Saturday, March 29th, 2025

Modern Dental Group: Capitalizing on Digital Dentistry to Drive Future Growth

Investment Recommendation:
Reiterate “Add” recommendation for Modern Dental Group Ltd. (3600.HK) with a target price of HK$5.66, offering a 40.4% upside from the current price of HK$4.03. The company’s focus on digital solutions and its extensive global network support its long-term growth potential despite short-term challenges in the Hong Kong market.

Investment Thesis:
Modern Dental Group is well-positioned to benefit from the growing demand for digital dental solutions. The company’s core profit in 1H24 grew by 6% year-on-year (yoy) to HK$225 million, despite sluggish demand in some regions, especially Hong Kong and North America. Europe and Australia remain strong markets, showing revenue growth of 16% and 3% yoy, respectively. The digitalization of dental services, particularly the use of intra-oral scanners, is a major driver of this growth, with digital solution cases up 61% yoy in 1H24.

Detailed Company Analysis:

  1. Financial Results:

    • 1H24 Performance: Modern Dental reported 1H24 core net profit growth of 6% yoy, amounting to HK$225 million, with strong performances in Europe and Australia compensating for weaker results in Hong Kong and North America. EBITDA margin improved by 0.2 percentage points to 23.1% despite currency headwinds from a strong US dollar.
    • Revenue by Geography: European sales led the company’s growth, increasing by 16% yoy to HK$823 million and accounting for 48% of total revenue. In contrast, Hong Kong’s revenue dropped by 19% as local residents sought more affordable dental treatment in China.
    • Growth Drivers: Digital solutions played a pivotal role, with 602,000 digital cases completed in 1H24, a 61% increase yoy. This accounted for 55% of all cases, highlighting the increasing adoption of digital tools across the industry.
  2. Stock Impact and Valuation:

    • Earnings Revisions: FY24-26 earnings per share (EPS) forecasts have been cut by 3-4% due to reduced profitability in Hong Kong and China, partially offset by stronger European performance. The company’s valuation remains attractive at approximately 7x FY25F price-to-earnings (P/E), significantly lower than its global peers, which trade at an average of 10x.
    • Target Price and Risks: Modern Dental’s target price is set at HK$5.66, based on 10x CY25F P/E. Risks to this valuation include weaker-than-expected demand for dental prosthetics in the US and continued challenges in Hong Kong.
  3. Earnings Revisions and Risks:

    • Revised Projections: The broker has lowered its revenue forecast for FY24-26 by 1-5% to reflect weaker-than-expected sales in Hong Kong, offset by strong European sales. However, EBITDA projections for the same period have been slightly increased due to improved European margins.
    • Key Risks: The main downside risks include further underperformance in North America and continued pressure in the Hong Kong market due to residents seeking treatment across the border.
  4. Valuation and Catalysts:

    • Valuation: Modern Dental is currently trading at around 7x FY25F P/E, a discount compared to global peers like Dentsply Sirona and Envista. The company offers a dividend yield of 4.1% in FY24F, increasing to 5.0% in FY25F.
    • Catalysts: Catalysts for a potential re-rating include accelerated adoption of digital dental solutions and stronger recovery in key markets like Europe and Australia.

Financial Targets:

  • Target Price: HK$5.66
  • Stop-loss Price: Not specified
  • Current Price: HK$4.03 (as of September 11, 2024)

Recommendation Date: September 11, 2024

Broker Information: This report is issued by CGS International Securities Hong Kong Limited.

China Construction Bank, China Merchants Bank, China Tourism Group Duty Free, and Kingmed Diagnostics

Investment Opportunities in China Construction Bank, China Merchants Bank, China Tourism Group Duty Free, and Kingmed Diagnostics China Construction Bank (HKEX: 0939): Strong Trading Income Mitigates Earnings Decline Recommendation: BUY Target Price: HK$6.00 Date...

Construction Boom Ahead: Analyst Highlights Top Picks and Trends for 2024

In a year set to be marked by mega-projects like Changi Airport Terminal 5 and the expansion of Singapore’s integrated resorts, PhillipCapital analyst Paul Chew has doubled down on the construction sector, maintaining an...

Hiap Tong Corp Stock Analysis: Bullish Rebound Potential and Technical Buy Signals

Comprehensive Stock Analysis and Recommendations Comprehensive Stock Analysis and Recommendations Broker: CGS Research Date: January 27, 2025 Hiap Tong Corp Ltd: A Technical Buy with Bullish Momentum Last Price: \$0.087 Hiap Tong Corp Ltd,...