Investment logic
The chain rate of private oral services in China is expected to increase gradually, and the company is in a leading position in the high-end private oral medical services market. According to Frost Sullivan, in terms of revenue in 2020, the company is the third largest provider of oral health services in China's entire private oral health service market, and the largest high-end private oral health service provider in China. The high-end market is aimed at upper-middle-class consumers in first-and second-tier cities, and the service price is generally 25% higher than the industry average. According to Frost & Sullivan data, the top five companies account for only 8.5% of China's private oral health service market in 2020. We believe that with the brand accumulation and talent construction of oral chain service institutions and the transformation of oral medical services to digitalization, the concentration of chain oral leading companies is expected to further increase.
Brand layering: "high-end + middle-end" two-line development. The company is divided into Ruier Dentistry and Ruitai Stomatology, Ruier Dental positioning high-end, Ruitai oral positioning second-and third-tier market. The company operates 111hospitals and clinics in 15 major first-and second-tier cities in China, providing medium-and high-end oral care services, and has served about 7.4 million patients. Ruier Dentistry mainly operates 51 oral clinics in first-tier cities as of September 30, 2021. Ruitai Stomatology mainly operates 7 dental hospitals and 53 oral clinics in first-tier and core second-tier cities, with a total of 882 dentists and 1204 dental chairs.
The company's IPO issued 46.5275 million shares at an offering price of HK $14.62. Of these, 4.653 million shares were sold in Hong Kong (10%) and 41.8745 million shares in international offering (90%). The over-allotment right was not exercised and a total of HK $680 million was raised. The funds raised are mainly used to further improve the penetration and coverage of existing cities, and expand the business to new core second-tier cities; build and optimize information technology infrastructure, optimize operations management, and patient relationship management capabilities.
Profit forecast and investment suggestion
We estimate that the adjusted net profit from 2022 to 2024 is RMB 0.56 million, the corresponding EPS is 0.02, 0.09, 0.18, and the corresponding PE multiple is 566, 136, 68, respectively. The relative valuation method is used to value the company. With reference to comparable companies in the same industry, the company is given a target price-to-earnings ratio of 42X within 12 months. We expect the company's adjusted net profit to be 170 million yuan in 2023, corresponding to the 12-month target market value of the listed company of HK $8.282 billion and the corresponding target price of HK $14.23 per share. For the first time, coverage gives a "buy" rating.
Risk hint
The risk of policy environment change; the risk of dental implant collection; the expansion of dental hospitals and clinics is not as expected; the risk of loss of doctors and health care personnel; the risk of recurrent outpatient visits.