Core views:

Favored Nanotechnology is the domestic leading plasma enhanced chemical vapor depositor (PECVD) polymerized nanofilm manufacturer with a sophisticated technology system and superior product performance indicators. It has successfully entered the supply chains of top tech names such as Huawei, Xiaomi, Apple, etc. With the commissioning of the fundraising project supported by IPO proceeds, coupled with the likely global demand scale of c. Rmb7.5bn for PECVD polymerized nanofilm in 2025, the Company stands well to create growth upside in the new energy vehicle (NEV), photovoltaic (PV) industries backed by its new product series to post high earnings growth. We assign a market cap of Rmb10.2bn for 2023, corresponding to a target price of Rmb30 on 50x 2023E PE, and initiate coverage with a “BUY” rating.

Abstract:

Company profile: Consumer electronics PECVD nanofilm leader in diversified transformation.

Favored Nanotechnology is a leading PECVD polymerized nanofilm manufacturer which mainly provides nanofilm products and coating services, and its main products include single-layer liquid resistant nanofilm, double-layer liquid and gas proof nanofilm, multi-layer corrosion resistant nanofilm. It has successfully entered the supply chains of top tech names such as Huawei, Xiaomi, Apple, vivo, Amazon, etc. With PECVD and plasma polymerization technology as the core, the Company has the advantages of high coating efficiency, wide range of film substrates, etc. Since 2019, it has started to extend its business from the consumer electronics sector to other application fields such as security equipment, automotive and so on.

Industry demand: PECVD nanofilm may create a broad market as the nano materials develop quickly.

We predict that the global PECVD polymerized nanofilm market will likely reach Rmb7.38bn in 2025, corresponding to a CAGR of 33.5% in 2022-25. In a breakdown: 1) The market size for consumer electronics may be Rmb3.13bn with a 5.8% CAGR in 2022-25; 2) That for NEV is Rmb2.69bn with an 80.5% CAGR in 2022-25; 3) That for PV is Rmb1.56bn.

Competitive landscape: PECVD coating technology presents an oligopolistic pattern globally, and market share of Favored Nanotech has increased significantly.

PECVD as a new high-performance route in the coating protection area, has high technical and equipment barriers. The main players in the field across the world are Favored Nanotech, P2i, HZO and Europlasma, presenting a competitive pattern of oligarch. Among them, Favored Nanotech has: 1) huge customer base in consumer electronics field; 2) advanced process technology, high-level coating uniformity, controllable film thickness and high coating efficiency; 3) excellent product quality and performance indicators; and 4) independent and controllable equipment. Therefore, the Company’s market share has increased continuously in recent years. It took up 13% and 7% of the global mobile phone coating and true wireless stereo (TWS) headset coating market shares, respectively, in 2021. We expect that after the commissioning of the Company’s Wuxi project, the above figures may increase to 45% and 12%, respectively, in 2025.

Investment highlights: Core technology leadership + downstream applications to leverage the blue ocean market + high stickiness of global head technology customers.

1) In recent years, Favored Nanotech has continued to invest in R&D, and has achieved an outstanding result of patents translating into earnings. It has formed a three-in-one core technology system of equipment manufacturing, material formulating and coating services. The performance of its products is leading the world; 2) The penetration rate of PECVD nanofilm in consumer electronics protective layers will continue to rise, and PECVD nanofilm has a wide range of applications in automotive, optical instruments and outdoor electronics, etc. Driven by the production target of 240 coating equipment per year, we expect the Company’s capacity to achieve a 34% CAGR in 2022-25. The above factors mentioned will jointly promote the Company’s new and old products to fully tap the downstream blue ocean market; 3) Favored Nanotech provides full-process engineering services and has a strong bond with global head tech enterprises through long-cycle customized services, presenting high customer engagement and high performance security.

Potential risks: Relatively concentrated downstream application fields; high customer concentration; less-than-expected penetration increase of PECVD nanofilm in the downstream fields; more-than-expected iteration speed of the technologies; high proportion of foreign raw materials; slower-than-expected project construction progress.

Investment strategy: Favored Nanotech is the domestic leading PECVD polymerized nanofilm manufacturer, which will likely see earnings ramp-up upon the commissioning of the fundraised projects and the realization of applications in the emerging fields in the future. The Company’s products have obvious technology advantages with strong bargaining power. As the effect of equity payment on management expenses may come to an ending in 2023, we predict the Company’s 2022E/23E/24E attributable net profit (ANP) to be Rmb45mn/ 202mn/300mn, corresponding to EPS forecast of Rmb0.13/0.60/0.89. Based on the Wind consensus estimates of 0.55x 2023E PEG for comparable companies including Shihua New Material (688093.SH) and Sidike New Material (300806.SZ) in the functional material manufacturing field (electronic manufacturing as its downstream link), and based on our estimate of a 97.40% ANP CAGR for the Company over 2021-24, we arrive at a corresponding valuation multiple of 54x 2023E PE. We assign a market cap of Rmb10.2bn for 2023, corresponding to a target price of Rmb30 on 50x 2023E PE out of prudence, and initiate coverage with a “BUY” rating.