Sector Top Pick: Dentium
The author is an analyst of NH Investment & Securities. He can be reached at pk.park@nhqv.co. -- Ed.
China’s dental implant price guidelines state the necessity of separation between service and consumables prices. Consumables represent 10~20% of dental implant procedure prices. At VBP bidding, a maximum discount rate of 20~30% is expected for Korean dental implant brands, a level which looks near meaningless when considering the pervasive discount promotions within the dental industry. Operating leverage effects should kick in upon large-scale sales expansion.
Take appropriate approach to China’s dental implant price guidelines
China has recently announced dental implant price guidelines, which include volume based procurement (VBP). The impact of the guidelines should widely vary by company. The consumables portion out of total dental implant treatment prices is limited to 20% based on our conservative estimates and 10% based on a Chinese local research center. Service prices, which take up the lion’s share of dental implant treatment prices at dental clinics, are to be sharply reduced, and dental implant companies that focus on the premium segment are to be hit hard. As domestic dental implant exporters already have low ASPs, however, the guidelines’ impact on their earnings should be limited.
Gauging level of ASP decline at time of VBP bidding
We draw investor attention to the consequences of already-VBP-implemented cities such as Ningbo and Bengbu. The post-VBP prices for dental implant consumables have recently been around RMB1,000/unit (Chinese) and RMB1,500/unit (imported) in Ningbo and RMB950~1,800/unit (combined) in Bengbu. We estimate the current selling price of fixtures and abutments for Korean brands at RMB1,120/unit or less. Given such, when excluding 30% for dental crown cost, the likely ASP discount from VBP is only 10%. Korean players are saying the discount for VBP bidding should be in the 20~30% range.
Conclusion: Q increase to be primary factor amid absence of competitive Chinese firms in value dental implant market
Although some price cut concerns are in play, we point out the need to understand how the normal discount system operates within the implant industry. In detail, a promotion system provides higher product quantity for large volume purchases. Up to a 20~30% reduction in ASP is still lower than the discount rate applied to the typical discount system in the dental implant industry. According to our domestic dental research, the price per unit of fixtures in large hospitals, which purchase in larger volume compared to private dental clinics, is roughly 50% discounted compared to the level for private clinics. When VBP is applied, Q is expected to increase tangibly, and the Korean companies should fully enjoy accompanying earnings benefits as no local competitors are competitive in the cost-effective market for the dental implant industry. In other words, adjusting the ASP downwards by up to 20~30% (not the average value) is meaningless when Q climbs. With production cost being fixed, leverage effects can be expected compared to promotion cost. We offer Dentium as our sector top pick.