ANO - Advance Nanotek Limited

[Ronchong]

Okay, let me just start by saying that this idea is not mine. I shamelessly leeched this off VIC when one of the comment bumped it up to the top of the website.

 

I would also like to add that I haven't proven myself to be very good at science while i was in school so even though I have done my fair bit of side research, I couldnt understand the bulk of what they are saying and you probably shouldnt listen to me.

 

If you are still reading, ANO is one of the most intriguing ideas I have come across this year. Valuation has almost cut in half since the original post by the VIC member.

 

Instead of rehashing the wrong thing, I shall just post the link to the original write up and lay out a few of the key points below.

https://valueinvestorsclub.com/idea/Advance_Nanotek_Limited/7700316588

 

Good

 

1) Profitable. Not your loss-making bio tech lottery ticket. Revenue grew at 100% over the past year and is expected to continue growing at a high rate.

 

2) ROE of 30% even without using debt.

 

3) Aligned major shareholder (previous company returned 23.7% since 2000) with track record took control of the company & turned it around. Major shareholder continues to buy share on the open market even as of recent. Current stake in the company is almost 60% of his public holdings ($90M out of $150M) and a substantial portion of his net worth.

 

4) Management build the company from the ground up with a cost-conscious culture after taking over (reduce SG&A by 50% after take over from FY2012 to FY2014, major shareholder take no salary after joining board in 2015, etc) and was not afraid to take bold decision (let go of 15 out of 16 employees at the Perth operations when previous employees thought they couldn't be fired since nobody knew what they did). Turns out the old management, which comprised of researchers, were not really interested in the business and couldnt commercialise the technology successfully.

 

5) Customer-centric and long term focused. Moved and improved production facility that lowered cost of production 30% - 50% when compared to competitors. Instead of keeping the savings, decided to pass the cost savings to clients instead, building relationship & further enhancing competitiveness.

 

6) Huge chemist network that assist with formulation and sales, reducing the cost and burden of formulation on brands. Would think this is similar to private branding? (Previously, ANO spent about $1m and more in a year just on sunscreen formulation alone. Now, chemist can do the formulation in a matter of hours for less than $10k)

 

7) Runs the company lean and i mean really lean. Did a rights issue to build up new production facility and a few months later released an announcement (Pre-corona) stating that they plan to do a capital distribution back to shareholders at the end of the year after profits flow back.

 

8) Has a portfolio of other patents that UWA shoved into the company during inception that management values at $100M - $200M though I highly doubt they would be able to extract any value out of it.

 

9) Apple recently submitted a patent that involves the use of ANO's next product, Alusion, that is currently being licensed by Merck.

 

10) Promising technology - key advantages of ANO patented MCP (Mechanochemical Processing) are :

 

Control of average particle size (nanoscale to micron-sized), narrow particle size distribution, low levels of agglomeration, control of chemical composition, including doping, unique morphologies possible, eg plate-like or rod-like particles.

 

What's the good in all this? Good question. I dont know either (told ya so).

 

However, one industry that MCP has been able to disrupt is that of the sunscreen technology. The common organic (chemical) UV filters have come under safety review recently in and so far only two minerals, zinc oxide and titanium oxide has been categorized as GRASE. (A study by FDA shows that several of common sunscreen chemicals enter the bloodstream at concentrations high enough to warrant further study. The rest of the common UV filters would be put under review for now as the FDA request for more data to come to a decision.). Additionally, common organic UV filters has also been found to contribute to environmental damage (such as the degradation of coral reefs). Places such as Hawaii, U.S. Virgin islands and Florida has already ban the sale of coral-damaging sunscreens, with similar legislation being considered in California & Australia. However, zinc oxide has traditionally been hard to formulate, often resulting in an unappealing thick and pasty feel and a white cast on the skin.

 

Enter ANO, MCP enables ANO to manufacture zinc oxide without any of the downside (Read key advantages of MCP above) and at a cheaper price than competitors too!

 

Bad

1) Its fairly valued, not cheap. ANO trade at approx ~20x times earning. In a climate like this, I expect to be able to pick dollars up for pennies.

 

2) Eccentric businessman that doesnt back down easily. Had a row with the exchange (major shareholder had a dispute with the exchange and now has an ongoing lawsuit against the exchange) that resulted in the suspension of the stock for 2 weeks. On the other side, it was quite entertaining seeing the exchange of words. Also hired a road expert to contest a $200 motorcycle fine.

 

3) The news releases are odd. ANO recently tried to capitalise on the coronavirus trend. (Really hated this)

 

4) As can be seen, I am probably bias. The good has 10 points while the bad only has 5.

 

5) I dont understand the company well enough so if anyone has something to chim in, that would be awesome.

[manuelbean]

Loved your "What's the good in all this? Good question. I dont know either (told ya so)."  ;D

I've taken a look at this one and I don't doubt that it might be a great investment. I still don't understand the industry though. Why aren't competitors able to make the same product?

And what about the chemists? How does this work? Don't the sunscreen companies make the formulas themselves?

 

I'm still interested in this company and I should try and answer all of these questions.

[Ronchong]

Glad that you enjoyed the post.

 

If i understood correctly, the key competitive advantage comes from their manufacturing process. To put it simply, due to the characteristics of zinc oxide, competitors have to keep it small enough (below 100mm) and well dispersed so that they are transparent. Zinclear, on the other hand, can be kept at >100mm due to finer control of particle size with minimal cluster because of their process (that makes it a lot cheaper). As an example, one of their competitor has recently raised price (claiming increase in cost of raw material etc etc) while ANO has managed to further reduce price. (point 5)

 

tbh, I am not so sure about the chemist network either. I have only heard of distribution network and this is the first time i'm hearing of a chemist network. It sounds like private labelling to me, where brands only need to put on their own branding without doing much work. Not sure if anything like this exist but this sounds like an interesting model to me whereby you have a sales force + R&D team without having to employ anyone. It is not hard to see the chemist promoting your products on your behalf in order to earn more $.

 

Note : The company has a lot of off-balance sheet assets (in the form of patents) that was not recorded on the BS. You can refer to the prospectus if you want to know more.