Company visit note China Healthcare A decent world-class denture maker On 13 Feb 2017, we joined the investor tour to visit Modern Dental Group s (MDG) (3600.HK, NR) factory based in Shenzhen. During the tour, the management has highlighted its (1) current production capacity; and (2) production process and selling price of both fixed and removable prosthetics. The counter currently trades at 22.0x trailing P/E (11.0x EV/EBITDA), versus global sector mean at FY16F P/E s 26.6x (16.6x FY16F EV/EBITDA). Key risk: Continuous M&A and possible further capital raising. Current Shenzhen factory to relocate to Dongguan. MDG, as a tenant of its current Xili site, has been granted to use the current building in Xili of Shenzhen until 2073. Despite the Shenzhen facilities were built without construction planning permit from the relevant authority, MDG has been so far operating it for over a decade and have not received any notice of relocation. Moreover, the Group plans to construct and relocate its plant to Dongguan by 2018, expanding its current production capacity by three times. The production building that we visited has 2,500 technical staff for the production to overseas, while another block on the same site houses another 1,000 staff for its HK and China production. The current plant contains CAD/CAM production equipment, including 3D scanners, 3D printers and CNC machines. Over there, we expect an overall 60%-70% capacity are currently being utilized. The Group has three main production facilities, including Shenzhen, Beijing and Madagascar (Africa), with other local workshops worldwide. 20 February 2017 Company profile Listed in HKEx on 15 Dec 2015, Modern Dental Group Ltd is a dental prosthetic device provider. The Company supplies fixed prosthetic devices, removable prosthetic devices, and others. Modern Dental serves customers worldwide. Over 75%/66% of 1H16 and 2015 total revenue derived from overseas. As at end- Jun 2016, its net gearing stood at 8.0%. Key shareholders are: (1) Chan Kwun Fung (Chairman) (47.2%); (2) Ngai Shing Kin (CEO) (9.7%); (3) Ngai Chi Ho Alwin (COO) (6.3%) Source: Company data; Guosen Securities(HK) Research Jason Siu PhD SFC CE No.: AVV237 +852 2899 6747 jason.siu@guosen.com.hk Elegant fixed dentures at higher prices. Their fixed prosthetic devices include metal-ceramic crowns and bridges, metalfree crowns and bridges, and metal crowns and bridges. Some metal-free crowns and bridges generally consist of a zirconia framework. Further, certain implant substructures (abutments) are installed onto dental implants for the support of implant prosthetics, normally made of titantium, ceramic or a combination of both. While removable dentures have been used over centuries to restore missing teeth, and their pricing have been cheaper than those fixed ones. Such dentures on the removable device are made of dental resins, usually reinforcing them with a metal framework. Sometimes, MDG may require to send these temporary removable devices to patients several times for trials, in order to achieve comfortable fittings. Anyhow, the fixed prosthetics with newer or specific design and material reinforcement, do pose them higher average selling prices (ASP) at HKD1,390 per set in 2015, compared to the removable ones at a mere HKD881. However, fixed and removable prosthetics gross margins were similar at 55.7% and 52.4% in 2015 respectively, on possible higher production