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:
-
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.
-
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.
-
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.
-
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.
