Dentium
The author is an analyst for NH Investment & Securities. He can be reached at pk.park@nhqv.com -- Ed.
Given the VBP policy implemented in Apr 2023, we caution against high expectations toward Dentium’s 2Q23 sales. But, with its Chinese market Q forecasted to climb by 50% in 2Q23, and with the VBP price being fixed for 3 years, significant Q increase effects are to be seen from 2024. Although Dentium has a DSO sales model, investor sentiment toward overseas players and that towards domestic firms is divided.
Sentiment sapped by short-term earnings, but luster to return
We maintain a Buy rating and a TP of W200,000 on Dentium. We expect the firm to book 2Q23 sales of W109.2bn (+13.0% y-y) and OP of W36bn (+2.2% y-y), satisfying the consensus projections.
After soaring in early June to W170,000, the company's share price has now adjusted back down to the level experienced at the time of its 1Q23 earnings release. While there have been no major news flow items as of late, current market sentiment is leaning toward a 2Q23 earnings surprise in line with the start (since April) of volume-based procurement (VBP) implementation in China. We point out that the VBP regulations entail relatively long-term (3 years) contracts, and initial implementation policy feedback is to be considered in 2H23. We advise investors to focus upon the low penetration rates now being witnessed not only in China, but also in global EMs.
VBP contract price fixed for 3 years; Q rise effects visible from 2024
It is important to note that China's VBP contracts carry a fixed price for their three-year contract periods. In other words, although a decrease in P and an increase in Q are to overlap this year, it will be next year before the effects of higher Q start being fully reflected in earnings. Based upon our 2Q23 Chinese sales estimate of W60.4bn, we assume a 20% drop in Chinese sales, but we also assume a 50% rise in Q. In keeping, with cost ratio likely continuing to decline (after peaking in 2023), we see P/E of 15.0x for 2023, 11.8x for 2024, and 9.7x for 2025.
We believe that Dentium's multiple remains modest at this juncture as only domestic multiples are going in the opposite direction from the general dental industry trend. We point out that the firm’s dental business sales (including equipment) are made through distribution system operators (DSOs), which conduct training and sales directly to dentists. DSOs sells fixtures and hold clinical data. A representative overseas example is Straumann, and domestic examples include Osstem and Dentium. We see this factor as accounting for the present discord between investor sentiment toward overseas players (re-rated for which is centering upon DSO market shares) and that towards domestic firms.