Aoxin Q&M Dental Group Limited - Phillip Securities 2018-06-01: Witnessing Greatness In The Making

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AOXIN Q & M DENTAL GRP LIMITED SGX: 1D4

Aoxin Q&M Dental Group Limited - Witnessing Greatness In The Making

• We attended the official opening of Aoxin Q&M Dental Group Limited’s (“Aoxin’s”) new dental hospital, Panjin Aoxin Q&M Stomatology Hospital 盘锦全民奥新口腔医院, in Liaoning Province, Northern China on Sunday 20th May-18. 
• During this site visit, we also had the opportunity to visit its other dental centres in Liaoning Province, as well as to understand Aoxin’s operations and technical insights from the Group’s Board of Directors and Executive Officers.

Investment Actions

• No stock rating or price target provided, as we do not have coverage on Aoxin Q&M Dental Group Ltd. However, on our back-of-the-envelope calculation, as we include earnings from its 3 new dental centres in FY18, we arrived at a valuation of S$0.29, based on estimated 0.82 SCents FY19 EPS (exchange rate of 1 SGD to 4.95 RMB) and 35x forward PER.

Dividend:

• No formal dividend policy.

Company Background

• One of the leading providers of private dental services and dental equipment and supplies in Liaoning Province, Northern China.
• The Group’s business can be categorised into 3 segments:
  1. Provision of private dental services, including management of dental centres for and on behalf of other owners. As of 20 May-18 it has a total of 12 dental centres (5 dental hospitals and 7 polyclinics), located across four cities in Liaoning Province, namely Shenyang, Huludao, Panjin and Gaizhou.
  2. Distribution of dental equipment and supplies. Dental equipment and supplies distribution network covers the Liaoning, Heilongjiang and Jilin Provinces in the Northern PRC.
  3. Laboratory services, e.g. manufacturing of porcelain crown, bridges and dentures.
• The Company was listed on the Catalist board on 26 Apr-17.

INVESTMENT THESIS

1. Dental centres mushrooming in Northern China

Fast expanding to capture favourable socio demographics: tailwind from one-child policy and rising affluence. 

• In particular, the growing demand for pedodontics (paediatric dentistry) in China.
• Aoxin Q&M Paedodontics Health Care Centre in Shenyang was established in 2010, as a pilot project to penetrate Northern China’s paediatric dental services market. It is the first large-scale high-quality paedodontics centre in Northeast China – it incorporates Singapore’s healthcare service concept, offers a comprehensive suite of services and is supported by a team of dental professionals who specialize in paedodontics.
• Its paediatric patients also forms a potential pool of clients to its general dental entres in future.

Think big.

• In addition to nurturing its existing clinics and hospitals, it is also growing organically and inorganically. In the past 12-months, the Group had:
  1. Acquired a dental laboratory, Shenyang Qingaomei Oral Restorative Technology Co., Ltd in 2017;
  2. Acquired a general dental clinic, Aoxin Dawei in 2017;
  3. Opened a new dental hospital, Panjin Aoxin Q&M Stomatology Hospital in 20 May-18; and
  4. Opened a new dental polyclinic, Shenyang Shenhe Aoxin Stomatology Polyclinic in Kaisa Commercial Centre– its first flagship dental clinic in a commercial centre in 26-May-18.

Next up in the pipeline.

• The Group targets to open 3 to 5 new dental centres per year, in Liaoning Province, via organic expansion or acquisition.
• It has recently announced potential acquisition of a dental clinic, Youxin Dental Clinic. Including the new Panjin Aoxin Q&M Stomatology Hospital, and the newly opened dental polyclinic in Kaisa Commercial Centre, should the aforementioned acquisition materialized, it would have reached its target for 2018.
• Notwithstanding the above, the Group is constantly looking out for opportunities to expand its businesses into other cities and provinces.

2. Integrating stand-alone solutions to capturing the full potential of dental market

• The Group comprises three different business segments:
  1. manufacturing of dental prosthetic devices,
  2. distribution of dental equipment and supplies, and
  3. provision of dental services.
• It enables the Group not only to tap onto respective markets, but also to diversify its business portfolio. It helps to streamline procurement process, enhances operating efficiencies, as well as quality control.

3. Building not only the hardware, but also the software

Collaboration with the Jinzhou Medical University secures the pipeline for dentists supply.

• Jinzhou Medical University Shenyang College of Dentistry is the Group’s undergraduate institution, established in collaboration with Jinzhou Medical University. Currently, this is the only training centre accredited by a university in China, i.e. students graduated from this training centre with dental qualifications are recognised by universities in China.
• Hence, Jinzhou Medical University Shenyang College of Dentistry serves as a platform for Aoxin to recruit talents amidst a backdrop of skilled dental health professional shortage in China. The ready talent pool would feed into its expansion plan, transforming it into a sustainable, organically grown company.
• In addition, the collaboration also enables the Group to be at the forefront of dentistry as the University acts as a gateway for the Group to monitor the development and trends of dental industry.
• Dr Shao Yongxin, the Group Chief Executive Officer, was the Dean for the past 3 years and has recently been re-appointed for a further period of 5 years. Together with the re-appointment of Dr Shao, this training centre has received accreditation for a further 5 years.

4. Digitisation on dentistry

Production of a precision-fit, functional and aesthetic prosthesis.

• The Group’s dental laboratories use computer-aided design and manufacturing (CAD/CAM) technology. The technology improves the design and creation of dental prosthesis, (including inlays, onlays, crowns and veneers) and minimizes waste.
• Compared to conventional method, the technology and materials used
  1. reduces patient’s discomfort with better accuracy,
  2. enhances aesthetic, and
  3. increases the speed of fabrication – patient can complete dental restoration in a single visit.
• Its dental hospitals are equipped with the CAD/CAM technology, while its dental laboratories will cater to the demand from its internal dental clinics as well as external (which include China Medical University School & Hospital of Stomatology).

Optimal results in dental services and patient education. 

• The visual aids would enable dentist to have a 360-degree view on patient’s condition before analysing and formulating the best treatment for the patient. It also helps in patient education, enhance patient experience and building brand loyalty. 

Engaging students in learning and effective training. 

• Its Jinzhou Medical University Shenyang College of Dentistry is equipped with multimedia teaching hall, multi-function simulation laboratory, technical laboratory, etc. These facilities could enhance students’ learning process, help understanding of concepts as well as provide a real-life simulated training ground to sharpen their technical skills. 

Early adopter advantage.

• The current dental landscape in Liaoning Province is fragmented with multiple small clinics that lacks the resources to invest in such equipment and technology. 

Investment Risks

• Acquisitions are usually partially funded via issuance of new shares (c.30-50% of total consideration), which could be dilutive to current shareholders.
• Higher staff costs as the Group ramps up recruitment drive in conjunction to its expansion plan.
• Start-up costs of the new Panjin hospital could erode margins in the first 2 years.
• All dental staff are employed on employment contracts.
• Huge amount of goodwill. Impairment could wipe off c.47.6% of shareholder’s equity.
• Highly regulated environment.

Soh Lin Sin Phillip Securities | https://www.stocksbnb.com/ 2018-06-01

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