• 9M18 Revenue met only 59% of our FY18e estimates due to lower than expected revenue from clinics. We previously modelled 20% YoY revenue growth for FY18e.
• 9M18 PATMI met 70% of our FY2018 estimates due to margin expansion.
• Currently has 72 dental outlets, 4 medical outlets in Singapore, 16 dental outlets in Malaysia and 1 dental outlet in PRC.

Downgrade to NEUTRAL with a lower TP of S$0.51 (previously S$0.65). With a more moderate pace of clinics expansion as well as lesser CHAS claims made by patients due to the government’s tightening measures, we lowered our FY18-FY19 revenue and PATMI estimates by 18-32% and 10-14% respectively. We reduce PER to 25x from 27x, which is line with peers’ average FY18e and FY19e PER (excluding hospitals).

The Negatives

– Muted clinics business growth. Revenue growth from both clinics and distribution at +0.40% YoY and -2.76% YoY respectively. Despite having more dental clinics in 3Q18 (89 clinics) as compared to 3Q17 (86 clinics), revenue was flat due to dampened patient demand under the CHAS and Pioneer Generation scheme as the government tightened claim limits this year. Q&M had been a beneficiary of this government initiative.

– The decrease of 2.8% YoY in distribution revenue was due to fewer purchases by the private sectors from both the Singapore and Malaysia distribution companies.

[Revenue for 9M18 is purely from Q&M, as Aidite and Aoxin were deconsolidated in Dec’16 and Apr’17 respectively; their profits are now recognized in share of profit from Associates, which fell 26.5% YoY due to lower share of profits.]

– Q&M is in a net debt position of S$63.1mn, S$52.6mn a year ago. Net debt has risen largely due to share buyback of S$4.7mn and dividends totalling S$10.5mn. Majority of debt is from a S$59.9mn three-year term loan to repay the MTN expiring in March 2018.

– Total dental clinics expanded by 3 YoY and 3 QoQ. As of November 2018, Q&M has signed agreements to open three new clinics in Singapore and four new clinics in Malaysia. As we approach the tail end of the year, it seems that Q&M’s aggressive expansion plan to add ten new dental clinics in Singapore and Malaysia each for 2018 will likely fall short. 

The Positive

+Gross profit margins for respective businesses reverted to their pre-acquisition levels. Clinic margins at c.93% and Distribution margin at c.30%.

Outlook

We are cautiously optimistic about the expansion plans in Singapore and Malaysia. Post-deconsolidation of its major revenue drivers in China, the Group is stepping up its regional expansion in Singapore and Malaysia to plug the gap.

We do not discount the possibility that the Group will expand into Southern China via joint ventures and organic growth initiatives with its Chinese associate, Aoxin Q&M Dental Group (the Group currently owns 43%). Aoxin Q&M Dental has a strong presence in Northern China.

Other updates

Potential new business – Education

With the MOH intending to release a new regulation in 1-2 years to require dentists practising aesthetic procedures to obtain a Certificate of Competency, Q&M is positioning themselves to be accredited by CPE as a teaching college for the dentistry profession in the next few quarters.

Exploring the use of Artificial Intelligence

With existing AI in the medical field mainly used in ECG and EEG diagnosis for the brain and heart, Q&M is experimenting with the use of AI to improve efficiency in the overall dental process. The dental AI process would require X-rays and scans of the patient’s mouth cavity, which is then run through an algorithm to come up with a treatment plan for both the patient and the doctor.

Investment Action

Downgrade to NEUTRAL with a lower TP of S$0.51 (previously S$0.65). With a more moderated pace of clinics expansion as well as lesser CHAS claims made by patients due to the government’s tightening measures, we lower our FY18-FY19 revenue and PATMI estimates by 18-32% and 10-14% respectively. We reduce PER to 25x from 27x, which is line with peers’ average FY18e and FY19e PER (excluding hospitals).

Potential re-rating catalysts would be (i) successful earnings accretive acquisitions; and (ii) better-than-expected results from associates.