Singapore’s exchange is well-known for being a REIT hub with many investors focusing on dividends.
There is less recognition for the bourse concerning growth stocks as most investors will look to either the US or Hong Kong for such investment opportunities.
Nanofilm Technologies (SGX: MZH), however, is one such growth stock.
Listed back in October 2020 at a share price of S$2.59, the group, which makes advanced materials and nano products for the consumer electronics, communications, and automotive industries, saw its IPO heavily oversubscribed by 23.3 times.
Nanofilm’s shares shot up to as high as S$6.53 back in July 2021 but have now shrivelled nearly 79% to the current S$1.38.
Can the group regain its lustre again and see its shares reclaim their former glory?
Unsteady revenue and volatile profits
Nanofilm started on the right foot in 2020 when it reported a sharp 52.8% year-on-year jump in revenue for that year.
2020’s net profit also surged 61.1% year on year to S$57.6 million, with the net profit margin expanding by 2.4 percentage points to 26.6%.
This momentum was maintained somewhat when the technology group reported its 2021 results.
Revenue continued its upward climb, rising 13% year on year to S$246.7 million while net profit improved by 8% year-on-year to S$62.2 million.
Net margin, however, slipped slightly to 25.3%.
2022 saw revenue and net profit start to wobble as the former dipped by 3.8% year on year while the latter plunged by 30.8% year on year.
Gary Ho, CEO of Nanofilm, commented on severe macroeconomic headwinds along with a “challenging operating environment” for the group.
For 2022, the group’s Advanced Materials business unit (AMBU), its largest revenue contributor, saw a 3.6% year-on-year dip in revenue with a shift in customers’ capital expenditure requirements.
The sharp plunge in profits caught investors by surprise and caused the share price to plunge as net profit for 2022 had fallen to a level below 2020’s profit of S$57.6 million.
A weak 1Q 2023 business update
The situation has not improved with Nanofilm’s recently-released fiscal 2023’s first quarter (1Q 2023) business update.
The group reported that revenue had plunged 40% year-on-year, coming in at S$33 million.
The reasons?
1Q 2023 was impacted by China’s soft recovery since its reopening and is also a cyclical low because of the 3C (computer, communications, and consumer electronics) production cycle.
AMBU, which took up three-quarters of the group’s revenue, also experienced a strong quarter in 1Q 2022 because of carry-forward production from 4Q 2021.
Hence, the comparative figures make the performance of this position look much weaker.
A victim of the semiconductor cycle
Semiconductor-related stocks have been badly hit by waning demand for devices and electronics.
Part of the reason is due to the surge in inflation and interest rates that have dampened consumer demand and crimped spending.
The pandemic-induced surge in demand has also lessened considerably as economies resume some semblance of normalcy.
Nanofilm has disclosed a few of its key customers in its prospectus such as Microsoft (NASDAQ: MSFT), Sunny Optical (HKSE: 2382), and Canon Inc (TYO: 7751).
Furthermore, it has several undisclosed customers which include an e-commerce company, an electronics components manufacturer, and a global technology company that sells consumer electronics.
The presence of these customers may explain why its Nanofabrication business unit and Industrial Equipment business unit, which together make up a quarter of group revenue, are also seeing softer demand as customers cut back on capital expenditures.
Continued investments
Despite the tough environment, Nanofilm continues to expand its production facilities.
The group secured a new site in Osaka of around 900 square metres and is undergoing renovation.
Nanofilm is also looking for a site in Europe to take advantage of opportunities in the industrial segment.
Concurrently, the group is also expanding its green plating business with the initial batch of equipment to be commissioned in the second half of 2023.
It is also making steady progress in its hydrogen energy business and is on track for mass production later this year.
Get Smart: A possible recovery in the second half
There could be a rebound in semiconductor spending and investments by the later part of this year as the supply-demand imbalance corrects itself.
If this happens, Nanofilm could see its business prospects improve.
Meanwhile, the group is busy building its capabilities and preparing itself for the eventual recovery.
Nanofilm may be facing headwinds now, but its expertise in nanotechnology and its myriad capabilities position it well for the future.
Investors, though, need to be patient.
Better financial numbers may only start trickling in next year should a recovery occur in late 2023.
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Disclosure: Royston Yang does not own shares in any of the companies mentioned.
