Nanofilm touts ‘deep tech’ edge to hit S$500m revenue target despite volatility

NANOFILM Technologies’ CEO Gary Ho wants investors to value the company not as a manufacturer of coatings for laptops and tablets, but as a deep-tech player that serves emerging industries such as electric vehicles (EVs) and hydrogen power.

His call comes as Nanofilm has been hit by supply chain constraints and pandemic disruptions in China. The share price of the company – which specialises in nanotech coatings, industrial equipment and nanofabrication – has fallen 49.5 per cent over the past year.

The stock closed Feb 23 at S$1.45, or 21.8 times earnings.

“The market can be very short-term; they say: ‘Oh, it’s another manufacturing company’. We are not. We do have our own proprietary technology covered with a very strong portfolio of patents. We really have fundamental research, something that we developed from scratch,” he told The Business Times.

“Once we break through into a new business, it’s going to stay for a long time. The barriers to entry are very high. For some of our solutions, we have remained the sole source for almost 20 years. It’s not easy for others to replicate but it also takes time to really take off.”

This urging to take a long view follows gloomy results for FY2022 ended Dec 31. Nanofilm’s net profit fell 29.6 per cent to S$43.8 million, while revenue was down 3.8 per cent to S$237.4 million. Revenue from the industrial equipment business was particularly badly hit: falling 30.8 per cent to S$30.9 million.

As Nanofilm disclosed in an earlier profit warning, it was hit by slowing capital investments by customers, higher operating expenses and softer end-consumer demand due to fears of a recession.

Covid-19 restrictions also affected one of the company’s final assembly suppliers, impacting supply for a key customer. And when China ended its zero-Covid policy in December, Nanofilm’s operations in the country were disrupted due to a spike in infections.

Ho believes the situation in China could stabilise after Q1. Nanofilm is still maintaining its mid-term financial target of S$500 million in revenue and S$100 million in net profit by 2025, albeit with a non-linear growth path.

These numbers are “not plucked from the sky” but based upon a clear analysis of the business direction, Ho added.

He reckons the company’s deep tech ventures in the EV and hydrogen power spaces could serve as fresh catalysts, and said it is still on the lookout for more opportunities in mergers and acquisitions (M&A).

Sources of growth

Nanofilm is eyeing an entry into the EV ecosystem through a JV in China, called Sichuan Apex Technologies Co (ApexTech). It owns 60 per cent of ApexTech, which is focused on providing “green plating” vacuum coating for battery components in EVs as well as energy storage applications.

Typically, the metallic components used in battery packs for EVs and energy storage solutions are coated using a process called electroplating. ApexTech offers an alternative coating solution – using its proprietary advanced materials – that is more sustainable and scalable.

“The key shortfall of electroplating is that it’s environmentally very hazardous; the process generates a lot of wastewater, which causes pollution and is harmful to the human body. China is also tightening up (the industry) a lot; they don’t issue new licences. If you want to set up a new electroplating shop or company, it’s almost like mission impossible,” he said.

Battery makers have therefore been seeking an alternative solution that is just as efficient. Ho believes ApexTech has achieved a “great breakthrough” with its green plating solution. He would not provide specifics on costs, but said it is “comparable” to electroplating.

Nanofilm’s partners in the JV are Shenzhen Everwin Precision Technology and Shanghai Hongshi Enterprise Management, which own, respectively, 30 per cent and 10 per cent of ApexTech. Everwin makes EV hardware components for major battery makers, and Ho sees ApexTech tapping Everwin’s customer base and track record.

Nanofilm is developing a facility for ApexTech in Zigong, Sichuan, with production set to commence in the second half of 2023.

Another nascent field Nanofilm is trying to break into is hydrogen power. In 2021, the company teamed up with Temasek to set up a S$140 million JV, Sydrogen Energy, to develop new components for hydrogen fuel cells.

Many fuel cells contain metal bipolar plates, which have a cost and weight advantage over graphite plates. But metal plates require an additional layer of coating to be corrosion-resistant. The norm now is to use gold, but this is expensive.

Sydrogen provides a more cost-effective solution made from graphite and diamond, said Ho, adding that it is about 20 to 30 per cent cheaper on a per-plate basis.

Ho sees this technology being “catalytic” for the hydrogen fuel cell industry: “We have bigger plans for Sydrogen, using our deep technology to really be able to contribute to all these critical components and then help to drive the cost down in order to make this (of) mass production scale.”

The company is engaging big brands in the automotive industry and has commenced offering its bipolar plate coatings to several players, mainly in China.

“Hydrogen (power) itself is still at a nascent stage; everyone is at the same starting point. But (as for) who can really run faster and have a long runway, that depends on… how the market takes off,” Ho said.

Not a sprint

Nanofilm also wants to break into more sectors. It is looking out for M&A opportunities where it can get new use cases for its coating expertise. It had S$147.8 million in cash as of end-2022 and S$46.6 million in borrowings.

“We are aiming… to find a company that (can) combine with our core technology to become something very unique, very differentiated,” said Ho.

Will that be enough to win over investors?

On Feb 23, UOB Kay Hian upgraded its call on Nanofilm from “sell” to “hold” and raised its target price to S$1.28 from S$1.02, on the back of expectations for a less challenging 2023.

Yet, turning the share price around may take time.

Nanofilm has conducted extensive share buybacks since its share price slumped in August 2021, following weak results. In 2021, the company repurchased over 5.2 million shares at an average of S$4.06 each. Last year, it bought back another 5.2 million shares at an average price of S$2.51. But its share price has still trended downwards.

“We find that through interactions, our company is not easy for the market to understand,” said Ho. The company is therefore putting a lot of effort into educating the market on what it does. Ho added that Nanofilm is “not here for the short 100-metre sprint, we are here for the long run”.