Share price: SGD0.305
Target price: SGD0.41(unchanged)
Strong interest in Asia’s leading listed dental group. The NDR we held yesterday for Q&M drew active participation from ten institutional fund managers and surprisingly, many stimulating questions despite Q&M being a relatively unknown small cap. We also received enthusiastic involvement from Q&M, comprising CEO, CFO and COO, who were able to effectively shed greater light on the group’s growth plans in the region particularly China, its strategy of balancing geographical expansion and capital needs, its successful model of sharing revenue with dentists and cost centralisation that has allowed it to punch above its weight with almost 20% market share in Singapore, and the benefits an alliance with Q&M brings to dentists. We maintain BUY on Q&M with a target price of SGD0.41.
Acquisitions seeing satisfactory progress. Due diligence being conducted on the proposed acquisitions of the two China entities in Liaoning province has been smooth so far. Also, management shared that Q&M was able to seek out good businesses such as established dental hospitals with 20-year operating histories and convince the owners to sell it a substantial stake at a favourable valuation of 10X earnings and still secure 12-year profit guarantees from the owners because Q&M provided them with significant longer term upside, both business and financial, from being allied with Q&M post-acquisition than they would be able to achieve on their own.
Q&M provides a winning formula. Essentially, Q&M provides the comfort of a proven and repeatable business model as well as a strong Singapore dental brand name, which cannot be matched by private equity funds that have also been knocking on the China dentists’ doors. Other than capital, the China dentists will gain prestige by being allied to Q&M and also access to proven processes, skills and technology from Q&M. In the long run, Q&M has also adroitly incentivised the China dentists to hope for greater financial upside as they will still retain 40% interest (Q&M to take 60%) in a larger group which they can profit from when Q&M lists its China operations. Apparently, once the two Liaoning deals are done, Q&M’s China operations will be as big as Singapore and will be ready for listing.
Interesting times ahead. Completing these acquisitions is just the start. Subsequently, management has more expansion plans in mind. It plans to add capacity to the existing overcrowded hospitals and build new hospitals in high-potential locations, and when the time is right, an IPO will be done in either China or HK but management also shared that the IPO is just a small step towards a larger growth plan that they plan to repeat in more countries. Having each of its subsidiaries listed will allow them to grow much faster if they have independent access to capital and put less strain on the balance sheet of the parent company. The current 18-shareholder agreement in Singapore has worked well to align interests and management plans to use this in other countries as well to align its goals with the interests of the dentists.
A business model that makes sense. Funds were particularly interested in how Q&M makes its model of revenue sharing with dentists work and why dentists should choose to be part of the Q&M group rather than working solo. Typically, a sole proprietor dentist would have to manage and bear the cost of non-revenue generating activities such as nurses, consumables, rental and equipment and bear the risk of the location of the clinic preventing him or her from building up a good patient base. Hence, while the idea of being the own boss is appealing on paper, many have found the long working hours to be onerous in the long term and have opted for the rewards and security that Q&M’s large network of clinics and patients brings. Management shared that in fact, many of their network dentists have actually reduced working hours and still increased their incomes!
Benefits that Q&M bring to dentists. For example, Q&M shared that its network clinics are able to consistently generate greater earnings than independent dentists’ outlets. The evidence supporting this claim that Q&M’s clinics are generally busier than independent clinics is that it operates only 8% of the total dental clinics in Singapore and hires only 11% of all the registered dentists in Singapore but it services 18.5% of the population that visits dentists at least once a year. First, its outlets fully save on rental as capacity is maximised in terms of dental chairs and dentist availability. As a result, each outlet is generally fully utililsed from 9am to 9pm. This is not achievable by independent dentists, unless they really work themselves to the bone which is not sustainable. Unlike GPs, dentists cannot call on locums. Second, its large pool of dentists allows Q&M to serve customers who walk in without appointments as dentists can be deployed depending on demand. This allows capable dentists to specialise in high-revenue treatments such as root canals and implants instead of having to provide low-revenue services such as cleaning & polishing, which independent dentists have to do as these kind of services generally pays the bills. This also allows for efficient referral of patients to the right dentists thus properly utilising dentists’ skills.
Third, the cost savings made possible from bulk purchasing and sharing of resources are considerable, which we estimate at easily 2-3% of revenue. One shared resource is nurses – for instance, 1 dentist will need 2 nurses (one to assist during the treatment and another to man the reception and handle calls/walk-ins) but 2 dentists only need the addition of a third nurse. Q&M’s ownership of companies involved in the distribution of dental equipment and supplies also allows it to capture more value in the supply chain, not to mention achieve cost savings from bulk purchases of dental consumables.
Finally, clinic location is paramount to develop a large patient base. While an independent dentist has to risk everything on the location usually with no second chances, Q&M has far greater collective experience in picking suitable locations.In fact, management reported that new malls now prefer to have dental clinics than GP clinics (due to greater demand for convenient access to dentists) and they usually have first dips at choice locations in MRT stations. Of course, as an organisation, Q&M is better placed to close down low profit outlets and reopen at better locations to maximise revenue opportunities. Lastly, the large patient database allows for more effective mass marketing compared to the resources of an independent dentist.
Finally, there is other less tangible but just-as-strong reason for dentists to remain loyal to Q&M and for new dentists to join. Q&M has a training program that aims to improve dentists’ skills, and eventually their pay. Senior dentists are tasked to guide younger dentists and further education will be sponsored as well. All dentists want to maximise their income but few independent dentists are able to do so effectively as rather than spend 100% of their billable time on providing high-revenue treatments such as root canals, implants and braces, they still have to divide their attention with low-revenue treatment such as cleaning & polishing, fillings and extractions.
Lastly, the Singapore story continues. At home, management plans to continue expanding its Singapore dental network despite being very close to its target of operating 60 dental outlets by 2015, thus underlining our belief that, despite being a developed market, the Singapore dental scene is still under-penetrated. Market saturation is not a major concern as there is strong support from the government’s Community Healthcare Assist Scheme (CHAS) which seek to channel patients away from overcrowded polyclinics. Currently, only 200,000 out of 700,000 eligible patients have signed up for this scheme, but we expect more to utilise this scheme as awareness grows.
From Jan 2014, the current age floor of 40 will be removed and eligible patients are expected to increase from 700,000 to more than 1.5m. Q&M is well-placed to benefit as 52 of its dental clinics have already signed up as a provider of CHAS services, out of the total of more than 200 dental clinics that have signed up so far. The fact that most of its clinics are in the suburbs where most of the eligible patients are is another reason to be optimistic.
For non-dental services such as GP and facial aesthetics, Q&M will continue to approach with caution. We see value on this front in terms of cross-sharing of patients and how Q&M ties together the revenue opportunity with a cost-conscious approach (all its GP clinics share a common premise with its dental clinics).
Publish date: 11/10/13