Q&M Dental Group revs up for roaring China business

China operations could grow to Singapore's size.

According to Maybank Kim Eng, Q&M is on track to acquire two China entities in Liaoning province.

"Apparently, once the two Liaoning deals are done, Q&M China's operations will be as big as Singapore and will be ready for listing," said Maybank.

Here's more from Maybank on why Q&M is faring so well in China:

Strong interest in Asia’s leading listed dental group. The NDR we held yesterday for Q&M drew active participation from ten institutional fund managers and surprisingly, many stimulating questions despite Q&M being a relatively unknown small cap. We also received enthusiastic involvement from Q&M, comprising CEO, CFO and COO, who were able to effectively shed greater light on the group’s growth plans in the region particularly China, its strategy of balancing geographical expansion and capital needs, its successful model of sharing revenue with dentists and cost centralisation that has allowed it to punch above its weight with almost 20% market share in Singapore, and the benefits an alliance with Q&M brings to dentists. We maintain BUY on Q&M with a target price of SGD0.41.

Acquisitions seeing satisfactory progress. Due diligence being conducted on the proposed acquisitions of the two China entities in Liaoning province has been smooth so far. Also, management shared that Q&M was able to seek out good businesses such as established dental hospitals with 20-year operating histories and convince the owners to sell it a substantial stake at a favourable valuation of 10X earnings and still secure 12-year profit guarantees from the owners because Q&M provided them with significant longer term upside, both business and financial, from being allied with Q&M post-acquisition than they would be able to achieve on their own.

Q&M provides a winning formula. Essentially, Q&M provides the comfort of a proven and repeatable business model as well as a strong Singapore dental brand name, which cannot be matched by private equity funds that have also been knocking on the China dentists’ doors. Other than capital, the China dentists will gain prestige by being allied to Q&M and also access to proven processes, skills and technology from Q&M. In the long run, Q&M has also adroitly incentivised the China dentists to hope for greater financial upside as they will still retain 40% interest (Q&M to take 60%) in a larger group which they can profit from when Q&M lists its China operations. Apparently, once the two Liaoning deals are done, Q&M’s China operations will be as big as Singapore and will be ready for listing.