A leader in the global dental prosthetic market
As a leader in the fragmented global dental prosthetic market, Modern DentalGroup (MDG) is well positioned to capture growth and consolidationopportunities in the value chain. With an efficient manufacturing process and aglobal sales and distribution network, MDG has established brand recognitionin key prosthetic markets including Europe, China, and Australia, while it plansto expand in the US. In the future, we expect acquisitions to be a significantgrowth driver. We model CAGRs of 23% and 20% for revenue and core profitover 2015-18, respectively. We initiate Buy with a target price of HKD4.6.
Global exposure with an integrated business model
We believe the global dental prosthetics market, driven by both medical andaesthetic demand, has a relatively defensive growth outlook. While the globalmarket is highly fragmented, MDG has a leading market share in Europe,Australia and China, with an aim to expand in the US. Having inked sevenacquisitions since 2013, MDG has successfully transformed itself into anintegrated dental prosthetic player with a global sales and marketing network.We highlight that China remains a bright spot among global markets with a17% CAGR from 2010 to 2014 and an anticipated CAGR of 19% from 2014 to2018, according to Roland Berger. The strong position of MDG in China shouldenable the company to enjoy sustainable growth. We forecast salescontribution from China to increase to 34% in 2018 from 28% in 2014.
M&A adds an additional leg of growth
We expect acquisitions in Europe, China, and the US to become a majorgrowth driver in the near/mid term. We anticipate the US and China to becomepriorities in executing M&A strategies based on sufficient market opportunitiesand growth prospects. With these acquisitions, we anticipate further andaccelerated penetration of the global market. We forecast a 21%/2% organicrevenue CAGR for China/ex-China over 2015-18 and a 30%/20% total revenueCAGR for China/ex-China in the same period.
Initiating Buy with target price of HKD4.6; risks
Our target price is based on 20x 2016E EPS of HKD0.23. This compares withMDG’s global dental consumables peers of 28x 2016E EPS with 19% growth in2017E (vs. 27% we model for MDG). We apply a 30% discount to its globalpeers due to low barriers to enter the dental prosthetic industry, which has lowtechnology requirements. Downside risks include slow acquisitions, low ASPgrowth, and possible suspension of facilities in Shenzhen.