Q & M DENTAL GROUP (S) LIMITED
QC7.SI
Q&M Dental Group - Expanding footprint in China
- Q&M proposes to acquire a dental laboratory group for Rmb66m. Implied valuation of 13x forward P/E undemanding and in line with its historical transactions (10-15x).
- Deal signals Q&M’s growth strategy in China.
- Acquisition lifts our FY17-18 EPS by 5%, edging our target price up.
- Maintain Hold. Downside risks include failure to conclude the deal.
Overview of the deal
- Q&M today announced the proposal to acquire a 33% stake in Shenzhen New Perfect Dental Research (SZNP) for a total consideration of Rmb66m (S$13.75m, US$10m), all cash. The deal, with an implied forward P/E is c.13x, comes with an annual profit guarantee for 12 years. Management guides for a year-end target completion.
Background of the acquisition
- SZNP is a dental prosthetic devices provider, operating 16 dental laboratories across 15 cities in China. The deal will add to Q&M's value chain and complement its dental ceramics manufacturing business (Aidite).
- As SZNP is one of the larger laboratory groups in China, we suspect overseas exports form a substantial portion of its revenues. For reference, about 40% of Aidite’s revenues come from exports.
- The implied valuation of 13x P/E is undemanding and in line with Q&M’s historical transactions of 10-15x.
What we like about the acquisition
- The acquisition is consistent with Q&M’s inorganic growth strategy and intention to build its franchise in China. It currently generates 40% of its earnings from China, with the balance 60% from Singapore, by our estimates.
- We think the longer-term strategy for the company will be to derive the majority of its earnings from China, which it sees as the engine for growth, especially given that Q&M is already the largest private dental chain in Singapore and is likely to see its domestic growth plateau.
Our near-term concerns
- Q&M already took on additional debt in 1Q16. After this acquisition, net gearing will rise to 0.39x from 0.26x as at end-1Q16.
- We also note that unlike its usual 50/50 cash/shares consideration which would be EPS-accretive due to Q&M’s lofty valuations, this deal is all cash.
- Completion of the deal could take longer than expected – Q&M has yet to conclude five deals announced in 2014-15 and has also terminated deals.
Read-through for healthcare players entering China
- Our secondary takeaway is Q&M's broader strategy of tapping China’s growing healthcare market.
- We note that the trend among larger hospital operators is to employ a greenfield strategy, as opposed to Q&M’s brownfield strategy.
- We opine that hospital operators prefer a greenfield strategy as they are targeting the premium segment, for which there are few suitable potential targets.
- Meanwhile, Q&M targets the masses and the hardware market (crown manufacturing and dental labs).
Maintain Hold, limited upside given valuations
- We lift our FY17-18 EPS forecasts by 5% and our target price to S$0.74 (34.5x CY17F P/E, -1 s.d.) but keep our Hold rating.
- Our target multiple represents a premium to healthcare services peers’ of 20x, which we think is fair given Q&M’s dominant domestic position and growing overseas presence, but at a slight discount to larger established hospital groups’ 37x.
- Upside risks include smooth M&A execution.
Jonathan SEOW
CIMB Securities
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Kenneth NG CFA
CIMB Securities
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http://research.itradecimb.com/
2016-06-07
CIMB Securities
SGX Stock
Analyst Report
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