• We hosted NanoFilm Technologies (SGX:MZH) for a virtual NDR on Wednesday, 16 Dec 2020. The online meeting was well-attended with 34 participants.
• The audience was interested in NanoFilm Technologies’ competitive advantages, progress of its capacity expansion and potential new revenue possibilities.
• We reiterate our ADD rating on NanoFilm Technologies.

Competitively Positioned

• NanoFilm Technologies's management highlighted its key competitive advantages of
  1. patented and better performance coating materials,
  2. patented coating technology, and
  3. in-house expertise in assembling its own proprietary coating equipment.
• NanoFilm Technologies also highlighted that its coating services are cost competitive due to the above-mentioned competitive strengths. We note that competitors’ coating cost could be higher as they need to buy coating equipment from external suppliers.

We Remain Positive on NanoFilm Technologies’ Outlook

• At end Jun-2020, NanoFilm Technologies had 122 coating machines and this could increase by another 200 machines when its second plant is completed in 1Q21F. We think with optimal space planning, NanoFilm Technologies has room to house more than 200 machines if required.
• Management also explained that although they are the only supplier to key customers’, NanoFilm Technologies’ pricing for its coating services are competitive.
• Management also expects seasonality effect (where 2H is stronger than 1H historically) to play out in FY20.
• New segments targeted by NanoFilm Technologies include fast moving consumer goods (FMCGs), fuel cells and 5G base stations.
• In its industrial equipment business unit, NanoFilm Technologies usually does not build for stock. Typically, as NanoFilm Technologies engages with customers in the early design stage of their products, there is some visibility that allows NanoFilm Technologies to plan for the building of equipment needed to meet customers’ coating demands.
• Management also highlighted that compared to conventional coating methods, NanoFilm Technologies’ process is environmentally-friendly as no toxic gases/waste water is generated and is less energy intensive as it uses electricity compared to heating in conventional methods.

Reiterate ADD on NanoFilm Technologies

• We reiterate our ADD rating with target price based on 35.3x FY22F EPS backed by 35.3% earnings growth over FY19-22F.
• Re-rating catalysts are new customer wins and market share gains.
• Downside risks are customer concentration and stronger competition.

Source: CGS-CIMB Research - 16 Dec 2020