Q&M Dental came into my mind when I decided that it’s been quite awhile since I last visited the dentist. I made an appointment with Q&M and was amazed at how fast I was able to get my appointment. I’m not sure if it is an isolated case, but from my experience, it seems like an interesting way to raise efficiency. What happened was, on Sunday, I called down at 4pm to ask if I could book an appointment on the earliest weekend for me to have my teeth checked.
I was immediately given a slot at 8.30pm which already impressed me since I recall my mother having to wait a really long time before she could get her appointment from another dental clinic. At 7pm I was contacted again, and told that my appointment could be shifted to 8pm, and at 7.30pm I was contacted once again to shift my appointment to “now”. I thought this was quite efficient since there’s minimal downtime in the clinic which means more business could be generated. Perhaps this is a common practice, to shift timings, or just that the doctor wants to go home, but I was impressed enough to want to look deeper into this company.
It occurred to me also that as people become more affluent, they would begin to care more about their cosmetics. Straighter teeth, whiter teeth, oral hygiene, etc. Not only that, when people’s tooth hurts or they experience tooth decay, they will seek the most convenient dental clinic that is affordable. Most Singaporeans don’t even have to worry about the cost of dental surgery with the implementation of CHAS. So now it boils down to speed of receiving service and convenience, which I think Q&M is doing a great job at it as I am starting to see more of their clinics springing up, especially near below the MRT stations.
As of 31 December 2015, Q&M has a total of 65 dental outlets in Singapore, many of them conveniently located at MRTs where it is easily accessible. Based on my personal experience, I would agree that Q&M is easily located and will only be more and more easily accessible as they continue to expand their fleet of clinics in Singapore. However, it’s arguable that Q&M may begin to reach the point of saturation soon and slow down in their opening of new clinics. Otherwise, I would say Q&M Dental clinics are convenient for most people.
Partnership with CHAS
Apart from being convenient, Q&M Dental services are very cheap with the partnership of CHAS. Dental treatments isn’t just accessible to just the more affluent, but also to those who cannot afford pricey treatments. Without CHAS, it would have made me think twice about receiving polishing and scaling services which saw my bill going up to $100. In the end, I ended up paying only $16.55. Look at the difference CHAS made! Therefore, I think it was very strategic of Q&M to work with CHAS since Q&M still earns that $100 by claiming the remaining from CHAS. This is definitely a plus point for Q&M!
Growth heavily reliant on acquisition
What I don’t particularly like about Q&M is that a lot of its growth relies on the acquisition of more companies to grow its earnings. In my opinion, Q&M took up a double-edged sword approach towards structuring their payment model towards their employees. On one hand, it is very lucrative to the employees to encourage more doctors to join Q&M, it also means that the only way Q&M as a business can increase earnings is to increase sales. A quick look into their numbers show that their net profit margin hovers at around 10%. As long as Q&M keeps acquiring new companies, sales would grow and so would their earnings. I think we should watch out for serial acquirers because they tend to overpay (goodwill) for the acquisitions which can be destructive in the long-run if there ever comes a day they decide to write-off goodwill.
Growing “Other Expenses”
A look into the 2014 Annual Report, we found that “The increase was mainly due to increases in sales commission, overseas travelling expenses, marketing expenses, repair and maintenance, and credit card merchant charges, which were in tandem with the Group’s revenue growth from its dental and distribution businesses and the acquisition of Aoxin in July 2014 and Aidite in August 2014.”
Other expenses increased by 43% in FY15 to $10.7 million from $7.4 million in FY14. The increase was mainly due to increases in legal and professional fee expenses related to the Medium Term Note (“MTN”) Programme and termination of International Finance Corporate (“IFC”) term loan as well as the acquisitions of TP Dental Surgeons Pte. Ltd., Tiong Bahru Dental Surgery Pte. Ltd. and Bright Smile Dental Surgery Pte. Ltd. in September 2015, acquisition of Aesthetics Dental Surgery Pte. Ltd. in November 2015, Aoxin in July 2014 and Aidite in August 2014.
