Q&M Dental Group - Maybank Kim Eng 2016-05-16: A good start; More China M&As could lead to rerating

Q&M Dental Group - Maybank Kim Eng 2016-05-16: A good start; More China M&As could lead to rerating Q & M DENTAL GROUP (S) LIMITED QC7.SI 

Q&M Dental Group - A good start; More China M&As could lead to rerating

Results in line; core dental business robust

  • 1Q16 core earnings grew 17% YoY and came in within expectations, at 22% of our FY16E. 
  • The earnings growth would have been higher, at 51% if we exclude the SGD0.7m financing costs in the quarter from SGD60m MTN raised in Mar 2015. 
  • Revenue of the core dental business, which contributed 82% of the group’s revenue, increased 28% YoY. 
  • It completed 4 acquisitions in Singapore and 4 smaller acquisitions in China, from Sep 2015 – Mar 2016. 
  • It has 68 dental outlets vs 60 dental outlets in 1Q15 in Singapore and number of dental outlets in China increased to 9 from 4.

Impact of factory shift on manufacturing is subsiding

  • Revenue of the dental supplies manufacturing segment fell 16% YoY, due to shifting to a new factory in Dec 2015. 
  • On the other hand, revenue grew by 108% QoQ, showing a significant improvement from 4Q15, which was hit by shifting and accounting adjustments. 
  • We expect the revenue to improve in the subsequent quarters, as productions ramp up after the > 60% increase in capacity. 
  • We remain confident on our 40% revenue growth forecast for this segment.

Q&M offers the best China exposure among peers

  • We estimate that China contributes c.35% of Q&M’s earnings for FY16 vs 0% for Raffles Medical (RFMD SP, BUY, TP SGD1.73) and Cordlife (CLGL SP, HOLD, TP SGD1.59). 
  • Q&M continues to build a good track record in China, as an established Singapore brand. Completing the acquisitions of 3 dental groups and a distributing company in Jan 2016 indicates that it is gaining traction there. More offers could knock on Q&M’s doors and the stock could command a higher valuation multiple for its success in China.

Maintain BUY; Sector top pick

  • We started the year with Q&M and Raffles Medical as our top picks in the healthcare sector. Raffles Medical has rallied 19% YTD to 40x FY16E P/E vs Q&M’s -4% YTD to 32x FY16E P/E. We recommend a switch from Raffles Medical to Q&M for more upside potential, greater EPS growth and better China healthcare exposure. 
  • Our TP of SGD0.88 is based on 42x FY16E P/E, 1SD above its 6-year mean to capture its M&A track record.

Swing Factors


  • More earnings-accretive acquisitions. Q&M has un-utilised SGD23m from MTN issued to fund acquisitions.
  • Penetration of China’s lucrative public dental hospitals, which command 90% of the market.
  • JVs or strategic stakes in Q&M by influential Chinese parties, which could introduce more M&A or expansion opportunities.


  • Adverse regulatory changes, especially in China, could slow down M&As and penetration of public dental hospitals.
  • Newly-acquired entities may not be able to meet Q&M’s profit targets and adapt to new management.
  • Succession planning. CEO and founder, Dr. Ng, was instrumental in originating and closing most of the deals on favourable terms.

John Cheong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-05-16
Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 0.88 Same 0.88