My first encounter with nanotechnology was that I had to study it for an exam during my university days.
I am proud that Nanofilm Technologies was a spin-off from my alma mater, Nanyang Technological University (NTU). We often see foreign universities hogging the headlines in commercialising academic research. It’s good to see that our local universities are maturing and contributing in this aspect.
I am also happy to see that SGX finally get a tech listing of considerable size (biggest non-REIT IPO in years!) since many local investors have been disappointed with the lack thereof in a tech boom era.
Hence, some excitement in this IPO is warranted.
In case you are too busy to flip through the 680-page prospectus, here’s a quick rundown. I included some of my thoughts to go along with it.
What is Nanofilm Technologies?
It provides coating services.
That’s the most succinct description for you.
But to be accurate, Nanofilm Technologies do more than coating – it has 3 business units:
- Advanced Materials (aka coating)
- Nanofabrication – customize and manufacture nanoproducts
- Industrial Equipment – sell turnkey coating and automation equipment (software and training included)
I would still call it a coating company because it derives most of its revenue (77%) from its Advanced Materials Business Unit.
Below is an overview of the coatings applied to different products and components.
Of its Advanced Materials Revenue breakdown, computers and wearables are the main revenue drivers.
Note: percentages in the chart below are based on the Advanced Materials revenue and not the entire firm’s revenue.
What’s so special about Nanofilm Technologies‘ coatings?
Nanofilm Technologies owns four proprietary advanced materials:
- TAC-ON®
- iTACTM
- MiCCTM
- FCVA Metals
TAC-ON® contains 85% of diamond-like carbons (compared to other products with just 55%) which makes the surface hard and scratch resistant.
iTACTM is a thick amorphous diamond coating that can prolong the average life expectancy of piston rings by 5 times.
MiCCTM is a nano-crystalline chromium nitride with superior adhesion, high surface hardness, low friction coefficient.
FCVA Metals improves energy efficiency, conductivity and reduces impurity in the coating process.
Besides these proprietary materials, Nanofilm Technologies also have an unique approach called the Filtered Cathodic Vacuum Arc (FCVA) to deposit the coatings.
Quoting the Prospectus:
Our 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.
Hence, a combination of proprietary materials, deposit technique, know-how, and operational capabilities gives the company an edge.
Who are the customers of Nanofilm Technologies?
Nanofilm Technologies has serve some of the big names in the electronics manufacturing industry, over long period of years.
These long term relations suggests that Nanofilm Technologies offers an attractive value proposition, else these big companies would not continue to work with them for as long as the past 14+years.
In this aspect, Nanofilm has some competitive advantage in retaining its customers:
| Key Customer | Approximate Length of Relationship |
| Fuji Xerox | 14 years |
| Nikon | 13 years |
| Canon | 13 years |
| Sunny Optical | 12 years |
| TPR | 11 years |
| Riken | 10 years |
| Ricoh | 10 years |
| Microsoft | 5 years |
| Huawei | 4 years |
| AAC | 4 years |
| Anqing TP Goetze Piston Ring (ATG) | 3 years |
| CYPR | 3 years |
We understand from the previous section that computers and wearables are the main revenue drivers and I suspect it is derived from Nanofilm Technologies’ largest customer.
In fact, this one customer contributed more than 50% of the revenue in most years:
Our largest customer (who is an end-customer) accounted for approximately 50.1%, 45.6%, 51.1%, 43.3% and 56.5% of our revenue (which includes sales to its contract manufacturers) for the financial years ended 31 December 2017, 2018 and 2019, and the six months ended 30 June 2019 and 2020, respectively. Our largest customer’s revenue contribution is primarily in our Advanced Materials BU segment, although we supply nanoproducts under our Nanofabrication BU to this customer as well.
This suggests a customer concentration risk but I was more curious about who could it be.
This was the clue:
Customer Z is a global technology company that designs, develops and sells consumer electronics, computer software and online services.
There aren’t a lot of companies that would fit “Customer Z’s” description. In terms of wearables, Apple, Samsung and Huawei come to mind. But which of these offer computer software and online services?
My best guess is that Apple is the main customer of Nanofilm Technologies.
Nanofilm Technologies’ production facilities
They own four production facilities situated in Singapore, Shanghai and Yizheng in the PRC, and Hai Duong in Vietnam. On top of those, a new Shanghai Plant 2 is expected to commence operations by the first quarter of 2021.
It isn’t surprising that the majority of their production capability and revenue reside in China, since China is still the factory of the world, especially when it comes to electronics.
China contributed 76% of the revenue in the first six months of 2020:
What are the growth prospects of Nanofilm Technologies?
Nanofilm Technologies has grown well at 17% per year in the past 3 years. Even during Covid-19, revenue for 1H2020 leapt up 41% compared to the same period last year!
It is definitely going right for Nanofilm Technologies and their growth doesn’t seem to be stopping anytime soon. Their coating technology could be applied to many other fields as consumers demand better performance and quality finishes in products.
Although Nanofilm Technologies’ revenue comes mainly in computers and wearables currently, consulting firm Frost & Sullivan, believes the coating can be applied to new segments such as FMCG personal grooming, optical lens, optical sensors, and 5G antennas.
Many segments have yet to adopt these advanced materials coating because it was previously inaccessible by conventional coating technologies. Nanofilm’s vacuum coating technologies, FCVA have made it possible, in a cost effective manner.
Frost & Sullivan estimated that the global market size for advanced materials is US$19.1 billion in 2019 and expected to grow at a CAGR of 7.5% between 2020 and 2023 to reach US$24.3 billion by 2023.
What are the risks?
Concentration risk. One customer contributes 50% of Nanofilm’s revenue. This customer can make or break Nanofilm Technologies. The top five customers accounted for approximately 81.9% of its revenue for the first six months of 2020.
