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Analysts keep 'buy' on Nanofilm as it sees 'significant runway' for company to capture new customers

Felicia Tan
Felicia Tan9/29/2022 06:09 PM GMT+08  • 5 min read
Analysts keep 'buy' on Nanofilm as it sees 'significant runway' for company to capture new customers
The JV exemplifies how Nanofilm can work with a strategic partner, says CEO Gary Ho. Photo: Albert Chua/The Edge Singapore
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Analysts from Citi Research and DBS Group Research are optimistic about Nanofilm’s prospects after the company announced its plans to establish a joint venture company (JVCo) with two partners to develop solutions for metal components in battery packs and systems in electric vehicles (EVs) and new energy storage applications in China.

The two partners are Shenzhen Everwin Precision Technology (Everwin) and Shanghai Hongshi Enterprise Management Partnership (Hongshi).

Under the JV, Nanofilm will take a 60% stake, while Everwin and Hongshi will have stakes of 30% and 10% respectively.

The new JVCo, named Sichuan Apex Technologies Co. Ltd (ApexTech), will have an initial registered capital of RMB50 million ($10.0 million).

In their release dated Sept 28, the partners also expressed their interest to expand beyond China and into the international market.

On this, Citi Research’s Jame Osman has kept his “buy/high risk” rating with an unchanged target price of $3.18.

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In his report, Osman estimates that meaningful contribution from the JV will only likely to be in 2024 when the JVCo targets mass production to commence.

That said, he continues to see a “significant runway” for Nanofilm to capture new customers as commercial adoption of its coating technology gains momentum outside its 3C (or consumer electronics, communication and computers) segment.

“Meanwhile, Citi’s Taiwan tech team remains optimistic on overall Apple order flow remaining resilient despite recent negative news flow on iPhone production momentum,” says Osman.

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To this end, the analyst finds Nanofilm’s risk-reward profile “more attractive”.

“[This is] as we believe gestational issues relating to its Shanghai Plant 2 are largely resolved and raise the scope for production ramp-up. We [also] see strong potential for commercial adoption of [Nanofilm’s] filtered cathodic vacuum arc (FCVA) technology and coating solutions,” he writes.

The team at DBS Group Research has also kept its “buy” call with an unchanged target price of $3.21.

Like Citi’s Osman, the DBS team expects some start-up losses during the initial stage of the new JVCo but they believe in its longer-term prospects whereby it has the ability to tap into the EV advanced battery business.

It adds that the JVCo will also be well-positioned to penetrate more industries and applications outside of EVs and energy storage systems, potentially replacing electroplating in other domains over the longer term.

“The electroplating process is pollutive and hence there is a growing demand for more environmentally friendly coating solutions. With increasing focus on environmental, social and governance (ESG), more companies are actively sourcing for alternative solutions,” the team writes. “Nanofilm’s vacuum coating technology and solutions can replace traditional electroplating with a sustainable, scalable, cost-competitive and more environmentally friendly solution.”

As such, the DBS team says it continues to like Nanofilm for its superior vacuum coating technology that is applicable to many industries.

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“Entry into new markets is one of the catalysts that we have highlighted,” it says. “With the gradual recovery on the supply front and the investments made in the new Shanghai Plant 2, the group is progressing well to deliver growth.”

In its note dated Sept 29, the DBS team has projected Nanofilm to see net earnings growth of 13% for FY2022 and another 19% in FY2023.

“[Nanofilm’s] share price has been weak recently, down [around] 15% over the last two weeks, on the back of the macro headwinds. At its current valuation of 17.1x forward P/E, the stock is trading near its trough valuation or at -1.5 standard deviations (s.d.) from its average P/E,” it adds.

Nanofilm, in its Sept 28 statement, pointed out that the total addressable market (TAM) of advanced batteries for EVs in China is estimated to be above 6.5 million units, amounting to US$79 billion ($113.86 billion) in 2023 and is growing at a compounded annual growth rate (CAGR) of 10% to reach US$156 billion in 2030, according to the International Energy Agency (IEA).

The company added that EV penetration in China is expected to reach 42% in 2030, up from 14% as of end-2021. On the global front, EV sales is expected to reach 14.8 million units in 2023, with battery costs amounting to about US$238.9 billion.

In a separate report released by Nanofilm’s JV announcement, UOB Kay Hian analyst John Cheong has kept “buy” on the company with an unchanged target price of $2.72.

The report comes after the brokerage held a non-deal roadshow (NDR) with Nanofilm’s management.

In his report, Cheong notes that the key takeaways include Nanofilm’s improved operations in the 3QFY2022 ending Sept 31 with its Shanghai plant reverting to its normal state. The plant is also currently in the peak season of its production cycle.

During the NDR, Nanofilm said that it is “gaining traction” with customer Z as it wins more wallet share across all product categories. Finally, the company said that it expects “positive development” in the EV battery space as announced on Sept 28.

Shares in Nanofilm closed 4 cents lower or 1.92% down at $2.04 on Sept 29.

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