Q&M Dental

Q&M Dental: Q&M Dental races up 7% today as Maybank-KE highlights that Q&M should be close to completing its acquisition of Aoxin Stomalogical, its largest purchase in China to-date. According to Q&M, the management company that will hold the assets of Aoxin’s founder, Dr Shao, and Q&M’s China WOFE (Wholly Owned Foreign Enterprise) that will own 60% of this management company have been incorporated. Barring any last-minute deal-breaking disagreements, the acquisition should be done by the deadline of end-Feb’14, although the house do not rule out the need for an extra month, which even then will not significantly impact earnings forecasts. To recap, Aoxin is a group of four dental hospitals and three dental clinics in Liaoning Province, China, which is highly profitable (28% FY13 net margin vs only 8% for Q&M) and Q&M will be paying less than 10x FY14 earnings for a minimum profit guarantee of $2.2m for 12 years. Furthermore, as part of Q&M’s future plans, the group intends to unlock the value of its China operations via an IPO in either Hong Kong or China. China healthcare providers typically trade in the range of 30-50x P/E. With the acquisition of Aoxin likely nearing completion, the house factor in a proforma 21% EPS uplift from Aoxin into its earnings forecast, leading to a raised TP of $0.48 (prev. $0.41), based on 34x FY14E core earnings. Maybank-KE is the only house that covers Q&M Dental in the street. Catalysts include a better 4Q and the smooth progress of its China acquisitions.