Nanoco – Update

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Nanoco has continued rise from 130p, to touching 200p intraday and back down to 160p as interest has waned, sellers have appeared, and short interest by GMT Capital has grown. Having talked to the CEO, Michael Edelman, a few interesting details can be added to the general picture about the Dow deal, production process, competition, Nanoco’s strategy, LCD’s, LED’s and catalysts for the share price. (Last article here)

The Dow Deal

Not much more to say on this, apart from clarifying that royalty is in the upper quartile of comparable Biopharma deals, with broker estimates on this ranging from 15%-25% and the lower end of this range being described as conservative. Further announcements regarding volume agreements can be expected in the months time frame, specifically six months plus.

Production Process

The Company has previously stated that their process of crystal seeding versus dual injection, leads to higher uniformity in size of quantum dots. The process is more tunable as dual injection is difficult to control due to heat application and rapid quantum dot growth, and hence colour change. Ultimately crystal seeding is slower but more accurate, and analogously is your school chemistry string in a copper sulphate solution. Production will be scaled to industrial vats at the DOW facility.

Competition

Even though QD Vision and Nanosys are rivals, Nanoco does have a competitive advantage with the Cadmium free angle and ROHS standards. Significance of this being Samsung pulling its $20m investment on Cd QD’s. Sony is using QD Vision cadmium quantum dots and is making noise about reclamation of used products TV’s etc, as Firstsolar has done with its CdTe modules. It seems that Samsung and other potential users are not willing to take the risk of investing in a product, only to have it shelved or have restricted market access.

Although there are other competitors and technologies, there are a host of issues such as capex requirements for OLEDS, and for smaller competitors, a general lack of bargaining power, such as the US floated Quantum Materials Corp – they generally seem to be scrabbling in the wake of the industries successors with their own funding issues.

There is the risk that as the industry progresses, the standard model of increasing competition driving down margins will take effect, but a first mover advantage should net a disproportionate market share and barriers to switching supplier.

LCD’s

Probably the most interesting point is that the quantum dots packaged as film looks to be the most sensible route to incorporating them into LCD’s, as higher powered LED’s produce heat that reduces optical efficiency of quantum dots. This happens at about 80 deg, so if the QD’s were incorporated directly on an LED LCD, there would be performance issues. Placed as a film, they only reach 50 deg and operate well with a lifetime in excess of 50,000 hours.

LED’s

LED’s themselves also face the heat problem. The higher the wattage, the higher the temperature is, and so the need to have space between the quantum dots and the gallium nitride diode. QD Visions Nexus light, with a quantum dot cap, is the roadmap for high powered truer colour lighting systems (this product was later pulled). As quantum dots can be joined more closely to lower powered LED’s, there is the issue of use for these products, where the value added of truer colour doesn’t necessarily exist.

The unveiling of Osram in conjunction with Nanoco, is proof of interest from this space though. Osram themselves are struggling in the extremely competitive LED industry, with their value added coming from their consulting approach i.e. advising supermarkets on what lighting should go where to draw the eye and increase sales (making your tomatoes redder), an effective vertically integrated service in comparison to the eastern churning assembly lines. Cadmium free QD’s would be a synergistic fit with their business model on this point alone. On the Asian LED angle, Michael Edelman did not deny that Taiwanese firms, such as Cree and Epistar, are also, or have been, in discussions.

Strategy

Although there have been negotiations in the past with Japanese majors, there has been a weakening relationship as they are struggling for their own survival, at the expense of innovation – Sharp in particular. So Kisco, the Japanese distributor and stock holder, have essentially been left in the cold with the DOW deal and is perhaps the reason for their rapid selling on the 26th.

With regard to the lighting space and a tie up, they are keeping their options open on whether to go it alone, with the solar space on the backburner. If there is an offer too good to refuse – then that will be that.

Recent Financial Moves

The university Superannuation fund has been reducing its stake, Henderson have increased theirs and GMT Capital has been increasing their short. This latter has been sending a few shivers down PI’s spines.

GMT Capital is US hedge fund run by T. Claughus, a Rohm and Haas employee for 17 years and manager of the European polymer division, with a degree in Chemical Engineering and Harvard MBA. Rohm and Haas, a Fortune 500 Company, was taken over by DOW in 2009. So you have quite a knowledgeable industry insider on the bear track – the question being what is their reasoning. The size of the bet is small so far in relation to the total size of the fund, so it could be stab in the dark purely on the present revenue basis and lull between expected newsflow, or the precursor to stake building of a weightier position on an expected trend to commoditisation and oversupply, or a downright negative opinion on the hopes of the technology. Ultimately you just can’t tell, but the latter explanations seem premature and high risk.

Furthermore, the recent selling by the Japanese Kisco could be signalling troubled waters, but another explanation is their isolation from the Company with its switch to Korean manufacturers. Henderson are clearly on the bull track – holding almost 10% of the shares after another bout of recent stake building.

Conclusion

For the time being, Nanoco seems to have all the ingredients to make it the front runner in exciting revolution of the visual display and lighting market. The downside is with scaling issues and the usual risks of bringing a new product to market. There is also competition, but the potential news flow in six months plus for volumes to the Koreans, via Dow, should net the Company a sizeable first mover advantage and fully allay fears on the heady p/e & p/s valuations. At present, the short position by GMT and its perception by the market make for a choppy trading outlook especially due to the CEO’s background, and that’s where there’s a difficult decision to make – trade in and out on the dips and peaks, or hold fast in the belief that the three brokers of Nomura, Canaccord & Liberum, are conservatively right – all with TP’s above 250p.

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