In many ways, Nanofilm Technologies International is the kind of company that will be held up as a poster child by Singapore Inc’s to attract talent and grow the economy and the capital markets.
Founder Shi Xu, who was from China, was a tenured professor at Nanyang Technological University. With some 100 published papers, Shi could have just settled for a stable and comfortable academic career. However, he saw the potential to apply his R&D efforts in nanotechnology in the commercial world.
“I find myself good at doing things that are more practical, putting multiple things together, combining them into something that works, creating this synergy from multiple disciplines,” Shi tells The Edge Singapore in an interview in 2017, when he won that year’s EY Entrepreneur of the Year award.
From within the labs of the university, the company was formed and spun off. This was back in the 1990s, before there was a concerted effort by the government and the universities to commercialise the patents of the academics, as part of an overall economic growth strategy.
Not all start-ups born from within the universities survived. Those who tried to get off the ground may not become sizeable, viable companies for reasons ranging from funding to market access. And certainly, none have been like Nanofilm to find a niche, grow and attract big-name investors like Temasek, and eventually, list on the Singapore Exchange at a time when Hong Kong and US markets are the choice of other flashier homegrown tech companies.
Within the broader technology space, Nanofilm has occupied a strong niche. Simply put, Nanofilm has a proprietary technology to apply a nano-thin layer of carbon coating on surfaces of parts where resistance to wear and tear is needed. Besides doing the coating for its clients, Nanofilm sells the machines used to apply the coatings too.
In its draft prospectus filed on Oct 16, the company tried to describe what its technology can do for products such as smartphones and computers, instead of just filling the pages with technical jargon. For example, it notes that smartphones, regularly handled by users, experience form high wear, tear, scratches and even discolouration. By applying the protective layer using technology provided by Nanofilm, the devices will become more durable as they take on anti-fingerprint, wear and scratch resistance properties.
“By using our advanced materials to coat the hinges and joints of laptops, we are able to provide high wear resistance, corrosion resistance and consistency in colour across devices,” adds the company.
The company now has more than 300 customers from different industries. Many of these customers have been buying from Nanofilm for years. Fuji Xerox, for one, has a 14-year-long relationship with Nanofilm. Nikon and Canon are both 13 years and counting, Sunny Optical 12 years, 11 years with TPR while Riken and Ricoh each have 10 years. So does another client, known only as “Customer W”. Meanwhile, software giant Microsoft, which has grown its hardware business in recent years, has five years while Huawei Technologies — which is one of the top three global markers of smartphones — has four years.
“We believe that the likelihood of our key customers switching to alternative solutions providers, to the extent there are any, is relatively low as we benefit from high barriers to entry. Our customers’ stickiness is evidenced by us being the single-source supplier, across a number of mission-critical applications, to nine out of our top 10 major customers (comprising four direct customers and five end-customers) for the nanotechnology solutions we supply to them,” the company states in its prospectus.
According to research firm Frost & Sullivan, the global market size for advanced materials is US$19.1 billion ($25.8 billion) in 2019. This market is seen to grow at a compounded annual growth rate of 7.5% between 2020 and 2023 to reach US$24.3 billion by 2023. Frost & Sullivan, in a report commissioned for the IPO, notes that Nanofilm is a leading provider of nanotechnology solutions in Asia.
The company now runs four production facilities, one each in Singapore, Shanghai and Yizheng in China and Hai Duong in Vietnam. Part of the proceeds from the listing is to help fund an additional plant in Shanghai, which is expected to commence operations by the first quarter of 2021. By then, the company will boost its production capacity with 200 additional coating machines.
Apart from Shi, his senior management team comes from largely engineering and manufacturing backgrounds. CEO Lee Liang Huang was previously group CEO of contract manufacturer MI Holdings, COO Ricky Tan Chong Ho was with Hitachi Global Storage Technologies while chief commercial officer Gary Ho Hock Yong was with Hi-P International. In addition, Nanofilm’s lead independent director is James Rowan, former CEO of Dyson. Prior to joining the UK company known for its hair dryers and vacuum cleaners, and an attempt at building electric cars, he held senior positions at Research In Motion (now BlackBerry) and Celestica, one of the leading contract manufacturers with its headquarters in Canada.
According to the prospectus, there are more than a dozen cornerstone investors involved. They are Temasek Holdings subsidiary Venezio Investments, Employees Provident Fund Board, Nikko Asset Management Asia, Aberdeen Standard Investments, Avanda Investment Management, JPMorgan Asset Management, Credit Suisse, SMALLCAP World Fund and American Funds Insurance Series — Global Small Capitalization Fund (which are funds advised by Capital Research and Management Company), Principal Asset Management, Eastspring Investments, AIA Investment Management, another Temasek subsidiary Fullerton Fund Management and Lion Global Investors. Together, they are taking up just over 104.2 million cornerstone shares, which consists of around 77.2 million new shares and around 27 million vendor shares.
Nanofilm has no fixed dividend policy for now but intends to pay at least 20% of its earnings for FY2021 ending Dec 31, 2021.
The company’s earnings is on the uptrend. For 1HFY2020 ended June 30, revenue was up 40.9% y-o-y to $77.8 million. Earnings in the same period increased by a faster pace of 62.3% y-o-y to $18.5 million.
Apart from the higher volume of sales, Nanofilm has been making better margins too. For 1HFY2020, Nanofilm’s gross profit margin was 52.6% — up from the 51.8% made for the six months ended June 30, 2019, even though Covid-19 was wrecking economies, as well as higher labour costs in China.
As indicated in the prospectus,Nanofilm was able to improve its margins during this period because of its operations leverage as a result of economies of scale arising from higher levels of production, increased efficiency of its operations through automation and improved manufacturing work processes, while maintaining its fixed overheads at its manufacturing plants.
Even as the company generates higher turnover, it has been boosting its spending on research and development, as it deems the technological advantage “critical” to its business. For FY2017, FY2018 and FY2019, the proportion of revenue spent on R&D in those respective years were 4.4%, 5.4% and 6.4%. For 1HFY2020, it spent an amount equal to 7.2% of its revenue on R&D.
In its prospectus, the company states that there’s “significant” room to capture a bigger market in its existing markets by selling more to existing markets and winning over new customers. It is upbeat on the smartphone manufacturing sector — where there is a large base volume — as well as printing, imaging and precision engineering.
As at June 30, Nanofilm’s net cash was $14.9 million, and its gearing ratio was 37%. If the convertible notes are excluded, that ratio is 18.8%. According to the company, when necessary, it can take on debt and fund future growth.