This is perhaps the number to look out for as it begins to swell up since it is very easy for them to throw charges into this account while attributing it towards acquisition purposes. This “Other Expenses” account in fact, accounts for 8.6% of Revenue in 2015. (Up from 7.4% in 2014)
Hard To Predict Earnings
Because acquisitions are sporadic and the size of acquisitions can be very hard to say for sure, it is very hard to predict future earnings. Should management become too focused on making acquisitions in the name of ‘growth’, I wouldn’t be surprise if they overpay or issue shares to raise cash for bigger acquisitions.
Penetration into China
Q&M has made it very clear that they will expand into China very strongly and for good reasons. China is a market that is growing to become more affluent and dental hygiene will definitely not be neglected. Picture Singapore 30 years ago and compare it with today. More and more people are putting on braces because they can afford it and want to look good. Indeed, dentistry is a very lucrative business and as long as Q&M keeps tapping into countries that are growing more and more affluent, I wouldn’t be surprise that they will become very successful, a global brand.
“The Group targets to have 50 dental clinics and 20 dental laboratories by 2015, subject to the economic conditions in PRC.” – 2012 Annual Report
“In PRC, we made strategic initiatives to enlarge our footprint, targeting the fast growth markets of northern and eastern PRC. We have set our sights on six dentals hospitals, three dental clinics, one polyclinic and one training centre. This comprises of Shenyang based Aoxin Stomatology Group’s three hospitals, three dental clinics and one training centre, Liaoning Donggang City Stomatology Hospital, the upcoming Dandong New Zone Stomatology Hospital, Rongcheng City Shidao Meichen Hospital and Rongcheng City Meichen Stomatology Polyclinic.” – 2013 Annual Report
“To date, the Group owns three dental hospitals, nine dental outlets, one dental supplies distribution company and one materials manufacturer.” – 2015 Annual Report
In the short-term we could be looking at more hospital acquisitions, 3/6 so far! Although we are still very far from the goal that was set initially (2012) perhaps due to headwinds in China, we seem to be seeing Q&M trying to unlock value by spinning off their subsidiaries into the China stock exchange. “More notably, The Group is also exploring the possible spin-offs of Q & M Dental Holdings (China) Pte Ltd (“QDHC”) and Q & M Aidite International Pte Ltd (“Aidite”). This will bring Q & M’s operations in the PRC to the next stage of growth while capturing additional value from the capital market.”
Potential for further growth (CAD CAM)
If you have followed Q&M’s annual report, you would know that they are very proud about being the first to have Computer-Aided Design/Computer-Aided Manufacturing (“CAD CAM”) technology. These multi-layer blocks are now available in more than 50 countries and we have also applied for patent coverage. If you want to invest in Q&M, this is the area to truly look into.
The CAD CAM machines fabricate dental prosthesis, such as crowns and veneers. Constructively, this technology aids the turnaround time for dental restorations to a few hours against the conventional one to two weeks. We plan to roll out this technology to all our 60 dental clinics from our current four in Singapore as part of our strategy in capturing a larger market share in the higher value CAD CAM dental healthcare services.
While the potential is great, “Being one of the pioneers of CAD CAM digital dentistry in Singapore, we are exploring means to lower our costs and make CAD CAM digital dentistry more affordable to the masses.” – 2015 Annual Report. The challenge now is to lower the cost of manufacturing. In my personal opinion, I think that Q&M is going through mass acquisitions to grow and to purchase bigger manufacturing companies to enjoy economies of scale to bring down the cost of a very lucrative part of their business that is largely untapped.
Unsuccessful penetration to foreign markets
Since Q&M has a very deep penetration of Singapore market already, further growth lies in the ability to penetrate into foreign markets as well, largely China and Malaysia. This will pose as a major threat should they fail to penetrate because a lot of potential growth has been priced into Q&M stock, with P/E currently at 49x. On the surface, everything seems to be doing rather well. Q&M has the support of both IE Singapore and SPRING to find partnerships abroad. A lot of tailwind from our agencies here, but there’s only so much they can do. The rest of the work will lie in the hands of Q&M management.
Q&M is a great company that is growing very well. What I am largely uncomfortable is the high P/E with a lot of growth already priced in. Bear in mind, the latest EPS (2015 Annual Report) stands at 1.39c. Despite the ongoing growth and acquisitions, I personally feel that it is not being reflected well enough in the earnings. The bigger risk I see is P/E not being able to sustain at such levels and eventually resulting in an overall fall in P/E valuation across the industry. Other than that, I like Q&M as a business.
Our Other Analyses: