Solid results in 1H16
MDG reported sales/core profit of HKD774m/95m in 1H16, representing YoYgrowth of 14%/13%. The solid growth was mainly driven by the overseasmarket and FX tailwind, while the slowdown in China was due to loss ofmarket share as hospital tender guidelines changed. We believe growth willaccelerate in 2H16 and 2017 as the consolidation of the US deal is expected in4Q16, while few acquisitions in Europe might be completed in 2017.Management remains confident on efficiency improvement after taking overthe US target, while organic growth is likely to remain at 10% per year.
Strong growth achieved for ex-China
Sales growth was 13%, 18%, 36%, and 4% for Europe, the US, Australia, andChina, respectively, in 1H16. The strong organic growth in Europe and the USwas largely driven by ROI from sales and marketing. For Australia, growth wasdue to a lower base in 1H15 as The SCDL Group was consolidated since March2015. Ex-FX growth in China was 7% in 1H16. The slowdown was ascribed toa change of tender guidelines, under which the company cannot enjoyexclusivity for its products in public hospitals. The company expects this tocontinue and will likely penetrate the private market to mitigate risk. On M&A,management remains positive on efficiency improvement for the US target, asit was previously controlled by a financial institution. The company indicatedthat the next focus for M&A would be in Europe.
Margin improvement due to a mix change
Gross margin was 55.2% in 1H16 vs. 53.9% in 1H15. The improvement wasattributed to a change in product mix to high-end products and depreciation ofRMB. Excluding one-off expenses, operating margin increased to 17.8% in1H16 from 17.4% in 1H15. We highlight that the major one-off item was RSUexpenses of HKD12m in 1H16 and the amount is expected to be HKD12m for2H16 and HKD7m for 2017. Additionally, acquisition fees related to the USacquisition were HKD6m in 1H16 and another HKD16m is expected in 2H16.
Maintaining target price at HKD4.2; risks
Our price target is based on 19x 2017E EPS of HKD0.22. This compares withMDG’s global dental consumables peers of 27x 2017E EPS, with 21% growthin 2017E (vs. 24% for MDG). We apply a 30% discount to its global peers dueto relatively low entry barriers for the dental prosthetic industry. Downsiderisks include slow acquisitions and low ASP growth.