and material costs for fixed ones. Organised production process We have seen MDG s technicians using wax to build up some shaped model covered with ceramic slurry, which was then subjected to heating. Then the slurry hardened to form a mold. After the alloy injection, we note that they usually apply porcelain to the metal framework to form a tooth shape, which may require further heating to harden the ceramic material. More specifically, these also extend to (1) processing 3D digital models to custom make dental restoration/ dentures using CAD/ CAM software; and (2) setting stock teeth in position to form a prototypes for making removable full dentures. Currently, our visited facilities See the last page of this report for important disclosures 1
had obtained FDA approval for production of prosthetics to the US. Note that, MDG also has (1) their quality control room to ensure each denture set in parcels should meet their quality requirement; and (2) 3D printing equipments which have not yet been involved in the current production. We reckon that, the latter should require more time needed to print a set of dentures versus traditional method of molding, resin loading, as well as melting and hardening post cooling. Figure 1 Global peers comparison table (one China A-share company inclusive) C ompa ny Ti c k e r R a t i ng P r i c e M k t c a p ( U S $ m) 3 - mt h a v g t / o ( U S $ m) P / E FY15 ( x ) P / E FY16 F ( x ) P / E FY17 F ( x ) 3 - Yr EP S C a gr ( %) P EG ( x ) D i v y l d H i st P / B ( %) H i st ( x ) P / B FY1 ( x ) EV/ EB I TD A EV/ EB I TD A C onse nsus FY16 F FY17 F TP Ta r ge t P / E FY17 F Ta r ge t EV/ EB I TD A FY17 F Adjusted sector median* 32.3 26.6 23.1 19.6 1.7 1.2 5.9 6.0 16.6 14.8 24.9 16.2 Henry Schein Inc HSIC.US Non-rated 167.25 13,462 98.6 28.9 25.4 23.1 11.4 2.23 N/A 4.66 4.41 15.3 14.2 171.2 23.6 14.5 Dentsply Sirona XRAY.US Non-rated 60.74 14,024 91.6 33.9 22.0 20.6 22.8 0.96 0.5 1.69 1.60 16.6 14.7 67.2 22.8 16.2 Patterson Cos PDCO US Non-rated 43.79 4,287 71.8 22.7 19.0 18.0 11.4 1.67 2.2 3.05 2.84 12.8 12.1 42.1 17.3 11.7 Align Technology ALGN US Non-rated 100.42 8,002 95.3 42.2 33.6 28.2 21.8 1.54 N/A 8.04 6.84 21.8 18.0 106.3 29.8 19.0 Straumann Hldg-R STM N.Se Non-rated 395.00 6,282 12.9 26.9 28.2 25.3 6.3 4.49 1.0 9.55 7.71 21.5 19.5 395.8 25.4 19.6 Osstem Implant 048260.KQ Non-rated 62,700.00 781 4.8 43.1 32.6 24.1 30.8 1.06 N/A 8.06 6.11 19.5 15.0 81,111.0 31.1 19.4 Q&M Dental Group QNM SP Non-rated 0.72 405 0.4 49.3 37.9 32.7 19.6 1.93 1.2 5.91 6.00 23.6 19.7 1.0 45.5 27.4 Lifco Ab-B LIFCOB SS Non-rated 241.00 2,470 0.8 24.1 20.4 19.6 10.5 1.94 1.2 4.65 4.08 15.5 14.8 241.8 19.7 14.8 Topchoice M edi-a 600763.CH Non-rated 29.76 1,389 9.5 49.6 48.9 39.0 17.4 2.82 N/A 10.09 9.27 33.2 26.2 29.8 39.0 26.2 Pacific Smiles G PSQ.AU Non-rated 2.10 246 0.2 32.3 26.6 21.6 21.3 1.25 3.7 7.43 7.39 13.8 11.4 2.42 24.9 13.1 * Outliners and "N/ A " entries are in red and excl. from the calculation of averages Source: Bloomberg data; Guosen Securities(HK) Research Guosen Securities (HK) 2
