Rating: BUY (Initiation) 

Target price: HKD18.92 

Share price (9 Aug): HKD6.73 

Market Cap (HKDm): 6,440.2 

Up/downside: 181.1% 

We initiate coverage with a BUY call and PT of HKD18.92 (181.1% upside potential). Via M&A, Modern Dental has established an exclusive global sales and distribution network with more than 100 subsidiaries, over 20 brands and more than 30,000 global customers. Its leading market share in Europe, North America, Greater China, Australia and other major markets. 

Strategic M&A and capacity expansion brings growth potential 

Modern Dental is the world’s leading supplier of denture equipment. It specializes in denture customization, including fixed and removable denture equipment, and other equipment. Through years of strategic M&As, it has established an exclusive global sales and distribution network, with more than 100 subsidiaries, more than 20 brands, and more than 30,000 global customers. It has a leading market share in Europe, North America, Greater China, Australia and other major markets. 

In October 2019, phase I of its Dongguan production base project was officially put into operation, covering 16,000 sqm, expanding production and operational capacity. In the pandemic impact, 2H20 performance recovered and grew to a net profit of HKD247m, a substantial yoy increase of 236.3%. 2H20 gross profit margin increased to 52.2% and net profit margin increased to 16.2%. The company reported 1H21 revenue of about HKD1.47bn, up 63.9% yoy. Greater China revenue came to about HKD329m, a substantial increase of 73.1% yoy. With the gradual completion and commissioning of the phase II project base and Vietnam production base, capacity would increase, adding further momentum in performance growth. 

C19 speeds domestic market integration; opportunities for digitalization pioneer  

There is a large number of domestic denture production companies, mostly small-scale regional technicians, so the industry concentration is low. The Covid-19 pandemic has accelerated the elimination of small denture processing companies, and social distancing measures have increased market attention to digital technology. Modern Dental, as industry leader, has significant advantages in the number of technicians, tech level, digital development level and customer channels, etc. It began to use CAD/CAM technology in 2007, and currently has four digital production centers. It has a centralized network of digital processes and equipment. It has the most oral internal scanning applications in the market. Modern Dental would benefit from the opportunities that come with market integration and digital development, increasing its market share and customer stickiness, and entrenching its industry leadership. 

Invisible orthodontics: exclusive advantage and channel resources boost volume 

In 2020, TrioClear, the company’s invisible orthodontic product, was launched in Hong Kong, Australia and Europe. TrioClear uses a unique three-step orthodontic method to replace three layers of braces with progressive thickness during patient treatment. It enables teeth to move in a gradual and predictable way, providing a comfortable wearing experience. Its exclusive TrioDim Force technology reduces the use of accessories and saves time for dentists. It covers more than 20,000 dentists worldwide, and with the help of stable customer channels, we expect TrioClear to expand rapidly. 

Valuation and risks 

We expect the company to benefit from the opportunities of accelerated market integration due to a strong recovery momentum. We estimate revenue will reach HKD2.99bn/3.71bn/ 4.48bn in 2021/22/23E and net profit will reach HKD454m/563m/706m. Relative to a peer PE of 40x in 2021E, we value Modern Dental at HKD18.17bn and derive a price target of HKD18.92. Risks include: global economic and transnational business risks; M&A uncertainty risks; concentration of production facilities risks; and risks related to deviation arising from different market valuation systems. 

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