Trade secrets leaks. Nanofilm Technologies has gone into joint ventures with some business partners such as CYPR, who has access to the details and formula of its proprietary technology and nanotechnology solutions. It was also mentioned in the Prospectus that two ex-employees had infringed the FCVA copyright and were sued by Nanofilm Technologies.
Competition. Nanofilm Technologies kind of played down their competition. Maybe it is true today that the technology is young and the market for it is still nascent. But I believe the competition will intensify in the future especially when the growth is high and margins are good.
It was mentioned in the Prospectus,
We provide differentiated technology-based solutions to our customers. Our solutions are based on our proprietary technologies, which we believe distinguishes us from our direct competitors. However, we do face a level of competition from other providers of surface solutions and nanofabrication companies in the regions and markets in which we operate.
In addition, it said,
we believe that our Industrial Equipment BU does not face significant direct competition.
Anyways, here’s the list of possible competitors mentioned by Nanofilm Technologies,
- Advanced Materials
- OC Oerlikon
- Vitalink
- Zhenghe
- Nanofabrication
- Sunny Optical
- AAC Technologies
- AMS AG
- Largan Precision
- Nissei Technology
- NIL Technology
- Genius Electronic Optical
- Hamamatsu Photonics
- Industrial Equipment
- Oerlikon Balzers
- IHI Hauzer
- Techno Coating
- Kobelco
- Kolzer SRL
- ULVAC
- Applied Materials
- Lam Research
- Tokyo Electron
- Mustang Vacuum Systems
There are a lot more risks that are not listed here, I had only included what I thought were the key ones. You can refer to the Prospectus for the full list.
Who are behind Nanofilm Technologies?
Dr Shi Xu is the founder and Executive Chairman of Nanofilm Technologies. He was a tenured professor at the Nanyang Technological University before founding the company in 1999 and was responsible for developing the proprietary technologies used by Nanofilm Technologies today.
He was also named EY Entrepreneur of the year in 2017 – a testament of a well run company and the embodiment of the entrepreneurial spirit.
Lee Liang Huang is the Chief Executive Officer of Nanofilm Technologies and he was previously the Group Chief Executive Officer of MI Holdings Pte Ltd and has held various senior management positions at IBM Singapore Pte Ltd.
Both Dr Shi and Mr Lee are remunerated according to market rate:
- Dr Shi: $500k to $750k
- Mr Lee: $1.25m to $1.5m
Dr Shi would be holding more than 50% stake in Nanofilm Technologies even after the listing. This suggests there’s still a lot of skin in the game for him – his personal wealth is tied to the performance of the company and its share price.
There are notable cornerstone investors for this listing, besides the commercial fund managers, Nanofilm Technologies could count on Venezio Investments, Avanda Investment Management (both are managing money on behalf Temasek Holdings) and Employees Providend Fund Board (Malaysia’s CPF equivalent). There’re definitely some credibility among the list of institutional investors.
What is the financial health state of Nanofilm Technologies?
Nanofilm Technologies is a growing and profitable company.
Its net profit was S$34.5m in 2019, or a rather fat net profit margin of 24% – few manufacturing companies can match that.
As at 30 June 2020, the gearing ratio was approximately 37% or 19% if excluding the convertible notes – which are expected to convert to shares during the IPO. Temasek-linked companies are holding these notes. The gearing isn’t high and the S$470m proceeds from the IPO would lower the debt further.
Nanofilm Technologies spent about 7% of its revenue in R&D, which I think is a little low as I have usually seen other tech companies committing to more than 10% of their revenue to pursue innovation. Given that Nanofilm Technologies prides itself on R&D and mentions about it extensively in the Prospectus, I would have expected a higher allocation.
In contrast, little was mentioned about how they would scale sales and distribution, which is an important driver for growth, and yet it cost the company about 10% of its revenue.
In terms of capital expenditure, Nanofilm Technologies has invested heavily in expanding their production facilities to meet the rising demand. It spent S$46.3 million in 2019, mainly for the construction of Shanghai Plant 2.
The cash flow generated from operations was S$52.5m, which is more than enough to afford the capital expenditure and produce a positive free cash flow.
In short, the company is in good financial health and growing nicely.
How much is Nanofilm Technologies raising and how would the funds be spent?
Nanofilm Technologies is raising S$470m at a market value of S$1.7b or a share price of S$2.59.
The cornerstone investors would take up S$270m and the retail tranche is only expected to be around S$10m (so the chance of you getting your desired allotment is going to be slim). The remainder are expected to be filled by accredited investors by the book runners.
Hence, it would not be an easy fill even if you are keen to subscribe to the IPO given the low supply of shares for retail.
Nanofilm Technologies intends to use the IPO proceeds for
- capital expenditure on development and building of new machinery for Advanced Materials and purchase of new machinery for our Nanofabrication (45%)
- R&D and engineering (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%)
Is Nanofilm Technologies a good buy?
As the post-IPO pro forma figures weren’t available in the Prospectus, I had to do some estimates.
Based on the estimated EPS of $0.0557, the Offer would be priced at about PE 46 and PEG 2.6 (less than 1 means cheap enough for growth). I calculated the Free Cash Flow yield to be around 1%. The Offer price looks expensive.
The management is not going to pay any dividends for FY2020 but promised to distribute at least 20% of its net profit in 2021.
I like the growth prospect of the company but the price is forbidding. I can understand the excitement about this tech listing on SGX and I am happy about it too. But… I’ll pass for now.
For those who are interested, the IPO is now open for subscription and will close by 28 Oct 2020 at 12pm. The shares will start trading on 30 Oct 2020 at 9am. Good luck!