Q&M Dental

Q&M Dental continues its acquisition spree, via the announcement of a MOU for the acquisition of a 51% stake in Qinhuangdao Aidite High Technical Cermaic (Aidite), for Rmb76.5m. The purchase consideration shall be paid either in cash or the company shares or partly in both. Aidite currently operates a specialized dental ceramics manufacturing facility in Qinhuangdao, Hebei PRC, and manufactures a product know as zirconium oxide blocks which is used in dental CAD/CAM machines in fabrication of dental prosthesis. The Net Tangible Asset of Aidite is RMB 30m, and the revenue of Aidite for FY12 is ~Rmb30m. The proposed acquisition will crystallize Q&M’s plan to integrate and provide synergy to the various components of its dental business, from supplies manufacturing to supply distribution and its dental clinics and centres. In a recent non-deal roadshow with Maybank-KE, Q&M’s Management provided more clarity on its China growth plans, and note that its strength lies in its ability to seek out good businesses such as established dental hospitals, and convince the owners to sell to it, a substantial stake at favourable valuations of ~10x P/E, in addition to long term profit guarantees. As part of its future plans, Q&M intends to unlock the value of its China operations via an IPO in Hong Kong or China. Private equity firms are already circling this niche healthcare segment for investments. Kunwu Jiuding’s proposed purchase of a 20% stake for Rmb200m, places a value of Rmb1b (~$200m) on Q&M’s China operation, which is higher than Q&M’s entire market cap in Singapore. Overall, relative valuations are compelling with Q&M trading at 27x FY14e P/E, versus its historical average of 38x, and the global peer average of 47x. Maybank-KE has a Buy call with TP $0.41 TP.