Comprehensive Analysis of Modern Dental Group Ltd

Broker: UOB Kay Hian

Date: Wednesday, 13 November 2024

Overview of Modern Dental Group Ltd

Modern Dental Group Ltd is a prominent player in the dental prosthetic device industry, providing an extensive range of fixed and removable prosthetic devices as well as other custom-made devices worldwide. With a strategic global distribution network and robust cash conversion capabilities, the company continues to enhance its industry leadership through digitalization, strategic mergers and acquisitions (M&A), and an expansive product portfolio.

Company Description

Modern Dental is a dental prosthetic device provider that supplies fixed and removable prosthetic devices, along with other custom-made devices globally. The company’s stock is categorized under the Health Care sector with a Bloomberg ticker: 3600 HK.

Stock Data

The company has issued 947 million shares and boasts a market capitalization of HK\$3,485 million (US\$453 million). The stock’s 52-week high and low are HK\$5.29 and HK\$3.28, respectively, with a three-month average daily turnover of US\$0.6 million.

Price Performance

Over the past year, Modern Dental has experienced a price performance decrease of 0.4% with a year-to-date decline of 12.7%. Major shareholders include Triera Holdings Limited with 49.7% and Ngai Shing Kin with 10.4%.

Leadership and Market Position

Modern Dental covers more than 30,000 dentists in over 23 countries, including Europe, China, and the US. The company has successfully expanded its geographic coverage by acquiring regional players, securing top three positions in key markets such as Europe, North America, and Greater China. Compared to local dental laboratories, Modern Dental holds a scale advantage with over 4,800 dental technicians, enabling the company to handle complex cases efficiently.

Technological Advancements

The adoption of intraoral scanners significantly enhances operational efficiency by reducing the remake rate of prosthetics and shortening production lead times. Intraoral scanners, which create digital impression data of the oral cavity, have a global adoption rate of about 20-25%. Additionally, the company employs computer-aided design (CAD) software, 3D printing, and metal additive manufacturing machines to accelerate production processes and improve quality.

Financial Performance

Key Financials (in HK\$m)

• Net Turnover: 2019 – 2,400; 2020 – 2,190; 2021 – 2,955; 2022 – 2,830; 2023 – 3,172
• Gross Profit: 2019 – 1,153; 2020 – 1,090; 2021 – 1,551; 2022 – 1,383; 2023 – 1,701
• Operating Profit: 2019 – 256; 2020 – 148; 2021 – 503; 2022 – 322; 2023 – 552
• Net Profit: 2019 – 162; 2020 – 108; 2021 – 361; 2022 – 220; 2023 – 404

Profit Margins

• Gross Margin: 2020 – 49.8%; 2021 – 52.5%; 2022 – 48.9%; 2023 – 53.6%
• Net Margin: 2020 – 4.9%; 2021 – 12.2%; 2022 – 7.8%; 2023 – 12.7%

Growth Metrics

• Turnover Growth: 2020 – (8.7%); 2021 – 34.9%; 2022 – (4.2%); 2023 – 12.1%
• Gross Profit Growth: 2020 – (5.5%); 2021 – 42.3%; 2022 – (10.8%); 2023 – 22.9%
• Net Profit Growth: 2020 – (33.3%); 2021 – 234.8%; 2022 – (38.9%); 2023 – 83.3%

Future Outlook

Modern Dental targets a high single-digit revenue growth in 2024-2025, driven by continued growth momentum in Europe. The company is confident in improving profitability through cost savings from the rising adoption of intraoral scanners and a streamlined manufacturing process. Long-term strategies include continuous R&D into digital platforms, opportunistic M&A for synergies, and comprehensive dental product portfolios.

Dividend Strategy

Management highlights strong cash conversion due to short production lead times and healthy receivable days. There is potential for a dividend payout ratio increase to 40% in 2024 (versus 35% in 2023) with a long-term target of 50%, supported by robust cash flow generation.

Valuation

Modern Dental is currently trading at 6.7x one-year forward PE, which is approximately 1SD below its five-year mean of 9.9x, according to Bloomberg consensus estimates.

Conclusion

Modern Dental Group Ltd is well-positioned as a leading global provider of dental prosthetic devices. With a strategic focus on digitalization, market expansion, and technological advancements, the company is set to sustain its growth trajectory and enhance profitability in the coming years. Investors can look forward to potential dividend increases and continued market leadership.