Nanofilm Technologies - Expect A Challenging 4Q22 Due To Disrupted Production; Downgrade To SELL
- We expect NanoFilm Technologies to report a weak 4Q22, with 2H22 earnings to decline by 30% y-o-y, due to Foxconn’s production in Zhengzhou, China being disrupted. The city is still subject to tight restrictions even though the seven-day lockdown was lifted on 9 Nov 22. The ongoing restrictions have led to Customer Z reducing its shipment forecasts for premium phones.
- We cut 2022 and 2023 EPS forecast for NanoFilm by 19% and 17% respectively. Downgrade NanoFilm to SELL with a 43% lower target price of S$1.02.
Production challenges faced by Nanofilm's major customer have led to a cut in shipment forecasts.
- NanoFilm Technologies (SGX:MZH)’s largest customer, Customer Z had in early-Nov 22 reduced the shipment forecasts of its newest premium iPhones after lockdowns in China affected operations of its supplier’s plant in China.
- To recap, Foxconn’s Zhengzhou factory, which operates the world’s biggest factory for Customer Z, underwent a seven-day lockdown on 2 Nov 22 due to a high number of COVID-19 cases in the city. Subsequently, on 9 Nov 22, the city of Zhengzhou lifted a lockdown order for the area around the airport. However, several areas within that district will remain classified as high risk, which means that they will continue to be subject to strict restrictions. The list of high-risk areas included Foxconn’s Zhengzhou plant, which implies that the flow of goods and people in and out of the main production base remains affected.
- Market researcher TrendForce also recently cut its iPhone shipment forecast for Oct-Dec 22 by 2m-3m units to 77m-78m, from 80m, due to the factory's troubles.
Mixed signals regarding reopening of China’s economy vs zero-COVID policy.
- Although China’s recent reduction of quarantine time for international travellers by two days signalled a gradual easing its strict zero-COVID policy, the tight COVID-19-related restrictions recently imposed in several cities, including Shijiazhuang, Guangzhou and Chongqing, are giving mixed signals about China’s COVID-19 policy.
- Shijiazhuang, a city of about 11m people near Beijing, has suspended schools, locked down universities and asked residents to stay at home for five days.
- Guangzhou is enforcing targeted lockdowns over a citywide order.
- Also, Chongqing has declared many individual high-risk areas that the city and residents in these areas are not allowed to leave their homes.
Nanofilm's IEBU should also face challenges from customers reducing their capex.
- NanoFilm’s second-largest segment, Industrial Equipment Business Unit (IEBU), which contributed 13% of the company’s total revenue as of 9M22 should also continue to remain weak in the near term. This is because most of its customers which purchase coating machines are likely to delay and cut their capex amid increasing macro uncertainties.
- In addition, currency weakness across many countries has caused purchases to become more expensive for its IEBU customers, especially those located in Japan.
Loss of operating leverage for seasonally stronger 2H22 could drag Nanofilm's margins for 2022; Sydrogen should remain an earnings drag.
- 2H is usually a seasonally strong half for NanoFilm, typically contributing around 60% of full-year revenue and 70% of full-year earnings. However, the expected lower production for 2H22 means its full-year gross and net margin will be impacted. The difference between 1H and 2H is usually around 4%.
- On the other hand, Sydrogen should continue to be in a loss-making position for 2022 and 2023.
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.
NanoFilm Technologies – Earnings forecast revision & recommendation
- We have reduced our earnings forecasts for NanoFilm in 2022/23/24 by 19%/17%/13% after reducing our revenue forecasts by 8%/8%/7% to factor in potential disruptions in customers’ productions due to the sporadic lockdowns in China.
- We have also reduced our gross margin assumptions for NanoFilm in 2022/23/24 by 3.4%/2.2%/1.7% to 50.4%/49.5%/49.0%. This is to reflect the lower operating leverage and higher start-up costs of new projects.
- Our earnings estimates indicate y-o-y earnings growths of -16%/18%/22% for NanoFilm in 2022/23/24.
- Downgrade Nanofilm Technologies to SELL with a 43% lower target price of S$1.02. We value NanoFilm based on 11x 2023F EPS, pegged to -2 standard deviation of its long-term forward mean to reflect the challenging environment it is facing, which could lead to further de-rating of its P/E multiple.
- Previously, we valued NanoFilm based on PEG of 1.0x (growth based on 3-year EPS CAGR of 16% from 2022-25).
- NanoFilm’s 2023F P/E of 14x is still at a premium vs Singapore peers, which are trading at 2023F P/E of 9x.
John Cheong UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-11-22 2022-11-22
Previous report by UOB:
2022-11-04 Nanofilm Technologies - 9M22 Below Expectations Due To COVID-19 Restrictions; Setting 2025 Targets.