Q&M Dental Group - Maybank Kim Eng Research 2015-10-05: Capturing Greater Value in China

Q&M Dental Group - Maybank Kim Eng Research 2015-10-05: Capturing Greater Value in China Q & M DENTAL GROUP (S) LIMITED QC7.SI 

Q&M Dental Group - Capturing Greater Value in China 

  • Acquiring 36% effective stake in Shenyang Lan Hai, a dental supply distributor. Should help Q&M become integrated dental player in China. 
  • Expect synergies with existing distribution arm. Earnings accretive, at only 9x P/E based on profit guarantee. 
  • BUY. Reduce TP to SGD0.97 from SGD1.05 after cutting EPS by 1-3% for recent update to terms of another acquisition. Still offers 37% upside. Catalysts from more acquisitions. 

Acquiring Chinese Dental Distributor; Positive 

  • Q&M’s 60% subsidiary, Shenyang Quanxin, is acquiring a 60% stake in Shenyang Lan Hai for CNY7.6m. Funded entirely by cash, this translates into a 36% effective stake for Q&M. Shenyang Lan Hai distributes dental equipment and materials nationwide in China. 
  • We view this move positively, as vertical expansion should help Q&M capture greater value in China’s dental industry. Recall that Q&M ventured into the distribution business in Singapore in 2010 with its acquisition of Dentmedix. It further acquired Quantumleap in 2011 and Malaysia-based AR Dental in 2013. 

Expect Synergies; BUY 

  • Q&M should benefit from cross-selling opportunities, in our view. 
  • We understand that its Singapore and Malaysia distributors have strong expertise in European products; they are now complemented by Shenyang Lan Hai’s capability in China. The acquisition should add to earnings, at 9x forward P/E vs Q&M’s 31x. Profit guarantee is SGD0.1m/CNY0.5m a year. 
  • Although this acquisition will contribute positively, we lower our FY15-17 EPS by 1-3%. Q&M allowed TP Dental, acquired last month, to reduce its profit guarantee from SGD2.0m to SGD1.6m, due to a change in the acquisition terms that benefits Q&M more in the long term. 
  • Maintain BUY. We lower our TP to SGD0.97 after cutting EPS, still based on 1SD above its 5-year mean. Our TP still suggests 37% upside. 
  • We expect catalysts from more acquisitions.

John Cheong Maybank Kim Eng | Gregory Yap Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2015-10-05
Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 0.97 Down 1.05