Nanofilm’s recent initial public offering made it Singapore’s latest unicorn, with a valuation of US$1.2 billion. The IPO raising up to S$510 million (US$375 million), and Reuters reported that it was Singapore’s biggest listing in at least six years.
But for many outside the deep-tech space, it can seem like Nanofilm’s success sprung out of nowhere. Many of the most prominent tech companies in Southeast Asia have not managed to go public.
Shi Xu, chief executive at Nanofilm Technologies International / Photo credit: Nanofilm
It has been a long journey for Nanofilm – over 20 years, to be exact. The nanotechnology company was spun off from Singapore’s Nanyang Technological University (NTU) in 1999.
The Nanofilm IPO proves that despite its high risk, “deep tech can also bring about high returns,” says Lim Jui, CEO of SGInnovate, a Singapore government-owned firm that invests in deep-tech startups.
Nanofilm also possesses a quality that’s elusive among tech companies: profitability. In 2019, it earned close to S$40 million in profits before income tax – a 14% increase compared to the previous year.
The company is poised for more growth as it offers more than just advanced materials. But being a deep-tech company that’s focused on business-to-business presents its own set of challenges.
Beyond advanced materials
Nanofilm’s bread and butter is advanced materials – specifically, coating. While these are largely invisible to the end consumer, they’re actually found on many electronic devices that people use daily, says Lim.
Indeed, Nanofilm’s customers include the likes of Fuji Xerox, Microsoft, and Huawei. These companies use Nanofilm’s products for consumer electronics (such as the logos on smartphones and tablets, or smartwatch bands), printer components, and piston rings.
Its coatings make products more durable or more aesthetically pleasing. For instance, smartwatch bands get discolored or scratched easily as they undergo a lot of movement and rubbing when worn. Nanofilm’s coating helps prevent damage like that.
Its Tac-On formulation is among the “hardest materials in the world known to mankind,” comparable to diamonds and graphene, according to a Frost and Sullivan report that Nanofilm cited.
Examples of applications for Nanofilm’s solutions / Photo credit: Nanofilm
The FCVA technology behind Tac-On had been a research focus for Shi Xu, Nanofilm’s founder and executive chairman, during his stint at NTU.
Shi and his wife had moved to Singapore from China to pursue careers in the academe. By the time Nanofilm was founded in 1999, he was an associate professor at the university’s School of Electrical and Electronic Engineering.
He also ran a research laboratory with S$4 million in funding and multiple patents. Shi’s work, particularly FCVA technology, caught the attention of Japanese electronics conglomerate Hitachi, which wanted to use the material for its hard drives.
NTU decided to spin off the technology into a standalone company. Nanofilm was born, with S$300,000 in capital and Shi at the helm.
But Nanofilm’s journey has not always been smooth sailing. It hit a rough patch in 2004, when the hard-drive industry consolidated.
That affected the company’s key customers, which meant plummeting revenues. Shi took a 60% pay cut as Nanofilm struggled to pay employees, before eventually finding new revenue streams.
Nanofilm was spun off from Singapore’s Nanyang Technological University. / Photo credit: Supanut Arunoprayote
Nanofilm has since diversified. Apart from advanced materials, the company now makes nanoproducts – or microscopic-sized devices – and industrial equipment for clients.
Still, the advanced materials unit makes up 77% or S$109.6 million of overall revenue in 2019, according to the company’s financial statement.
About 30% of revenue (S$43.2 million) comes from advanced materials for computers, while 22.5% (S$32.2 million) is generated by advanced materials for wearables and accessories. Smartphones make up S$13.6 million (9.6%).
In the beginning, many of Nanofilm’s key customers were Japanese companies. It currently has long-standing relationships with Fuji Xerox (14 years), Nikon (13 years), Canon (13 years), and Ricoh (13 years).
But in the past few years, Nanofilm’s China subsidiaries have made up the bulk of its revenue, contributing 66.6% of the total compared to 12.5% from Japan.
Can Nanofilm’s IPO spur investments in deep tech?
Edwin Teo, an associate professor at NTU, believes that Nanofilm is slated for “substantial” growth, in line with the rest of the advanced materials industry. With the IPO, Nanofilm aims to ramp up market share in industries such as fast-moving consumer goods/personal grooming, automotives, optical lenses, and new energy.
The company also aims to get more embedded with existing customers such as Microsoft. As a logo supplier of the US tech titan’s Surface tablets, Nanofilm is in charge of end-to-end production: from laser cutting each stainless steel piece to applying advanced materials on each logo.
However, Nanofilm suffers from concentration risk. In particular, its single biggest customer – which the company does not disclose – accounts for between 45% to 51% of its revenue in the past three years.
When customers are hit by adverse events, Nanofilm would also be vulnerable, as the 2004 hard-drive industry consoliation showed.
Another risk is third-party claims on intellectual property infringement, though Nanofilm says it is not aware of or has dealt with claims of that nature. But even if such claims were untrue, they could still hit its operations.
There could be many other potential deep-tech unicorns here, just waiting to be uncovered. But it may be a long and winding journey.
As always, there’s the threat of competition, making investments in research and development necessary. NTU’s Teo observes that more startups are taking applied research directly down the commercial path.
That aside, Nanofilm’s IPO has set Southeast Asia’s tech scene abuzz, though any company outside of the typical internet or mobile app space will likely need to look beyond the region to raise substantial funding, as is the case for digital therapeutics firm Biofourmis and cancer-focused medtech startup Mirxes.
“Deep-tech companies require a much longer time to market,” says SGInnovate’s Lim. “This also means a typically higher capital requirement and in-depth expertise. Traditional roadmaps for business models or market conquest may not apply.”
Will this IPO lead to more eyeballs – and money – for the deep-tech space? Lim says that Nanofilm has shown a pathway to success for deep-tech startups, a positive sign considering the research capabilities of Singapore’s universities.
“[It] suggests that there could be many other potential deep-tech unicorns here, just waiting to be uncovered,” he observes. “But it may be a long and winding journey.”
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