brokers at NanoFilm Target Prices.
Listing of broker reports at NanoFilm Analyst Report.

Relevant links:
NanoFilm Share Price History,
NanoFilm Announcements,
NanoFilm Dividends & Corp Actions,
NanoFilm News Articles


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