Q&M Dental Group

UOBKayhian on 8 Mar 2012

Investment highlights

• Q&M Dental Group (Q&M) provides dental healthcare services in Singapore and is expanding into China, with nine dental clinics and proposed JVs to own a dental hospital group, dental clinic and dental laboratories. Recently, Q&M has also ventured into Malaysia with two dental outlets in Johor and another one in Kuala Lumpur. 
• In our view, Q&M is currently trading at a lofty valuation of 45.3x 2011 PE and 40.5x 2012F PE vs consensus earnings growth of 36.0% (PEG of 1.13).

Our view

• Revenue growth would be a function of clinics, dentists and procedures. Q&M has been expanding its Singapore clinics and dentists with a CAGR of 20% and 37% respectively over 2009-11. Q&M targets to have a strong network of 60 clinics by 2015. While 14% of total procedures are specialised and accounts for 30% of the revenue, Q&M expects to boosts the proportion to 20% of procedures and 50% of revenue through comprehensive in-house training programmes. We think that Q&M would definitely have the scale and expertise in conducting such courses with its two highly-equipped dental centres.
• Favourable government policies. Although there are no explicit policies to boost the dental healthcare sector, Finance Minister Tharman Shanmugaratnam had reported that the government will commit S$8b a year for the next five years on healthcare expenditure from S$4b currently. Ministry of Health had also made changes in the Community Health Assist Scheme (CHAS) to allow more middle- to lower-income Singaporeans to receive subsidised outpatient medical and dental services at CHAS clinics. For example, CHAS will subsidise S$256.50 for a complete denture that would cost S$534-834 in dental clinics. Applicants of such a scheme must be a Singaporean, 40 years and above and with a per capita household monthly income of less than S$1,500. Q&M expects 700,000 Singaporeans can apply under this scheme.
• Secondary listing of its China operation. Q&M targets to own and operate 50 dental outlets and 20 laboratories in China by 2015 and is looking to invest an estimated Rmb400m in Chinese JVs. The acquisition target must provide a profit guarantee of 10 years, service agreement of 10 years and management agreement of 30 years so that Q&M can continue to carry on the licence after the service agreement has expired. With a projected combined profit of Rmb70m-80m, Q&M looks to list the China operations in Hong Kong or China.

Risks

• Execution risks remain for Q&M to embark on such an aggressive China expansion. However, if it is able to list the China operation overseas at peers’ valuation, this could enhance its market value.
• Secondly, Q&M had announced that they will invest Rmb400m in China. However, as cash on balance sheet is only S$13.6m, we expect Q&M to undergo some cash injection in the form of capital fund raising or strategic investment by institutional funds.