Q&M Dental Group - Maybank Kim Eng 2016-08-14: Strong lift from acquisitions; More expansion & news flow

Q&M Dental Group (QNM SP) - Maybank Kim Eng 2016-08-14: Strong lift from acquisitions; Q & M DENTAL GROUP (S) LIMITED QC7.SI

Q&M Dental Group (QNM SP) - Strong lift from acquisitions; More expansion & news flow

Results in line; core earnings grew 96% YoY  

  • 2Q16 core earnings grew 96% YoY, in line with our expectation at 44% of our FY16E. 
  • Growth was mainly driven by acquisitions of dental clinics in Singapore and China. 
  • From Sep 2015 to Mar 2016, Q&M completed eight acquisitions. The manufacturing segment is also gaining traction. 
  • With SGD66m cash in its war chest, Q&M could explore more expansion opportunities. Also, the stock could react to positive news flows from the spin-offs of two Chinese subsidiaries. 
  • Maintain BUY & TP of SGD1.08.

Robust core dental segment 

  • Revenue of the core dental business, which contributed 77% of the group’s revenue, increased 30% YoY. Q&M completed four acquisitions in Singapore and four smaller purchases in China, from Sep 2015 – Mar 2016.
  • It now has 68 dental outlets vs 61 in 2Q15 in Singapore, and outlets in China increased to 11 from seven.

Manufacturing segment is gaining traction 

  • Q&M’s dental supplies manufacturing company, Aidite, has shown good progress since it shifted to a new factory in Dec 2015. Operations have stabilised and sales increased by 36% QoQ. Also, sales in Jun 2016 were higher than Jun 2015. We expect sales momentum to accelerate in 2H16.

Catalysts: More expansions & news flows of spin-offs 

  • Q&M is constantly on the lookout for more expansion opportunities. Aside from China, it targets to continue growing its Singapore franchise. With around 1,000 dental clinics in Singapore vs Q&M’s 68, management sees ample expansion opportunities. 
  • News flows regarding its proposed spinoffs of two Chinese subsidiaries could be another catalyst. Management targets to complete the spin-offs by end-2016. 
  • Our TP is still based on 42x FY17E P/E, 1SD above its long-term mean to capture its M&A potential. 
  • Q&M is our top pick in the sector given its upside potential, greater EPS growth and better China healthcare exposure. It has underperformed its peers YTD, due to lesser news flows and coverage.

Swing Factors


  • More earnings-accretive acquisitions. Q&M has unutilised 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&A 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/ 2016-08-14
Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 1.080 Same 1.080