Concerns over China Linger, but Business Environment Looks Solid
The author is an analyst of NH Investment & Securities. He can be reached at pk.park@nhqv.co. -- Ed.
We expect Dentium to report 2Q22 sales of W87.7bn and OP of W23.1bn, with both figures to slightly top consensus. Despite the sluggish dental implant exports seen for May on the Korean government’s statistics portal, Dentium’s May sales climbed 10% m-m. A solid growth trend is forecast to continue in the Chinese value (affordable) dental implant market.
To deliver strong 2Q22 performance
We maintain a Buy rating and TP of W100,000 on Dentium. In line with the drop in peer share prices, our target P/E is cut from 15.1x to 13.9x, and we transition from applying 2022E NP of W80.9bn to 12-month forward NP of W85.1bn.
We project Dentium’s 2Q22 sales at W87.7bn (+21.0% y-y) and OP at W23.1bn (+37.2% y-y), with both figures to slightly beat consensus. While May dental implant exports from Suwon city (government figures used to estimate Dentium’s exports) fell q-q, Dentium’s May sales grew 10% q-q, and export increase is likely in June on the lifting of China’s city lockdowns. We attribute the difference between the government’s published export data and Dentium’s actual sales to the time lag between exports and sales recognition.
In terms of Dentium’s 2Q22 earnings, the important point will be the degree of OPM improvement. In 1Q22, OPM arrived at 27.4%, a dramatic q-q increase even amidst slow seasonality. Despite inflation, COGS-to-sales rise for dental implants is generally limited by the nature of implants (low raw material and logistic cost portion), and this trend should continue through 2Q22. Although OPM has tended to strengthen each quarter, we conservatively reduce our 2Q22 and 3Q22 OPM estimates versus the 1Q22 result to 26.4% and 25.6%, respectively. Significant OPM improvement is possible in 2023 once leverage effects are confirmed.
Concerns over China linger, but business environment looks solid
Continued growth inevitably results in concerns over growth slowdown. However, while worries have grown that Dentium’s sales increase is temporary due to inventory accumulation by dealers, the possibility of such is limited, as 60% of sales in China are done through direct sales channels. In addition, the chances of dealers stockpiling Dentium’s products are minimal due to China’s protection measures for Chinese companies. Although the possibility of ASP expansion due to rising raw material costs could drive inventory accumulation at dealers, we note that thanks to the limited impact of inflation on Dentium’s products, the company is not considering ASP mark-ups, and there are currently no issues with raw material supply and demand.
With the potential implant market estimated at 20bn teeth, the market with purchasing power projected at 2bn teeth, and the 2021 implant market sized at 32mn teeth, growth potential is practically unlimited. Against this backdrop, the largest growth opportunity appears to lie in China’s value (affordable) implant market, in which Dentium boasts the second-largest market share, topped only by Osstem Implant.