Equity, Bottom-up Analyst, Investics Research

Sameer Taneja

Equity, Bottom-up Analyst

Investics Research

It is important to note that the information provided by Investics Research is based on publicly available data and own knowledge, which has been gathered and analyzed from a variety of sources. While every effort has been made to ensure the accuracy and completeness of the information provided, it is not guaranteed to be free from errors or omissions. All forecasts and estimates are based on information that has been obtained from public sources that are considered to be reliable. The sources include but are not limited to, company announcements, exchange filings, presentations, etc. Investics does not guarantee the accuracy and completeness of the forecasts, estimates, and/or other information.

Equity Bottom-up Research

Equity Bottom-Up

<h2>Investment Thesis in Modern Dental</h2>
<ol>
<li>We believe that <a href="https://www.smartkarma.com/entities/modern-dental-group-ltd" target="_blank" data-smartkarma-citation="entities:21020:1" rel="noopener">Modern Dental Group (3600 HK)</a>  has been a beneficiary of Covid as it has gained market share in the last 3 quarters globally in the dental prosthetics market. Q1 2021 showed 15-20% YoY revenue growth. Management guides revenue growth of not less than 10% for FY21 (vs. normalized high single-digit revenue growth from FY17-19) which we believe is conservative.</li>
<li>The company has emerged leaner from Covid 19 as they completed a massive restructuring in 2020, resulting in EBITDA margin expansion to 25%  (from the 15-16% levels historically) in Q4 2020. We believe the company will maintain a 53%  gross profit margin and 25% EBITDA margin, and 16.5% Net profit margin through 2021, resulting in 410 mn HKD net profit for FY21. Based on this estimate, the stock trades on 9.2x PE FY21 despite the stellar run in share price in Q1 2021.</li>
<li>With improving cash flows due to low Capex requirements (~90 mn HKD in FY21e and FY22e), we see <a href="https://www.smartkarma.com/entities/modern-dental-group-ltd" target="_blank" data-smartkarma-citation="entities:21020:1" rel="noopener">Modern Dental Group (3600 HK)</a> generate a free cash flow of 330 mn HKD in FY21e and 400+mn HKD in FY22e. At the very minimum, if the company adheres to its stated 30% dividend payout ratio, it will be net cash 52 mn HKD in FY21 and 338 mn HKD in FY22 ( almost 9% of the current market capitalization) from a net debt position of 158 mn HKD in FY20. </li>
<li>The company will use the excess cash on its balance sheet to raise the dividend payout ratio beyond 30%.  We also think management will continue to buy back stock subject to management stake not increasing by more than 5% every year.  The company has actively repurchased stock in 2020 and 2021. </li>
</ol>
<p>Trading at an undemanding valuation of 9.2x/8.7x PE FY21/22, we think there is an opportunity for at least 50% upside as peers in the similar industry of dental supply trade in the 20-25x range.  With a 30% payout ratio, there is also a decent dividend yield of 3.5% on the stock.</p>

Investment Thesis in Modern Dental

We believe that Modern Dental Group (3600 HK)  has been a beneficiary of Covid as it has gained market share in the last 3 quarters globally in the dental prosthetics market. Q1 2021 showed 15-20% YoY revenue growth. Management guides revenue growth of not less than 10% for FY21 (vs. normalized high single-digit revenue growth from FY17-19) which we believe is conservative.
The company has emerged leaner from Covid 19 as they completed a massive restructuring in 2020, resulting in EBITDA margin expansion to 25%  (from the 15-16% levels historically) in Q4 2020. We believe the company will maintain a 53%  gross profit margin and 25% EBITDA margin, and 16.5% Net profit margin through 2021, resulting in 410 mn HKD net profit for FY21. Based on this estimate, the stock trades on 9.2x PE FY21 despite the stellar run in share price in Q1 2021.
With improving cash flows due to low Capex requirements (~90 mn HKD in FY21e and FY22e), we see Modern Dental Group (3600 HK) generate a free cash flow of 330 mn HKD in FY21e and 400+mn HKD in FY22e. At the very minimum, if the company adheres to its stated 30% dividend payout ratio, it will be net cash 52 mn HKD in FY21 and 338 mn HKD in FY22 ( almost 9% of the current market capitalization) from a net debt position of 158 mn HKD in FY20. 
The company will use the excess cash on its balance sheet to raise the dividend payout ratio beyond 30%.  We also think management will continue to buy back stock subject to management stake not increasing by more than 5% every year.  The company has actively repurchased stock in 2020 and 2021. 

Trading at an undemanding valuation of 9.2x/8.7x PE FY21/22, we think there is an opportunity for at least 50% upside as peers in the similar industry of dental supply trade in the 20-25x range.  With a 30% payout ratio, there is also a decent dividend yield of 3.5% on the stock.

