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DBS: Nanofilm Technologies International Ltd – Buy Target Price $3.21

News Analysis: Forms China JV to target EV market

Forms China JV to target EV market.Nanofilm has entered into a joint venture contract to set up a 60:30:10 JV in Zigong, Sichuan province, in the PRC, with Shenzhen Everwin Precision Technology Co., Ltd and Shanghai Hongshi Enterprise Management Partnership.

The JV, Sichuan Apex Technologies (ApexTech) will have an initial registered capital of RMB50m.  ApexTech will develop and provide proprietary advanced materials vacuum coating solutions for battery components and systems in electric vehicles (EV) and new energy storage applications in China. 

About Everwin. Everwin, founded on 17 July 2001 and listed on the Shenzhen Stock Exchange, is a high-tech enterprise with a proven track record in developing, producing and selling intelligent terminal components for consumer electronics, components for new energy vehicles, industrial robots and automation system integration. Hongshi is a related party of Everwin as its shareholders include Everwin’s employees.

Setting up production facilities in Sichuan, target initial production in 1H23, mass production in 2024. To maximise production and customer synergies with Everwin, ApexTech will set up its production facilities close to Everwin’s facility in Zigong, Sichuan. Utilising Nanofilm’s advanced vacuum coating solutions combined with Everwin’s manufacturing capabilities, ApexTech is targeting initial production in 1H23, and has plans to reach industrial scale mass production in 2024. Everwin has an established customer base with leading electric vehicle players, coupled with strong volume manufacturing and metal stamping capabilities. We expect some start-up losses in the initial stage but we believe in the longer term prospects that ApexTech can tap in the EV advanced battery business.

Huge addressable market with CAGR of 10%. The total addressable market (TAM) of advanced batteries for electric vehicles in China is estimated to be above 6.5m units, amounting to US$79 bn in 2023 and is growing at a compounded annual growth rate of 10% to reach US$156 bn in 2030, according to IEA. Electric vehicle penetration in China is expected to reach 42% in 2030, up from 14% as of end-2021. On the global front, EV sales is expected to reach 14.8m units in 2023, with battery costs amounting to about US$238.9bn.

Well-positioned to penetrate more industries, potentially replacing electroplating in the longer term. ApexTech will also be well-positioned to penetrate more industries and applications outside of electric vehicles and energy storage systems, potentially replacing electroplating in other domains over the longer term. The electroplating process is pollutive and hence there is a growing demand for more environmentally friendly coating solutions. With increasing focus on ESG, more companies are actively sourcing for alternative solutions. Nanofilm’s vacuum coating technology and solutions can replace traditional electroplating with a sustainable, scalable, cost-competitive and more environmentally friendly solution. 

Maintain BUY with TP of S$3.21.We continue to like Nanofilm for its superior vacuum coating technology that is applicable to many industries. Entry into new markets is one of the catalysts that we have highlighted. With the gradual recovery on the supply front and the investments made in the new Shanghai Plant 2, the group is progressing well to deliver growth. We project net earnings growth of 13% for FY22F and another 19% in FY23F. Share price has been weak recently, down c.15% over the last two weeks, on the back of the macro headwinds. At current valuation of 17.1x forward PE, the stock is trading near its trough valuation or at -1.5 SD from its average PE. Reiterate BUY with TP of S$3.21.    

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