Hyundai Dental achieved HK $1.08 billion in revenue in the first half of 2017 (a year-on-year increase of 39.7%) and a net profit of HK $8470 (an increase of 20.2% over the same period last year, 14% lower than our expectations). First-half net profit accounted for 48 per cent of the full-year forecast (2016 first-half net profit accounted for 70 per cent of full-year results). We downgrade our EPS forecast as follows: EPS will be lowered from 0.18 yuan to 0.16 yuan (year-on-year growth of 58.9%) in 2017, EPS from 0.23 yuan to 0.19 yuan (18.6% year-on-year growth) in 2018, and EPS from 0.28 yuan to 0.22 yuan (14.8% year-on-year growth) in 2019. We will lower the target price from HK $4.1to HK $3.250.The current price has 12.5% room to rise from the target price. As a result, the rating was downgraded to overweight.

The gross profit margin went down. In the first half of 2017, revenue from fixed dental equipment, removable denture equipment and other equipment increased by 48.8%, 16.4% and 29.8% respectively compared with the same period last year. Gross profit margin fell from 55.2% of 1H16 to 49.5% of 1H17, mainly because MicroDental produces and sells locally in North America. The company's average selling price rose 6.3 per cent to HK $1230 in the first half of 2017. Sales of fixed denture equipment were 544032 (an increase of 43.7% over the same period last year), accounting for 62.3% of total sales (57% in the first half of 2016). In addition, the company has declared an interim dividend of HK $25 million, with a dividend payment rate of 30 per cent (30 per cent in the first half of 2016).

Balance sheet. Net cash flow from operating activities in the first half of 2017 was HK $5180 (an increase of 24.7 per cent over the same period last year). Net cash outflow from investment activities was HK $82.4 million, compared with HK $460 million in the first half of 2016. Capital expenditure in the first half of 2017 was HK $6490 (HK $457.8 million in the first half of 2016). In addition, the debt ratio fell from 21.9% at the end of 2016 to 21.5% at the end of June 2017.

The performance in most areas is mediocre. The company's revenue in North America increased by 295.4% year-on-year to HK $360 million, as a result of the company's acquisition of the North American MicroDental Group in October 2016. However, revenue growth in other businesses is in the single digits. European market revenue grew by 7.3 per cent, Greater China by 1.6 per cent and Australia by 6 per cent. In order to ensure the future production of custom dentures in the Chinese market, STM Digital was established in Hong Kong as a modern dental consortium.

Active mergers and acquisitions to expand the market. In January 2017, Modern Dental Europe, a wholly-owned subsidiary of the company, completed the strategic acquisition of 100% equity interest in Schmidt Dentalkeramik APS in Denmark. In February 2017, Modern Dental Europe strategically acquired all shares of the Group's existing distributors CDI Dental AB and CDI Supply AB in Sweden. The acquisition strengthened the company's leading position in the European market, with revenues of HK $414 million, up 7.6 per cent from a year earlier.

Downgrade to overweight. We downgrade our EPS forecast as follows: EPS will be lowered from 0.18 yuan to 0.16 yuan in 2017 (an increase of 58.9% over the same period last year), EPS from 0.23 yuan to 0.19 yuan in 2018 (an increase of 18.6% over the same period last year), and EPS from 0.28 yuan to 0.22 yuan in 2019 (a year-on-year increase of 14.8%). The target price is reduced from HK $4.1to HK $3.25m, representing 20 times 17-year PE and 16.9 times 18-year PE. The current price has 12.5% room to rise from the target price, downgrade to overweight.