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Saturday, 22 April 2017

Aoxin Q&M Dental Group Limited

Aoxin Q&M Dental Group Limited ("Aoxin" or the "Company") is placing out 57m Placement Shares at $0.20 each for a listing on Catalist. There is no public tranche. The IPO closes on 24 April 2017 at 12pm and will start trading on 26 April. The market cap post the Honour Subscription shares 372m is $74.4m.

Principal Business

The Company is one of the leading providers of private dental services and dental equipment and supplies in the Liaoning Province, Northern PRC.  The Company has 240 dental professionals (comprising 113 dentists and 127 dental surgery assistants) in 11 dental centres (4 dental hospitals and 7 polyclinics) in 4 different cities, namely Shenyang, Huludao, Panjin and Gaizhou.

There are two core business - provision of private dental services and distribution of dental equipment and supplies.

Financial Highlights

While it is good to see the revenue and profit growing strongly from FY2013 to FY2015, it started from a very low base. In addition, the revenue stagnated and profitability from continuing operations declined in the last 2 years 

According to the prospectus (page 80), assuming the service agreement is in place, the EPS will be 0.53 Singapore cents based on the pre-placement shares of 298m. This will drop to around 0.43 Singapore cents using the post placement shares of 372m after the Honour Subscription is completed. This translate into a whopping PER of 47x!

Using the 9M2016 pro forma financials presented above, it seemed like FY2016 is a tough year. I am not privy to the FY2016 results, hence assuming i pro-rate the FY2016 revenue and profit equally, revenue will come in at RMB 81,989m and profit will come in at RMB 6.512m, meaning that net profits has declined by 19% compared to FY2015.

Under this circumstances, the PER is going to escalate even higher to 55x, making this one of the most expensive IPO. The only "saving grace" is that the NAV per share of around ~$0.12 versus the IPO price of $0.20 is not as bad as i expected. At least it should help support the trading price should it fall to those levels.

Use of Proceeds

The IPO proceeds will be used to expand the business though acquisitions and for working capital.

What i like about the Company
  • On the macro side, rising middle income group in China will demand better quality dental care and this will help the Company
  • Get direct exposure to the dental healthcare sector in China. It may have small operations in Liaoning now but it is a good starting point 
  • Having a listed Company Q&M as major shareholder (44% stake), investors can be more comfortable about the corporate governance. The CFO of Q&M dental also sits on the board of Aoxin
  • Good to see Q&M 'rewarding its staff' by gifting the shares to its 628 employees via the "Honour" scheme

Some of my concerns
  • The pro forma financials includes "discontinued operations". I personally don't like such financial statements as it may not be so easy for a company to "discontinue" operations going forward. The Company is trying to "sell you the idea" that going forward, the discountinued operations will not longer affect the business.
  • The valuation is way too high, paying >50x PE for this business. While the sector is trading at such high multiples, in my view, there are better alternatives to invest in
  • Complicated arrangements and non compete agreements with Q&M (parent). Example among others, Aoxin is not able to compete in Southern PRC, including but not limited to Shanghai (page 128)

My chilli ratings

My ratings is probably not important since there is no public tranche. The current buoyant IPO market year to date (see table below) and the low absolute 20c pricing will provide near term support (assuming the placement was done well).

While i like the dental healthcare sector, i am really skeptical of the high valuation which this IPO was launched. Based on the forward PER, it is being listed at more than 50x PE! 

Enjoy the hay while the sun is out (hope they place to strong hands!) but it is a zero chilli rating for me valuation wise.

Happy Aoxing


Anonymous said...

The Honour Scheme is for the 94 or so Chinese dentist, shares are held by a Ms Peng.. not sure Sporean or Chinese... and she has to sign blank share forms to the company for keeping.. some complex arrangements..
for the QnM staffs is another scheme with free shares based on working years.

Anonymous said...

QnM goes for acquistitions and profit guarantees in order to boost their profits. same modus operandi in China.. the biggest issue is are they able to do that in China?? China has very strict rules against Foreign ownership in Medical services.. includes Dental. In their Offer Document they have explained a complex arrangement in order to circumvent the Rules bcos a huge chunk of their revenue comes from the China insurance payments handed out by the government supposedly to the local hospital and clinics with QnM has taken over... anyway their Chinese lawyer has given them advice... but they also qualify their work by putting a huge chunk on Risks Factors about things may not work out right... about 40 pages... if, the chinese authorities discover and label them as Foreign entities despite all the complex arrangement, then the company will be in deep trouble for circumventing the Rules. Not sure if investors who are not familiar with china medical services restrictions will be burnt or not..

Mr. IPO said...

Interesting insights. Yes, I should have include legal risks for hiring dentists but apparently the laws are loosening up.

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