10 Things To Know About Nanofilm Technologies International Limited Before You Invest

Shares of Nanofilm Technologies International Limited (“Nanofilm”) (SGX:MZH) surged 12.4% to close at S$2.91 from its initial public offering (IPO) price of S$2.59 in its recent debut on the Singapore Stock Exchange on 30 October 2020. The company – which makes advanced materials and nano products for the consumer electronics, communications and automotive industries, is Singapore’s biggest non-REIT (retail estate investment trust) listing in recent years. If you are looking at Nanofilm with interest, here are 10 things to know before you invest.  

1. History of the company 

Nanofilm was established in 1999 by its founder and Executive Chairman, Dr. Shi Xu, as a high-tech spin-off from Nanyang Technological University (NTU). Before this, Dr. Shi served as a tenured professor at NTU, and was responsible for developing the proprietary technologies used by the company today. He was also named EY Entrepreneur of the year in 2017 – a testament of his visionary leadership and entrepreneurial spirit. 

(Source: Company’s website)

2.  Business segments

Nanofilm divides its business into three business units (BU) – Advanced Materials, Nanofabrication and Industrial Equipment – as set out in the diagrammatic chart below. 

(Source: IPO prospectus)

Advanced Materials is the company’s largest BU, followed by Nanofabrication and Industrial Equipment, which delivered 76.7%, 19.2% and 4.1% of the company’s revenue in 2019. We will focus on the Advanced Materials BU since it is the biggest revenue contributor.

The company’s Advanced Materials BU is a leading provider of surface solutions based on its proprietary vacuum coating technologies and advanced materials. Its surface solutions are able to deliver a strong value proposition to customers because they offer mission-critical applications (such as miniaturization, increased durability, thermal management and wear resistance) which enable customers to overcome functional and cost constraints imposed by conventional coating technologies. 

Smart phones, computers (desktop, laptop and tablet), wearables & accessories, printing and imaging, precision engineering and automotive are some of the key products (or sub-segments) where the company’s nanotechnology surface solutions are commonly used.

(Source: IPO prospectus)

3. Advantages in coating technology and advanced materials 

Nanofilm owns four proprietary advanced materials:

• TAC-ON® – contains 85% diamond-like carbons (compared to other products with just 55%) which makes the surface hard and scratch resistant.
• iTACTM – a thick amorphous diamond coating that can prolong the average life expectancy of piston rings by 5 times.
• MiCCTM – a nano-crystalline chromium nitride with superior adhesion, high surface hardness, low friction coefficient.
• FCVA Metals – improves efficiency, conductivity and reduces impurity in the coating process. 

In addition, the company uses a unique approach called Filtered Cathodic Vacuum Arc (FCVA) to deposit the coating solutions. Conventional coating technologies require high temperatures and energy consumption to operate. By contrast, Nanofilm’s FCVA technology is capable of coating deposition at room temperature, which is both environmentally friendly, and enables vacuum coating to be performed on a wider variety of substrate materials such as plastics, rubber and ceramics. Set out below are the key components of Nanofilm’s FCVA technology platform. 

(Source: IPO prospectus)

4. Production facilities

Nanofilm owns four production facilities situated in Singapore, Shanghai and Yizheng in China, and Hai Duong in Vietnam. On top of these, a new Shanghai Plant 2 is expected to commence operations by the first quarter of 2021.

(Source: IPO prospectus)

It is not surprising that the majority of the company’s production capabilities and revenue reside in China, since the country remains the factory of the world till today. In fact, China contributed about 76.7% of revenue for the first six months ending 30 June 2020. 

(Source: IPO prospectus)

5. Reputable customer base 

Nanofilm has over 300 customers across various industries and has decade-long relationships with several key customers. These long-term relationships suggest that Nanofilm offers an attractive value proposition for retaining its customers.   

(Source: IPO prospectus)

Nanofilm’s direct customers are contract manufacturers who manufacture and assemble end-products for its end-customers. However, the company views its end-customers (and not its contract manufacturers) as the party with whom it has the primary business relationship. 

Investors should note that Nanofilm faces significant customer concentration risk since its largest customer (who is an end-customer) accounted for approximately 56.5% of its revenue in 2019. Further, the company’s top five customers (both direct and end-customers) accounted for approximately 81.9% of its revenue for the same year. 

