The author is an analyst for NH Investment & Securities. He can be reached at pk.park@nhqv.com -- Ed.
Sales at Dentium slowed in 3Q23 amid economic downturn in China and logistics issues in Russia. Although revenue growth should rebound in major regions in 4Q23 (a peak season), ultimately, the results desired by the market will require improved growth in the domestic and overseas dental industries driven by economic recovery.
Economic slowdown concerns loom amid approach of peak season
We maintain a Buy rating and TP of W180,000 on Dentium. The firm logged 3Q23 sales of W93.8bn (+3% y-y) and OP of W30.1bn (-11% y-y), missing consensus. Due to economic slowdown, growth continues to decelerate overall in the dental industry. Economic recovery will be needed for a strong rebound in the 4Q23 peak season.
Dentium reported 3Q23 sales toward China of W54.2bn (+12% y-y), with sales volume up 40% but ASP down 20%, resulting in lackluster sales volume relative to expectations. Russia sales amounted to W2.7bn, falling significantly q-q due to logistics issues. But, with inventory asset valuation losses narrowing versus 2Q23, GPM recovered to 72%. One-off ad expenses (eg, TV ads) came to W4.5bn.
Global markets continue to be impacted by economic downturn. For reference, 3Q23 sales at leading peer Straumann climbed 11% y-y. In 3Q23, Straumann saw sales growth continue to slow in all regions except Asia-Pacific (+27% y-y), including Europe+Middle East+Africa (+7%), Latin America (+19%), and North America (+6%). In China, still high prices for non-VBP products and demand support from affluent customers helped to bolster APAC region growth.
Earnings to improve from 4Q23; still no valuation burden
Although economic recovery concerns remain in play, earnings growth should recover at Dentium in 4Q23, a peak season. We forecast Dentium’s 4Q23 sales at W121.2bn (+29% y-y) and OP at W42.1bn (+16% y-y). Backed by peak season effects, China sales should jump by W59.6bn (+42% y-y). For Russia, sales should rise by W13.8bn (+13% y-y), thanks to logistics recovery. We expect margins to strengthen from 2Q24, when price decline in China should end, with 2024 OPM predicted to reach 34%.
With Dentium shares trading at a 2024F P/E of 10x, we see no valuation burden. Recently, expectations for Chinese consumption have led to a rebound in the company’s share price. Moving ahead, growth recovery in the dental industry driven by economic rebound will remain key.