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Nanofilm down 30% – buy the dip or catch a falling knife?

SG, Stocks

Written by:

Bryan Tan

Who would expect such volatility at home?

If you took a position in nanofilm anywhere near its $6+ highs, about a third of your capital would be gone by now. This comes as much of a surprise to me as it is not often that we see such intense volatility in SGX stocks. Sure we’ve had some intense rallies in the past with Oceanus, Hyphens Pharma and Jutian Chemical, but I definitely wouldn’t classify Nanofilm in the same category as them.

This crash comes amidst a series of bad news one after another. While I find some factors to be negligible, others do deserve our attention as this may be the start of a bear rally for the company.


TLDR : What does Nanofilm(SGX : MZH) do?

“We are a leading provider of nanotechnology solutions in Asia, leveraging our proprietary technologies, our core competencies in R&D, engineering and production, to provide technology-based solutions across a wide range of industries.”

Reference to the Product Highlights Sheet from Nanofilm’s IPO

Nanofilm’s latest series of bad news

Bad news surfaces all the time. In the macroenvironment, every business will face similar issues such as supply chain issues (eg. chip shortages), inflation or even demand-related issues. Investors don’t usually bother too much about most of these “day to day” problems.

However, Nanofilm’s latest problems look a little more serious and we should take a closer look at current events:

1) Slowing Growth Rates – Bottomline Reveue and Gross Profit

I would say that as a growth stock, Nanofilm’s stock price is highly reactive to any changes in their half-yearly reports.

What investors want to see is continued growth in all aspects from revenue to profit. Conversely, stagnating growth rates tend to scare investors.

Like most growth stocks, once growth rates show signs of slowing, alarms bells start going off and investors tend to react. This was exactly what happened in their recent results overview 1H2021.

I wouldn’t say these results are disappointing but stocks like Nanofilm have to ensure that their bottom line financials continue to keep up the pace, or else investors may lose heart.

2) Problems at Home – Management Instability

As with any other company, what they cannot control are changes in the macroenvironment but what they can control are matters at home.

In this case, I can’t help but feel extremely uneasy with the departure of both their CEO and COO in such a short period of time. In all honestly, I try to find some “bit of good” in these departures but there seems to be something amiss. The market seems to think so too with the 30% sell-off as proof of their dissatisfaction with current events.

On the company’s end, they have come forward to provide some commentary on the departure of their COO. I leave it to readers to draw their own conclusion on them.

Speaking at a results briefing on Monday, deputy chief executive Gian Yi Hsen said COO Ricky Tan’s resignation was “part and parcel of a corporate restructuring under which a business unit head is appointed to directly oversee each division of the company”.

“This will help to drive and accelerate business growth more effectively,” Mr Gian said, adding that there is no need for an additional layer of reporting under the COO and that Mr Tan’s departure will have “minimal impact” on NanoFilm’s operations

The Straits Times, 16th August 2021

Buy the dip or catch a falling knife?

It is indeed tricky.

On one hand, I’m firm that the current sell-off is indeed an over-reaction on the part of the market. At about 30% off its highs, this definitely presents a good entry opportunity. What I’m less optimistic about are the management issues, as it could be a sign of trouble brewing.

To enter a position on weaknesses in a company such as slower earnings is one thing, but to buy into a company whose top executives are leaving is another.

Commentary aside, let’s take a look at what the technicals say:

The tricky thing about newly listed stocks is the lack of historical data. Most indicators don’t work well as technical analysis is all about analyzing patterns in the past, which may give us an indication of the future.

In the case of Nanofilm, I wouldn’t recommend using the Moving Average Indicator as there just aren’t enough time periods for the indicator to work with. Instead, the old-school method of plotting structural support levels could give us some direction:

With the past week of selling, we’ve seen 3 major support levels being broken. $5.15 was broken easily last Monday with the $4.60 support and $4.30 support failing to hold as well. Much to my surprise, even the physiological support level of $4 was broken.

The only support level firm at this point is $3.80 and it is also at that point where we see an almost equal amount of buyers coming in to fill the gap.

Given how oversold the stock is at the moment, it is likely we will see the stock rebound a little higher in the short term.

However, in the longer term, given the degree of the selling pressure, I think that the odds are against us to think that this is a correction.

Notable events: What happened after Nanofilm’s sell off?

The company has been aggressively buying back shares the past week with total share buyback amounting to approx. $20M. Other events worthy of note would be that Capital Group has trimmed their exposure to Nanofilm, reducing their stake by about 0.5% from 7.09% to the current 6.61%. I would leave the interpretation of such actions to the individual reader.

My take

Moving forward, my overall take on recent events is that this is more than a correction. Even with other innovative plans set in motion, I’m not certain that there will be enough new investors coming in to pick up the pieces.

A short-term swing trade may work but for a reversal back to the upside, I believe a stronger catalyst would need to present itself.

Well, if you prefer to invest in tech stocks that have the potential to grow fast steadily, you might find Cheng’s approach interesting. At the point of writing, he and his students are up ~40+% YTD.

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