Nanofilm Technologies International’s revenue in 1H2023 decreased by 34.4% year-on-year to S$73.2 million from S$111.3 million in 1H2022 whilst adjusted EBITDA decreased by 72.4% YoY to S$10.4 million. PATMI1 fell by 140.7% to a net loss of S$7.6 million. The Company has proposed an interim dividend of 0.33 Singapore cents per ordinary share in view of its 1H2023 performance and full year outlook.
The decrease in revenue and net loss for 1H2023 was mainly due to weaker demand in the consumer electronics market as well as investments in long-term business initiatives to drive future growth. End-consumer sentiment was affected by inflationary pressures, higher interest rates and ongoing geopolitical tensions which led to reduced consumer discretionary spending that affected demand. This was coupled with a softer than anticipated post-reopening recovery in China in 1H2023.
The softening demand which led to inventory wind-downs, significantly impacted the Group’s Advanced
Material Business Unit (AMBU), in particular its Computer, Communication and Consumer (3C) segment, and its Nanofabrication Business Unit (NFBU). Overall cautious market sentiment also led to a tightening of customers’ capital expenditure, which impacted the Group’s Industrial Equipment Business Unit (IEBU).
Ongoing Optimisation of Operations
Operating expenditure in 1H2023 compared to 2H2022 has declined 17.1%, due to on-going cost reduction efforts. However, cost savings as a percentage of revenue are higher due to lower revenue base. 1H2023 total R&D and Engineering expenses, after capitalisation of eligible expenses, as a percentage of sales increased to 8.7% from 7.8% in 1H2022 due to a lower revenue base as well as higher capitalised expenses. The higher capitalisation of eligible R&D and Engineering expenses reflect the higher quality R&D and Engineering activities that are closer to achieving commercial benefits. The Group, as a deep tech material science company, views R&D and engineering investments as essential to maintain its lead in technology and innovation to promote long-term sustainable growth. The focus of research includes expansion of advanced materials coating kinds, product development in fuel cell applications and new advanced nanocomposite materials.
Overall, the Group’s 1H2023 EBITDA and operating cash flows were positive, with a net loss being incurred mainly due to higher depreciation and fixed non-cash expenses attributed to capacity expansion. The Group’s investments in long-term business initiatives to drive future growth have increased operating expenses and these include costs related to new facility set-ups in Zigong and Huizhou, China, ongoing business-building expenses related to Sydrogen, as well as capital investments in new production facilities such as in Vietnam.
Commenting on the 1H2023 results, Mr Gary Ho, Group CEO, said: “1H2023 was a challenging operating period for us due to a number of factors including softer end-consumer demand, particularly in our 3C segment, and the slower-than-expected post-reopening recovery of China. Despite this, we maintained positive EBITDA and operating cash flows, and are fully focused on improving the Group’s performance by pursuing opportunities to expand our product offering and diversifying our customer base. We have taken the necessary steps to optimise operational efficiency and cost management throughout the Group in order to strengthen the foundation for future growth. We are seeing signs of a consumer recovery in the early part of 2H2023, and remain cautiously optimistic on the outlook for the rest of the year. We will continue to leverage our technological and innovative edge and leading market position to capture future revenues and growth as market conditions improve.”
Business Outlook
The operating environment has remained challenging, with softer demand for consumer electronics exacerbated by the macroeconomic environment, inflationary pressures and geopolitical tensions. This
has also weighed on the Group’s customers, particularly IEBU customers who remain tight on capital expenditure. However, the 3C consumer business (AMBU and NFBU) inventory rebalancing is improving.
Demand and production volume for the peak season in 2H2023 will be predicated on end-consumer interest in upcoming new product launches.
A combination of increased manpower and higher depreciation expenses has elevated costs in the
2H2022 but the Group has sought to optimise its cost structure with the lower revenue in 1H2023, by instituting strict cost controls while remaining focused on maintaining operational efficiency and effectiveness. These have included cost reduction measures in manpower, overheads, and other operating expenses in areas involving streamlining business processes, which are expected to be realised in 2H2023. These cost management measures, while on-going, will have to be balanced against the costs to be incurred for 2H2023 peak production requirements and new business initiatives.
Nanofilm remains fully focused on delivering its long-term growth through the execution of its market expansion strategy to countries like Vietnam, India, and Europe. This will focus on the three key end markets of Consumer, Industrial, and New Energy and will be driven through multiple business models such as Equipment Sale, Coating as a Service, Components Production, and Value Chain Integration.
To ensure that Nanofilm is best positioned to deliver on this growth strategy, it will require ongoing
investment into the business, through investing in R&D and Engineering to maintain the Group’s technological and innovation edge, including the Advanced Technology Research Centre in Singapore; as well as into geographical and customer diversification.
Looking ahead 2H2023, the business climate remains uncertain and challenging, particularly on IEBU business where customers remain tight on capex spending / investments. While 3C consumer business (AMBU and NFBU) inventory rebalancing is improving and peak seasonality production is expected, demand and production volume for 2H peak season will be predicated on end-consumer interests for the upcoming new product launches. The on-going cost improvement measures will not be applied indiscriminately. Rather, the measures will be balanced against 2H peak production requirements and new businesses initiatives. The Group anticipates strong operating leverage when the markets recover and the production volume returns.
Barring any unforeseen circumstances, 2H2023 revenue is expected to be higher than 1H2023, driven by seasonality peak production for the consumer segment. However, 2H2023 will not be comparable to 2H2022 due to the uncertain macro environment. The full-year profitability of the Group is subject to the level of demand from end-consumers in the upcoming new 3C product launches and customers’ capital expenditures not being further tightened. The Group will continue to focus on executing pipeline contracts and lean cost management.
Despite the ongoing challenges around consumer demand, the mid to long-term prospects for the Group
remains strong, especially as the choice solution provider with deeper penetration and geographical strategic sites coverage of 3C supply chain and its world leading customers’ new product range; new segments such as green plating applications including EV battery connectors in New Energy7 end-market
and functional coating applications in Industrial end-market are expected to provide new revenue streams from FY2024 onwards.
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About Nanofilm Technologies International Limited (MZH / NANO.SI)
Listed on the Mainboard of Singapore Exchange Securities Trading Limited (“SGX-ST”) on 30 October 2020, Nanofilm Technologies International Limited (“Nanofilm”) is a leading provider of nanotechnology solutions in Asia, leveraging its proprietary technologies, core competencies in R&D, engineering and production, to provide technology-based solutions across a wide range of industries. Nanofilm’s solutions serve as key catalysts in enabling its customers to achieve high value-add advancements in their end-products in an environmentally sustainable manner. Nanofilm is a constituent of the FTSE ST All-Share Index, FTSE ST China Index, FTSE ST Large & Mid Cap Index, FTSE ST Mid Cap Index, MSCI ACWI Small Cap Index, MSCI Singapore Small Cap Index, and the MSCI World Small Cap Index.