Modern Dental: A Turnaround Story with Tremendous Upside

Founder

Kemp Dolliver, CFA

Cherrystone Hill Research

<p>Modern Dental listed on the HKEX in December, and the lock-up expiry date is 14 June. The shares have declined by 18% from the listing price of HK$4.20 to a recent HK$3.45, so we don't expect any insider selling. Execution since the IPO has been mixed (2015 results missed estimates) while M&amp;A activity has been in line with expectations. Management has reiterated 2016 guidance recently. </p><p>The shares look attractive at these levels considering:</p><p>1) insider buying occurred 10-15% below these levels</p><p>2) we had liked the IPO if priced at these levels  </p>

Modern Dental listed on the HKEX in December, and the lock-up expiry date is 14 June. The shares have declined by 18% from the listing price of HK$4.20 to a recent HK$3.45, so we don't expect any insider selling. Execution since the IPO has been mixed (2015 results missed estimates) while M&amp;A activity has been in line with expectations. Management has reiterated 2016 guidance recently. The shares look attractive at these levels considering:1) insider buying occurred 10-15% below these levels2) we had liked the IPO if priced at these levels  

Asia Pac ECM and Index Rebal, Shenton Research

Ke Yan, CFA, FRM

Asia Pac ECM and Index Rebal

Asia Pac IPO & Placement Research, China Biotech

DZT Research

DZT Research is an independent Asia Pacific equity specialist. Our quantitative research covers index rebalancing flows, alongside exchange data analytics accross Asia Pacific. On the equity capital markets side, we focus on Asia Pacific ECM, especially biotech and TMT. Our lead analyst is frequently cited by international media.

Equity Capital Markets

Modern Dental Group / Equity Capital Markets

<p>Modern Dental Group, a multi-national dental prosthetic supplier, launched its IPO to raise US$110-160m. Our fellow insight provider <a href="https://www.smartkarma.com/profiles/13" target="_blank" data-smartkarma-citation="accounts:13">Kemp Dolliver, CFA</a> talked about the fundamentals of the company in his insight <a href="https://www.smartkarma.com/insights/unique-opportunity-unique-risks" target="_blank">here</a>. </p><h2>IPO Overview</h2><figure class="editor-figure"><img src="https://static-prod.smartkarma.com/images/media/000/004/392/original/IPO%20overview.JPG?1449125543" class="editor-image img-responsive" data-smartkarma-image-id="4392"></figure><h2>Our thoughts</h2><p><strong>1/ The company derives majority of its earnings from outside China</strong> - 50% from Europe and 10.6% from Australia and 11.2% from North America, while currently only 28% from China. Companies with large operation outside China but yet trying to capture Chinese…</p>

Modern Dental Group, a multi-national dental prosthetic supplier, launched its IPO to raise US$110-160m. Our fellow insight provider Kemp Dolliver, CFA talked about the fundamentals of the company in his insight here. IPO OverviewOur thoughts1/ The company derives majority of its earnings from outside China - 50% from Europe and 10.6% from Australia and 11.2% from North America, while currently only 28% from China. Companies with large operation outside China but yet trying to capture Chinese…

Modern Dental IPO: Reconciling Ambition and Reality

<p>Modern Dental Group Limited is a pending IPO on the HKEX. The company is a China-based dental prosthetic company that operates globally in a highly-fragmented market. In contrast with most HK-listed healthcare companies, China represents only 28% of revenue. In addition, there are not any significant dental lab companies listed globally. The company plans to continue to expand geographically thought acquisitions. Despite some interesting aspects to the business, we would take the deal only if priced at the lower end of the indicated range of HKD3.40 - 4.90.</p>

Modern Dental Group Limited is a pending IPO on the HKEX. The company is a China-based dental prosthetic company that operates globally in a highly-fragmented market. In contrast with most HK-listed healthcare companies, China represents only 28% of revenue. In addition, there are not any significant dental lab companies listed globally. The company plans to continue to expand geographically thought acquisitions. Despite some interesting aspects to the business, we would take the deal only if priced at the lower end of the indicated range of HKD3.40 - 4.90.

Hong Kong

Modern Dental Group is a leading global provider of custom-made dental prosthetics, including crowns, bridges, dentures, and clear aligners. The company also offers orthodontic devices, sports guards, and anti-snoring devices, leveraging digital dentistry solutions. Founded in 1986, Modern Dental Group is headquartered in Hong Kong.

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Modern Dental Group (3600 HK)

Modern Dental: A Turnaround Story with Tremendous Upside

Modern Dental is an exciting investment opportunity. The dental prosthetic provider trades at a 9.2x PE multiple, 9% FCF yield with a 3.3% dividend...

Sameer Taneja

Modern Dental: Time to Re-Visit

Modern Dental listed on the HKEX in December, and the lock-up expiry date is 14 June. The shares have declined by 18% from the listing price of...

Kemp Dolliver, CFA

Modern Dental IPO: Reconciling Ambition and Reality

Modern Dental Group, a multi-national dental prosthetic supplier, launched its IPO to raise US$110-160m. Our fellow insight provider Kemp Dolliver,...

Ke Yan, CFA, FRM

Unique Opportunity, Unique Risks

Modern Dental Group Limited is a pending IPO on the HKEX. The company is a China-based dental prosthetic company that operates globally in a...

Kemp Dolliver, CFA

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