Maybank Kim Eng Research 2015-07-28: Q&M Dental Group - Scaling up in China. Maintain BUY.

Scaling up in China 

  • Impressed with China operations during our recent visit. More positive on growth potential. 
  • Observed good working relationships with the Chinese. Expect greater penetration of dental hospitals & capacity expansion. Adjust FY15E/16-17E EPS by -9%/+3% for a 3- month delay in acquisitions/higher Aidite contributions. 
  • Maintain BUY with higher TP of SGD1.05 from SGD1.02 after EPS increase. Still on 45x FY16 P/E. Expect catalysts from more acquisitions & capacity expansion. 

Visited Dental Hospitals & Manufacturing Plant 

  • We visited Q&M’s operations in Liaoning Province, including Aoxin’s three hospitals, the Liaoning Medical University (LMU) Stomatology Hospital No. 2 and Aidite’s manufacturing facilities. 
  • We were impressed with their scale and standards of operations. 
  • We now expect greater contributions from Aidite as it aims to add two new production lines when its new facility is completed in Oct 2015. This is to meet overwhelming demand. 
  • We also think Aoxin has much more room for growth as two of its three hospitals are new. 
  • One just commenced operations a year ago while the other just completed its 3-month renovation. We raise FY16-17 EPS by 3% for higher Aidite contributions but reduce FY15 EPS by 9% for a 3- month delay in the completion of its four Singapore acquisitions. 
  • We expect 2Q15 core earnings to be c.SGD2.2m, down QoQ due to MTN interest costs. However, YoY growth could be c.80%, from Aoxin’s & Aidite’s contributions. 4Q15 will be a catch-up quarter. 

Smooth Integration, Followed by Further Expansion 

  • We understand that Aoxin intends to replicate Q&M’s Singapore model of expanding through acquisitions and internally. It will turn its attention to the privatisation of public hospitals as this segment offers substantial growth potential. 
  • After our EPS adjustments, we raise TP to SGD1.05 from SGD1.02, still based on 45x FY16 EPS. 
  • This is 1SD above Q&M’s 5-year mean. 
  • We expect catalysts from more acquisitions and quicker-than-expected capacity expansion

(John Cheong; Gregory Yap)

Source: http://www.maybank-ke.com.sg