Nanofilm is below $1b market cap! Why did Nanofilm drop so much?

What happened to Nanofilm?

Nanofilm released its 3Q22 results after market hours on 2 Nov 2022 and the stock saw a 2% decline the next day. But on 4 November 2022, the stock suddenly plummeted 16% to close at $1.46 which is an all time low for the stock.

This left investors wondering what the possible reasons could be and whether this could be an opportunity to acquire the stock. Here we look into the factors at play.

Slowdown in growth

9M22 revenue growth slowed to 10%, with the Industrial Equipment segment recording negative growth. This was a sharp decline from the 6M22 revenue growth of 15.2% which may imply that 3Q22’s revenue performance was likely flat on a year-on-year basis or could have even recorded a small decline.

Nanofilm faces a challenging near-term operating environment with macro headwinds, supply chain challenges, slowdown in capital investments and the ever-ongoing COVID-19 restrictions.

This has led to softer consumer demand and hence Nanofilm’s customers have tightened their purses. Although Nanofilm is attempting to drive revenues through differentiated quality solutions and products, manage its cost base through cost optimisation and continue investments into R&D and engineering to keep up on its innovation front, the macro headwinds are unpredictable and market watchers do not know when these would be alleviated.

Downgrades from research analysts

Since the results were out, research analysts have added fuel to fire with UOBKayHian downgrading the stock to Hold with a target price (TP) of $1.79, much lower than the previous TP of $2.72. Revenue was below expectations and near term performance expect to remain lackluster due to ongoing COVID-19 restrictions.

Citi has downgraded the stock to Sell with a TP of $1.55, also much lower than the previous TP of $3.18 due to deceleration of revenue growth and uncertainty of the trajectory of recovery of the value chain. Nanofilm’s plans to scale its production capacity across several markets are likely to mean front loaded gestation costs and put pressure on margins.

DBS also reduced their TP from $2.54 to $2.22 as earnings estimates were cut on weaker than expected revenue growth and macro headwinds.

Substantial downgrades in target prices tend to shake investors confidence and hence this could be one major reason why the share price fell.

Apple is not doing that well

It is common knowledge that one of Nanofilm’s major customer who they affectionately refer to as Customer Z is Apple. Although Apple is one the few bright spots left among the FAANG with overall revenue growing in the recent quarter, the company signalled that it would be more cautious with spending, cutting back on expenditures and slowing or freezing hiring.

iPhone sales fell short and also slowed down in China. Output of Apple iPhones at Foxconn may also slump as much as 30% in November due to tightening COVID-19 curbs in China and this may further impact Apple’s other suppliers.

What is Nanofilm’s turnaround plan?

Nanofilm has listed 4 strategic areas, namely, geographical diversification, new segment capabilities and product expansion, inorganic growth and a focus on R&D and product development.

The company has shared its intention to expand its production facilities in strategic locations such as in Vietnam as well as expand its business in green energy and hydrogen fuel. 

Nanofilm plans to establish a mega site on a land of approximately 40,000sqm in Hanoi, in the vicinity of the existing production facility in Tan Truong Industrial with the land expected to be acquired in 1Q23.

It has also announced the provision of Green Plating vacuum coating solutions to the new energy advanced batteries industry in China in a joint venture with Shenzhen Everwin Precision Tech Co.

Nanofilm is also committed to expending at least 5% of its revenue on R&D and these efforts are expected to deliver growth in all 3 of its key end markets of consumer, industry and new energy, with its growth strategy executed with multiple business models such as Coating as a Service, Value Chain Integration as well as Industrial Equipment and Component.

With these endeavors, Nanofilm targets to drive its revenue to $500 million and its profit to $100 million by 2025, from $246 million and $62 million respectively in 2021. This is a compounded annual growth rate of 19.4% and 12.6% for its revenue and profit respectively.

So is it an opportunity to acquire the stock?

In October 2021, when Dr Shi was interviewed after the share price plummeted from its highs of more nearly $6.7 in Aug 2021, He said, in reference to the stock’s sharp fall as a result of the earnings disappointment.

“We are here for the long term, not the short term. That’s the fundamental mentality. So I don’t really overthink the short-term stuff. My philosophy is to do the right thing (that) can withstand the test of history“

Dr Shi Xu

Since the interview in October 2021, the stock has continued on its downwards trend, falling 62% in the past year and 78% from its highs!

Nanofilm is a company that is focused on growth at a reasonable pace. Growth has slowed in the near term, much of it can be attributed to the macro headwinds impacting consumer demand. Apple, its biggest customer has also not been immune to these headwinds. To make things worse, analyst downgrades have also acted as an anchor against its share price.

But Nanofilm has a plan, with growth strategy in multiple strategic areas and also a commitment to focus on R&D to further build its capabilities. With the investments it has laid out, it has also set both a revenue and profit target for 2025, which can be considered a medium term target.

As the near term headwinds are likely to continue to persist, investors who have faith in Nanofilm’s plans and are keen to purchase the stock should take a medium term perspective and space out their investments accordingly.