Nanoco (Quantum Dot Nano-Materials Manufacture) Ready to Roll


QDOTS imagesCAKXSY1K 8Quantum dots developer’s Dow deal a game-changer for digital displays.

The Manchester University spin-off develops and makes quantum dots, tiny, fluorescent semiconductors used to make next-generation electronics. Nanoco’s IP-protected manufacturing method avoids cadmium, a heavy metal banned in many countries, and its trademarked NanoDot technology is used in several applications; solid state lighting, solar panels, even some medical devices.

As we originally predicted, it is in digital displays where the biggest breakthrough has come thanks to a landmark global licensing deal with US giant Dow Chemical (DOW:NYSE) at the start of the year (23 Jan). Quantum dot LED (QLED) displays are set to become the next big trend in consumer electronics.

NANOCO GROUP - Comparison Line Chart (Rebased to first)

Market potential

A report in March from technology analyst Wintergreen Research predicts the QLED display market will hit $6.4 billion by 2019 from a standing start just a couple of years back. The report backs up our theory that once manufacturers learn to integrate quantum dots into products they will be falling over themselves to do so thanks to the technology’s lower energy use and cheaper manufacturing cost.

According to Wintergreen, Samsung (005930:KS) reckons QLED displays could cost half as much as LCD or organic LED (OLED) panels. It also estimates 80% better energy efficiency, for thinner devices with a sharper display.

TVs are a starting point, but expect QLED in smartphones and tablets too as device manufacturers desperately seek ways to defend market share in high margin top-of-the-range products.

As analysts at house broker Canaccord Genuity point out, an increasing number of industry participants share Dow Chemical’s and Nanoco’s confidence that quantum dots are on the cusp of widespread adoption in a $100 billion display market.

Sony (6758:T) already has launched the world’s first quantum dot TV using cadmium-based technology from Nanoco’s privately owned rival QD Vision. But since sales will be barred in many major markets, the US and European Union, mass market products look destined to follow the cadmium-free technology route. Nanoco is already expanding its factory in Runcorn, Cheshire from an annual 25kg capacity to 70kg, beyond initial plans to expand it to 40kg. It is rumoured to be eyeing a brand new set-up in Asia post the Dow deal, with Korea the hot tip.

Liberum sees year to July royalty-based revenues of £4 million rising to £4.6 million in 2014, before the really exciting sales flood in, hitting over £100 million inside five years from a licensing/royalty business model similar to that of UK chip champ ARM (ARM). That would imply over £90 million pre-tax profit thanks to 88% operating margins.

With cash burn running at around £5.5 million a year, its £12.5 million of cash pile should mean Nanoco is unlikely to tap investors for fresh funds. Liberum sees the shares hitting 260p over the next year, while Canaccord is even more optimistic, setting a 275p target price. That could be just scratching the surface of the shares’ longer-term profits potential.

 

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