• Initiate coverage on NanoFilm Technologies with BUY.
• Proprietary differentiated vacuum coating technologies that are superior to that of conventional technology.
• Capturing greater share in existing markets – 3C , printing and imaging, and precision engineering.
• Great prospects in newly ventured markets - FMCG personal grooming, automotive, optical lens, optical sensors and new energy.

Proprietary Differentiated Technology-based Solutions

One-of-its-kind vacuum coating technologies and processes.

• NanoFilm Technologies (SGX:MZH)’s vacuum coating technologies and advanced materials have significant advantages compared to conventional methods, and enable the Group to solve complex problems. The advanced materials with differentiated properties utilised in its surface solutions, coupled with its capability in high-volume coating processes, enable NanoFilm Technologies’s customers to achieve greater functional and aesthetic improvements in their end-products.

FCVA technology is superior to conventional technology.

• According to Frost & Sullivan, NanoFilm Technologies’s patented FCVA technology is considered to be superior in film density, surface adhesion, hardness, strength and repeatability as compared to existing technologies such as PVD (sputtering) and CVD.
• Other characteristics of its unique FCVA technology include superior adhesion, high density, high hardness and the ability to achieve good uniformity in the surface coating, which are qualities that prolong the durability and lifespan of its customers’ products and enhance their attractiveness and saleability.

Nanotechnology’s ability to deposit at room temperature opens up new markets which others cannot access.

• NanoFilm Technologies’s FCVA technology enables vacuum coating deposition to be performed at room temperature, which is both environmentally friendlier and enables vacuum coating to be performed on a wider variety of substrate materials such as plastics, rubber and ceramics, on a commercial scale. Due to their low melting points, it has not been cost-effective or possible to perform vacuum coating on such substrates using conventional coating technology.
• According to Frost & Sullivan, the ability of FCVA to deposit advanced materials on substrates at room temperature (as opposed to high temperature deposition by other conventional methods) opens up new markets that were previously inaccessible by conventional coating technologies.

Ability to create new designs on materials with low melting points.

• The ability of NanoFilm Technologies’s FCVA technology to be applied on low-melting-point materials has created new design (material choices) opportunities across several industries such as 3C (computer, communication and consumer electronics), automotive, precision engineering, and printing and imaging.

Entrenched Relationship With Key Blue-chip Customers

Superior technologies forge customer stickiness.

• NanoFilm Technologies’s technology-based solutions enable its customers to offer end-products of superior quality which were not achievable with conventional coating. This helps its customers to differentiate their products. Through its R&D, engineering and production capabilities, NanoFilm Technologies is also able to offer its technology-based solutions to customers at affordable prices, replacing the need to rely on expensive materials.
• NanoFilm Technologies’s differentiated technology-based solutions have entrenched the Group in its customers’ value chains, resulting in high customer stickiness.

One-stop service provider.

• NanoFilm Technologies has achieved value chain integration to offer integrated solutions for several of its customers by leveraging synergies across business segments. For example, NanoFilm Technologies is a supplier to Microsoft for its Surface tablet logos and is also responsible for the end-to-end production of each logo, from laser cutting of each stainless steel piece to application of its proprietary advanced materials on each logo.

Sole supplier to many of its top customers.

• Due to its superior technological capabilities and its ability to offer total solutions to its customers, NanoFilm Technologies is the sole supplier to many of its top customers.

Multiple Avenues to Capture High-growth Opportunities

Advanced materials market to grow at a CAGR of 7.5% between 2020 and 2023.

• NanoFilm Technologies’s differentiated technology-based solutions, in-house engineering and production capabilities and customer intimacy open up multiple avenues for the Group to grow its business. Frost & Sullivan has estimated that the global market size for advanced materials was US$19.1bn in 2019, and is expected to grow at a CAGR of 7.5% between 2020 and 2023 to reach US$24.3bn.

Ample opportunities for Nanofabrication division.

• Frost & Sullivan also projects the growth in the global market size for nanoproducts to reach US$7.8bn in 2023, implying ample growth opportunities for NanoFilm Technologies’s nanofabrication division.

1) Capturing Greater Share in Existing Markets

Significant room for improvement via increasing market share and growing customer base.

• The key factors which contribute to NanoFilm Technologies's market share in existing markets are:
  1. its proprietary technology,
  2. the quality of its customers’ end-products.
• There is significant room for NanoFilm Technologies to increase its market share in existing markets by increasing sales to existing customers and growing its customer base, which include end-industries such as 3C (particularly in a larger base volume market, such as the smartphone sub-segment which has a lower historical revenue contribution to its Advanced Materials unit), printing and imaging, and precision engineering.

Well-positioned to ride on secular growth trends.