6. A large total addressable market  

The total addressable market (TAM) for a company is a measure of the potential business that all players within the industry can capture. In a nutshell, if the TAM for an industry continues to grow, this means that all companies within the industry stand to benefit too. 

Frost & Sullivan has estimated that the global market size for advanced materials is US$19.1 billion in 2019, and is expected to grow at a compounded annual growth rate (CARG) of 7.5% between 2020 and 2023 to reach US$24.3 billion by 2023. 

Since Nanofilm’s 2019 revenue from its advanced materials business unit of S$109.6 makes up only 0.4% of the estimated TAM for the same year, there is much room for the company to grow significantly in the future. 

This can be evidenced by examining Nanofilm’s breakdown of revenue by segmentation for the six months ended 30 June 2020 as compared to six months ended 30 June 2019, where revenue from the Advance Materials BU has leapt by 66.9%!

(Source: IPO prospectus)

7. How the IPO proceeds are used

Nanofilm is raising $470.1 million to be used as follows:

• Capital expenditure on development and building of new machinery for its Advanced Materials BU and purchase of new machinery to support its Nanofabrication BU (45%)
• R&D and engineering for entry into new end industries and new areas and/ or products in existing business segments (25%)
• Construction, refurbishment and renovation of new and existing production facilities – (15%)
• General corporate and working capital purposes (10%)
• Payment of underwriting commissions and offering expenses (5%)

8. Management and substantial shareholders 

Apart from Dr. Shi, Nanofilm’s senior management team comes from largely engineering and manufacturing backgrounds. CEO Mr. Lee Liang Huang was previously Group CEO of contract manufacturer MI Holdings Pte Ltd, and has held various senior management positions at IBM Singapore Pte Ltd. Meanwhile, its COO Mr. Ricky Tan Chong Ho has held senior roles at HGST Singapore Pte Ltd, Pemstar Ltd and IBM. Separately, the company’s 

Chief Commercial Officer Mr. Gary Ho Hock Yong previously held senior management positions at Hi-P International Limited (SGX:H17), a Singapore listed global manufacturing company in the telecommunications, lifestyle, computing and automotive industries. 

Even after the listing, Dr. Shi would still be the single largest shareholder in Nanofilm, holding more than a 50.0% stake. We like that he still has a lot of skin in the game as his personal wealth is tied to the performance of the company and its share price.

Meanwhile, Nanofilm has more than a dozen cornerstone investors. They include Temasek Holdings subsidiary Venezio Investments, Employees Provident Fund Board, Nikko Asset Management Asia, Aberdeen Standard Investments, Avanda Investment Management, JPMorgan Asset Management, Credit Suisse, just to name a few. 

9. Financial Highlights 

	For the financial year ended / As at 31 December	For the sixth months ended / As at 30 June
	2017	2018	2019	2020
Revenue (S$)	103,603,553	122,844,245	142,908,469	77,827,957
Profit after income tax (S$)	26,934,386	29,310,142	34,540,759	18,537,180
Gross profit margin (%)	55.9	53.9	54.4	52.6
Net profit margin (%)	26.0	23.9	24.1	23.8
Cash conversion cycle (days)	88	145	83	77
Current ratio	1.6	3.1	2.0	1.0
Gearing ratio (%)	15.6	35.8	35.5	37.0
Adjusted gearing ratio (%)	15.6	5.7	13.6	18.8

(Source: IPO prospectus)

Nanofilm is a growing and profitable company. Its revenue and profits have been growing at CAGR of 17.5% and 13.2% respectively over 2017 to 2019. Meanwhile, it has relatively juicy margins for a manufacturing company – gross profit margins and net profit margins were consistently above 55.0% and 20.0% respectively over the same years. 

The company should also not have any liquidity issues. As at 30 June 2020, its cash conversion cycle – the time it takes for a company to convert its investments in inventory and other resources into cash flow from sales is under 3 months (i.e. 77 days). Moreover, its gearing ratio was approximately 37.0% or 18.8% excluding the convertible notes – which are expected to convert to shares during the IPO. 

10. Current valuation looks expensive   

With a closing share price of S$2.91 as at 12 November 2020, Nanofilm is trading at a price to earnings (PE) ratio of 44.6, with a market capitalisation close to S$1.9 billion. The company is interesting given its growth prospects but looks pricey at the current valuation. Since it is a new listing, investors could do well to place the company in their watch list and monitor its development closely. 

(Source: Google Finance)

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