Figure 2 Full year and half year P&L Year-ended Dec (HKDm) FY14 1H15 2H15 FY15 1H16 Fixed prosthetic devices 824 462 503 965 528 YoY change 42.2% 17.9% 16.2% 17.0% 14.3% % Total revenue 69.2% 67.8% 68.5% 68.2% 68.2% Removable prosthetic devices 264 135 155 290 174 YoY change 80.1% 13.4% 6.4% 9.5% 29.2% % Total revenue 22.2% 19.8% 21.1% 20.5% 22.5% Other devices 103 85 77 161 72 YoY change 101.7% 96.1% 27.3% 56.0% -14.4% % Total revenue 8.7% 12.4% 10.4% 11.4% 9.3% Total revenue 1,192 681 734 1,416 774 YoY change 53.3% 23.0% 0.0% 18.7% 13.7% Cost of sales (550) (314) (340) (654) (347) Gross profit 642 367 394 761 428 YoY change 55.4% 23.9% 14.0% 18.6% 16.4% GPM 53.9% 53.9% 53.6% 53.8% 55.2% Selling and distribution expenses (138) (68) (80) (148) (82) Administrative expenses (313) (201) (234) (434) (219) Other operating expenses (6) (1) (5) (5) (15) Operating profit 186 98 76 174 111 Operating margin 15.6% 14.4% 10.3% 12.3% 14.4% Other income and gains (expenses) 20 3 (1) 3 2 Other expenses 0 0 0 0 0 Finance costs (30) (18) (24) (42) (14) EBIT 206 101 75 177 113 EBT 175 83 51 135 99 Income tax expense (44) (24) (28) (52) (28) Tax rate 21% 23% 37% 29% 25% Reported net profit 120 60 22 82 70 Non-controlling interests 11 (0) 1 1 1 Adjustment (60) (51) (64) (114) 0 Core profit 180 110 86 196 70 YoY change 13.9% 13.2% 4.4% 9.1% -36.2% Core profit margin 15.1% 16.2% 11.7% 13.9% 9.1% Source: Company data; Guosen Securities(HK) Research YoY Total revenue 1,192 681 734 1,416 774 Gross profit 55.4% 23.9% 14.0% 18.6% 16.4% Selling and distribution expenses 73.4% 7.6% 7.1% 7.3% 19.7% Administrative expenses 98.3% 44.5% 34.6% 39.0% 9.4% EBT 15.7% -19.6% -28.7% -23.3% 19.3% Core profit 13.9% 13.2% 4.4% 9.1% -36.2% Margin analysis Total revenue 100.0% 100.0% 100.0% 100.0% 100.0% Gross profit 53.9% 53.9% 53.6% 53.8% 55.2% Selling and distribution expenses 11.6% 10.0% 10.8% 10.4% 10.5% Administrative expenses 26.2% 29.5% 31.8% 30.7% 28.3% EBT 17.3% 14.9% 10.3% 12.5% 14.7% Core profit 15.1% 16.2% 11.7% 13.9% 9.1% Guosen Securities (HK) 3
**Note that, the photographs in Figure 3 to Figure 10 were taken in MDG s Shenzhen site, and posted in this research report under the company s permission. Figure 3 3D Restoration Figure 4 3D printing machines Figure 5 Fixing the mold Figure 6 Mold and dentures to be processed Source: : Company data and photograph*, Guosen Securities (HK) Research Figure 7 Getting the dentures in shapes Figure 8 Working on fixed prosthetics Guosen Securities (HK) 4
Figure 9 Quality control room Figure 10 Processing overseas orders Guosen Securities (HK) 5
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信息披露 公司评级 行业评级及相关定义 公司评级买入 : 我们预计未来 6-12 个月内, 个股相对大盘涨幅在 10% 以上 ; 中性 : 我们预计未来 6-12 个月内, 个股相对大盘涨幅介于 -10% 与 10% 之间 ; 减持 : 我们预计未来 6-12 个月内, 个股相对大盘跌幅大于 10% 行业评级超配 : 我们预计未来 6-12 个月内, 行业整体回报高于市场整体水平 10% 以上 ; 中性 : 我们预计未来 6-12 个月内, 行业整体回报介于市场整体水平 -10% 与 10% 之间 ; 低配 : 我们预计未来 6-12 个月内, 行业整体回报低于市场整体水平 10% 以上 利益披露声明 报告作者为香港证监会持牌人士, 分析员本人或其有联系者并未担任本研究报告所评论的上市法团高级管理人员, 也未持有其任何财务权益 本报告中, 国信证券 ( 香港 ) 经纪有限公司及其所属关联机构 ( 合称国信证券 ( 香港 )) 并无持有该公司须作出披露的财务权益 ( 包括持股 ), 在过去 12 个月内与该公司并无投资银行关系, 亦无进行该公司有关股份的庄家活动 本公司员工均非该上市公司的雇员 免责条款 证券价格有时可能非常波动 证券价格可升可跌, 甚至变成毫无价值 买卖证券未必一定能够赚取利润, 反而可能会招致损失 本研究报告内容既不代表国信证券 ( 香港 ) 的推荐意见, 也并不构成所涉及的个别股票的买卖或交易要约 国信证券 ( 香港 ) 或其集团公司有可能会与本报告涉及的公司洽谈投资银行业务或其它业务 ( 例如配售代理 牵头经办人 保荐人 包销商或从事自营投资于该股票 ) 国信证券 ( 香港 ) 不排除其员工有个人投资于本报告内所提及的上市法团 报告中的资料均来自公开信息, 我们力求准确可靠, 但对这些信息的正确性 公正性及完整性不做任何保证 本报告没有考虑到个别客户特殊的投资目标 财务状况或需要, 并不构成个人投资建议, 客户据此投资, 责任自负 客户在阅读本研究报告时应考虑报告中的任何意见或建议是否符合其个人特定状况 本报告并不存在招揽或邀约购买或出售任何证券的企图 本报告仅向特定客户传送, 未经国信证券香港书面授权许可, 任何人不得引用 转载以及向第三方传播, 否则可能将承担法律责任 研究报告所载的资料及意见, 如有任何更改, 本司将不作另行通知 在一些管辖区域内, 针对或意图向该等区域内的市民 居民 个人或实体发布 公布 供其使用或提供获取渠道的行为会违反该区域内所适用的法律或规例或令国信证券 ( 香港 ) 受制于任何注册或领牌规定, 则本研究报告不适用于该等管辖区域内的市民 居民或身处该范围内的任何人或实体 Guosen Securities (HK) 7