DBS downgrade

Order momentum slower than expected

Expecting a weak 1H23.  On the back of the macro uncertainties which have affected demand, especially for consumer electronics, 2Q23 for Nanofilm is still expected to be weak but better than 1Q23. For 1Q23, Nanofilm reported a 40% y-o-y drop in revenue to S$33m. Overall, 1H23 revenue is expected to be much weaker than the S$111.2m in revenue recorded for 1H22, as 1H22 benefitted from the spillover of the positive impact from production that was carried forward from 4Q21, which was affected by the supply chain disruptions.

 

2H23 recovery intact, but momentum is slower than expected.  Based on our channel checks, order momentum only saw a slight improvement starting June 2023, hence 2Q23 is still expected to be weak. 2H23 recovery is intact, but customers are still cautious and only increasing production at a moderate pace. Furthermore, as the supply chain disruptions have almost fully subsided, it is not necessary to ramp up production just to keep a high level of inventory.

Overall, the order momentum is slower than anticipated, as demand for consumer electronics is still fragile, especially for new products. 

 

Bright spots for precision engineering, printing & imaging, and automotive,  but these segments are only expected to contribute about 20% to total revenue, with the bulk coming from the 3C segment. 

 

Trade diversification in the works.  The group&rsquo s Vietnam plant is targeted for completion this year. With the completion of this plant, we would expect the group to shift some of the production to Vietnam, and possibly other locations outside China, in view of the trade diversification trend in place on the back of the geopolitical tensions and the need to build a resilient supply chain.

 

Steep cut in earnings downgrade to FULLY VALUED, from HOLD, to factor in near-term challenges and slow order momentum.  We have cut FY23F/FY24F earnings by 58%/32% to factor in the weaker-than-expected demand recovery. Our target price is reduced to S$1.00 (S$1.33 previously), as we rolled forward to FY24F earnings, but it is still pegged to c.16x PE, c.1.5SD of its average since listing. Given the weak outlook, we downgrade to FULLY VALUED, from HOLD. 

 

Risks to management&rsquo s longer term revenue and net profit target.  With the delayed recovery, we believe there are heightened risks that the management&rsquo s target to achieve revenue of S$500m and net profit of S$100m by 2025 may not be met. In the longer term, the various initiatives that were put in place, including the entry into the energy segment &ndash i.e., hydrogen fuel cell, advanced EV battery, and solar cell &ndash are still intact, but significant contributions could only come in beyond 2025.