• NanoFilm Technologies is well-positioned to implants, new renewable energy sources (such as fuel cells and solid-state batteries) and high-frequency communication 5G network equipment could also help to boost demand. Refer to appendices in report attached below: Nanotechnology to enhance value chain integration [page 39] for other examples.

2) Prospects in Newer-established End-markets

• NanoFilm Technologies has established its presence in new markets including the FMCG personal grooming, automotive, optical lens, optical sensors and new energy industries.
• In the automotive industry, NanoFilm Technologies has established a joint venture company in 2019 with CYPR, the PRC’s largest engines which are sold to well-established automotive makers and for export markets.

China’s commitment towards greener initiatives to drive demand for nanotechnology.

• Shanghai's commitment towards greener kick in by June 2021. Hence, there is opportunity for NanoFilm Technologies to benefit from piston ring players seeking solutions that comply with the new standards. NanoFilm Technologies's piston ring solutions have about 30% lower emissions and energy loss.
  • In the FMCG personal grooming gold-plating, which is costly and prone to corrosion. NanoFilm Technologies’s surface solutions, which utilise advanced materials, offer a more cost-effective solution, and provide superior functional properties such as high corrosion resistance and high electrical conductivity.

Expansion into new end-industries.

• New industries that NanoFilm Technologies could enter include biomedical, aerospace and IoT optics. With its nanotechnology, NanoFilm Technologies is well-positioned to benefit from the growth trends in these additional new markets such as rising usage of medical implants, rapid adoption of electric vehicles, and high demand for both high-speed data processors and aircraft engine efficiency.

Attractive Financial Profile With Strong Growth, Resilient Margins and Strong Returns

Strong revenue growth, high and sustainable margins.

• For FY20, NanoFilm Technologies's net profit surged 61% y-o-y on the back of excess of 20%, at an average of 25.3%. Going forward, we expect NanoFilm Technologies's margin improvement on economies of scale and also the Group’s efforts to improve productivity and efficiency.

Strong balance sheet, turned net cash in FY20.

• Despite the additional bank loan for the construction of the Shanghai Plant 2 and also for working purposes, NanoFilm Technologies ended FY20 with a strong net cash of S$188m, from net debt of S$28m in FY19.
• Besides the strong operating cashflow, the conversion of the S$50m convertible notes into equity also helped to beef up the balance sheet. The IPO gross proceeds of ~ S$200m, out of which NanoFilm Technologies has only utilised about 25% so far, provides further ammunition for the group to grow.

Highly Experienced Founder and Management Team With a Strong Track Record of Customer-centric R&D Innovation

Experienced team with entrenched R&D and technical expertise.

• Dr Shi Xu, founder, developed NanoFilm Technologies's proprietary nanotechnology and currently oversees the operations and research and development. He is assisted by a highly experienced and talented management team, comprising industry veterans with significant industry experience in various fields and extensive experience in delivering growth and innovation.
• Chief Executive Officer, Mr Lee Liang Huang, was previously the Group Chief Executive Officer of MI Holdings Pte Ltd and has held various senior management positions at IBM Singapore Pte Ltd.

Key Risks

• Refer to report attached below for SWOT analysis and also the key risks of NanoFilm Technologies.

Valuation & Peer Comparison

Pegged to peers in all three business segments.

• As NanoFilm Technologies has three key business segments, we have included peers in the three divisions.
  • For the key Advanced Materials segment, the peers included are companies involved in the manufacturing of specialty materials and components, and also those engaged in chemicals and coating and sealing products, which include 3M, DuPont de Nemours, PPG Industries, EMS-Chemie, Entegris, Element Solutions, CMC Materials, etc.
  • For the Nanofabrication segment, as the Group is currently involved in optical lens and sensors, we have included peers in these industries, including manufacturers of optical and optical-related products, and also image sensors, which include Sunny Optical Tech, Largan Precision, Hamamatsu Photonics, AAC Technologies, etc.
  • Peers in the Industrial Equipment division are equipment manufacturers in the semiconductor space, which include Ulvac, Applied Materials, Lam Research Corp, etc.

PEG valuation an appropriate metric to capture growth potential.

• NanoFilm Technologies reported a 61% y-o-y growth in net profit for FY20. With the multiple avenues of growth in place, we are projecting another 45% and 31% growth in earnings for FY21F and FY22F respectively.
• Given the high-growth profile for NanoFilm Technologies, we believe PE-to-growth (PEG) is an appropriate metric to look at, to capture the growth potential ahead.
• We derived NanoFilm Technologies's target price using average earnings growth rate for FY21F and FY22F of 38% and pegging it to peers’ average PEG of 1.13x.

Source: DBS Research - 18 Mar 2021