Excerpts from analyst's report
Phillip Securities analyst: Soh Lin Sin
Loss and Gain of Aidite Spin-off Listing
| What to lose? (a) Material dilution of the Group’s equity interest in Aidite. To be eligible for listing on the New Third Board, Aidite will need to be converted into a company limited by shares. Post-restructuring exercise, Q&M Dental’s equity interest in Aidite will be diluted from 100% to 51%. Despite the material dilution, it does not have a significant impact on the Group’s current structure, as the Group has always recognised only 51% equity interest in Aidite in its financial results in view of the options granted to the two founders and directors of Aidite. There is a risk where the eventual post spin-off ownership of Aidite could be less than 51%. However, the Group intends to maintain substantial holdings of no less than 30%, such that Aidite will at least still remain as an associated company of the Group. (b) Changes to the Non-Compete and potential loss of the Profit Guarantee. If and only upon successful listing of Aidite on the New Third Board, (i) the Non-Compete undertaking will be restructured directly to Aidite instead of the Group; and (ii) the Profit Guarantee will be discharged. Aidite contributed c.37% of the Group’s profit before tax in FY15, up from that of c.25% in FY14. Notwithstanding its superior growth (profit guarantee is expected to grow at 15% y-y vs Singapore’s 5-10%), if successfully listed in FY16, the remaining Profit Guarantee for the next ten years, which amounts to RMB142.86 mn (equivalent to c.S$29.84 mn @ CNY/SGD 4.787), will be forfeited. Nonetheless, the managements from both Aidite and Q&M are still in the midst of finalizing the terms and conditions. |
Q&M Dental's COO, Dr Raymond Ang, presenting at a recent Financial PR event for investors. Photo: Ngo Yit SungWhat to gain?
(a) Unlocks value and a more focused expansion for Aidite as well as Q&M. The potential listing on the New Third Board will offer Aidite new opportunities to accelerate its growth and enhance its core business. The New Third Board mainly serves innovation-oriented, entrepreneurial and growth medium, small and micro enterprises.
Given its nature as a national over-the-counter stock exchange, the New Third Board is less accessible as compared to China’s other markets, thus dominated by professional fund managers instead of retail investors. 
Q&M Dental CEO Dr Ng Chin Siau.
Photo: Leong Chan TeikTherefore, it offers new channel for companies to access capital markets and gain greater exposure to the investment community, but less susceptible to erratic trades. On the other hand, Q&M could free up its capital to invest into other areas which could bring higher returns on investments for its shareholders as compared to its manufacturing business.
(b) Potential incentives and compelling offers by the local authorities to attract companies to list in the New Third Board. In addition to the lower cost of listing, companies could also enjoy policy incentives and government subsidies.
The lack of red tape in the New Third Board could also be a plus for Aidite. There is no requirement for companies to be profitable prior to listing. There are no limits on the amount that shares can move in one day.
(c) Potential special dividend from the likely cash accretive restructuring exercise and investment gain (spin-off proceeds less initial acquisition and Aidite’s shares purchase costs). Aidite was acquired in Aug-14 at 9.7x implied PER (RMB39.5 mn cash upfront with further capital injection of RMB35 mn). A value-buy compared to the group’s average historical PER at 42.1x.
Taking into consideration of:
(i) Higher valuation in China markets
Average forward PERs of SGX- and HKex-listed medical equipment & devices manufacturers at 16x and 19x, respectively, compared to that of 62x in China markets.
(ii) Pure dental manufacturing peers trading at 15-29x forward PER
(iii) Market liquidity risk premium for Aidite to be listed on the New Third Board. It is highly likely that Aidite could fetch a higher valuation in its bourse at home as compared to Q&M’s acquisition PER multiple of 9.7x.
Taking guidance from the Aidite’s Profit Guarantee for the year is RMB19.84 mn, and assuming Q&M intends to maintain equity interest in Aidite at 51%,
(i) if Aidite is listed at 15x FY16F PER, Q&M would have a net gain of RMB71 mn (or S$15 mn);
(ii) if Aidite is listed at 30x FY16F PER, Q&M would have a net gain of RMB217 mn (or S$45 mn);
(iii) if Aidite is listed at 60x FY16F PER, Q&M would have a net gain of RMB509 mn (or S$106 mn).
On the other hand, Q&M could also issue new shares to Aidite and retain all the proceeds to fund its own expansion.
| ♦ Target price 70 cents on 38X FY16F earnings |
 Soh Lin Sin, Phillip Securities analyst. Valuation Q&M currently trades at a 43.1x FY15 PER, which is c.56% premium to its Singapore healthcare services peers. As we rollover the balances into a new financial year, we have (i) adjusted the number of clinics to reflect the latest acquisitions, (ii) revised downward our FY16F earnings by 40% to S$15 mn to reflect the challenging business environment in the countries where the Group operates in, and (iii) reset the PER multiple to a 38.2x FY16F PER (a slight premium compare to its Asian peers but 1 std. dev. lower from its 4-year historical PER). In view of the above and with the change of analyst, we downgraded to “Neutral” rating with a lower TP of S$0.70 from S$0.96. |
Full report here.
