Nanofilm Technologies International has released its business update for 3Q2023 and 9M2023.
Review of 3Q2023
The operating environment for 3Q2023 continued to be challenging, exacerbated by macro headwinds and the dampening of overall consumer sentiment. Nanofilm saw an uptick in operational activity for 3Q2023, driven by the seasonal peak period for the Computer, Communication and Consumer (3C) segment, leading to an improvement in gross profit margins achieved through improved cost control efforts. However, given the macro uncertainties, customers continue to be cautious about their capital expenditure, and this impacted Nanofilm’s equipment sales.
In 3Q2023, gross profit margin was above 40%, compared to 32% in 1H2023. This was on the back of a 76% QoQ gross profit increase due to improvement in operational performance in 3Q2023. However, the 3Q2023 gross profit saw a 28% decrease YoY due to Nanofilm’s inability to enjoy more economies of scale benefits as a result of lower production volumes in the current challenging environment.
Operational expenditure for 3Q2023 increased 5% QoQ but decreased 10% YoY, indicative of the Group’s efforts to balance its investments for longer term business expansion initiatives together with its various cost control measures. Nevertheless, Nanofilm was profitable in 3Q2023 and continued generating positive operational cash flows for 9M2023.
Resultant Group revenue for 9M2023 reached S$128 million, representing a 29% decrease YoY. Over the course of 9M2023, Nanofilm has sough to address excess capacity at its Shanghai plants resulting from lower utilisation of certain equipment. This equipment will be redeployed to other locations, while Nanofilm will continue to utilise its Shanghai plants for multiple business units (BUs) that leverage demand from the China market. Some equipment is being utilised for new business initiatives involving new product introductions (NPIs) and process qualifications, which will generate revenue when the projects transition to mass production.
Mr Gary Ho, Group CEO, commented: “Despite persistent macro headwinds continuing to dampen overall consumer sentiment with customers cautious on capital expenditure in 3Q2023, we saw an improved business performance quarter-on-quarter (“QoQ”) helped by the seasonal 3C demand and
ongoing cost optimisation efforts. Nearer term, we expect to see continued market volatility in 4Q and are continuing our efforts to balance cost with the necessary investment and market expansion activities to support future growth and innovation whilst remaining focused on our strategic goals to deliver
sustainable long-term growth.”
Business Updates
The 3C consumer business (under AMBU and NFBU) continue to be involved with customers’ NPIs for future generation of products as well as new product lines for the 3C segment; while the industrial business (under AMBU and IEBU) continue to focus on replicating their success across different industrial segments like precision engineering, multi-functional printer, automotive, etc.
Nanofilm’s joint venture, ApexTech, is currently undergoing customer qualification at the component level for electric vehicle busbar connectors but progress has slowed due to customers’ excess production capacity from current market weakness. ApexTech is also exploring the application of its green plating solutions to other components.
In August 2023, Sydrogen entered into a strategic partnership with Shanghai Hydrogen Propulsion Technology Co., Ltd. (“SHPT”) to capitalise on their respective technical advantages, marketing channels and after-sales service resources to further increase market penetration into Southeast Asia, Europe, and America. The parties will jointly develop the sales and services of fuel cell stacks, systems and components, providing in-depth services and competitive solutions to meet the diverse needs of customers in different fields such as on-road automotive and non-automotive applications.
For R&D, Nanofilm’s Advanced Technology Research Centre for new application and product development is expected to be completed by end-2023 at its Singapore HQ and Nanofilm has entered into a research and collaboration agreement with Nanyang Technology University (“NTU”) to establish a corporate laboratory for advancing deep tech R&D for earlier Technology Readiness Levels (“TRLs”), announced in October 2023.
European Expansion
The European market and original equipment manufacturers (OEMs) in the region are early technology adopters and embrace advanced technologies that add value and differentiate their products and services, making them prospective customers for Nanofilm’s cost-leading advanced technologies, and represents a significant opportunity for Nanofilm to leverage its cutting-edge FCVA thin film technologies and manufacturing scale to provide these solutions.
The estimated Total Addressable Market in Europe for 2023 is €13 billion, out of which it has a
Serviceable Obtainable Market estimated to be in excess of €400 million, and is expected to
grow at 10% CAGR over the next five years.
Attractive market segments for Nanofilm’s thin film coating solutions in the European market include:
- General industry with applications such as Off Highway Diesel, CNC Machine Tools, Industrial
Hydraulics. The Group’s films offerings provide value through improving fuel efficiency, system
longevity and performance. - Decorative applications in areas like automotive interiors, sanitary fittings, consumer luxury goods. The value proposition is to provide abrasion resistant decorative surfaces combined with cost leadership via its in-line technologies.
- Medical devices with particular applications in dental implants & tools, medical devices and medical robotics. The value proposition is to provide thin film coating solutions with enhanced performance.
Nanofilm plans to enter Europe via Germany as the leading market in Europe, accounting for approximately 51% of the thin film coating market, and is actively assessing potential sites and pursuing an M&A strategy to gain a foothold there.
Nanofilm’s expansion into Germany thus paves the way for the Group to have a larger multi-country footprint within Europe, which aligns with its geographical and diversification coverage strategic pillar to become a truly global company.
Business Outlook
The Group’s 3C consumer business under its AMBU and NFBU, is seeing improvement in inventory rebalancing but production volumes are still lower YoY. For IEBU, customers remain tight on their capital expenditure but there are active customer engagements for their requirements in FY2024.
The macro environment in FY2024 continues to be uncertain, and Nanofilm will redouble efforts to balance cost management with the necessary spending to support future growth and innovation whilst remaining focused on its strategic goals to deliver sustainable long-term growth.
In addition, Nanofilm will be redeploying equipment from its Shanghai plants to new geographical sites for the 3C supply chain as calibrated with customers and expects net business growth with this move. Their Shanghai plants will continue to be an important strategic site for the 3C and other BUs, including IEBU, Sydrogen, and NFBU.
Nanofilm will be building up its functional coating capabilities and presence in Europe and this will be supplemented through selective inorganic growth opportunities. In India, Nanofilm is finalising a factory-in-factory arrangement with a partner to expedite its deployment of equipment for the 3C supply chain, expected to be completed by 1Q2024. As for Vietnam, with Phase One renovations and fit-out for Nanofilm’s second Vietnam site expected to be completed by 1Q2024, the installation and commissioning of AMBU Consumer and NFBU equipment will commence first, with IEBU operations to follow thereafter.
While aiming for profitability, Nanofilm’s FY2023 financial performance will depend on end consumer demand for new 3C product launches, and its bottom line may be negatively impacted if end-consumer demand remains muted.
Nanofilm’s share price as of 7 November 2023 after market close was S$0.965.
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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.
